## Health Care: Dear Senator Reid

Dear Senator Reid:

We write to thank you again for your leadership in the Senate health reform deliberations. We greatly appreciate the important elements of fiscal sustainability that are included in the Manager’s Amendment.

Among the features that we believe to be critical to a fiscally responsible approach to health reform is a more effective independent Medicare advisory body. The Manager’s Amendment has strengthened the role of the body, now called the Independent Payment Advisory Board. The Amendment gives the Board the authority to produce annual reports beginning in 2014 and to report on privately financed medical care as well as care financed by Medicare. In addition, its recommendations will receive fast-track consideration under a broader set of circumstances than under the Senate Leadership Bill. These are important steps toward assuring that health care reform will significantly reduce health care inflation in both the public and private sectors.

Another feature that has been strengthened is the commitment to delivery system change. The Manager’s Amendment contains several provisions that should stimulate the development of innovative approaches to payment for care. These approaches hold the promise of improving quality and lowering the costs of care. Specifically, the Manager’s Amendment includes an expansion of Medicare pilot programs and provisions for bundled payments for a larger set of conditions. These aspects of the proposed legislation make it far more likely that health care providers will have the tools and incentives to deliver better health outcomes.

As a nation, we will need to do more in the coming decade to promote the efficiency and quality of health care. The Manager’s Amendment includes important features that will move our nation’s health care forward while helping to control health expenditure growth. We are grateful for your ongoing efforts and the improvements in the Manager’s amendment. We urge expeditious enactment of your reform legislation.

Sincerely yours,

Dr. Henry Aaron, The Brookings Institution
Dr. Stuart Altman, Brandeis University
Dr. Kenneth Arrow, Stanford University, Nobel Laureate in Economics
Dr. Gary Burtless, The Brookings Institution
Dr. David Cutler, Harvard University
Dr. Patricia Danzon, University of Pennsylvania
Dr. Angus Deaton, Princeton University
Dr. Brad DeLong, University of California, Berkeley
Dr. Peter Diamond, Massachusetts Institute of Technology
Dr. Victor Fuchs, Stanford University
Dr. Alan M. Garber, Stanford University
Dr. Dana Goldman, University of Southern California
Dr. Jonathan Gruber, Massachusetts Institute of Technology
Dr. Daniel McFadden, University of California, Berkeley, Nobel Laureate in Economics
Dr. David Meltzer, University of Chicago
Dr. Joseph Newhouse, Harvard University
Dr. Uwe Reinhardt, Princeton University
Dr. Alice Rivlin, The Brookings Institution
Dr. Meredith Rosenthal, Harvard University
Dr. Isabel Sawhill, The Brookings Institution
Dr. William Sharpe, Stanford University, Nobel Laureate in Economics
Dr. John Shoven, Stanford University
Dr. Robert M. Solow, Massachusetts Institute of Technology, Nobel Laureate in Economics
Dr. Laura D’Andrea Tyson, University of California, Berkeley

## Self-Presentation, Intellectual Property, Mindshare, and Reputation in the Age of the Internet

Scott Payne interviews Patrick Appel:

Scott: How did you first get involved in assisting with the production of the Daily Dish?

Patrick: I interned for the Atlantic in the Fall of 2007. Andrew’s former assistant, Jessie Roberts, returned to Columbia to finish her degree just as my internship was ending, and Andrew asked me to take her place.... Every day Chris Bodenner (Andrew’s other assistant) and I draft between twenty and thirty posts. Andrew then approves, rewrites, or deletes these posts. We’ve created a blogging labor line of sorts.

Scott: Can you run me through an average day for you?

Scott: In drafting those posts, is there something that could be considered a SOP or guiding philosophy that you, Chris, and Andrew share in terms of determining what types of information make the cut to be considered as drafts and those that don’t?

Patrick: There is no standard operating procedure. Each of us has his own interests, but everything is approved by Andrew, and filtered through his frontal cortex, so his sensibility dominates. By this point, the mind meld is near completion, and I’ve an intuitive sense what Andrew will and won’t post....

Scott: What kind of interaction do you, Chris, and Andrew tend to have over a given day?

Patrick: There isn’t much direct communication.... Seeing what Chris and Andrew post and adjusting my searching accordingly is its own form of communication. Chris and I are housemates, so I see a good deal of him, but all three of us can do our jobs independently. When I first started, Andrew would give me daily or semi-daily feedback. By this point both Chris and I don’t need much guidance.

Scott: You’ve been pretty up front about you disagreements with some of Andrew’s positions, specifically I’m thinking about the Trig Palin issue. Do those disagreements cause any tension in the “blogging line”?...

Patrick: Andrew has always celebrated disagreement. This predates the Dish. When he published The Bell Curve in The New Republic, he also published an issue’s worth of articles countering Charles Murray. Whether I agree or disagree with Andrew on a given topic, I will hunt down the best counterarguments and sort through the best reader dissents so that he has to confront the strongest arguments against his position. Features like Dissent Of The Day are the core of the Dish’s identity, and this encouragement of open debate has been hugely beneficial to both our readers and our operation. Its in Andrew’s nature to seek out opposing viewpoints, and my disagreeing with him over various issues has made him respect me more, not less....

Scott: What is the most rewarding aspect of working to produce the Dish for you?

My view of this can be summed up in one sentence from copyright: "A.N. Author asserts his/her moral right to be identified as the author." I want to know who wrote the words I am reading, and whose ideas they are. Patrick Appel needs his own weblog.

Patrick Appel fractures the solitary voice of the Daily Dish and writes:

Life As Part Of Sully's Brain - The Daily Dish | By Andrew Sullivan: A reader writes:

To learn that nearly half the posts on Andrew's blog are not his posts proper (but admittedly prepared under his aegis) is somewhat disheartening. I think the blog owes it to the readers and its own high standards to start putting bylines on all posts.

We tried bylines once and it made the blog read funny. Almost all the posts I write are naked links or excerpts, which makes Andrew a weather-vane in the gale of the larger debate.

I've marinated in Sullivan's cerebral juices for a few years now and know intuitively what he interested in and what to bring to his attention. If Chris and I were forced to byline the posts we write under Andrew's supervision, we would have to own those opinions and draw contrasts with Andrew, as we do when he takes vacations. Bylines would fracture the solitary voice of the blog.

This is the argument that the Economist uses for not having bylines--that the institution works better when people write as instantiations of the hive-mind that is the Economist rather than in their own individual personae. The fact that the Economist is now riddled with bylined columns makes me doubt this--think that it is much more about control, power, and keeping a large chunk of the writers' reputation for the organization.

## Ten Economic Paragraphs Worth Reading: December 21, 2009

What is the cause of large and continuing budget deficits? The Bush tax cuts, the wars in Iraq and Afghanistan, and the economic downturn explain "explain virtually the entire deficit over the next ten years." Notice the tiny contribution of Tarp, Fannie, and Freddie (shaded red) and the stimulus package (shaded yellow, just below the red area) to the deficit from 2012 onward. These are not the source of our long-term budget problems.

Over the last six years or so, since coming to George Mason and in the last three years since conducting a weekly podcast, I’ve been thinking a great deal about the following ideas: 1. Some orderly things are not intended by anyone. 2. The division of labor is limited by the extent of the market. 3. It is easy to fall prey to confirmation bias. 4. Politicians respond to incentives. These are pretty simple ideas. When you give people the one sentence version or paragraph version they nod and tell you they agree with the essence of the idea. But I find these ideas to be quite deep. They are easy to understand but very difficult to absorb. The more I think about them, the deeper is my understanding. I give Hayek credit for number 1 on the list. He didn’t invent the idea. But he made me think about it the most.

"Picture Japan, suffering from flooding along its coastal cities and contamination of its fresh water supply, eyeing Russia's Sakhalin Island oil and gas reserves as an energy source . . . Envision Pakistan, India and China - all armed with nuclear weapons - skirmishing at their borders over refugees, access to shared river and arable land." This might look like the minutes from a meeting of Hollywood executives. In fact, it is from a Pentagon memo on the possible consequences of global warming. Climate change is not just an environmental question, it could have a massive impact on international security. People in the developing world will likely suffer most, as climate change will make the resources they depend on more scarce: fresh water, cropland, forests and fisheries. This will have grave humanitarian consequences. Oxfam predicts 30m more people could be at risk of famine as a result of global warming. With more famine we should expect more disease...

From all reports, the talks were completely deadlocked when U.S. President Barak Obama arrived on the scene.... Through a series of bilateral and eventually multilateral meetings of President Obama with Chinese Premier Wen Jiabao, Indian Prime Minister Manmohan Singh, Brazilian President Luiz Inacio Lula da Silva, and South African President Jacob Zuma, a document gradually emerged.... It is virtually unprecedented in international negotiations for heads of government (or heads of state) to be directly engaged in, let alone lead, negotiations, but that is what transpired in Copenhagen.  Although the outcome is less than many people had hoped for, and is less than some people may have expected when the Copenhagen conference commenced, it is surely better – much better – than what most people anticipated just three days earlier, when the talks were hopelessly deadlocked.... President Obama characterized the new Accord as “an important first step”.... [A]ll of the seventeen countries of the Major Economies Forum--which together account for some 90% of global emissions--are agreeing to participate.... 1. The signatories validate their will to “urgently combat climate change in accordance with the principle of common but differentiated responsibilities and respective capabilities.”... 2. Action and cooperation on adaptation is urgently required, particularly in the least developed countries, small island developing states, and Africa. Developed countries commit to provide financial resources to support adaptation measures in developing countries.... 3. Annex I Parties of the Kyoto Protocol (the 1997 list of the industrialized countries and the emerging market economies of Central and Eastern Europe) commit to implement mitigation actions (specified in Appendix I), and Non-Annex I Parties (the developing world, as defined in the Kyoto Protocol) also commit to implement mitigation actions (specified in Appendix II), all of which will be submitted to the UNFCCC Secretariat by January 31, 2010.... 4. Emissions reductions for the Annex I parties will be measured, reported, and verified according to guidelines (to be established), which will be rigorous and transparent, whereas mitigation actions taken by non-Annex I parties will be subject to domestic measurement, reporting, and verification (MRV) reported through national communications, with international consultation and analysis.... 5. Least developed countries and small island developing states may undertake actions voluntarily and on the basis of support (from other countries).  Such actions will be subject to international measurement, reporting, and verification.... 6. The parties will establish positive incentives to stimulate financial resources from developed countries to help reduce emissions from deforestation and degradation.... 7. The parties agree to pursue opportunities to use markets to achieve cost-effective mitigation actions.... 8. Predictable and adequate funding will be provided to developing countries for emissions mitigation, reduction of deforestation, and adaptation.... 9. The developed countries commit to a goal of jointly mobilizing $100 billion annually by 2020 from sources both public and private.... 10. Evaluation of the Accord’s implementation is to be completed by 2015, including consideration of strengthening the long-term goal as the science indicates... While the recession is expected to drive states’ poverty rates up for 2009, new analysis based on Census data shows that the American Recovery and Reinvestment Act of 2009 (ARRA) is keeping large numbers of Americans out of poverty in states across the country. In addition to boosting economic activity and preserving or creating jobs, the recovery act is softening the recession’s impact on poverty by directly lifting family incomes. The Center’s analysis, which covers 36 states and the District of Columbia, examines the effect on poverty of seven ARRA provisions: the expansion of three tax credits for working families, two provisions that strengthen unemployment insurance assistance, a provision that boosts food stamp benefits, and a one-time payment for retirees, veterans, and people with disabilities.[1] Nationally, these provisions are keeping more than 6 million Americans out of poverty and reducing the severity of poverty for 33 million more. (These figures include both people whom ARRA has lifted out of poverty and people whom ARRA has kept from falling into poverty.) These estimates are conservative... It is not a surprise that the most reflexively and ideologically partisan commentators are lashing out. Today, it’s the editorial board of the Wall Street Journal. For an economist, the irony is rich. The editorial board that did more to bring supply-side economics – or in George H.W. Bush’s immortal words, "voodoo economics" – to Washington is raising the specter of a fiscally irresponsible health reform bill in which efforts to rein in health care cost growth are an "illusion." But the ironies run richer, since an editorial that hurls accusations of overselling cost containment itself displays more impressive rhetoric than substantive content. The Journal makes three fundamental claims. The first is that health reform represents a huge risk to the federal budget, and will end up exploding the deficit, because it relies on an array of speculative policies to control costs. What the Journal misses is the crucial difference between this health reform effort and the flawed supply-side economics that drove the country into the deep deficits of the 1980s: we are insisting that the legislation be deficit neutral as scored by the Congressional Budget Office (CBO) in addition to including a variety of delivery system reform and other cost-containment measures for the long term. In other words, unlike supply-siders, we are not waiting for magic savings to appear. Instead, we are relying on hard, scoreable savings – not the long-term cost-control measures – to pay for the expansion of health care coverage. This "belt and suspenders" approach provides a crucial fiscal backstop, and it's the prudent, realistic, and wise thing to do. (Note to the Journal ed board: here's the link to the CBO score of the Senate legislation, in case you'd like to read it.) With regard to the delivery system reform and cost-containment component of this belt-and-suspenders approach, we have always been clear that we do not know with absolute certainty the changes that will most effectively improve quality and restrain health care cost growth over the long term. But research does suggest the most auspicious approaches, and we are pursuing those... [W]hat the GOP’s “No, no, no” policy has wrought: 1) Instead of a healthcare reform to slow cost increases... instead of a new system that attempts to control costs, we’re just going to have a bigger and more expensive version of the old system, with a few tinkers around the edges. Republicans could have been architects of improvement, instead we made ourselves impotent spectators.... 2) House and Senate conferees last night rejected a proposal to deny EPA funds to enforce its new powers over greenhouse gasses. So instead of an economically rational approach to carbon abatement – a carbon tax or even a cap-and-trade system stripped of the abuses and boondoggles attached to it by House Democrats – we’re going to have the least rational approach: bureaucratic enforcement. The furious rejectionist frenzy of the past 12 months is exacting a terrible price upon Republicans. We’re getting worse and less conservative results out of Washington than we could have negotiated, if we had negotiated. As is, we’re betting heavily that a bad economy will collapse Democratic support without us having to lift a finger. Maybe that will happen. But existing party strategy has to be reckoned a terrible failure. Most Republicans will shrug off that news. If polls are right, rank-and-file Republicans feel little regard for the Washington party, and don’t expect much from it. But it’s the rank-and-file who are the problem here! Republican leaders do not dare try deals for fear of being branded sell-outs by a party base that wants war to the knife. So we got war. And we’re losing. Even if we gain seats in 2010, the actions of this congressional session will not be reversed... 8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Gregory Gause: The Kuwaiti Confidence Vote: On Wednesday, Dec. 16, the Kuwaiti parliament, for the first time in its history held a confidence vote on the prime minister. Shaykh Nasir al-Muhammad won the vote by a margin of 35-13, with one abstention. This may sound like ordinary Parliamentary politics. In Kuwait, it isn't. The Kuwaiti constitution allows the legislature to declare an "inability to cooperate with the government" by a majority vote of the elected representatives.... [I]n the past, when such votes were threatened the Amir either accepted the government's resignation (usually reappointing the prime minister to form a new government) or dissolved the parliament, rather than subject a senior member of the Al Sabah family to a confidence vote. It was only in the last year or so that the ruling family has allowed confidence votes on its members.... A confidence motion on the prime minister is unprecedented. This is a big step in Kuwaiti politics, a confirmation of constitutional government and, one hopes, the beginning of the end of the stand-off between the legislature and the government that has led to six different governments since February 2006 and three elections since June 2006... 9) STUPIDEST THING I'VE READ TODAY: newtgingrich: As callista and i watched what dc weather says will be 12 to 22 inches of snow i wondered if God was sending a message about copenhagen... Every once in a while, you see a set of interesting numbers pass across your desk. Today's numbers are about Berkeley's enrollment. 33,145 students in total--9,310 graduate students and 23,835 resident undergraduate students. 3,655 new freshmen; 1,754 new transfer students; 8,413 "seniors." With 5,409 students entering, and with attrition of roughly 10% per class before people reach their senior year, I can compute that Berkeley students appear to spend 1.56 years as "seniors." Put it another way, I can guess that your average transfer student spends 3.1 years enrolled at Berkeley and studying on the campus, and the average entering freshman spends 5.1 years enrolled at Berkeley and studying on the campus. Think about attrition (people who spend less than four years at Berkeley because they drop out and leave), think about those constrained by money or with things to do who use their AP credits and overloads to leave early, and I think I'm looking at some pretty depressing (and not-widely-advertised) numbers for time-to-undergraduate-degree. Hope I'm wrong. ## links for 2009-12-21 ## Hoisted from the Archives (2001): Charlie Kindleberger's View of Financial Crises Charlie Kindleberger's View of Financial Crises: Back when I started out as an economist there were several years during which it seemed that most of the articles I wanted to write had, I discovered, already been written in the previous decade by Barry Eichengreen. He reports that when he started out he found himself subject to the same phenomenon--only with respect to Charlie Kindleberger. So I spent part of last weekend rereading Kindleberger's (1978) Manias, Panics, and Crashes, looking for places where Kindleberger had already said what I think before I thought it, and had expressed it better than I can. I found a number of such places: Kindleberger's declaration that in the last analysis the making of international economic policy under such circumstances "is an art" and that that "says nothing--and everything." And there was Kindleberger's summary that the rescuer of the system, the "lender of last resort", "should exist... but his presence should be doubted.... This is a neat trick: always come to the rescue in order to prevent needless deflation, but always leave it uncertain whether rescue will arrive in time or at all, so as to instill caution in other speculators, banks, cities, or countries.... some sleight of hand, some trick with mirrors... because monetarist fundamentalism has such unhappy consequences for the economic system" when expectations converge on the "unfavorable" equilibrium. Kindleberger's declaration that he does not wish to "contravert" the claim that the "presence of a lender of last resort weakens the self-reliance of the banking system and increases its likelihood of falling into excesses of overtrading, revulsion, and discredit," even though this argument "has overtones... that there is no use providing the poor with housing since they will only keep coal in the bathtub" and the possibility that the known existence of a lender of last resort causes expectations to converge on the favorable equilibrium: that it does not "increase speculation and overtrading" but "calms anxieties when overtrading occurs." That finding the point of balance for all these conflicting issues and concerns is very difficult, and keeping the point of balance is almost impossible, is very clear in Kindleberger's "on the one hand... on the other hand" argument. That finding the point of balance is very difficult was also my thought on listening to Allan Meltzer this afternoon. This afternoon we have heard the Meltzer Commission Meltzer: the Meltzer who fears the growth of moral hazard, who thinks that large-scale lenders of last resort create by their very existence the crises they then are forced to handle, the one who believes that a lean IMF is a good IMF and that it is important that speculators f ## James Fallows on the Senate Filibuster He writes: The filibuster: let's talk about it - James Fallows: [C]ontrary to the tone of most day-by-day political reportage, [the filibuster] is not some timeless feature of American constitutional design. In newspaper accounts, you read things like this [by Robert Pear].... In the past 25 years, something that was an exceptional, last-ditch measure has turned into a damaging routine.... For most of the first 190 years of the country's operation, U.S. Senators would, in unusual circumstances, try to delay a vote on measures they opposed by "filibustering" -- talking without limit or using other stalling techniques. For most of those years, the Senate could cut off the filibuster and force a vote by imposing "cloture," which took a two-thirds majority of those voting (at most 67 of 100 Senators). In 1975, the Senate adopted a rules change to allow cloture with 60 votes, and those are the rules that still prevail. The significant thing about filibusters through most of U.S. history is that they hardly ever happened. But since... the early Clinton years, the... filibuster has gone from exception to routine... the aberrational nature of this change should not be overlooked.... Talk shows analyze exactly how the Administration can get to 60 votes; they don't discuss where the 60-vote practice came from and what it has done to public life.... [T]his isn't a partisan question -- even though in any given administration it presents itself as one.... Also for the record, as the chart below shows, the huge increase in threatened filibusters came from the Republican minority, after the Democrats took back the Senate in 2007. Since the time covered by this chart, the number of threatened (Republican) filibusters has shot up even more dramatically... ## In Which Brad DeLong Recognizes and Accepts the Mental Tyranny of Literature As of yesterday afternoon, I had never to my recollection ever eaten mushroom-barley soup. Yet last night I bought mushroom barley soup last night at Whole Foods. Only now do I understand why: Steven Brust (2006), Dzur (New York, Tor), pp. 85-6: There were several different soups that could have appeared at this point, of which I passionately enjoyed all except the beet soup. Today was one of my favorites; I smelled the mushroom-barley before Mihi arrived with it. The bowls were wide, white, and there was wonderful steam coming out of them. Valabar's mushroom-barley soup is something I can almost build. At least, I can come closer to achieving the right effect than I can with most of their menu. First, I quarter a whole chicken. Then I throw the carcass into the pot with onion, garlic, celery, salt, pepper, and a little bit of saffron. I clean the stock and dust it with powdered saffron. I cook the barley in the same pot (which took me a bit to figure out), and throw in some chopped garlic and shallots that I have sauteed in rendered goose fat until they are clear, and wood mushrooms, nefetha mushrooms, or long mushrooms, whatever looked good at the market that day. Then I just cook it until it reduces. That's almost like Valabar's. I've never quite identified the difference.... It was a bit of an annoyance, but not enough to prevent me from enjoying what was in front of me. That first taste just hits you, you know, and as the aroma fills your nose, the broth--just the tiniest bit oily from the goose fat--rolls around on your tongue. It's wonderful. "This is really good," said Telnan. "How do they make it?" "I have no idea," I said. "Glad you like it, though." Oh! The tyranny of literature! ## When Content Management Systems Attack!!!! Bob Williams of the Urban/Brookings Tax Policy Center writes: This is a test of the toolbox over 1040 icon. Do not post.This is a test of the toolbox over 1040 icon. Do not post. This is a test of the toolbox over 1040 icon. Do not post. This is a test of the toolbox over 1040 icon. Do not post. This is a test of the toolbox over 1040 icon. Do not post. This is a test of the toolbox over 1040 icon. Do not post.This is a test of the toolbox over 1040 icon. Do not post. This is a test of the toolbox over 1040 icon. Do not post.This is a test of the toolbox over 1040 icon. Do not post. This is a test of the toolbox over 1040 icon. Do not post... ## How the Republicans Turned Evan Bayh into a Raging Partisan Democrat Perhaps the best thing the very sharp Jon Chait has written this year: The Republican Health Care Blunder: The United States is on the doorstep of comprehensive health care reform. It's a staggering achievement, about which I'll have more to say later. but the under-appreciated thing that strikes me at the moment is that it never would have happened if the Republican Party had played its cards right.... [M]oderate Democrats were desperate for a bipartisan bill... willing to do almost anything to get it.... make enormous substantive concessions to win the assent of even a few Republicans... [for] something far more limited than what President Obama is going to sign.... But Republicans wouldn't make that deal. The GOP leadership put immense pressure on all its members to withhold consent from any health care bill. The strategy had some logic to it: If all 40 Republicans voted no, then Democrats would need 60 votes to succeed, a monumentally difficult task. And if they did succeed, the bill would be seen as partisan and therefore too liberal, too big government. The spasm of anti-government activism over the summer helped lock the GOP into this strategy -- no Republican could afford to risk the wrath of Tea Partiers convinced that any reform signed by Obama equaled socialism and death panels. The role of Olympia Snowe is interesting here. Snowe negotiated seriously for months, and Democrats met what seemed to be her substantive concerns, but, like the Russian army retreating before Napoleon, she insisted that the bill be drawn out indefinitely. Snowe demanded that the process not be rushed, but she never defined what a reasonable time frame would be. In the summer, "taking your time" and "doing it right" meant waiting until after the August recess. In the fall, it meant until after Thanksgiving. Now it means until after Christmas. If it lasted until next year, eventually Republicans would demand that the process not be rushed before the midterm elections, and that the fair thing would be to let the people decide in the 2010 elections.... Thus Snowe... removed herself.... And so Democrats found themselves all alone... realized that bipartisan dealmaking was not at hand, and it had to pass a bill or face the same calamity as it did in 1994.... The unified partisan front of the Republican Party forced the Democrats to adopt their own unified partisan front, something that appeared impossible as recently as this last summer. This passage from the New York Times is telling: Faced with Republican opposition that many Democrats saw as driven more by politics than policy disagreements, Senate Democrats in recent days gained new determination to bridge differences among themselves and prevail over the opposition. Lawmakers who attended a private meeting between Mr. Obama and Senate Democrats at the White House on Tuesday pointed to remarks there by Senator Evan Bayh, Democrat of Indiana, as providing some new inspiration. Mr. Bayh said that the health care measure was the kind of public policy he had come to Washington to work on, according to officials who attended the session, and that he did not want to see the satisfied looks on the faces of Republican leaders if they succeeded in blocking the measure. Evan Bayh! When you've turned the somnolent, relentlessly centrist Indiana Senator into a raging partisan, you've really done something... ## Alan Brooke, the Future Field Horse Slave the Deputy-Companion Alanbrooke, Liveblogs World War II: December 20, 1939 Thanks to a nudge... Left Metz at 7:45 Am... to call on the Div Comd of the 42nd Div.... From there motored to Keplich why I met Johnson and Barker, and we went round one of the Maginot forts at Welshtenberg. The fort reminded me of a battleship built on land, a masterpiece in its way, and there is no doubt that the whole conception of the Maginot line is a stroke of genius. And yet! It gave me but little feeling of security, and I consider that the French would have done better to invest the money in the shape of mobile defences such as more and better aircraft and more heavy armoured divisions than to sink all this money into the ground.... After visiting the fort I went up with Hawkesworth..., We went first to the Black Watch.... Practically no activity on either side, a certain amount of shelling was going on..., and an air battle in the afternoon, otherwise absolute peace. The defence does not inspire me with confidence... ## Ten Economics Paragraphs Worth Reading: December 20, 2009 They are certainly not stupid. And they are certainly not ignorant either. I know that the ones I'm complaining about are smarter than me, and more knowledgeable than me. And that includes economics smarts and knowledge. Some of them make me feel totally inadequate on a daily basis (I read their blogs daily). Some of my best friends are microeconomists. But they just don't get macro! I'm talking about money wages and employment. I can't be bothered to link to the posts I'm complaining about. And I can't be bothered to go through those posts and explain why their reasoning is wrong. Others have done this, and have failed. Or at least, have failed to make any impression on the 'microeconomic miscreants'. They seem to be preaching to the choir; and the choir is composed of macroeconomists. I want to try a different tack. I'm not going to try to show that they are wrong. I want to try to understand why they keep going wrong.... They don't understand monetary exchange.... It is monetary exchange (or rather, the high transactions costs of barter that make monetary exchange essential) that is the root of all deficiencies in aggregate demand.... To demand apples is to supply money in exchange. And if people want to hang onto their money, rather than buy apples with it, the demand for apples, and the demand for labour, will be deficient.... A deficiency of aggregate demand is a deficiency of peoples' willingness to get rid of money.... The Aggregate Demand curve is a locus of points at which people in aggregate are just willing to hold the stock of money they do hold. If microeconomists don't think about monetary exchange they can't think about aggregate demand. Cuts in wages will improve or worsen unemployment due to deficient aggregate demand if and only if they increase or reduce people's willingness to get rid of money... For whatever reason—global warming seems to be one—Bolivia’s Chacaltaya glacier, whose runoff provided water for the contiguous cities of La Paz and El Alto for centuries, is now gone.... I hadn’t really understood the water poverty of the altiplano until a few years ago, at a celebration sponsored by several farming villages some twenty miles from Lake Titicaca on the border between Bolivia and Peru. By Bolivian standards this was a privileged community, located not far from both a major thoroughfare and an important water source. The festivity was a big event; a rededication of one of those imposing churches the Spanish missionary orders used to build in the middle of nowhere.... Soon the midday meal was served, and only a city tourist like me could have doubted that it was a magnificent spread: proudly, the campesinos rolled out two strips of black plastic on the ground, and then emptied on them many sacks of cooked potatoes of every color, size and taste: little potatoes left to freeze underground in the winter, larger blackish potatoes left to freeze in the streams, pink and yellow and white freshly-harvested boiled potatoes. Coarse salt was provided as an accompaniment, along with small amounts of a venomously hot chile sauce and quite a bit of white cheese that tasted of equal parts salt and curd. This, for campesinos in what was until recently the poorest country in South America, was a banquet, produced by scratching the earth with sticks and hoes and guiding the available water to each potato plant by means of backbreaking labor. Life seemed so desperately hard in the shadow of that church. The urgent question now is how a population with almost no water will deal with even less water when the ice has finished melting... By adopting a tone of civility and respect towards those who may often disagree with America, from the mosques of Cairo to the street cafés of old Europe, Mr Obama has cut a lot of ground from under those who always hate America... that is a revolution in global opinion. What Mr Obama will do with it remains to be seen. But it is a promising start.... [Obama] did what was necessary to stave off a global depression.... Pumping hundreds of billions of dollars into institutions that were instrumental in bringing about the crisis offended people’s sense of justice. So too do the obscenely large bonuses Wall Street is now paying out. Posterity may also judge Mr Obama to have squandered this “defining moment in history” to overhaul the contract between Wall Street and America. Against that, however, it is worth considering what could have gone wrong. During his campaign John McCain argued that the best stimulus would be to cut spending. He also argued that big institutions should be allowed to fail. The first was illiterate. The second reckless.... [H]e did what was necessary to prevent this crash from becoming a disaster. And for that much credit is due (no pun intended). In addition to getting scant acknowledgement for these accomplishments, Mr Obama is taking the blame for trends not of his making.... [M]any of the criticisms aimed at Mr Obama are fair. Of these the most damaging is that he seduced voters into believing he would change the way business is done in Washington. It is the oldest betrayal in the book. You campaign in poetry and govern in prose... Taibbi admits he confused two Jamie Rubins in his Rolling Stone article on Obama economic team, but in his correction, he says, “there is indeed a factual error in the piece — a minor biographical detail that identifies Bob Rubin’s son Jamie as a former Clinton diplomat.” Yes, but. The mistake is one that someone familiar with the territory in DC wouldn’t have made.... Taibbi is in over his head, and his chosen weapon to fight his way out is snark and hyperbole.... The problem with this approach was beautifully illustrated by The Awl’s Chris Lehmann. A political reporter getting into finance, starting with an attack on The Big Money’s Heidi Moore.... That’s because Lehmann got a basic fact in his story very wrong. In essence, he used the wrong number. A number that anyone who knew their subject matter well would’ve never confused with the correct number.... Lehmann corrected himself not by saying, “I used the wrong number” but instead by saying, “Gee, I was so tripped up by Moore’s writing that I conflated two numbers that have nothing to do with each other and now I’m going to make it sound like it wasn’t totally my fault even as I apologize.” That’s a pretty weak way to issue a correction. What’s also galling is when Lehmann says people with Moore’s decade of financial writing experience might be part of the problem, since she and they are, “instigator[s]... of widespread public miseducation in financial matters.” He says established financial journalists like Moore are threatened by upstarts like Taibbi.... I haven’t been at this as long as Heidi, but finance is absurdly complicated and you need years of experience, regular talks with analysts and experts, regular study of the news and ideally a newsroom full of similarly focused people to work with, to even BEGIN to write knowledgeably on finance, let alone to make it clear to the average non-technical reader... Amazon.com said Monday that the Kindle is having its best month ever. As always, however, it didn’t say how many sales that amounts to.... The news also comes as Kindle’s competition struggles to get devices into consumers’ hands in time for Christmas. Barnes & Noble said Sunday that its Nook reader won’t be available in stores until Dec. 7, and noted earlier that only customers who ordered one before Nov. 20 would receive it for the holidays. Sony said two weeks ago that it would ship its Reader from Dec. 18 to Jan. 8 but couldn’t guarantee the delivery date. As many have noted, those delays are good news for Amazon. The company, however, is notoriously cagey about Kindle sales.... The lack of a numeric figure hasn’t deterred analysts from speculating on Kindle sales and the health of the e-reader market overall. In October, Forrester said it sees Kindle sales of 900,000 during the holiday season and 3 million for the year — up from an earlier estimate of 2 million. Piper Jaffray is expecting 750,000 Kindles to be sold in the fourth quarter, citing Amazon’s advertising and “fading” competition. Goldman Sachs said that its holiday spending survey found that 6% of U.S. consumers plan to give an e-reader as a gift this year, and Nomura said it sees U.S. e-reader sales reaching 20 million units by 2014. “So that’s your advice is it? As my agent? On the week my book comes out in paperback, I should produce my own pirated version and give it away free? Why don’t I just punch my publisher in the face? That would be less work.” My agent rocked back in his chair (a chair bought with 15% of my earnings) and laughed. “I didn’t say it was my advice, I just said there’s nothing they can do to stop you.” Before our meeting had taken its subversive turn, we had been talking about ebooks: a subject that’s on every publisher and agent’s mind this week after the decision by Stephen R. Covey, author of The Seven Habits of Highly Effective People, to make his books available exclusively on the Amazon Kindle. Covey’s move has caused a highly effective shit-storm because he made it in direct defiance of his paymasters at Simon & Schuster who won’t see a penny from the deal.... Covey claims that the electronic rights remain with him to do with as he wishes. Simon & Schuster, perhaps unsurprisingly given that they sold 136,000 paperback copies of the book this year, disagree – arguing that Covey’s contract precludes him from publishing any ‘competing works’. “Our position is that electronic editions of our backlist titles belong in the Simon & Schuster catalog, and we intend to protect our interests in those publications.” said an S&S spokesman, ineffectively.... For Covey, the problem with Simon & Schuster’s digital strategy seems to be largely financial. The company that he has chosen to publish his new Kindle edition – Rosetta Books – has made a big play of the fact that they’re paying him a significantly higher royalty on sales than he was previously making on ebooks. Meanwhile Amazon has promised a huge site-wide promotional campaign for the titles.... I can’t fault my publisher on money: Weidenfeld & Nicolson has paid me not one, but two generous advances to write books about myself, and I’m certain I’ve cost them the same again in lawyers’ fees thanks to the legal threats I seem to attract prior to publication. I earn a decent royalty on ebook sales in the UK and Europe and, because I still own the US rights to my books, I was free to produce my own Kindle edition – limited to US customers – and take 100% of the profits. Equally, I can’t fault W&N on supporting my principles: largely because I don’t have any. No, the reason I found myself in my agent’s office earlier this week bitching about my publisher’s digital strategy was something even stronger than money and principle: my monstrous ego.... I now have more people reading my words each week in North America than I do in the UK.... [B]arely a day goes by without someone telling me they tried to find my book in the US, only to be disappointed that – due to publishing’s ridiculous obsession with territories – it’s only available outside North America. “It’s available on the Kindle” I say. “Pft” they reply, “I don’t have a Kindle”. In most cases I end up emailing them a PDF – a distribution model that doesn’t really scale... Who does Bloomberg think has the appetite to wade through 4,000 words on a single Californian bond deal in October? The answer is “probably no one” which means that most of the people reading Michael Marois’s article will read the first five paragraphs, conclude that California got royally ripped off by the troika of JP Morgan, Citigroup, and Goldman Sachs, and move on. If you read the whole thing, however, it’s not nearly as simple as that: the bond deal in question was in many ways perfectly timed, from the point of view of a major issuer, coming right when interest rates were at their low point. And it was huge —$4.14 billion — which is far too big to do an auction deal where the issuer sells to the banks directly, rather than using them to underwrite an issue aimed at real-money investors. What’s more, California sold the vast majority of the bonds it wanted to sell, while other states, like Maryland and Minnesota, sold as little as 25% of their intended issuance.... I kept waiting for the other shoe to drop — to read some piece of information which indicated that California could have done better than it did. But it never quite got there.... [B]anks made fat fees... for no more than a couple of weeks’ work and no real risk. But... California got 30-year bonds away at 7.23%, even after paying a steep 325bp spread over Treasuries. When the state came back to the market in November, the spread had come down to 300bp, but the yield was still slightly higher. Clearly this deal isn’t going to win any awards — it had to be shrunk from $4.5 billion to$4.14 billion; it priced significantly higher than the banks had led California to expect; and it soured the entire national market for municipal bonds.... I get the impression that the main criticism of the deal is that the banks persuaded California treasurer Bill Lockyer to sign on to a monster bond issue on the grounds that they could build a lot of buzz around a super-jumbo deal and that it would be a blowout success. The implication is that Lockyer — and the muni market as a whole — would have been much better off just saying no. There might be something to that — but at the same time the bond market had to turn at some point: interest rates never fall forever. And the less that California issued at those low rates, the more of a backlog it would have, and the more it would end up having to issue at higher rates...

8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Jacob Davies: A conversation that has happened more times in my career than I care to mention:

Someone else: "How long of a title shall we allow? 32 characters? 64?" Me: "FOR THE LOVE OF GOD WHY DO WE NEED TO SET A MAXIMUM LENGTH? IS THIS 1952???" Someone else: "But what if they put in a really long title and fill up the database?" Me: "THE VERY NEXT FIELD - THE 'CONTENTS' FIELD - IS A FREE-TEXT FIELD WITHOUT A LENGTH CONSTRAINT SO IF THEY WANTED TO FILL THE DATABASE THEY COULD DO IT THERE ANYWAY." Someone else: "Won't it waste space if we allow a variable-length string in the title?" Me: "OH MY GOD YES A TERRIFYING LOSS OF ABOUT 3 BYTES ON A RECORD THAT IS A MINIMUM OF 1024 BYTES LONG AND OFTEN OVER A MEGABYTE, YOU ARE SO RIGHT." Someone else: "Yes but every other system has a length constraint for titles." Me: "YES AND I SUPPOSE IF EVERYONE ELSE WAS JUMPING OFF A BRIDGE YOU'D DO IT TOO." etc. Computer programmers are subject to some kind of strange mental degeneration in which they rate the potential waste of 0.00001% of the capacity of a modern hard disk as more important than the ability to enter titles longer than 32 characters in length.

9) STUPIDEST THING I'VE READ TODAY: Outsourced to DanieL Larison: Eunomia » Fighting To Make Iran More Powerful:

Victor Davis Hanson... one line that was so strained and desperate.... Hanson: "Iran... many argued, was supposed to be have been empowered after we removed its nemesis Saddam Hussein. And, indeed, it sure looked that way when Iranian agents were stirring up violence in Iraq. Yet this year, a million Iranians went out in the streets to demand free and fair elections of the sort they hear constantly about across their border. In other words, perhaps the democratic experiment in Iraq — where Shiite Muslims enjoy freedom — will prove destabilizing in the long term to the Iranian theocracy." Deposing Hussein did increase Iranian influence and power in the region. That is simply what has happened. Groups that have long received official Iranian state backing, such as ISCI, have become major players in Iraqi government.... It would be refreshing if Iraq war supporters could at least attempt to make an argument that greatly expanded Iranian influence was an acceptable price to pay for whatever goods they think the invasion brought about, but they simply cannot allow that their war was strategically disastrous for U.S. interests according to their definition of those interests. These are the same people who are terrified when Iran tests a medium-range missile... but Iraq war supporters won’t own up to making the Iranian regime they detest far more powerful in the region. Why would anyone conclude that Iraq’s political experiment, which has so far yielded mass sectarian bloodletting, political deadlock and an ongoing foreign military presence that is only gradually coming to an end, would recommend itself to Iranian voters?...

10) FROM THE ARCHIVES: Brad DeLong: Kennedy School Conference:

## Support Health Care Reform!

Kevin Drum on how, living as we do not in Platonis politeia but instead in Romuli faece, it is time to close ranks and support health care reform:

Sleazy Sewers and Healthcare Reform | Mother Jones: Glenn Greenwald has this to say about the Senate healthcare bill now that the public option and the Medicare buy-in have been stripped out:

In essence, this reinforces all of the worst dynamics of Washington.  The insurance industry gets the biggest bonanza imaginable in the form of tens of millions of coerced new customers without any competition or other price controls.  Progressive opinion-makers, as always, signaled that they can and should be ignored [...] Most of this was negotiated and effectuated in complete secrecy, in the sleazy sewers populated by lobbyists, industry insiders, and their wholly-owned pawns in the Congress.  And highly unpopular, industry-serving legislation is passed off as "centrist," the noblest Beltway value.

This is pretty much correct.... Any honest observer has to concede that all this makes it hard to defend the final product.  Except for one thing: in 1994 Bill Clinton failed to get the support of these groups and healthcare reform died. If Obama had done the same, it would have died this year too.  There's really just no question about this. It's ugly, but that's the real world.... From any kind of progressive point of view it's hard to see how you could seriously argue that the current bill is a net harm. Sure, it makes compromises to powerful interests that are hard to swallow.  But that's why they're called powerful interests.... In return, though, the Senate bill brings down insurance rates, expands Medicaid, offers the prospect of moderately priced insurance to tens of millions of the uninsured, forces insurers to take you on even if you have a chronic pre-existing condition, mandates minimum levels of coverage, and takes several small but important steps toward reducing the future growth of healthcare costs. That's an enormous advance for the progressive agenda. There's an alternate universe out there in which you could get all this stuff without compromise based on the sheer force of progressive arguments.  Sadly, it's not this universe.  I sure hope we don't have to learn this the hard way yet again.

## The Manchester Guardian Regrets the Errors...

From the Invaluable "Regret the Error:" The Year in Media Errors and Corrections:

The Guardian (U.K.): A reply to a question in Notes & Queries yesterday recommended purchasing lion and tiger urine from Chester Zoo to stop neighbourhood cats from urinating in a vegetable patch (G2, page 17). Chester Zoo would like to forestall requests for its big cats’ urine: it asks us to make clear that it does not in fact sell either tiger or lion urine. Many years ago the zoo sold elephant dung, but it no longer does.

The Guardian (U.K.): A comment piece about achievement and frailty in the lives of artistic greats mentioned Wagner’s reminder to his favourite Vienna chambermaid to wear purple knickers next time they met. A Wagner expert points out that the pants in question were pink.

The Guardian (U.K.): This article was amended on Tuesday 20 January 2009. In our entry on Garrison Keillor’s Lake Wobegon Days, we referred to "A Prairie Ho Companion"; we meant "A Prairie Home Companion." This has been corrected.

## Ten Economics Paragraphs Worth Reading: December 19, 2009

Robert J. Samuelson has argued that extending health insurance to 25 million to 35 million uninsured Americans is undesirable unless and until health spending is controlled.... The House-passed bill and the one before the Senate would offset the spending necessary to extend coverage with other spending cuts and tax increases. These bills would reduce the deficit slightly over the first 10 years and more later. Samuelson disparages the budget cuts because Congress has not always enforced promised spending reductions. Congress has, however, repeatedly stuck with promised cuts in health-care spending... [that are] gradual. In contrast, Congress has refused to enforce poorly designed, meat-ax cuts in physicians' fees. Those cuts were so draconian that thousands of physicians were likely to have stopped serving Medicare patients. The poor design is regrettable. The failure to enforce a bad policy is not. In his column this week, Samuelson cited a Center for American Progress study and seemed to accept its estimates. But according to that study, the bills under consideration would shave more than $1 trillion from national health-care spending and use half that money to extend coverage. Yet Samuelson says that isn't good enough.... It is easy to write about the need to transform health care and the evils of the fee-for-service system. But vague commentary does not help transform a$2.6 trillion industry -- an entity as large as the economy of Britain...

[I]f the Fed really wanted to anchor [inflaiton] expectations they would announce an explicit target....  But the Fed refuses to set any explicit target.... [T]he real problem is the very low inflation since mid-2008, and the low expected inflation over the next two years.  These low inflation expectations are consistent with an economy suffering from a severe demand shortfall in the near term.... How would setting such a target “cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward.”  That makes no sense at all.... If the optimal rate of inflation is exactly the same as the current expected rate (which is implied by his answer) then is the Fed is implicitly claiming that additional AD would be unwelcome in an economy with 10% unemployment, an economy where this year’s NGDP will fall at the fastest rate since 1938.  Does the Fed really want to say that additional AD would be unwelcome?  They can’t have it both ways.  If we need additional AD, then we need higher inflation expectations. I found this answer infuriating because he danced around all the important issues....  If you are serious about inflation targeting and have a symmetrical response function, then by necessity there will be times when you wish inflation to be a bit higher.  And if this is not such a time, a year when we have experienced the first deflation since 1955, then will there ever be a time when the Fed tries to boost inflation expectations?  If not now, when?...

Right now, real interest rates are too high... the economy is clearly operating far below capacity due to insufficient demand. The cost of that insufficient demand is enormous.... While real interest rates are too high, however, the short-term nominal rate is as low as it can go. So there are only two ways real rates can be reduced. Either the Fed has to buy long-term assets, driving down the wedge between short and long rates — the Gagnon proposal, which comes out of Ben Bernanke’s own work — or it needs to raise expected inflation. Or it could and probably should do both. But it is, in fact, doing neither. Why? Because of fear that the Fed would lose credibility as a staunch inflation-fighter. Future economic historians will, I believe, see this as fundamentally absurd — as absurd as the inflation fears that paralyzed the Bank of England in the early 1930s even as the world went into a deflationary spiral.... [A]s far as I can see nobody is even trying to assess these alleged tradeoffs seriously. Instead, the notion of an unchanging inflation target — not to be revised even in the face of the worst slump since the Depression — has acquired a sort of mystical force; it has become identified with the notion of Civilization, in much the way that a previous generation assigned mystic significance to the gold standard. Ben Bernanke, we’re told, is a great admirer of Liaquat Ahamed’s Lords of Finance; so am I. All the more irony, then, that Ben has, without realizing it, turned into Montagu Norman...

[O]ne would expect that the Peterson-Pew report would really lay it on the line, tell it like it is and put forward a serious, detailed plan for cutting the deficit that left no sacred cow unscarred. Sadly, it did none of these things. Its big recommendation is to stabilize the public debt at 60% of the gross domestic product by 2018. I was unable to find a single, solitary deficit reduction proposal anywhere in the report—not $1 of spending that should be cut nor$1 of revenues that should be raised. The whole report consists of nothing but hand-wringing and platitudes about the seriousness of the deficit problem, and how important it is that someone address it one of these days. To be fair, the Peterson-Pew Commission did post on its Web site an illustrative list of possible spending cuts and revenue increases that would achieve its goal of merely stabilizing the debt/GDP ratio. However, they are all rather vague--eliminating outdated programs, reforming contracting, broadening the tax base and the like--and none was officially endorsed by the commission or included in its official report...

There is much more to be gained much more quickly by implementing a jobs package using fiscal policy measures than by attacking the problem with quantitative easing alone. As I said, perhaps monetary policy could help, I’ve been in favor of a portfolio approach to policy from the start, but why have people suddenly stopped talking about a jobs package, stopped putting pressure on congress to do something? Just as the voices for another stimulus package began to grow louder and get some attention and political traction, the voices stopped and suddenly turned to the Fed, as though the Fed could solve the employment problem with a wave of its magic QE wand. It can’t. Given enough time it can perhaps be part of the solution, so I’m not saying that people shouldn’t try to get the Fed to change course. But I am going to continue to focus mainly on fiscal policy because I think it will do the most good. I don’t want to give congress the easy out of pointing their fingers at the Fed and saying it’s their fault, not ours, but the way is being paved for congress to do just that...

A recent proposal to allow people aged 55 to 64 to “buy in” to Medicare would have done relatively little to increase competition in the market for health insurance, and health reformers should not greatly mourn its removal.... The pending health reform legislation would create a system of health insurance marketplaces.... Plans would not be allowed to turn people away, charge higher rates because of their health status, or deny coverage for pre-existing conditions.... Low-income people would receive a tax credit.... Medicare has been a great success and is highly popular.... In the absence of broader reforms to extend coverage to the uninsured, allowing older people to purchase (or “buy into”) Medicare coverage has much to recommend it as an incremental improvement.... In the context of comprehensive health reform, however, as one option within the exchange, a Medicare buy-in loses much of its attraction.... Medicare likely would cost more for people aged 55 to 64 than other plans offered in the exchanges because it would cover only people age 55 and over — its risk pool would not include younger people, who tend to be healthier and less costly. Medicare’s lower administrative expenses and lower payment rates to health care providers would offset some, but probably not all, of the higher costs...

9) STUPIDEST THING I HAVE READ TODAY: Michael D. Tanner: Five Health Reform Whoppers:

[I'm not going to reproduce any of it here: the Cato Institute should be very ashamed of what it is turning into.]

10) FROM THE ARCHIVES: J. Bradford DeLong (July 25, 2006): The Invisible College:

I am greedy. I want more. I would like a larger college, an invisible college, of more people to talk to, pointing me to more interesting things. People whose views and opinions I can react to, and who will react to my reasoned and well-thought-out opinions, and to my unreasoned and off-the-cuff ones as well. It would be really nice to have Paul Krugman three doors down, so I could bump into him occasionally and ask, "Hey, Paul, what do you think of..." Aggressive younger people interested in public policy and public finance would be excellent. Berkeley is deficient in not having enough right-wingers; a healthy college has a well-diversified intellectual portfolio. The political scientists are too far away to run into by accident — somebody like Dan Drezner would be nice to have around (even if he does get incidence wrong sometimes). Over the past three years, with the arrival of Web logging, I have been able to add such people to those I bump into — in a virtual sense — every week. My invisible college is paradise squared, for an academic at least. Plus, Web logging is an excellent procrastination tool...

## Liveblogging Your Personal Final Exam Nightmare...

So there I was, hanging out in Hearst Gymnasium 230 waiting for my final exam to begin at 12:30. And people began showing up--my students, and some others. "Is this the room for the exam for the Soc 160 exam?" the others would say.

"Well," I said, "I don't think so. This is the room for the Econ 115 exam."

I went to the computer and consulted the final exam schedule: "Soc 160: 4 Leconte 5:30-8:30 Thursday December 17" the registrar said.

"I'm sorry," I said.

Their faces turned ashen.

They said: "But our teacher just emailed us! She told us that our exam had been moved from Evans to Hearst Gym 230!"

I went back to the computer: "Soc 160: 4 Leconte 5:30-8:30 Thursday December 17" it still said.

"I'm sorry," I said.

They huddled off in a corner. "Should we go back to Evans?" they asked. "The registar says your exam was yesterday afternoon in LeConte," I pointed out..

And more arrived. Now there were fifteen. I started changing my answer: "The registrar says your exam was yesterday evening, but since there are fifteen of you here I declare it to be a social fact that this is the exam for Sociology 160." I'll write a big sociology-of-culture essay question on the blackboard and then send the exams with a note to the teacher, I thought to myself.

Then Professor Fourcade showed up to save the day.

We consulted. I went back to my computer. Now it said: "Soc 160: 220 Hearst 12:30-3:30 Friday December 18."

"It said something different half an hour ago," I said. "It says 220," I said.

We looked down the hall. 220 was completely empty--not a soul in it.

Professor Fourcade shrugged. "The registrar emailed me 230," she said.

And now for the past twenty minutes students have been shamefacedly coming up to the front, and asking to switch their exams--either Econ or Soc--for the other one.

I wonder how many of the students will do the wrong exam and hand it in?

Two 200+ people courses in one converted basketball court. We are surely breaking the fire laws...

## Time for Some Hand-Forcing at the Fed?

Ben Bernanke:

Macro and Other Market Musings: Monetary Policy Quote of the Day: The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored...

Bernanke... A look at the average 10-year inflation forecast from the Survey of Professional Forecasters says Bernanke should not be worried about inflation expectations. They have been anchored relatively well since 1997 around 2.5 percent. Too bad Paul Krugman was not beating his influential drum with a message of inflation targeting--or in my dream world nominal income targeting--over the past year or so. Maybe others would have joined in and forced Bernanke and the Fed to think more about this option. Krugman admitted recently it would have been the first-best economic solution to the current crisis, but avoided doing so because he thought it would be a second-best political solution. (He thought expansionary fiscal policy would be more politically feasible.)... David Wessel in his new book reports that Bernanke came into the Fed wanting to target inflation. He faced, however, strong opposition and (unlike his predecessor) wanted to be a consensus builder at the Fed. He did not want to force his hand on the FOMC.

One possibility is that the center of gravity of the FOMC is way behind the times--that we need to strongly encourage at least six reserve bank presidents to resign and make way for people with stronger macroeconomic analysis muscles, or we need to change the membership of the FOMC...

## Will Wilkinson on the Pringles Problem

Will Wilkinson likes extruded salt-based potato product, and writes about monetary policy:

Bernanke and the Pringles Problem: I guess we could call it the “Pringles Problem.”... Bernanke seems to think that if the Fed tries to increase long-term inflation expectations once, a fair portion of the public will suspect that the Fed won’t be able stop, will act on the expectation of runaway inflation, and everything will go to s---... “such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward.” OK. But I believe that the Fed can eat just one. Bernanke believes the Fed can eat just one.... But some significant part of the “the public” does not. How exactly does one measure the public’s position on the Pringles/Lay’s Problem?... Is there survey evidence about this? Anything? If the Fed can’t credibly signal a commitment to a theoretically sound monetary policy, why not?... [M]y educated hunch is that there is no sound technocratic science here, just the educated hunches of cautious technocrats. May Bernanke’s gut be true.

My hunch is that the right quote to grasp for is R. G. Hawtrey's, on those who in 1930-1933 were worried about excessive inflation. He said they were:

crying "Fire! Fire!" in Noah's Flood.

OK. It's 10% unemployment in America, not 23%. And the world's second industrial power's president is not about to appoint Adolf Hitler as Reichskanzler. So take a deep breath. Calm down...

## Five Economics Paragraphs Worth Reading: December 18, 2009

The last time I taught this course in the Spring of 2007, the key topics were inflation, the possibility of stagflation, and the possibility of containing the ongoing housing slowdown.... [This] semester... [the] two big concerns were (1) dealing with the Taylor rule, and (2) dealing with the banking sector. A less difficult-to-deal issue is the consumption function.... Over the past ten years, the trend in macro textbooks has been to dispense either partly or fully with the IS-LM construct... and substitute in a monetary reaction function... This was a useful innovation, but was difficult to apply... as of late 2008 as the zero interest bound became a reality for American policymakers.... So, IS-LM still seems to be a useful construct for analyzing fiscal and monetary policy efficacy... [for it] can accommodate the fiscal policy pessimists (as I discuss in my post here), and (of course) the liquidity trap critique of monetary policy (keeping in mind Joe Gagnon's point). Of course, conveying the idea of credit easing is still hard to convey in this simple construct. Which leads me to challenge number (2), namely how to incorporate different aspects of the financial sector. I chose to use a fairly simple framework, namely the Bernanke-Blinder CC-LM model... provide[s] a rationale for Fed actions in terms of quantitative easing shifting out both the CC and LM curves.... Finally... discussion of how consumption depends on both current disposable income and net household wealth is essential.... Of course, in adding new material to the undergrad course, some material has to be dropped... the New Classical models (the Lucas supply curve, and Real Business Cycle models).

Volcker, legendary former chairman of the Federal Reserve Board with much more experience of Wall Street than any current policymaker, was blunt: We need to break up our biggest banks and return to the basic split of activities that existed under the Glass-Steagall Act of 1933.... Volcker is basically saying that what the administration has proposed and what Congress looks likely to enact in early 2010 is essentially — bunk. Speaking to a group of senior finance executives... Volcker made his point even more forcefully.  There is no benefit to running our financial system in its current fashion, with high risks (for society) and high returns (for top bankers).  Most of financial innovation, in his view, is not just worthless to society – it is downright dangerous to our broader economic health. Volcker only makes substantive public statements when he feels important issues are at stake...

Brad DeLong had asked: "Why haven’t you adopted a 3% per year inflation target?" And Mr Bernanke responded.... I can't imagine getting a more direct answer from the chairman than that. Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk. Personally, I think that Mr Bernanke owes us all a better explanation of why he has opted to place so much more emphasis on the price stability aspect of his mission than the full employment aspect. And, there should be a policy debate on this question, the resolution of which should inform the choice to reappoint (or not) Mr Bernanke. But that's clearly not going to happen. It's unfortunate. But it is what it is. Best to focus on the next question—how to minimise the fall-out from five or more years of high unemployment.

To gauge a converging country’s degree of undervaluation, the appropriate yardstick cannot be purchasing power parity; it should rather be the regression (over 145 countries) that provides the best fit for the Balassa-Samuelson effect. While the renminbi was undervalued by 60% in PPP terms, it was merely undervalued by 12%, if the regression fitted value for China’s per capita income level is compared to the current value in 2008. Note that India and South Africa (which had a current account deficit) were more undervalued than China by that Balassa-Samuelson benchmark, by 16% and 20%, respectively, in 2008. The currencies of Brazil and Russia were appropriately valued, i.e. close to the regression line...

I’m having increasing trouble identifying with the religious-like fervor many deficit hawks are expressing these days.  I also don’t think the hawks are advancing the debate by their take-no-prisoners attitude that often seems to cross the line to zealotry. I need to emphasize from the start that I’m talking about real, substantively based deficit hawks rather than those who condemn deficits only when it suits their political purposes. This definitely does not include those who only think the deficit is terrible when the other political party is in the majority. In my mind you don’t qualify as hawk if you talk about the deficit but then fail to support the spending cuts and tax increases that would actually reduce it. In case anyone is wondering, you also aren’t a deficit hawk if all you do is support largely symbolic efforts like process changes. But I’m getting ahead of myself. Let me start from the beginning...

## Julian Sanchez on the Republican Party: Expect the Craziness to Get Worse Before It Gets Better

He has some very smart things to say:

The Politics of Ressentimentt: The word he wants is ressentiment:

Ressentiment is a sense of resentment and hostility directed at that which one identifies as the cause of one’s frustration, an assignation of blame for one’s frustration. The sense of weakness or inferiority and perhaps jealousy in the face of the “cause” generates a rejecting/justifying value system, or morality, which attacks or denies the perceived source of one’s frustration. The ego creates an enemy in order to insulate itself from culpability.

Conservatism is a political philosophy; the farce currently performing under that marquee is an inferiority complex in political philosophy drag.... [T]he pathology of the current conservative movement is... specific and  convoluted. Palin irritates the left, but so would lots of vocal conservatives if they were equally prominent—and some of them are probably even competent to hold office. Palin gets to play sand in the clam precisely because she so obviously isn’t. She doesn’t just irritate liberals in some generic way: she evokes their contempt.... Think back to the 2004 RNC—which I happened to be up in New York  covering. After witnessing three days of inchoate, spittle-flecked rage from the people who had the run of all three branches of government, some wag (probably Jon Stewart) puzzled over the “anger of the enfranchised.” And it would be puzzling if the driving force here were a public policy agenda, rather than a set of cultural grievances.... The secret shame of the conservative base is that they’ve internalized the enemy’s secular cosmopolitan value set and status hierarchy—hence this obsession with the idea that somewhere, someone who went to Harvard might be snickering at them.

The pretext for converting this status grievance into a political one.... Check out the RNC’s new ad on health reform, taking up the Tea Party slogan “Listen to Me!” There’s almost nothing on the substantive objections to the bill; it’s fundamentally about people’s sense of powerlessness in a debate that seems driven by wonks.... [C]onsider the study Ryan Sager highlighted a while back, showing that many SUV owners don’t merely think their choice of vehicles is harmless or morally neutral, but positively virtuous.... [T]his is classic ressentiment: It’s not just that SUVs are great in themselves because they somehow “embody” some set of ideals. They’re good just because they symbolize an inversion of the “anti-American” values of critics. Second, think what it reveals that people feel the need to construct these kinds of absurd rationalizations—to make their cars heroic.... It betrays an incredible sensitivity, not to excessive taxes or regulations on the vehicles, but to the feeling of being judged....

Even if conservatives retook power, they wouldn’t be able to provide a political solution to a psychological problem.... It effectively says: We cede to the bogeyman cultural elites the power of stereotypical definition, so becoming the stereotype more fully and grotesquely is our only means of empowerment. To see how the difference between ressentiment and simple schadenfreude matters, consider Palin one more time.  If the goal is just to antagonize liberals, making her the Republican standard-bearer seems tactically bizarre, since ideally you want someone who isn’t so repugnant to independents as to be unelectable. If the animating force is ressentiment,  the leader has to be a loser to really deserve the role. Which is to say, expect the craziness to get worse before it gets better.

## Ultimate Food Blogging by Avram Gruner

Shall we just say that I am so much in awe of Avram Gruner, and leave it at that?

Avram Gruner: Paarfi of Roundwood, author of the Quixote: Ever since high school, when I read Steven Boyett’s Ariel, I’ve been meaning to read Don Quixote, but I still haven’t gotten around to it, partly because I can’t decide which translation to read. (What I really oughta do is learn Spanish so I can read it, and Borges, in the originals, and to get back at Chris for knowing more Yiddish than I do.)

Today, I looked up a bunch of translations on Google Books, and compared their opening paragraphs. These all introduce Quixote, mentioning that he keeps old knightly gear (lance, shield, horse, greyhound), and describe the food and clothing that consume his money. The different approaches to describing Quixote’s food are striking, and seems to have been the subject of considerable scholarly effort.

Here’s Cervantes himself:

Una olla de algo más vaca que carnero, salpicón las más noches, duelos y quebrantos los sábados, lentejas los viernes, algún palomino de añadidura los domingos, consumían las tres partes de su hacienda...

And we are off and running. Read the whole thing. Read it all.

## Well, Back to Fiscal and Banking Policy...

Free Exchange parses Ben Bernanke:

Free Exchange: From the horse's mouth: I can't imagine getting a more direct answer from the chairman than that. Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk. Personally, I think that Mr Bernanke owes us all a better explanation of why he has opted to place so much more emphasis on the price stability aspect of his mission than the full employment aspect. And, there should be a policy debate on this question, the resolution of which should inform the choice to reappoint (or not) Mr Bernanke. But that's clearly not going to happen. It's unfortunate. But it is what it is. Best to focus on the next question—how to minimise the fall-out from five or more years of high unemployment.

From my perspective, the most interesting thing is that I believe that the Ben Bernanke of ten or even five years ago would have advocated adopting a 3% inflation target under circumstances like those of today.

## Summer 2010: U.C. Berkeley: The Twentieth Century: Economies, Polities, Societies, and Technologies

Next summer's offerings: PEIS 160A under the more general rubric of PEIS 160: Political Economy in Historical Context

PEIS 160A Summer 2010 Draft Syllabus

PEIS 160A COCI Supplement for Online Courses

The different and interesting thing about this particular summer school offering is that--if we get our approval from COCI--we are going to be trying to do it online instead of in one of the lecture halls:

Live chat rooms, projects, real-world case studies, and interactions with your fellow students and instructors give you many ways to learn. Courses in a wide range of subjects—from the history of Islam to an introduction to statistics—ensure UC Berkeley Extension has the online education you want.

There are many potential benefits to doing courses online: time-shifting, place-shifting, eliminating the danger that the lecturer is simply having an off-day, the possibility of speeding-up the lecture so you can listen to it in half the time (at the price of having the lecturer by Alvin the Chipmunk), better integration of active learning computer and other calculation exercises with the course, et cetera.

There are also costs--which seem to me to be mostly connected to our East African Plains Ape nature as herd animals. I fear these costs may be very large and that as a result this may not work very well--if it did, after all, education would have been utterly transformed by Gutenberg, and it wasn't really.

But we are going to try, COCI willing and the crick don't riz...

## Senate Banking Committee Bernanke Vote

A correspondent emails:

Final vote is 16-7 for Bernanke. That is much tighter than I expected. Every Democrat except Merkley voted yes.

Krishna Guha:

FT.com | Money Supply | Bernanke has a Republican problem: Another Republican swing vote that looked as if it was up for grabs has just gone against Bernanke - Kay Bailey Hutchison. Bernanke can rely on Republicans Bob Corker and Judd Gregg. But with David Vitter also saying he does not want to proceed before there is more information on AIG - and hardcore opponents Jim Bunning and Jim De Mint guaranteed No votes - that looks like at least half the Republican group on the commitee against by my calculations.

This follows an earlier blow for Fed chairman Ben Bernanke - Richard Shelby, the ranking Republican on the Senate Banking Committee, will vote against Bernanke’s reconfirmation for a second term. I think that could mean half or more of the Republicans say no.

Bernanke should still win the vote, but a Republican revolt is a problem. A narrow mandate would not stop him doing what he wants as Fed chief - but it would weaken his hand further in the political debate about reforms that would weaken the Fed’s powers and independence. Plenty to worry about here.

## Ben Bernanke Takes His Macroeconomics Exam

Sudeep Reddy:

Sen. Vitter Presents End-of-Term Exam For Bernanke: Earlier this month, Real Time Economics presented questions from several economists for the confirmation hearing of Federal Reserve Chairman Ben Bernanke.  Many of the questions were addressed at the hearing, though not always directly. Sen. David Vitter (R., La.) submitted them in writing and received the  responses from Bernanke, along with his own other questions.  We offer them here.

The Wall Street Journal reported on some questions that different economists felt that you should answer. Let me borrow from some of those and I will credit them with their questions accordingly:

A. Anil Kashyap, University of Chicago Booth Graduate School of Business: With the unemployment rate hovering around 10%, the public seems outraged at the combination of three things: a) substantial TARP support to keep some firms alive, b) allowing these firms to pay back the TARP money quickly, c) no constraints on pay or other behavior once the money was repaid. Was it a mistake to allow b) and/or c)?

TARP capital purchase program investments were always intended to be limited in duration. Indeed, the step-up in the dividend rate over time and the reduction in TARP warrants following certain private equity raises were designed to encourage TARP recipients to replace TARP funds with private equity as soon as practical. As market conditions have improved, some institutions have been able to access new sources of capital sooner than was originally anticipated and have demonstrated through stress testing that they possess resources sufficient to maintain sound capital positions over future quarters. In light of their ability to raise private capital and meet other supervisory expectations, some companies have been allowed to repay or replace their TARP obligations. No targeted constraints have been placed on companies that have repaid TARP investments. However, these companies remain subject to the full range of supervisory requirements and rules. The Federal Reserve has taken steps to address compensation practices across all firms that we supervise, not just TARP recipients. Moreover, in response to the recent crisis, supervisors have undertaken a comprehensive review of prudential standards that will likely result in more stringent requirements for capital, liquidity, and risk management for all financial institutions, including those that participated in the TARP programs.

B. Mark Thoma, University of Oregon and blogger: What is the single, most important cause of the crisis and what s being done to prevent its reoccurrence? The proposed regulatory structure seems to take as given that large, potentially systemically important firms will exist, hence, the call for ready, on the shelf plans for the dissolution of such firms and for the authority to dissolve them. Why are large firms necessary? Would breaking them up reduce risk?

The principal cause of the financial crisis and economic slowdown was the collapse of the global credit boom and the ensuing problems at financial institutions, triggered by the end of the housing expansion in the United States and other countries. Financial institutions have been adversely affected by the financial crisis itself, as well as by the ensuing economic downturn.

This crisis did not begin with depositor runs on banks, but with investor runs on firms that financed their holdings of securities in the wholesale money markets. Much of this occurred outside of the supervisory framework currently established. An effective agenda for containing systemic risk thus requires elimination of gaps in the regulatory structure, a focus on macroprudential risks, and adjustments by all our financial regulatory agencies.

Supervisors in the United States and abroad are now actively reviewing prudential standards and supervisory approaches to incorporate the lessons of the crisis. For our part, the Federal Reserve is participating in a range of joint efforts to ensure that large, systemically critical financial institutions hold more and higher-quality capital, improve their risk-management practices, have more robust liquidity management, employ compensation structures that provide appropriate performance and risk-taking incentives, and deal fairly with consumers. On the supervisory front, we are taking steps to strengthen oversight and enforcement, particularly at the firm-wide level, and we are augmenting our traditional microprudential, or firm-specific, methods of oversight with a more macroprudential, or system-wide, approach that should help us better anticipate and mitigate broader threats to financial stability.

Although regulators can do a great deal on their own to improve financial regulation and oversight, the Congress also must act to address the extremely serious problem posed by firms perceived as “too big to fail.” Legislative action is needed to create new mechanisms for oversight of the financial system as a whole. Two important elements would be to subject all systemically important financial firms to effective consolidated supervision and to establish procedures for winding down a failing, systemically critical institution to avoid seriously damaging the financial system and the economy.

Some observers have suggested that existing large firms should be split up into smaller, not-toobig- to-fail entities in order to reduce risk. While this idea may be worth considering, policymakers should also consider that size may, in some cases, confer genuine economic benefits. For example, large firms may be better able to meet the needs of global customers. Moreover, size alone is not a sufficient indicator of systemic risk and, as history shows, smaller firms can also be involved in systemic crises. Two other important indicators of systemic risk, aside from size, are the degree to which a firm is interconnected with other financial firms and markets, and the degree to which a firm provides critical financial services. An alternative to limiting size in order to reduce risk would be to implement a more effective system of macroprudential regulation. One hallmark of such a system would be comprehensive and vigorous consolidated supervision of all systemically important financial firms. Under such a system, supervisors could, for example, prohibit firms from engaging in certain activities when those firms lack the managerial capacity and risk controls to engage in such activities safely. Congress has an important role to play in the creation of a more robust system of financial regulation, by establishing a process that would allow a failing, systemically important non-bank financial institution to be wound down in an orderly fashion, without jeopardizing financial stability. Such a resolution process would be the logical complement to the process already available to the FDIC for the resolution of banks.

C. Simon Johnson, Massachusetts Institute of Technology and blogger: Andrew Haldane, head of financial stability at the Bank of England, argues that the relationship between the banking system and the government (in the U.K. and the U.S.) creates a “doom loop” in which there are repeated boom-bust-bailout cycles that tend to get cost the taxpayer more and pose greater threat to the macro economy over time. What can be done to break this loop?

The “doom loop” that Andrew Haldane describes is a consequence of the problem of moral hazard in which the existence of explicit government backstops (such as deposit insurance or liquidity facilities) or of presumed government support leads firms to take on more risk or rely on less robust funding than they would otherwise. A new regulatory structure should address this problem. In particular, a stronger financial regulatory structure would include: a consolidated supervisory framework for all financial institutions that may pose significant risk to the financial system; consideration in this framework of the risks that an entity may pose, either through its own actions or through interactions with other firms or markets, to the broader financial system; a systemic risk oversight council to identify, and coordinate responses to, emerging risks to financial stability; and a new special resolution process that would allow the government to wind down in an orderly way a failing systemically important nonbank financial institution (the disorderly failure of which would otherwise threaten the entire financial system), while also imposing losses on the firm’s shareholders and creditors. The imposition of losses would reduce the costs to taxpayers should a failure occur.

D. Brad Delong, University of California at Berkeley and blogger: Why haven’t you adopted a 3% per year inflation target?

The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.

## Unemployment Insurance Claims

Last week the number of unemployment insurance claims dropped--but not by quite as much as the seasonal adjustment factor was expecting. So reported seasonally-adjusted claims rose by 7000.

Last year over the next three weeks--the last weeks of the year--weekly claims rose by more than 300,000, but because the seasonal adjustment factor was expecting them to rise by more than 400,000 the seasonally-adjusted numbers claimed that the economy was getting better, or at least getting worse more slowly. It was misleading.

Ask me in February about the real state of the labor market. I won't have much of a clue until then...

## Five Economics Paragraphs Worth Reading: December 17, 2009

Time giving Ben Bernanke its Person of the Year honors seems to me to say a lot about where we are as a society. Bernanke... follows basically conventional thinking and doesn’t make any unusual errors. Unfortunately, conventional thinking and normal errors lead into a major financial panic and the worst recession in 70 years. Then during the desperate fall of 2008 Bernanke takes decisive action and helps put a floor on the collapse. By spring 2009 it’s clear that this will be the worst recession since the end of the Great Depression.... At this point he basically unfurls a “Mission Accomplished” banner, says ten percent unemployment is okay by him, and if congress wants to do anything fiscally it should look at cutting Social Security benefits.... [That] demonstrates a very specific class skew—extraordinary intervention into the market place just long enough to fix the situation from the point of view of asset-owners while leaving wage-earners holding the bag. But the owners and managers and editors of Time Magazine and the companies that advertise in it probably don’t care so much about that. In a lot of respects it strikes me as the most fitting possible choice, an eloquent statement about where America is in 2009...

I warned you, back in 2001! "So in the law as now written, heirs to great wealth face the following situation: If your ailing mother passes away on Dec. 30, 2010, you inherit her estate tax-free. But if she makes it to Jan. 1, 2011, half the estate will be taxed away. That creates some interesting incentives. Maybe they should have called it the Throw Momma From the Train Act of 2001." And it’s happening: "At the beginning of 2010, the Bush estate tax plan is scheduled to change such that all estates, up to any value, are excluded. Because the tax bill was passed through reconciliation, however, it has a ten-year time frame, meaning that the law expires at the end of 2010. And that means that the heirs of fortunes received in 2010 will pay no tax, while heirs getting theirs in 2011 will pay 50% of the value of the estate to the Internal Revenue Service. Perhaps you notice the uncomfortable incentive structure here."...

[T]he people lining up to praise Bernanke include Stanley Fischer; Mervyn King; monetary historian Liaquat Ahamed (who wrote the book Bernanke “wishes he had written himself”); Alan Greenspan; Frederic Mishkin; Jean-Claude Trichet; Kevin Warsh; Tim Geithner; and Hank Paulson. It’s heavy on Davos-circuit central bankers — the kind of men who instinctively circle their own wagons in times of crisis and will always say nice things about each other if asked. Besides, substantially all of them, bar Ahamed, would implicitly be criticizing themselves if they said anything bad about Bernanke’s decisions: they all signed on to what he did. Grunwald himself has clearly decided that Bernanke is a hero, dismissing serious criticism of say the decision to let Lehman fail by simply saying that “it’s not clear how the Fed could have saved Lehman without a buyer”. (Of course there was a buyer — Barclays — and it’s precisely by stepping in with some short-term Bear-style financing that the Fed and Treasury could have allowed a smooth acquisition to proceed.)...

4) STUPIDEST THING I HAVE READ TODAY: Jonathan Adler: The Volokh Conspiracy: Over the Limit:

CBSNews.com reports that, at least by some measures, the U.S. has exceeded the legally authorized debt limit.... The ceiling was set at $12.104 trillion dollars. The latest posting by Treasury shows the National Debt at nearly$12.135 trillion... [No it has not: as the Treasury says, the National Debt is a different debt concept than the debt subject to the Congressionally-mandated limit: the difference is made up of "unamortized discount[s] on Treasury bills and zero coupon Treasury bonds, miscellaneous debt (very old debt), debt held by the Federal Financing Bank[,] and guaranteed debt...]

What do we do now?... We do two things. First, we have the Federal government reduce the supply of risky financial assets by having the government buy or guarantee (thus making the assets no longer risky, you see) or support the purchase of mortgages (and other things) and so push the private financial-sector supply of financial assets to the left. Second, we have the Federal government "encourage" the financial sector to recapitalize itself, thus pushing the supply up and to the right... pushing up the prices and reducing the interest rates charged on financial assets, making the good equilibrium reappear, and keeping us out of depression.... That, in a nutshell with simple graphs, is what Larry is saying, with the addition that he thinks that we now have in motion enough policy moves to resolve the crisis and save the world economy from depression...

## Winston Churchill Liveblogs World War II: December 17, 1939

December 17, 1939:

Force K, comprising the Renown and Ark Royal, was completing a sweep which had begun at Capetown ten days before and was now six hundred miles east of Pernambuco and 21,j00 miles from Montevideo. Farther north still the cruiser Neptune, with three destroyers, had just parted company with the French Force X and was coming south to join Force K. All these were ordered to Montevideo;.they had ﬁrst to fuel at Rio. However, we succeeded in creating the impression that they had already left Rio and were approaching Montevideo at thirty knots.

On the other side of the Atlantic Force H was returning to the Cape for fuel after an extended sweep up the African coasts. Only the Dorsetshire was immediately available at Capetown, and she was ordered at once to join Admiral Harwood, but she had nearly 4,000 miles to travel. She was followed later by the Shropshire. In addition, to guard against the possible escape of the Spee to the eastward, Force I, now comprising the Cornwall, Gloucester, and the aircraft-carrier Eagle from the East Indies station, which at this time was at Durban, was placed at the disposal of the C.-in-C. South Atlantic.

Meanwhile Captain Langsdorif telegraphed on December 16 to the German Admiralty as follows:

Strategic position off Montevideo. Besides the cruisers and destroyers, Ark Royal and Renown. Close blockade at night; escape into open sea and break-through to home waters hopeless.... Request decision on whether the ship should be scuttled in spite of insufﬁcient depth in the estuary of the Plate, or whether internment is to be preferred.

At a conference presided over by the Fuehrer, at which Raeder and Jodl were present, the following answer was decided on:

Attempt by all means to extend the time in neutral waters.... Fight your way through to Buenos Aires if possible. No internment in Uruguay. Attempt effective destruction if ship is scuttled.

As the German envoy in Montevideo reported later that further attempts to extend the time-limit of seventy-two hours were fruitless, these orders were conﬁrmed by the German Supreme Command.

Accordingly during the afternoon of the 17th the Spee transferred more than seven hundred men, with baggage and provisions, to the German merchant ship in the harbour. Shortly afterwards Admiral Harwood learnt hat she was weighing anchor. At 6:15 p.m., watched by immense crowds, she left harbour and steamed slowly seawards, awaited hungrily by the British cruisers. At 8.54 p.m., as the sun sank, the Ajax's aircraft reported: "Graf Spee has blown herself up." The Renown and Ark Royai were still a thousand miles away.

Langsdorif was broken-hearted by the loss of his ship. In spite of the full authority he had received from his Government, be wrote on December 19:

I can now only prove by my death that the ﬁghting services of the Third Reich are ready to die for the honour of the ﬂag. I alone bear the responsibility for scuttling the pocket-battleship Admiral Graf Spee. I am happy to pay with my life for any possible reﬂection on the honour of the ﬂag. I shall face my fate with ﬁrm faith in the cause and the future of the nation and my Fuehrer.

That night he shot himself.

Thus ended the ﬁrst surface challenge to British trade on the oceans. No other raider appeared until the spring of 194o, when a new campaign opened, utilising disguised merchant ships. These could could more easily avoid detection, but on the other hand could be mastered by lesser forces than those required to destroy a pocket-battleship.

## Ten Economics Paragraphs Worth Reading: December 16, 2009

Serious People (and Fox News) are rallying around the idea that if Obama really wants to create jobs, he should cut the minimum wage.... [R]educing wages would at best do nothing for employment; more likely it would actually be contractionary.... The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?... [T]he textbook argument... lower wages lead to a lower overall price level. This increases the real money supply, and therefore liquidity. As people try to make use of their excess liquidity, interest rates go down, leading to an overall rise in demand.... [Y]ou could achieve the same effect, much more easily, simply by having the Fed increase the money supply. But what if we’re in a liquidity trap, with short-run interest rates at zero? Then the Fed can’t achieve anything by increasing the money supply; but by the same token, wage cuts do nothing to increase demand. Wait, it gets worse. A falling price level raises the real value of debt. To the extent that debtors are more likely to cut spending in such a case than creditors are to increase it — which seems likely — the effect of the wage cuts will actually be a fall in demand. And... to the extent that people expect further declines in wages and prices, this raises real interest rates, which is even more contractionary. So proposing wage cuts as a solution to unemployment is a totally counterproductive idea. Not that I expect any of this discussion to make any impact on those proposing it.

Congress is trying to figure out what to do. It has only two basic options on the table: Extend the 2009 rules (a 45 percent rate and a $3.5 million exemption) for another year or two and figure it all out when it addresses the rest of the expiring Bush tax cuts in 2010. Or find on a permanent fix. The House has agreed to extend the current rules permanently. The Senate, tied in knots over the health bill, is likely to go for a temporary fix, but no-one knows when. Sometime soon, this will all sort itself out. But Congress is playing a game of hide-the-pea here. Most of the attention has been on the size of the exclusion. Should all estates valued at$3.5 million be excluded from tax? Should the exemption be increased to $5 million? (And, btw, with a bit of estate planning, a couple can easily double their exemption). Don’t get me wrong, the exemption matters, but the rate is far more important. To see why, just ask yourself the question: Would I rather have a higher exemption or a lower rate? Then do some simple math... 3) OECD: The OECD today invited Chile to become its second member in Latin America after Mexico: The OECD today invited Chile to become its second member in Latin America after Mexico. Chile will formally accept this invitation when an Accession Agreement is signed in the presence of Secretary-General Angel Gurría and President Michelle Bachelet on 11 January 2010 in Santiago. The invitation to Chile to become the Organisation’s 31st member comes at a time when the OECD is expanding its relations with the region. In addition to acknowledging Chile’s efforts to develop its market-based economy, it confirms the OECD’s determination to explore new frontiers to help governments address world economic challenges while championing the highest standards in public policy. “For the OECD, the accession of Chile is a great contribution in our drive to expand our global reach and to transform the Organisation into a more plural and inclusive institution that will play an increasingly important role in the global economic architecture,” OECD Secretary-General Angel Gurría said at a ceremony at OECD headquarters in Paris... I think his defining decision, this year at least, has been to conclude that 10% unemployment is acceptable—that having averted a Depression-style 25% unemployment scenario, his countercyclical work is complete. And that the risk of sustained high unemployment is outweighed by the risk of continued efforts to boost the economy (either by asking for more fiscal stimulus or targeting nominal GDP or generally committing the central bank to some level of inflation).... He does not think that pushing the unemployment rate down to, say, 7% would overextend the economy and touch off a big increase in wages and prices. He simply seems to think that leaving his primary job half done is acceptable. That's a pretty momentous choice, affecting millions of people directly and billions indirectly. It will shape American politics and economics for the next decade, at least. So sure, I'd say he deserves the person of the year award. But reappointment? That's another story entirely. Dick Fuld began with$301 million in stock, received $62 million in cash bonuses, and sold$471 million in stock before losing his supposed $1 billion.... [L]et’s say you’re a bank CEO with a lot of wealth tied up in stock. Satan comes along and offers you the following deal: if you undertake a strategy with a lot of risk, every year you will get a cash bonus, every year your stock price will go up, every year you will be able to sell some (but not all) of your stock at this higher price, and every year you will get more restricted stock awards–until at some point everything collapses and the stock becomes bankrupt. Would you take that deal? Of course you would. Yes, it means that your losses in the final crash will be bigger than with a more conservative strategy. But it means that you would make a lot more money in the meantime.... Now, there are things in life besides money, and Dick Fuld has no doubt suffered tremendously in the past year. And at this point, maybe he would gladly give up that$533 million he took out to see a healthy Lehman Brothers. So yes, there are other reasons why CEOs do not want to see their banks blow up. But holding a lot of restricted stock is not necessarily one of them...

Some critics charge that the new policies pursued by President Obama and the 111th Congress generated the huge federal budget deficits that the nation now faces. In fact, the tax cuts enacted under President George W. Bush, the wars in Afghanistan and Iraq, and the economic downturn together explain virtually the entire deficit over the next ten years (see Figure 1). The deficit for fiscal 2009 was $1.4 trillion and, at an estimated 10 percent of Gross Domestic Product (GDP), was the largest deficit relative to the size of the economy since the end of World War II. Under current policies, deficits will likely exceed$1 trillion in 2010 and 2011 and remain near that figure thereafter. The events and policies that have pushed deficits to astronomical levels in the near term, however, were largely outside the new Administration’s control. If not for the tax cuts enacted during the Presidency of George W. Bush that Congress did not pay for, the cost of the wars in Iraq and Afghanistan that began during that period, and the effects of the worst economic slump since the Great Depression (including the cost of steps necessary to combat it), we would not be facing these huge deficits in the near term. While President Obama inherited a bad fiscal legacy, that does not diminish his responsibility to propose policies to address our fiscal imbalance and put the weight of his office behind them. Although policymakers should not tighten fiscal policy in the near term while the economy remains fragile, they and the nation at large must come to grips with the nation’s deficit problem. But we should all recognize how we got where we are today...

Greg Woock is the chief executive of Pinger, a fast-growing Silicon Valley company that makes iPhone applications. So Mr. Woock spends a fair amount of time interviewing job applicants. In almost every interview, he told me recently, the applicant asks about Pinger’s health insurance plan. Now think about that for a minute. In the cradle of American innovation, workers are making career choices based on co-payments, pre-existing conditions and other minutiae of health insurance. They are not necessarily making decisions based on what would be best for their careers and, in turn, for the American economy — that is, “where their skills match and where they can grow the most,” as another Silicon Valley entrepreneur, Cyriac Roeding, says. Health insurance, Mr. Roeding adds, “is distorting the decision-making.” It is impossible to know how much economic damage these distortions are causing, but they clearly aren’t good. Economic research suggests that more than 1.5 million workers who would otherwise have switched jobs fail to do so every year because of fears about health insurance.... Given the consequences of the innovation deficit — slower growth, fewer jobs, lower living standards — you would want to look for every possible solution, wouldn’t you? You’d want to allow more talented immigrants to become citizens, so that the next Sergey Brin, Liz Claiborne or Andy Grove, immigrant entrepreneurs all, didn’t end up starting their companies elsewhere. You would want to clean up the tangled corporate tax code. You would want to finance more basic research. And you would want to make people feel confident that they could take risks — start a new company or join a young one — without worrying about whether they would still receive adequate medical care...

In present Russian society, there is a disturbing tendency to mythologize the late Soviet period. The myths include the belief that the Soviet Union, despite its problems, was a dynamically developing world superpower, until usurpers initiated disastrous reforms.... The collapse can be traced to two factors in the Soviet economy: grain and oil. In 1928 and 1929, Russia debated whether to choose “the Chinese model” of agriculture, but Stalin chose forced collectivization and extraction of food from the countryside... a sharp decrease in long-term agricultural productivity.... [G]rain procurement did not increase at all from the 1960s on. Russia--the biggest exporter of grain during the prewar period--became the world’s largest importer. As the Soviet Union grappled with serious problems with agriculture, rich oil deposits were discovered in western Siberia in the 1970s. There was intense debate within the Soviet leadership on how to exploit the oil and production.... [T]he timeline of the Soviet downfall begins not in August 1991, but on September 13, 1985. Sheik Imani, the Saudi Arabian minister of oil, declared that his country would radically change its oil policy, ceasing to protect oil prices. Over the next six months, production in Saudi Arabia increased fourfold in real terms.... Short on hard currency, the Soviet Union had to choose between ending subsidies to Warsaw Pact countries, radically cutting food imports, or drastically reducing military production. None of these were seriously discussed by the Soviet leadership. They chose to close their eyes and hope the problem would magically disappear.... Maligned foreign minister Eduard Shevardnadze was ordered to secure funding at any cost. The Soviet leadership then realized the full gravity of the situation: the Soviet economy hinged on oil production...

9) STUPIDEST THING I HAVE READ TODAY: Armenian-American Person of Color Mark Krikorian Calls for a Boycott of the Census:

It's not surprising that such an effort would come from NALEO, the National Association of Latino Elected and Appointed Officials, because the more illegal aliens who get counted, the more seats the group's members get in Congress, state legislatures, county councils, etc., and the more taxpayer money non-profit groups will be able to siphon off to serve their ostensible constitutents. But it's also not surprising that NALEO would overlook the obvious implications that illegal aliens should return to their ancestral communities — its membership and staff are overwhelmingly left-wing Democrats (2008 ACU score for the chairman of the Congressional Hispanic Caucus Nydia Velazquez: 0; ACU score for Luis Gutierrez, sponsor of the Democrat amnesty bill: 0; Co-chairman of the Congressional Progressive Caucus: Raul Grijalva). If illegal aliens won't go back to their home towns to be counted, at least they can strike a blow against Caesar and boycott the census!

5) FROM THE ARCHIVES: The Lost[?] Promise of International Capital Flows (January 12, 2004):

Those of us card-carrying neoliberals who pushed for large-scale opening of capital flows in the early 1990s had a particular vision of the future in our minds' eyes--a vision of the future did not come to pass. We looked at how extraordinarily strongly the world's system of relative prices was tilted against the poor: how cheap were the products that they exported, and how expensive were the capital goods made in the post-industrial core that they needed to import in order to industrialize and develop. "Why not free up capital flows and so encourage large-scale lending from the rich to the poor?" we asked. Such large-scale lending might cut a generation off the time it would take economies where people were poor to converge to the industrial structures and living standards of countries where people were rich. Certainly such large-scale borrowing and lending had played a key role in the economic development of the late-nineteenth century temperate periphery--Canada, the western United States, Australia, New Zealand, Chile, Argentina, Uruguay, and South Africa--more than a century ago. But the future we saw did not come to pass. Instead of capital flowing from rich to poor, it flowed from poor to rich--and overwhelmingly in recent years into the United States of America, whose rate of capital inflow is now the largest of any country, anytime, anywhere. Central banks that sought to keep the values of their home currencies down so that their workers could gain valuable experience in exporting manufactures to the post-industrial core, first-world investors who feared sending their money down the income and productivity gap after the crises of Mexico '95, East Asia '97, and Russia '98, techno-enthusiasts chasing the returns of the American technology boom, the third-world rich who thought a large Deutsche Bank account would be a good thing to have in case something went wrong and they suddenly had to flee the country in the rubber boat (or the Learjet)--all of these fueled the flow of money into the United States, which was thus enabled to invest much more than it managed to save. The U.S. economy became, and remains, a giant vacuum cleaner, soaking up all the world's spare investible cash...

## In Which John Sides Wants to Flush the Tank on the New York Times and the Washington Post

As you know, I agree:

The Monkey Cage: What We Have Learned from the Health Care Debate: [R[]eporters start in with “news analysis” like this silliness from John Broder in Sunday’s New York Times. Here, climate change is framed around what Obama can or cannot accomplish, complete with portentous questions like:

Can Mr. Obama surmount those problems in his latest effort to save the world?...

A while back, I posted about a Ted Lowi essay in which he characterized this sort of news coverage as “unbelievably primitive.” And it is. Understanding policymaking means taking Congress seriously.... Policy change is not solely a matter of presidential will or skill.... Yglesias and others have rightly pounded away at the notion that policymaking should somehow be framed around the president’s goals, actions, and standing. This frame gets the policymaking process wrong, and it arguably hurts our understanding of the policies themselves, whose details are subordinated to armchair quarterbacking about the president’s decisions or lack thereof. At its worst, you get this stunning contempt from David Broder for the fact that making policy is a process and that the point of the process is to (try to) make the right decision:

...the urgent necessity is to make a decision — whether or not it is right...

I know the usual excuses: presidents are visible figures, they make for easier news stories, public policy is boring, the horse race is fun, etc. I actually think that it’s not that much of a stretch for journalists...

But it's not one they are their editors want to undertake, is it?

Why oh why can't we have a better press corps?

## The Republican Party Needs Help

Please, everybody, send money to David Frum and Bruce Bartlett. They appear to be pretty much the only people willing to put themselves in political-intellectual harm's way to try to return the Republican Party to its best self. And they need help.

Eric Kleefeld watches the train wreck:

GOP House Candidate: 'I Hate Big-Tent. I Hate Inclusiveness. And I Hate Outreach': Allen West, a Republican candidate for the swing seat of the 22nd Congressional District in Florida, is making a bold declaration against the party becoming more open to moderation. "There are three words I hate to hear used. I hate big-tent. I hate inclusiveness. And I hate outreach," West told the Weekly Standard, in a new profile piece. "I think you stand on the principles that make you great, which transcend everybody in America, and people will come to it." West previously ran for the seat in 2008, losing to incumbent Democrat Ron Klein by 55%-45%, in a district that Barack Obama carried by 52%-48%.

West is a retired Army colonel, who was forced into his retirement after a 2003 incident in which he, as the Standard puts it, "conducted a harsh interrogation" on an Iraqi police officer, in which West fired his gun near the man's head.

That's four words, anyway...

## A Conspiracy so Immense...

David Weigel:

The John Birch Society to Co-Sponsor CPAC: The 51-year-old ultra-conservative group, once ostracized by the right, is co-sponsoring the 2010 Conservative Political Action Conference.

JBS will have a double booth with half dedicated to offering educational and promotional materials and the other half housing a TV studio that will stream live video from the booth and broadcast onto JBS LibertyNewsNetwork.tv, a website that will feature archived JBS video and live video streams.

This doesn’t really surprise me...

Is it wrong to want an opposition party not dominated by cuckoos?

## We Welcome Their Hatred!

In one month I have been called a follower of Joe McCarthy by the Volokh Conspiracy, and now a follower of Heinrich Himmler and Lavrenti Beria by Lou Dobbs.

It's nice to know that you are having an impact.

Spencer Ackerman watches Lou Dobbs so I don't have to:

ATTACKERMAN: Lou Dobbs, literally two seconds later: “By the way, Ezra Klein is the fellow that put together Journolist, that little group that has really turned into the, I guess you could call them the Brownshirts of the Left, or — can we say that? — or would we call them the KGB...

## New York Times Crashed-and-Burned-and-Smoking Watch

Yes, Tom Friedman is that big an amoral idiot.

Daniel Larison:

Eunomia » Friedman’s Jihad: Thomas Friedman’s new column reminded me of the line from Casino Royale: “Arrogance and self-awareness rarely go hand in hand.” In the same column in which he complains that Westerners treat Muslims as nothing more than objects and deprive them of agency and responsibility, he urges on the mass slaughter of said Muslims by other Muslims to get them to stop believing “bad things.” In short, he won’t credit them with being morally responsible agents until they embark on a bloody religious war of his design.... Maybe Muslims should be expressing more outrage over jihadist atrocities, but Friedman is demanding impassioned reaction from hundreds of millions spread out across four continents in response to events that are mostly abstract and far removed from them.... Unless I miss something, the only way Friedman is going to get the war he wants is for jihadists to become much more numerous and widely distributed throughout Muslim-majority countries so that every Muslim society can be terrorized and then react against the attackers. That would mean a dramatic increase in terrorism worldwide and all of the attendant excesses that various national governments would engage in to combat these threats.... If jihadists have been making gains, it is partly because we have provided them abundant provocations and attacks to use as fodder for their propaganda. These policies have radicalized entire populations. That is what wars do: they radicalize and intensify political and/or religious beliefs, and they typically empower maximalists and fanatics. As destructive as the conflicts he would wish upon all Muslims would be, the end result could still very well be a larger population of deeply radicalized people, which would be disastrous for the welfare of all these societies and likely damaging to the security of the U.S. and allied nations.

Spencer Ackerman:

ATTACKERMAN » No, This Time You Suck On This: [W]hat problem can’t be solved by the deaths of hundreds of thousands of people worldwide, egged on from the sidelines by a newspaper columnist? I love how later in the column Friedman can’t understand why there was “no meaningful condemnation emerging from the Muslim world” about select atrocities committed by Muslims. Well, maybe when the most important foreign affairs columnist for the world’s most important newspaper gets a boner from the prospect of mass Muslim deaths, maybe those leaders are going to worry about playing into his hands.... [W]e Jews have a Yiddishism, shanda ver der goyim, which at its heart is the very human impulse to say, “Stop airing our dirty laundry in public for the outsiders to see and use against us.” Maybe Friedman ought to think on this for awhile. You know, strategically. Like he gets paid oodles of cash to do. Finally, he ought to think harder about just the online takfirism problem that occasioned this blithe call for bloodshed, since online extremism is something that plays into the hands of U.S. intelligence and law enforcement capabilities. If that’s the way al-Qaed-ism is moving, maybe that’s not such a terrible thing from our perspective. Let’s neither diminish nor overstate threats.

Why oh why can't we have a better press corps?

## Listen to the IMF on Cimate Change

Carlo Cottarelli:

Climate Change—Some Simple (and Quite Convenient) Truths: As world leaders gather in Copenhagen, climate change is again in the headlines. The science of the issue can get pretty incomprehensible pretty quickly. And the politics are clearly very ugly. Let’s not forget, however, that much of the economics is simple.

It’s an externality, stupid—so price it

Climate change is an “externality” problem. Individuals, firms, and, yes, governments, do not take full account of the harm that others suffer when they emit greenhouse gases. So they emit too much. And the best way to stop them doing this is to charge them a price for the carbon content of what they emit: a “carbon price.” Admittedly, climate change is a particularly complicated externality. Since the damage will fall largely on future generations, the proper price depends very much on how we value their well-being relative to ours. The importance of such long-lived investments as power-stations, and the heavy sunk costs of investing in new technologies, mean that the carbon prices people expect in the future are even more important than the price now. And the fact that the world’s supply of fossil fuels is ultimately fixed means that the effect of carbon prices on total emissions is not as clear cut as it may seem. But the basic principle remains—polluters should pay...

## Reconfirm Ben Bernanke...

Paul Krugman worries about his friend Ben Bernanke:

Bernanke and the cover curse - Paul Krugman Blog - NYTimes.com: So Time magazine has named Ben Bernanke Person of the Year. Be afraid, be very afraid. The magazine cover curse is a well-known phenomenon: you should always short the stock of a company whose CEO is the subject of a glowing cover story in a major magazine...

And immediately after I see this:

David Dayen: FDL News Desk: Jeff Merkley To Vote Against Bernanke Confirmation: Sources tell FDL News that Sen. Jeff Merkley (D-OR), a member of the Senate Banking Committee, will vote against Ben Bernanke’s nomination for a second term as Chair of the Federal Reserve.... [A]t least five Senators have placed a hold on a Senate floor vote, with many of them blocking the nomination until they get a standalone vote on auditing the Federal Reserve.... UPDATE: Here’s Merkley’s statement:

Tomorrow, I will vote against confirming Ben Bernanke as Chairman of the Federal Reserve. The reason, in short, is that as Chairman, Dr. Bernanke failed to recognize or remedy the factors that paved the road to this dark and difficult recession. Following our economic collapse, it is also apparent that he has not changed his overall approach to prioritizing Wall Street over American families. My decision is based on my fundamental belief that our economy cannot recover if we do not put Main Street first.... As a member of the Board of Governors, Chair of the Council of Economic Advisers, and then ultimately as Chairman of the Board of Governors, Dr. Bernanke supported each of these decisions, failing to take the necessary precautionary steps that could have averted or mitigated financial collapse.... [A]lthough Wall Street prospered in the short-term from reduced leverage requirements, securitization of faulty mortgages, and the explosion of derivatives, Americans did not. The expansion that occurred from 2002 to 2007 became the first economic expansion in which working families were worse off at the end than at the beginning. This is not a path that we can afford to travel again.

In my view, Ben Bernanke has made four mistakes--at least three of which I said at the time were mistakes:

• Not supporting Ned Gramlich's push for tighter regulatory oversight of mortgage financing and associated securitizations and derivatives.

• Not moving immediately in early 2008 to nationalize more of the banking system and support asset prices to a greater extent.

• Believing in the late summer of 2008 that the big problem was that the Federal Reserve had pumped too much liquidity into the economy, and believing that a bankruptcy on the part of Lehman Brothers would send a healthy message to bankers that they would not always be bailed out by the government and would send that maessage without having damaging consequences for the economy as a whole.

• Failing to walk down the strategy tree in the fall of 2008 and thus to place a high priority on ensuring that if the government's interventions in financial markets worked to stabilize asset prices and avert depression then the government would profit and would be seen to profit healthily from its interventions.

In these mistakes, Bernanke played second fiddle (and Geithner played third fiddle) to first Alan Greenspan and then Hank Paulson. But they were not Paulson and Bernanke's mistakes only: they were Bernanke's.

Now I am morally certain that had I been in Bernanke's (or Paulson's, or Geithner's) shoes over the past two years, I would have made more and bigger mistakes, and we would right now be worse off. He has done better as Fed Chair than I would have, or indeed that almost everyone I can think of would have. So I am inclined to judge Bernanke lightly, and say that the Senate should confirm him for a second term in spite of his mistakes: he is, I think, one of the very best we can get for the job right now, and he won't make the same mistakes again

## We Mourn the Death of Yegor Timurovich Gaidar

I talked to him at length only once--when he came to Berkeley to give a lecture in the late 1990s, and wound up at my house for Thanksgiving dinner.

He said that in retrospect he had had only two important decisions to make:

• At the start of his tenure, whether to decontrol prices or to send the Red Army out into the country to collect the harvest for the cities at gunpoint.

• In the middle of his tenure, whether to go ahead with voucher privatization or try a more "Chinese" style system by which the private sector grew up around the still-operating state-owned sector.

He believed that he had made the right decisions. If he had sent the Red Army to collect the harvest at gunpoint, he said, people would have gotten shot and the political consequences woukd have been incalculable and could have been very bad indeed. If he had attempted ther "Chinese" approach, he said, it would have led to the nomenklatura stealing absolutely everything as they used their positions as managers of the state-owned sector to tunnel everything valuable out from the state-owned sector and into their own private businesses. The only thing that made the "Chinese" approach feasible in China, he said, was that China was so poor that there was effectively nothing for the nomenklatura to steal.

He was a friend of the people. He tried very hard.

I had never known that his father was a friend of Raul Castro's and had fought in the Bay of Pigs, or that he was the son-in-law of Russian science-fiction writer Arkady Strugatsky. I would have had him sign my copy of his father-in-law's book if I had known.

## Five Economics Paragraphs Worth Reading: December 15, 2009

1. Antonio Fatas: Using a hammer or a wrench to pop asset price bubbles?: I am very sympathetic to this argument: [the] interest rate is probably not the right tool to deal with asset price bubbles and using regulation or a 'macroprudential instrument' is the right thing to do. However, we still need to ask the question: What if those instruments are not available or are simply failing to do their job? Is there a role for monetary policy? He cites the example of Spain as a country where the central bank was stressing the importance of dynamic provisioning for banks and still went through a real estate bubble. It might be that the Bank of Spain was not aggressive enough, but how do we know that the systems that we are setting in place now will take care of the next bubble or financial imbalance? One can argue that interest rates should not be used to deal with an imbalance in financial markets, because this is not part of their mandate, but I think this is a very narrow view of the role of central banks. There is no doubt that imbalances in financial markets spread to the real economy. In fact, there were many signs of a macroeconomic imbalance prior to the crisis such as excessive consumption, current account imbalances. Aren't interest rates the tool to deal with macroeconomic imbalances? If we apply Adam Posen's logic to some of the previous recessions, we could come up with the conclusion that central banks should never use the interest rate as a stabilizing tool. We could always claim that previous recessions originated in a specific sector of the economy and it would be better to deal with these developments using 'sector-specific' tools...

2. Matthew Yglesias: Insurance Coverage Status Affects Mortality Rate in Pediatric Trauma Patients: Nothing to see here, I’m sure: "A study led by Heather Rosen, MD, MPH, research fellow in the Department of Plastic Surgery at Children’s Hospital Boston and Harvard Medical School, found that uninsured children were over three times more likely to die from their trauma-related injuries than children who were commercially insured, after adjustment for other factors such as age, gender, race, injury severity and injury type in an analysis of data from the National Trauma Data Bank. Moreover, publicly-insured children were 1.19 times more likely to die from trauma when compared with commercially-insured children." Some people in earlier posts on this topic claim to find a contradiction between my belief that many Americans overtreated and my belief that the uninsured minority of Americans are undertreated. The consistency seems pretty clear to me. In fact, the reality that both of these things are true is one reason why taxing cadillac insurance plans is a good way to pay for expanded coverage...

3. Daniel Davies -- FOR bigger pies and shorter hours and AGAINST more or less everything else: Grasping reality with one hand and my wallet with the other...: After the "first hundred days" in the term of a new Democratic President comes the next stage; the almost impreceptible transition among his supporters from saying "of course, he's been hampered by all sorts of obstacles to date, but he's about to start delivering on all those promises he made to his supporters on the left" to saying "well, he never really promised anything and it's terribly naive to think he was ever going to deliver anything to his supporters on the left" Apparently we've reached it. It's rather like, although not quite the same phenomenon as, that by which literally millions of people who all evidence suggests were highly likely to have been U2 fans in the past, have reconstructed a version of history in which they always hated U2 (I am entirely guilty of this last one myself).

4. STUPIDEST THING I HAVE READ TODAY: Megan McArdle on Non-Recourse Loans: [I]t sure sounds like they just decided that once the price of their property fell, they shouldn't have to pay back the money they'd borrowed. There is a sizable school of thought that says why shouldn't they?  They made a contract with the bank under known rules, and as long as they're willing to pay the penalties, why shouldn't they just walk away, the way a corporation would?  Well, for one thing, companies don't always behave like this, and those who get a reputation for stiffing their suppliers run into trouble.  But for another, because society doesn't really work on such clean logic.  The reason we can have easy bankruptcy and a pretty robust credit market (usually) is that most people act like debts are obligations which should always be paid off if possible.  I'm not saying you should live on Kraft dinner and water for twenty years to slave at an impossible mountain of debt.  But I think before you walk away from three different mortgages, you should explore life options that do not include 1,800 worth of new furniture... 5. FROM THE ARCHIVES (NOT MINE, HOWEVER): Henry Farrell: DeLong, Scott and Hayek=: Brad DeLong has a review of James Scott’s Seeing Like a State which I found pretty useful in clarifying some of my disagreements with him (Brad, not Scott). What he sees as a fundamental problem in Scott (that Scott is a Hayekian in denial, and that his denial of his intellectual heritage leads him erroneously to claim that markets are harmful to human freedom) I see as pointing to an important, but underplayed set of themes in Scott’s argument. Which is to say that I would have liked Scott to develop the reasons why he disagrees with Hayek more explicitly, but I think that they are clearly present in the book, and are in some respects at least, compelling.... I... think that doing what Brad wants him to do would have led him to write a very different book. Seeing Like a State is in large part an intervention in an internal argument within the left, arguing against the grand planners and for the Jane Jacobs types and the anarchists. Introducing a proper critique of Hayek, Mises and the rest would have greatly lessened its impact within that debate, by allowing the targets of Scott’s critique to focus on the mean things Scott would have probably said about pro-market types who they dislike, while ignoring the flights of arrows intended to pierce their own hides... ## We Are Live at The Week: "I Did Not Run for Office to be Helping Out a Bunch of Fat-Cat Bankers "I did not run for office to be helping out a bunch of fat cat bankers on Wall Street," President Obama told Steve Kroft of 60 Minutes. In a narrow sense, that may be true. But Obama did run for office in part to keep the unemployment rate from rising to -- and staying above 10 percent. And his pursuit of that end has aligned the president with the fat cats. In a financial crisis like the one we are in, spending falls and unemployment rises. To curb the rise in unemployment, something has to be done to boost spending. There are two broad mechanisms. First, Obama could use the government directly to boost spending--nationalize banks and get them to lend to people who will spend; order government-sponsored enterprises to lend to farmers, home buyers and others who will spend; and boost direct government purchases. With the roll out of its787 billion stimulus plan, the administration has done a little along those lines. But using government to boost spending also requires boosting the short-term government budget deficit extravagantly. And it is clear that Obama thinks he did not run for office to do that.

So the first mechanism is out. What is the second?

The second is to persuade the private sector to boost its spending. It is to use the government indirectly‹by making households feel that they are richer and can spend more; making businesses feel that their expansion plans will be profitable (and thus justify spending more); making banks feel that additional lending to businesses will be safe and that they can reliably profit by lending more.

Government achieves this by intervening in financial markets to change the balance of supply and demand in order to boost asset prices, including real estate, businesses, stocks and corporate bonds. As a result, consumer households feel richer and willing to spend more; businesses feel optimistic about expansion and willing to spend more; banks feel that additional lending to businesses is safe and profitable.

Bur for indirect government policies to boost spending, they must boost asset prices--especially long-term, risky asset prices. And guess who owns the most long-term, risky assets? Guess who benefits most when those long-term, risky asset prices rise?

Yep. It's fat-cat bankers. That's what fat-cat bankers do: they raise money--mostly by borrowing--from people who want to keep their wealth liquid and relatively safe, and they use this money to buy long-term risky assets, relying on their technical skill and judgment to preserve a margin between what they are paid by borrowers and what they must pay, in turn, to their creditors.

In a crisis like the present, if you avoid the nationalization and extravagant deficit-spending route, and you still succeed in avoiding persistent mass unemployment, you will have done so by a process that boosts asset prices and enriches fat-cat bankers.

The fact that the policies you undertake to avoid persistent mass unemployment also help fat-cat bankers doesn't mean that you can¹t implement other policies to place burdens on them. Progressive income and wealth taxes, tight capital and regulatory requirements, impositions of enormous risk on financiers in order to remove the possibility that they will retain their wealth even as their organizations go bankrupt these are all policies that make fat-cat bankers' lives less fat and less feline. And I am strongly in favor of enacting all of these long-term structural reforms.

But there¹s no point in pretending that the policies that avoid persistent mass unemployment are not the same policies that enrich fat-cat bankers. They are. At this moment, what is good for JPMorganChase is good for America -- and vice versa.

In effect, Obama did run for office to help out a bunch of fat-cat bankers on Wall Street. He just may not have realized it at the time.

## Support Health Care Reform!

Paul Starr lays down the party line:

Deal or Die on Health Caret: [T]he central provisions of the legislation... would extend health coverage to an estimated 33 million of the uninsured, raise standards of protection for millions... eliminate some of the most hated abuses of the insurance industry... create a new system of insurance exchanges that would enable people who buy policies individually or through small groups to get new choices and better prices for coverage.

Yet these provisions... are poorly understood by the public, including many of those who would benefit from the changes.... because the supporters of reform have been fixated on one goal -- saving the public option.... Strategists will argue about whether it ever made sense to include a public option in the bill, given the low probability it had of being enacted in a strong enough form to be significant and sustainable. If it turns out to have been useful, it was precisely because it could be dropped in the end and serve as evidence that moderate Democrats had won concessions....

[I]f Democrats succeed in getting a bill through Congress in the next several weeks, they can return to some of the issues in the reconciliation process next year. And at that point they won't necessarily need to have Lieberman on board.

If progressives in Congress can see that far ahead, they'll see their way to vote for a compromise.

• One of the most peaceful administrations ever is considering whether or not to send flying killer robots into a large Pakistani city...
• Turmoil in the housing market has led to fears that home prices will drop precipitously, particularly if foreclosures force large numbers of homes onto the market in the coming year. Recently, these fears have driven financial stocks down and led to the government rescue of Fannie Mae and Freddie Mac. But the projected losses have been wildly exaggerated. Most Americans have not experienced any significant decline in the value of their homes -- nor are they likely to. Only four states -- Arizona, California, Florida and Nevada -- have had declines of more than 4 percent in home prices over the past year, according to the house price index of the Office of Federal Housing Enterprise Oversight. Some worry that OFHEO's index may be missing the full extent of the crisis because it doesn't include very high-priced homes with "jumbo" mortgages or homes bought with subprime loans -- the ones being hit hardest. While one could argue that the index would be more representative if it included...
• Regulators closed Reston-based Greater Atlantic Bank Friday night, the first bank failure in Virginia since 1993. The failure does not affect the bank's customers. The Federal Deposit Insurance Corp. sold the bank's deposits and virtually all of its assets to Sonabank, based in McLean, which will reopen Greater Atlantic's four branches on their normal schedules. Customers can continue to write checks and withdraw money from ATMs over the weekend. Greater Atlantic was sunk by rising losses on commercial real estate loans, both its own and those it purchased from other banks, according to FDIC spokesman David Barr. Lending to real estate developers was a common focus for small banks in recent years, particularly in high-growth areas. Now defaults on those loans have emerged as an outstanding threat to banks, particularly in the overdeveloped suburbs of Sun Belt cities. Local banks have so far fared relatively well. Greater Atlantic is only the second to fail, following the January sei...
• The issue here is not that Taibbi should be nicer to the Obama administration.... Taibbi... has imbued them with a lot more power than they have. If the result of the 2010 election is that Obama fires his economics team and moves his administration to the left, but the Republicans pick up 60 seats... American public policy outcomes move to the right. Conversely, if Obama brings Bob Rubin back as his vice president, but Kanjorski picks up 65 allies in the next election, then outcomes move to the left. "At a minimum," Taibbi concludes, "Obama should start on the road back to sanity by making a long-overdue move: firing Geithner." I'm... among those who think Obama should probably fire Geithner... Geithner's presence is a liability for moving better bills through the Congress... But so long as the media keeps telling the story of American policy outcomes primarily in terms of the opinions and skills of the executive branch, it's going to be very hard to make anything better
• If “no health insurance means bad health care” or “bad health care can lead to death” were some kind of wildly counterintuitive propositions at odds with sound theory, then I think we might have good reason to doubt these results [as Michael Cannon claims to]. But in fact they’re perfectly intuitive results that accord perfectly with, among other things, the elementary economic theory that says people wouldn’t pay for health insurance unless it provided something of value. The bulk of empirical studies also seem to confirm this. Lack of insurance is associated with low-quality health care which is associated with enhanced risk of death.
• My colleague Chuck Lane accuses me of a "venomous smear" against Joe Lieberman today, which is fair enough. He's hardly the first to see it that way. What is surprising is that Lane, well, agrees with my venomous smear. "I understand that [Lieberman] seems to bear a grudge against the Democratic liberals who tried to unseat him in 2006 because of his vote for the war in Iraq," writes Lane, "and that he might be engaged in a little pay back right now." That's pretty much the ballgame...
• So, to summarize: Mankiw is wrong that the stimulus consists mostly of Keynesian-type investments. So far, it has been closer to the tax cut end of the spectrum. But he's also wrong that the stimulus is not working. By the benchmark that he implicitly endorses -- GDP -- it's done very well. Mankiw is so wrong, in other words, that he may actually be right: the stimulus looks a lot like one he might have designed, and it's helping the economy.