## Health Reform Benefits That Start Tody

John Larson:

Starting today, insurers will be required to:

1. Keep you covered when you get sick: Simple mistakes or typos will no longer be grounds for insurance companies to cancel your insurance.

2. Cover kids with pre-existing conditions....

3. Allow young adults to stay on their parents' plan up to age 26....

5. Phase out annual [coverage] limits....

For any insurance plan that goes into effect after September 23, 2010, your insurance company must:

1. Pay for preventive care like mammograms and immunizations....

2. Give you a better appeals process for insurance claims....

3. Let you choose your own doctor... choose any available participating primary care provider as your provider, and any available participating pediatrician to be your child's primary care provider.

5. Allow you to use the nearest emergency room without penalty: If an emergency arises while you're away, you will no longer have to drive home to your in-network provider to receive in-network benefits.

## The Way Out of the Slump

Paul Krugman and Robin Wells:

The Way Out of the Slump: Most of the time, we count on central banks to engineer economic recovery following a slump... cut the short-term interest rates it controls; market-determined longer-term rates fall in sympathy; and the private sector responds by borrowing and spending more.

The sheer severity of the slump after the 2008 housing bust means, however, that this normal response falls far short of what’s needed.... [C]onventional monetary policy is up against the “zero lower bound”: it can do no more.... What’s left?

One answer is fiscal policy: the government can step in to spend when the private sector will not. We’ve already argued—in the first part of this review—that a rise in government deficits played a key role in preventing the crisis of 2008 from turning into a full replay of the Great Depression. Why not use more deficit spending to push for a full recovery?

That’s a question that deserves more serious consideration than it has received so far. Leave aside the political considerations: if you believe that deficit spending is an effective way to reduce unemployment—as, for example, Roubini and Mihm clearly do—why not advocate going all the way and spending enough to restore full employment?

Yet that is a recommendation few economists have been willing to make.... [I]n December 2008 Larry Summers... explicitly rejected the idea that the stimulus should be large enough to restore full employment... too much spending might create worries about the US government’s long-run fiscal position, and thus lead to a sharp rise in US borrowing costs....

Richard Koo... will have none of that.... Koo argues that today, with the world as a whole in balance-sheet recession, the governments of major economies need precisely to run large fiscal deficits, and to continue doing so until the private sector is ready to spend again. Only then, with the economy no longer dependent on government support, would it be appropriate to shift to deficit reduction. But can governments really continue to borrow and spend? Yes, says Koo: like the world Keynes saw in the 1930s, today’s world is awash in savings with nowhere to go.... This is, needless to say, a view very much at odds with the current conventional wisdom—but these days the conventional wisdom is looking very foolish. Ever since the crisis began, establishment figures have warned that the bond markets are about to lose faith in nations with big budget deficits; yet interest rates keep falling rather than rising....

In our view, Koo makes a persuasive case. Unfortunately, it’s not a case currently making any headway in American politics.... So are there any alternative policies that might at least help promote recovery?

If there are any options left, they probably involve actions by central banks.... What could the Fed do? It can’t push short-term interest rates on government debt lower. But it could try to reduce other interest rates. Interest rates on long-term government debt normally contain a premium demanded by investors in return for locking up their funds; the Fed could reduce this premium, and hence long-term rates, by buying long-term government debt directly. Interest rates on private debt normally involve an additional premium, because of the possibility of default; again, the Fed could reduce this premium by buying such debt directly.... The Fed could also try to change expectations by announcing its intention to keep short-term interest rates low for a long time....

All three of the books reviewed here, however, end up arguing against the use of unconventional monetary policy. This isn’t surprising in the case of Rajan, who doesn’t seem concerned at all about promoting recovery. It’s more surprising in the cases of Roubini-Mihm and Koo.... In the case of Roubini and Mihm, rejection of unconventional monetary policy seems of a piece with their unwillingness to follow the logic of their own Keynesianism.... Koo... adopts what seem to us to be contradictory positions... monetary expansion and an attempt to raise expectations of future inflation are ineffective in an economy with balance-sheet problems... [and] quantitative easing would threaten to create widespread inflation. We’re not sure how he can believe both things....

So what would we recommend doing? Practically everything that might stimulate the economy. If more spending on infrastructure is politically impossible, at least make the case for it and pound its opponents for their obstructionism. (It’s worth noting that President Obama’s recent proposal for a national infrastructure bank is very similar to a proposal that has been endorsed by none other than the bitterly anti-Obama Chamber of Commerce.) Targeted, temporary tax cuts—like the temporary incentives for business investment also recently proposed by the Obama administration—aren’t our preferred policy, but they would be better than nothing. And monetary expansion should be pursued through every route possible—yes, it’s uncertain how effective any given measure would be, but that’s no reason not to try.

We should also consider policies that enable borrowers to reduce the burden of their debt, such as allowing mortgages to be covered by personal bankruptcy procedures or, as Bill Gross of the bond fund Pimco has proposed, allowing Fannie Mae and Freddie Mac to engage in mortgage refinancing. (Although Obama’s program for modifying mortgage obligations was a step in that direction, it has largely failed as a result of overly complex rules and stonewalling by lenders—a result of its cautious construction. Indeed, it has made many borrowers worse off)...

## The Obama Administration Goes Off-Message Again...

As one sub-cabinet Obama staffer once said: "I went to Washington fearful that I would have to try to stop the president's media people from trying to enact policies that were bad for the country's economy but good for Democrats in the the midterm election. I never expected to have to try to stop the likes of David Axelrod from trying to enact policies--like a premature pivot to deficit reduction before the recovery was well-established--that were both bad for the country's economy and bad for the Democrats in the midterm election."

Today David Axelrod runs into Susie Madrak. David Dayen:

Blogger Susie Madrak Asks David Axelrod: “Do You Know What Hippie Punching Means?”: Some fireworks at the end of an otherwise uneventful conference call with White House Senior Adviser David Axelrod, when blogger Susie Madrak took the White House to task for their continued swipes at the “professional left.”

Madrak asked, “I’m a blogger, and I don’t know if you know this term, but are you familiar with the term hippie-punching?”

She continued. “Liberals and bloggers feel like we’re the girl you take under the bleachers but won’t be seen with in the light of day.” She mentioned a series of incidents where the White House distances themselves from their base, and wondered how that helps Democrats regain enthusiasm from those same people. “We’re not big numbers, but we raise money and we encourage people to vote and get involved. You have to help us help you,” she concluded.

Axelrod tried to bring Madrak in on common goals.

Let me say this. I really believe this is the most consequential time in our lifetime.... We are in a struggle, we are in a fight. We don’t have to agree, but we all have to lock arms and move forward here.

He then pivoted, kind of making it sound like both sides need to lower the temperature.

Saying we shouldn’t be involved in intramural skirmishes, I couldn’t agree more. And that goes on both sides.... I’m not lecturing you, I’m speaking to everyone involved on our side. There are big things at stake here. The nature of progressive thought is that we go at it, we trade ideas, and that’s as it should be. But we have to come together.

Axelrod tried to make it sound like Madrak was saying she wanted help (I don’t really know what he was intimating here), but Madrak said,

No, I said help us help you. Don’t make our jobs so much harder with these comments.

“I’d say right back atcha,” replied Axelrod, growing a bit tense. “Whatever differences we have pale in comparison to the differences to the folks out there today masquerading as representatives of the American people.”

“I hear you, I hope you hear me,” he wrapped up...

Greg Sargent:

Liberal blogger directly confronts David Axelrod, accuses White House of "hippie punching": The call seemed to perfectly capture the tense dynamic that exists between the White House and the online and organized left: Though White House advisers in the past have dumped on the left, anonymously and even on the record, Axelrod repeatedly pleaded with the bloggers on the call for help in pumping up the flagging enthusiasm of rank and file Dems.

"You play a great role in informing people about the stakes of elections," Axelrod told the bloggers. "One of the reasons I was eager to expend time was to enlist you."

But hovering over the call was the obvious disconnect between this plea for help and statements like those of Robert Gibbs, who recently pilloried the "professional left" for being overly critical of the White House.

That tension burst out into the open when Madrak directly asked Axelrod: "Have you ever heard of hippie punching?" That prompted a long silence from Axelrod.

Life is funny: Basically, after Axelrod told us how wonderful we were and how much they needed us to close the enthusiasm gap in this election, I called him on it. Like, yo Dave, here we are, liberal activists who give money and GOTV, and the White House needs to punch us in public so no one thinks they take us seriously? And then he said, like, your feelings don’t really amount to a hill of beans in this crazy mixed-up world when we’re TRYING TO SAVE THE COUNTRY, and then I said excuse ME, we’re not talking about my feelings here, how am I supposed to motivate my readers when you treat them like the town ho?

Or words to that effect. I do it all for you, my beloved readers.

## Writing for National Review Has Rotted Avik Roy's Brain

Does he have no true friends? I think an intervention is called for. If we can get him out of the toxic intellectual environment of that culture of ignorance, perhaps he can still be saved...

Avik Roy:

The Pledge to America on Health Care: [T]he Pledge says almost nothing about the biggest and most difficult questions in health policy: Medicare and Medicaid reform. It criticizes PPACA’s “massive Medicare cuts” without offering an alternative solution... promises that Republicans “will make the decisions that are necessary to protect our entitlement programs for today’s seniors and future generations. That means requiring a full accounting of Social Security, Medicare, and Medicaid, setting benchmarks for these programs and reviewing them regularly, and preventing the expansion of unfunded liabilities.” About as bracing as a glass of milk.

But perhaps it would have been unrealistic to expect more. Democrats have engaged in their fair share of entitlement demagoguery, which is likely to intensify as we get closer to the election. Up to this point, the President has not shown a serious interest in entitlement reform...

Let us look at Figure A-3 from the Congressional Budget Office's Long Term Budget Outlook--the CBO's projections of what the budget balance will look like for the next seventy years if the economic forecast is fulfilled and if congress sticks to PAYGO:

Back in 2009 the CBO projected the emergence after 2025 of a large structural gap between primary spending and revenues as the health programs grew to take over the world, and projected a federal debt held by the public that hit 200% of GDP before 2070--even if congress did nothing to violate PAYGO.

Today the CBO projects that the public debt will stay below a year's GDP until all of us now full-grown are dead.

Why? Because of two "entitlement reforms" by Obama: the IPAB that puts a brake on the growth of Medicare costs, and the excise tax on high-cost health plans that raise revenue.

Rather than saying "the President has not shown a serious interest in entitlement reform," it would be closer to the truth for Avik Roy to say: "Obama did entitlement reform through the PPACA, and I did not notice."

Indeed, the fact that Avik Roy--and lots of other people--did not notice what current law plus PAYGO implies is what leads Doug Elmendorf at the CBO to fear that the policies enacted in the PPACA will not stand, and leads him to present an Alternative Fiscal Scenario in which the cost-containing and revenue-raising portions of the bill are repealed in fairly short order.

It is a fair criticism of Obama to say that his entitlement reforms may not last. It is not a fair criticism to claim that they were not done--or that he has "not shown a serious interest."

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

## William Galston Says Obama Must Pivot Toward Hooverism

It is remarkable:

William Galston: Obama must use Summers’ exit to chart new course: With the impending departure of his chief economic policy advisor Lawrence Summers, and all-but-certain departure of his chief of staff Rahm Emanuel, President Barack Obama faces personnel choices that will reshape his administration over the next two years.... [B]oth the president’s economic and political strategy have hit a wall. His economic policies prevented a complete collapse but have not sparked vigorous growth, and there is neither the fiscal space nor the will for an additional round of stimulus.... [T]he White House is contemplating... a new economic approach focused on reducing the long-term budget deficit and getting private capital off the sidelines. If so, the president needs a senior economic advisor who can help him execute this strategy.

Such a figure would be someone with credibility as an advocate of fiscal restraint, who has better links to the business community than anyone on the current team. It wouldn’t hurt if the new advisor were seen as an honest broker open to new ideas that diverge from Keynesian orthodoxy. Armed with a new economic strategy, Mr Obama would be able to invite the Republicans into a negotiation that they might initially resist but would eventually have to enter...

Teh Stupid... it burns...

You will notice that Galston gives no specifics as to how to pursue a bipartisan strategy to reduce the deficit when the Republican Party's three core fiscally-significant demands are for (a) tax cuts, (b) repeal of the IPAB projected cuts in Medicare spending growth, and (c) repeal of the excise tax on high-cost health care plans. That is because he has no fracking idea.

You will notice that Galston gives no specifics as to how to create a recovery not by monetary expansion or by banking policy or by fiscal policy but by "getting private capital off the sidelines." That is because he has no fracking idea.

The words come out of the mouth... but was there a brain behind them?

## Forecasting Track Records

Paul Krugman:

Who You Gonna Believe?: I went through my mail today, and got the usual batch of letters declaring that I’m wrong about everything, and that we should do the opposite of anything I say. Hey, it’s a free country. But I found myself wondering, as I often do, about the determination with which people believe pundits who please them ideologically, no matter how wrong they have repeatedly been — wrong in ways that, if you believed them, cost you money.

Suppose you had spent the last five years actually believing what you read from the usual suspects — the WSJ opinion pages, National Review, right-wing economists, etc.. Here’s what would have happened:

• In 2006 you would have believed that there was no housing bubble.

• In 2007 you would have believed that the troubles of subprime couldn’t possibly spread to the financial system as a whole.

• In 2008 you would have believed that we weren’t in a recession — and that the failure of Lehman was unlikely to have bad consequences for the real economy.

• In 2009 you would have believed that high inflation was just around the corner.

• At the beginning of 2010 you would have believed that sky-high interest rates were just around the corner.

Now, we all make mistakes and get things wrong — although it’s striking how often the trolls on this blog feel the need to accuse yours truly of saying things I didn’t. But after this string of errors, wouldn’t you at least begin to suspect that the people you find congenial have a fundamentally wrong-headed view of how the world works?

## Ryan Avent Is Overly Harsh...

He writes:

Free exchange: MY CRUSADE for a more sophisticated discussion about the American labour market seems to be falling short of its goals. Lawrence Mishel released a note yesterday entitled, "Debunking the theory of structural unemployment", which concluded:

Widespread claims that our unemployment crisis is structural are not only inaccurate, but they imply that macroeconomic tools such as fiscal policy (spending or tax cuts) or monetary policy can not address our unemployment crisis.  Surprisingly, perhaps amazingly, there’s no systematic empirical evidence for such assertions. Policy makers should understand that the problem faced by the unemployed is a simple scarcity of jobs...

Sigh. First of all structural unemployment isn't a "theory" to be "debunked"...

He misreads Larry: the "theory" to be debunked is the theory that our current unemployment is structural, and thus that standard expansionary macroeconomic policy tools would not be effective. And, indeed, that is what those who are saying that our current unemployment is structural are claiming: that standard expansionary macroeconomic policy tools would not be effective.

So when Ryan writes:

contrary to most of the people poo-pooing the structural side of things, structural unemployment does not imply that government should do nothing...

He should be writing:

contrary to most of the people pushing the importance of the structural side of things, structural unemployment does not imply that the government should do nothing...

The overwhelmingly likely possibility is that at the moment little of our unemployment is "structural," but that if demand is not boosted to reduce cyclical unemployment that it will turn into structural unemployment and then be with us for a decade or more. The fact that cyclical unemployment turns into structural unemployment is a possibility that adds immense urgency and power to the case for more demand stimulus right now.

Yet that is not what Ryan Avent concludes. Instead he reaches for the "plague on both your houses" journalistic trope:

Policymakers have become less interested in knowing what problems need solving and more interested in knowing how best to sell the policies they'd like to enact. Republicans don't want to enact stimulus, but wouldn't mind cutting taxes, cutting the minimum wage, and rolling back other labour rules. Democrats may want to enact more stimulus, but they also remain interested in other programmes that are likely to boost spending (in practice, it's hard to know what "Democrats" want—the caucus is hardly speaking in unison right now). And so the polarised policy discussion sources itself in a polarised analysis of current conditions. And if you care to influence this policy debate, you have to speak in polarised terms. Policy is explicitly zero-sum. If you acknowledge structural unemployment, you strengthen the Republican policy argument and weaken the Democratic policy argument.... [S]ome prominent economic writers appear to have so internalised the polarised method of argumentation that they no longer recognise they're doing it. It comes naturally, even when discussing issues that haven't necessarily been wedged into the polar, partisan dynamic.

It's unfortunate, and frustrating, and disappointing. But I don't know that anything can be done about it.

What Ryan could do is say that the fact that some of our unemployment may be structural and a lot more is likely to become structural makes the Republican policy stance not just stupid and destructive but insane and catastrophic.

## There Is No Excuse for Anybody Who Cares Even a Smidgeon About Good Policies to Support the Republicans This Fall. None.

Ezra Klein:

Ezra Klein - The GOP's bad idea: "America is more than a country," begins the GOP's 'Pledge to America.' America, it turns out, is an "idea," an "inspiration," and a "belief." And the GOP wants to govern it. Their policy agenda is detailed and specific... a set of hard promises that will increase the deficit by trillions of dollars, take health-care insurance away from tens of millions of people, create a level of policy uncertainty businesses have never previously known, and suck demand out of an economy that's already got too little of it.

You're also left with a difficult question: What, exactly, does the Republican Party believe? The document speaks constantly and eloquently of the dangers of debt -- but offers a raft of proposals that would sharply increase it. It says, in one paragraph, that the Republican Party will commit itself to "greater liberty" and then, in the next, that it will protect "traditional marriage." It says that "small business must have certainty that the rules won't change every few months" and then promises to change all the rules that the Obama administration has passed.... It is a document with a clear theory of what has gone wrong -- debt, policy uncertainty, and too much government -- and a solid promise to make most of it worse....

Perhaps the two most consequential policies in the proposal are the full extension of the Bush tax cuts and the full repeal of the health-care law. The first would increase the deficit by more than $4 trillion over the next 10 years, and many trillions of dollars more after that. The second would increase the deficit by more than$100 billion over the next 10 years, and many trillions of dollars more after that. Nothing in the document comes close to paying for these two proposals, and the authors know it: The document never says that the policy proposals it offers will ultimately reduce the deficit.

Then there's the question of policy uncertainty. The health-care law, which is now in the early stages of implementation, would be repealed. In its place, Republicans would write a new health-care bill.... [T]hree sentences on shrinking and reforming Fannie Mae and Freddie Mac... the two mortgage giants are backing nine out of every 10 new loans....

The agenda is least confused on the subject of reducing government... a cap on non-security discretionary funding... congressional review process for big-ticket regulations, a hiring freeze on federal employees, and weekly votes on spending cuts....

It is hard to believe in both deficit reduction and policies that would add trillions to the deficit. It's also hard to warn of the dangers posed by regulatory uncertainty and then propose changing all the rules...

But they do it.

As I say, repeatedly, America simply does not need the Republican Party as it is currently constituted. If it cannot reform itself, it needs to die.

## Liveblogging World War II: September 23, 1940

Time Magazine Liveblogs Wendell Willkie's presidential campaign:

REPUBLICANS: While London Burned: Last week Wendell Willkie went forth as an evangelist. For weeks he had smoldered in Rushville, Ind., reading reports that his campaign had stalled. The only answer he got to his daily denunciation of Franklin Roosevelt was an aloof and lofty silence. Mr. Willkie wanted to fight; Mr. Roosevelt made it plain that he was too busy to campaign. Angry, steam up, Mr. Willkie finally climbed aboard his campaign train.

He was grim and unsmiling as the twelve-car train pulled out of Rushville. First scheduled stop was Chicago. First important speech would be three days later at Coffeyville, Kans., where he had taught high school. Willkieites counted on that speech to do what his acceptance speech at Elwood had failed to do: set the Willkie drive on fire. If the Coffeyville speech did not do it, GOPoliticians would have good cause for gloom. Aboard the train were skeptical newspapermen, the candidate's staff of amateur advisers, Mrs. Willkie in a grey hat and coat, Son Philip, Brother Ed.

Wendell Willkie was in Chicago next day. A cavalcade of 30 autos took him to the Union Stock Yards. In the stockyard stench he talked with fervid earnestness. His audience, some in bloodied aprons, listened with polite interest, few cheers.

He rode through quiet, cynical streets to the Western Electric plant, said to 5,000 workers:

He [Harry Hopkins] said the people were 'too damn dumb' to understand the reason why the New Deal can get away with the things it has. . . . You don't look 'dumb' to me.

In a confused moment he made his first blunder, let slip: "To hell with Chicago." The cavalcade rushed off to the financial district, LaSalle Street. There Chicago's cool reception turned tumultuous. A ticker-tape blizzard showered down.

He rolled off again to the South Chicago steel mills. He strode into the American Giants Baseball Park before 8,000 Negroes, promised to eliminate discrimination because of race or religion. His voice was getting husky.

His train took him south through Illinois, criss-crossing the meandering route of Democratic Vice-Presidential Candidate Henry Wallace. Joliet, Morris, Ottawa, LaSalle, Peoria. Local politicians climbed aboard, appeared beside him on the rear platform. The crowds that gathered to see & hear numbered in thousands. If they did not rock with enthusiasm, they listened carefully to Willkie's fervent voice. He did not spare himself. His voice began to croak.

He made his second slip. Denouncing Mr. Roosevelt's capacity for handling foreign problems, he cried:

Was that an extraordinary demonstration of human knowledge . . . when he telephoned Hitler and Mussolini and urged them to sell Czecho-Slovakia down the river?

Aides hastened to explain. Mr. Willkie had "misspoken," had meant to say that Mr. Roosevelt had urged a settlement at Munich and the Munich pact "agreed to sell Czecho-Slovakia down the river."

A bigger Willkie blunder became apparent as his train rolled on across Illinois. He had continually disdained the microphone, had not saved his voice. In fact, it was suddenly discovered that he had lost it. To Galesburg, Ill., a doctor was summoned from Chicago. He warned the candidate not to talk any more that day. Willkie stood in silence on the platform, holding out his arms to the crowds with a rueful smile. At Rock Island he croaked: "The spirit is—squawk—but the voice is —squack." He crossed the Mississippi River to Iowa. His entourage was in despair. A specialist from California flew east, looked down the Willkie throat.

Morning of the day he was due in Coffeyville he was better. Reassured, he made platform speeches again as the train chugged west through Missouri—Pleasant Hill, Butler, Nevada; Pittsburgh, Kans. That afternoon he reached Coffeyville.

It was a hot Kansas evening. A crowd of 15,000 streamed into Coffeyville's softball park (now "Willkie Park")—women in summer dresses, men in shirt sleeves. Walter Johnson, "Big Train" of baseball, who once lived in Coffeyville, introduced Wendell L. Willkie.

In a voice that scratched, twice almost cracked, he said:

I am here to open a campaign. It is a political campaign. It belongs to our American traditions.... As I speak, a great city on the other side of the Atlantic Ocean is in flames... a place named London. But it is much more than that which is burning today. A philosophy is in flames, a way of life is in peril.... And I wonder what stands between us and that calamity except a smooth radio voice offering us the gold brick of safety without sacrifice. We are all just as much concerned with the Battle of Britain as Mr. Roosevelt. But we must be more concerned right now with the Battle of America...

He had learned, he said, from the history he had once taught at Coffeyville high school,

that democracy is not what we call the Government. Democracy is the people.... Only we, the people, can save this our beloved country.... Democracy is rooted in the people. The chief executive of a democracy must therefore believe in the people.

But, he charged: "Franklin Roosevelt has lost faith in the American people..." The President is surrounded by:

cynics who scoff at our simple virtues. [They] sneak through back doors and pull hidden wires. A few of them form an illegitimate cabinet that gets the President's ear when few others can.... The cynicism of these men has spread through Washington and down, unfortunately down into the very roots of our democracy. Because it does not trust us, our Government no longer feels obliged to tell us the truth...

He attacked Roosevelt's preparations for national defense.

He defended his Administration with the deceptive phrase 'on hand or on order'... most of the equipment he was talking about so confidently was merely 'on order,' some of it not to be delivered for two or three years. No doughboy ever made the mistake of firing a rifle that was 'on order.' If the President trusted us, surely he would not have misrepresented the strength of our military establishment when we were so very, very anxious to know the truth. He has also used other subterfuges. I guess we are supposed to believe that he was drafted for a third term by the free votes of the delegates to the Democratic convention.

He said bitterly, in carefully spaced-out words and avoiding for the most part his Hoosier slur:

He [Roosevelt] now has power, among other things, to close all of our banks whenever he wishes; to change the value of the money you and I carry in our pockets.... If he declared another emergency he could close all the broadcasting stations. And incidentally, he has declared about 40 emergencies in the last seven years.

He accused Roosevelt of delaying the defense program by refusing to appoint a chairman of his Advisory Defense Commission, because he wished to retain all the power for himself.

I am frightened to think that our only shelter is—not airplanes and tanks—but a man who in seven years of peace could not get factories producing our peacetime needs."

He challenged:

Awaken your fellow citizens to those moral and spiritual values, without the exercise of which our democracy must inevitably contract into a dictatorship.... And I turn to that vast, mistaken, deluded Government of ours in Washington, and I say to them: Give our country back to us, it belongs to us. We want it. We're not cynical about it. We love it. We should like to share the burden of it amongst ourselves. We should like if necessary to suffer for it, so that we may pass it on intact to other generations.

Having finished his speech, he stepped into a car and was driven to the Coffeyville high school. He went in. On a classroom door was written: "This Is the Room Where Wendell Willkie Taught." Said he: "Oh, no; this isn't it." He found his old room, scrawled on the blackboard: "No Third Term—Wendell Willkie."

## The Final Question I Asked in Today's Econ 1 Lecture

What is the most likely outcome for the U.S. budget come 2060? 1. We will have raised taxes to pay for government health spending. 2. We will have cut doctors' wages and enslaved them by drafting them into a socialist national health service. 3. We will have abandoned our commitment to providing state-of-the-art health care to the sick and not just the wealthy. 4. The health care fairy will have figured out a way for us all to have all the medically-appropriate care we need for a surprisingly low private and public budgetary cost. 5. The federal government as we know it will have collapsed, and those of us still alive will be starring involuntarily in a remake of “Mad Max: Beyond Thunderdome”.

## Who Can Replace Larry Summers?

My view: nobody. The Obama administration is going to be weaker as a result of his forthcoming departure.

The job of Assistant to the President for Economic Policy has two components:

1. Making sure that the President hears and considers the arguments, and makes an informed decision.

2. Making sure that everybody thinks that the president has heard and considered their arguments, and made an informed decision, and that they are valued and respected members of the team who are being given due influence and deference.--and also to make sure that the president hears everybody's arguments and makes an informed decision.

Larry is superb at figuring out how to present complicated arguments to make them comprehensible to non-experts, and at setting up frameworks for discussion and debate that kept policy discussions on track and organized. That is most of the job. That is (1). And at that Larry is the best in the world.

The other part, part (2)--making sure that everybody thinks that their point of view has been given a fair shake, and that they are valued and respected measures of the team? Well, given who Larry is, he far, far exceeded expectations. Only one public shouting fight in the halls of the West Wing in two years is... quite good, really.

If I were Obama, I would (a) move Tim Geithner over to the West Wing job, for that is the job that matches his skill set where I think he would indeed by best in the world, and (b) bring Laura Tyson in to be Treasury Secretary...

Failing that, were I Obama, I would probably try to grab Alan Blinder from Princeton to fill the West Wing job...

And were I really devious, I would bring Ben Bernanke over to the West Wing and put Larry in the Fed Chair job...

## Dan Ziblatt In Defense of the Continued Relevance of the Barrington Moore Problematic

Hoisted from Comments: Dan Ziblatt writes:

After Barrington Moore: Draft for September 25, 2010 50th Anniversary Conference - Grasping Reality with Both Hands: Just taught Moore to my PhD students last week.

One amendment: while you are certainly correct that the "Moore problematique" has diminished relevance in the industrialized world of U.S. and Europe, it is very much alive and well in much of the world. Less relevant than his particular dependent variable (communism, fascism, and democracy) is his explanatory framework: the urban-rural split and the nature of rural social structure is at the heart of fights over political regime, for example, in Thailand (e.g. Thaksin's populist appeal to Thai countryside vs. urban elite) as well, even more to the point, in Pakistan where one of the Taliban's main appeals there is to rural tenants against powerful rural landlords, a Junker-type landowning class. To put it more strongly: Without a Barrington Moore framework, we cannot understand the appeals of Pakistan's Taliban.

The point: Moore's explanatory paradigm (rural social structure as determinant of politics, however defined) remains alive and well in countries, outside of the core of the OECD world, that are also increasingly of interest to ambitious social studies students.

I assume, I should add, that is part of the reason I am able to keep publishing stuff on 19th century rural social structure and European democratization in political science journals--people see parallels to many other countries today.

## On the Type of Intellect (Partially) Molded by Harvard's Social Studies Major

After Barrington Moore: Draft for September 25, 2010 50th Anniversary Conference - Grasping Reality with Both Hands: This post makes me sad I just gave away everything on my shelves that had the words "Africa" "Peasant" "South America" and/or "economics" in the title. I just broke down and looked at my shelves, and at my life, and said it was holding me back. I hasten to add that thinning the herd by 26 bags only means that I can still not fit the remainder on the shelves allotted to my stuff and other things remain boxed by project/idea in case I ever do anything with them.

But reflecting back on Soc Stud, even though I can hardly remember anything in any detail, it was well worth the doing. Especially compared to the narrow focus of the other departments. I remember, when I was pre-doccing at the American Bar Foundation with the legal studies people attending a sociology discussion and having the sociologists ask me "why I'd read some sociology book?" since I was an anthropologist. This question made absolutely no sense, to me. The Soc Stud question, I think, would have been "why didn't you read book X?" if it referred to anything that an educated person was supposed to care about: philosophy, sociology, history, linguistics, biology, anthropology.

## Lori Montgomery of the Washington Post Once Again Fails to Do Her Job

Outsourced to Duncan Black:

Eschaton: The Missing View:Here's how the WaPo writes up Summers exit:

Congressional Republicans - and some Democrats - have been more critical of Summers's tenure. House Minority Leader John A. Boehner (R-Ohio) recently called on Obama to fire both Summers and Treasury Secretary Timothy F. Geithner, accusing the White House of pursuing misguided economic policies that ran up record deficits without creating jobs or significantly improving the economy.

Many prominent economists have rebutted that view, arguing that Obama's economic policies prevented last year's recession from turning into a depression. Still, with unemployment at 9.6 percent and Democrats getting battered in the polls, even some administration loyalists say they were surprised that it has taken so long for Obama to recast his message on the economy and reshape his economic team.

While it acknowledges that "some Democrats" have been critical, the implication is that their criticisms were similar to those of Congressional Republicans and Boehner. Missing is any suggestion that there is criticism from The Left.

The only quotes are from John Boehner, Tim Geithner, and "an administration official."

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

## Practice Midterm for Econ 1: Fall 2010: U.C. Berkeley: J. Bradford DeLong

Draft Mock Midterm

Suppose that it is December 2008 and you are Berkeley Professor Christina D. Romer, called to Chicago to audition for a cabinet-level post in Barack Obama’s forthcoming administration and to advise him on the proper size of the economic stimulus program. Your forecast is that were 2010 to be a normal business-cycle time that the level of GDP in 2010 would be $15.5 trillion/year. You are conducting your analysis in the income-expenditure framework where: Y = C + I + G + NX, C = co + cyY. You believe that cy = .5. You project that NX will be on trend during the recession—that imports will fall as U.S. purchasers shrink their spending, but exports will fall by about as much because there is a recession in the rest of the world as well. You project that there will be little change from trend in consumer confidence co. You project that there will be three years—2009, 2010, and 2011—during which the economy will be depressed. And you project that even with U.S. Treasury and Federal Reserve support for financial markets to increase the supply of and reduce the demand for safe assets, that the scramble for safety will cause financial and non-financial businesses to shrink their business investment spending by$375 billion/year as they cut back spending on risky assets and try to move their portfolios into safer asset vehicles. You are asked to advise the president-elect on what the government should do to its level of purchases G over the next three years 2009-2011.

1. Suppose that your goal is to achieve balance—to keep total economy-wide spending on trend during the three years that you forecast investment spending will be depressed—what total boost to government purchases G over the next three years should Obama propose and ask his allies in congress to enact in the form of a three-year fiscal stimulus Reinvestment and Recovery Act?

2. The President-Elect’s assistant for economic policy, Harvard Professor Lawrence Summers, writes that it would be a mistake to propose a stimulus program to fill the entire spending gap—that the Recovery Act proposal should be crafted as “an insurance package against catastrophic failure.” Suppose that the President-Elect endorses Lawrence Summers’s argument and asks you to plan a Reinvestment and Recovery Act to fill half the spending gap.. What is the total three-year boost to government purchases G that you propose?

3. Suppose Chief-of-Staff Rahm Emmanuel warns you that congress will take a quarter of the sum you propose and waste it on measures that are actually extremely ineffective at boosting the economy. If you seek to fulfill the charge to close half of the spending gap, how large a program do you advise the President-Elect to propose?

4. In the end, the Reinvestment and Recovery Act as passed contained $600 billion of true stimulus—increases in government spending G—spread out over three years. Yet the level of GDP in 2010 is not$15.5 trillion but $14.6 trillion. Two things went wrong: first, state and local governments unexpectedly cut their contributions to government purchases G by an extra$100 billion per year that you had not planned on. Second, the flight to safety and hence the reduction in business investment spending turned out to be significantly larger than you had forecast in December 2008. If you maintain your belief that your analysis of the effects of a fiscal stimulus Reinvestment and Recovery Act were accurate, what is your forecast of what the level of GDP in 2010 would have been had the Reinvestment and Recovery Act been filibustered and died in the Senate in February 2009?

5. Explain whether or not, why, and how the following items are included in the calculation of GDP:

1. The sale for $25,000 of an automobile that cost$20,000 to manufacture that had been produced here at home last year and carried over in inventory.
2. The sale for $35,000 of an automobile that cost$25,000 to manufacture newly-made at home this year.
3. The sale for $45,000 of an automobile that cost$30,000 to manufacture that was newly-made abroad this year and imported.
4. The sale for $25,000 of an automobile that cost$20,000 to manufacture that was made abroad and imported last year.
6. In the monetarist framework Y = (M/P)∙V—real GDP Y equals the money stock M divided by the price level P times the velocity of money V— and M = μR—the money stock equals the money multiplier μ times cash-and-reserves R, solve for the equilibrium price level P:

1. If V = 3, Y = $15 trillion, R =$1 trillion, and μ = 5
2. If V = 5, Y = $20 trillion, R =$1 trillion, and μ = 5
3. If V = 4, Y = $16 trillion, R =$1.5 trillion, and μ = 4
4. Explain what decisions and actions are taken in the chain of causation that leads from a central bank decision to increase the money stock to an increase in the overall price level
7. In the Phillips Curve framework in which π = E(π) + β(u* - u)—the inflation rate π equals the previously-expected inflation rate E(π) plus the “slope” β times the difference between the natural rate of unemployment u* and the actual rate of unemployment u—calculate the rate of inflation π

1. If E(π) = 2% per year, β = ½, u* = 7%, u = 5%
2. If E(π) = 9% per year, β = ½, u* = 5%, u = 7%
3. If E(π) = 2% per year, β = ½, u* = 4%, u = 8%
4. Explain what decisions and actions are taken that leads from a central bank decision to raise the unemployment rate to a decline in the inflation rate.
8. What do you remember about the Paul Krugman article “That 1937 Feeling” which began with this passage?

Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder. But if those calls are heeded, we’ll be repeating the great mistake of 1937...

20091021 practice midterm

## After Barrington Moore: Draft for September 25, 2010 50th Anniversary Conference

20100921 Social Studies:

John Stuart Mill was perhaps the last who was substantially at home in and competent in all the branches of moral philosophy: political theory, psychology, history, public administration, political economy, sociology, etc.

Afterwards young scholars paying their dues found it simply impossible to learn everything and still have time to write anything. And since it is much easier to teach undergraduates what you know than what you don't, specialization in research drove specialization in curriculum as well. But dividing up the social sciences makes sense even for professors and graduate students only if the beast is cut at the joints, so that the problems in understanding the world that fall in the debatable lands between two disciplines are few and unimportant. And dividing up the social sciences makes no sense for undergraduates: What use are economics B.A.s who know no political science or history? None at all. What good is a government department where, in my day, an undergraduate without trying could find himself assigned Graham Alison's Essence of Decision five times in five different classes?

But to try to construct an undergraduate education with its foundation as a simple injunction to read widely in the social sciences would be an enterprise doomed to failure. We think in patterns--analytical classifications and narratives. A program needs a backbone, something to give it enough structure to make sense to the minds of nineteen year-old East African Plains Apes with our limited brains and yet not reproduce the narrowing blinders imposed by each of the disciplinary straightjackets? And how could such a program attract teachers when the incentives are all on the side of working on the core concerns of the disciplines in which they must eventually make their homes?

The project of building a Social Studies was "rescued," if that is the word, by history. The Eurocentric view of the world before 1914 was of one in which the wonders of science drove prosperity, prosperity drove order, order allowed the spread of liberty, and liberty promoted peace and thought, and peace and thought drove science. All was not for the best in the best of all possible worlds but, in the words of Lennon and McCartney, getting better all the time,

Then came World War I. Lenin. Mussolini. Stalin. Hitler. Franco. Mao. Pol Pot. Idi Amin. Augusto Pinochet. A host of others. The virtuous circle was not the natural path but instead a fragile accident. No discipline was designed to or qualified to think how to get the North Atlantic world at least back to its happy place, back to something like the society of progress in which people once thought they had lived--a world in which the extra-judicial slaughter of thirty-five Europeans at Kishinev excited horror and condemnation, even if they were Jews.

Call this problematic presented by the history of the world from 1914 to 1975 the "Barrington Moore problematic": it is to understand the historical and social origins of dictatorship and democracy, of slavery and freedom, of ideology and rationality, of poverty and prosperity. Humanity had moved from societies of illiterate farmers producing little more than subsistence dominated by thugs with strong arms and sharp spears to urban, literate, industrial orders. That produced Abraham Lincoln but also Vladimir Lenin, Franklin Delano Roosevelt but also Mao Zedong, Konrad Adenauer but also Augusto Pinochet. And Adolf Hitler as the sole member of the my-regime-killed-50-million club. Why? How? And what could be done to make it stop?

The Barrington Moore problematic provided the spine of the Social Studies major--of pretty much all the interdisciplinary social sciences majors on the North American continent for two generations. Few "majored" in it. It was too big. They found some other smaller, more manageable pool of issues. But in their gallop through the issues of the Barrington Moore problematic they had, as one early observer of Social Studies put it, read an awful lot of books that were very good to have read--if not fun to read. And so the major has been a fifty-year success--not just because budgetary restrictions capped it and the best Harvard students will gravitate like lemmings toward anything that promises to exclude some applicants.

Can the Barrington Moore problematic serve a role similar in the next generation to the one it has served in the past two?

I would say not.

Adolf Hitler is sixty-five years in his grave. Societies in transition to urban-market-mass political modernity and how to keep more Lenins and Hitlers from arising in them does not seem to be the globe's most urgent problem any more. And our most recent modern monsters seem of a different and perhaps older kind: Saddam Hussein reminded me more of the Caliph Uthman or of Mehmet II than of Hitler. Hamas, Al Qaeda, and Hezbollah seem more like updated versions of the Assassins of Syria rather than of the Comintern. Rwanda seems more like the Sicilian Vespers with radios than like the terror-famine of the Great Leap Forward.

Outside we have demonstrators.

They are answering a question posed by Martin Peretz. "Do I have to pretend," he asked, "that I think Muslims are worthy of the privileges of the First Amendment, which they are so likely to abuse?"

I take it that the demonstrators are saying that the answer is "Yes, he does."

But focus on the fact that the asking of that question and the ire of those who answer it is a powerful sign that the concerns of the Barrington Moore problematic are not our big concerns.

The demonstrators are not there calling for a more equal distribution of income. They are not calling for true participatory democracy. They are not calling for a reorganization of work or the abolition of the gulf between existence and essence or of an end to hierarchy and bureaucracy.

They are calling for a very different transformation.

So how then should Social Studies organize itself for the next generations?

What intellectual thread should you follow as a guide through the labyrinth that is the study of human society? You need to expose students to the broadest range of ideas and perspectives. You need to avoid dissolving into a blooming, buzzing confusion. And yet you need to avoid the narrowing--I would say crippling--straightjackets of our current disciplinary perspectives. And you still need to allow individual students to find and study their own ultimate interests.

We at Berkeley face the same problem.

We do not have good answers.

I occasionally play with "global history" a la Ernest Gellner, James McNeill, and Jared Diamond.

I occasionally play with a narrower dialogue of centralization vs. decentralization a la John Maynard Keynes, Karl Polanyi, Joseph Schumpeter, Friedrich Hayek, and James Scott.

I have had only one really good idea: that is to invite your Chair Richard Tuck out to Berkeley this fall for our internal review of our Political Economy major, so that he can come down from the mountaintop, reveal the tablets, and tell us what the answer is.

SOCIAL STUDIES 50th Anniversary Celebration. September 25th, 2010

8:30. Continental Breakfast. Science Center Lobby

9:30. Welcome from Richard Tuck. Science Center B. Film of Stanley Hoffmann

10:00. Panel: Social Studies and the Social Sciences. Science Center B. Charles Maier, Chair. Seyla Benhabib, Yale University. Rogers Brubaker, ‘79 UCLA. J. Bradford DeLong ‘82, UC Berkeley. Sherry Turkle ’70, MIT

12:00. Lunch . Adams House. Welcome from Grzegorz Ekiert. Recognition of Head Tutors and Directors of Studies: Robert Paul Wolff, Richard Hunt, Martin Peretz, Michael Donnelly, Cheryl Welch, Judith Vichniac, Anya Bernstein. Principal Speaker: Robert Paul Wolff

2:00. Panel: Social Studies and Social Change. Science Center B. Michael Walzer, Chair. Jarrett Barrios ‘91, Gay and Lesbian Alliance Against Defamation. EJ Dionne ’73, Washington Post. Jamie Gorelick ‘72, Former Deputy Attorney General. Adele Simmons ’63, Chicago Metropolis 2020

4:00. Coffee Break. Science Center Lobby

4:45. Welcome From Drew Faust. Science Center B

5:00. Navin Narayan Memorial Lecture. Amy Gutmann ’71, President of the University of Pennsylvania

6:15. Reception. Northwest Science Building Atrium

## Herodotos of Hallicarnassos

Herodotos of Hallicarnassos, 2500 years ago:

I knew, O king! at the outset, that if I told thee the truth, my speech would displease thine ears. But as thou didst require me to answer thee with all possible truthfulness, I informed thee what the Spartans will do.... [T]he Lacedaemonians, when they fight singly, are as good men as any in the world, and when they fight in a body, are the bravest of all. For though they be free-men, they are not in all respects free; law is the master whom they own, and this master they fear more than thy subjects fear thee. Whatever he commands they do, and his commandment is always the same: it forbids them to flee in battle, whatever the number of their foes, and requires them to stand firm and either to conquer or die...

## Files for September 22 Econ 1 Lecture: Budget Economics: Econ 1: U.C. Berkeley: Fall 2010

September 22: Budget Economics:

## Very Unhappy with the Federal Reserve, Duncan Black Is

Nevertheless, speak like Yoda, he does not, still:

Eschaton: Everthing's Terrible It's All Our Fault And We're Not Going To Change. The sociopaths at the Fed have spoken.

I've swung around to the view that Barack Obama's decision not to replace Ben Bernanke with Larry Summers was his worst unforced error, and his biggest mistake in governance.

Felix Salmon is equally unhappy with the Federal Reserve:

Monetary policy: Fed next: [T]he Fed is acknowledging that inflation levels are not presently consistent with its price stability and full employment mandates.... [T]he Fed indicates that it is willing to take additional action to move inflation back to a level consistent with those mandates. A very reasonable question to ask is why the Fed opted not to act now....

It does seem, however, that this statement is moving the Fed toward additional easing.... Sadly, we'll have to wait until November for the next scheduled meeting and the Fed's next bite at the apple.

At this point, it seems silly to speculate about what's going on inside the FOMC. We've all looked into our crystal balls and wondered why the Fed hasn't yet acted, and there's little more to be said on this front. The bottom line is that the Fed could and should do more and most observers—including those drafting the Fed statements—seem to acknowledge this. It's a shame that we'll have to wait two more months, at least, to see something done at last.

## Unhappy with the Obama Administration, Duncan Black Is

Speak like Yoda, he does not:

Eschaton: Decision Points. They screwed up first with a too small stimulus. They screwed up second last December/January when they got skeered of zombie unicorns invisible bond vigilantes. They screwed up the third time when they thought recovery summer was here and the jobs growth was coming, despite very little evidence of that.

## Scott Lemieux: People who make $400K a Year: Very Affluent Scott: People who make 400K A Year: Very Affluent : Lawyers, Guns & Money: Prof. Brad Deling has an excellent post on a particular type of rich person rage, i.e.$400,000 a year isn’t really that much money, so any increase in marginal tax rates is outrageous.

In this case the argument seems to be that if you don’t have an unlimited budget for luxury trinkets and vacations after buying an extremely expensive house in a good neighborhood in a terrific city and sending your kids to extremely expensive schools, you’re not really rich. I trust that this is self-refuting.

A central problem with the idea that 300 or 400 grand a year doesn’t go as far if you live in a desirable urban location is that living in a desirable location is something you’re getting with your money. If it’s really important to you to have money left over for ivory backscratchers, you can move to the periphery of the urban area; being very affluent doesn’t mean not having to make any tradeoffs. This goes double for Manhattan, where a status cost above and beyond actual amenities is built into the price of real estate. I mean, if you’re paying a huge premium to live on the Upper West Side instead of Brooklyn or Queens, it sure ain’t for the restaurants...

## Karl Smith: No, Fannie and Freddie Did Not Cause the Housing Bubble

Karl Smith:

Fannie / Freddie Acquitted: Fannie Mae and Freddie Mac are members of a long list of individuals and entities including Gary Condit, Tom Delay, Michael Jackson, Rod Blagojevich and JonBenet Ramsey’s parents.... tried and convicted in the popular press essentially on the grounds that they were creepy.... As I hope to continue to argue, being creepy, a bad person, or even a usual suspect does not make one automatically guilty.... [G]overnment subsidies in the housing market are a bad idea for a host of reasons and have been for years. I will testify to this with vigor and passion. However, that does not mean that Fannie or Freddie caused the housing bubble. Indeed, by my count they were among the biggest victims of it.

The proper question is not: What story is consistent with my general philosophy or worldview?

The proper questions is: What story is consistent with the facts?

Fact One: Fannie and Freddie’s primary business of subsidizing conventional loans was not a driver of the housing the bubble....

Fact Two: Fannie and Freddie lost market volume during the boom....

Fact Three: The major losses to Fannie and Freddie came through their expansion into guaranteeing non-traditional loans, not through their portfolio. That is, yes like every other financial entity Fannie and Freddie were buying subprime packages in the secondary market. However, these losses were relatively mild....

Fact Four: The key change in the Fannie / Freddie business model was their expansion in the types of loans they willing to guarantee. In particular moving into the Alt-A and Interest-Only categories....

Fact Five: The higher number of Alt-A and Interest Only loans combined with ultimately higher delinquency rates have meant that a plurality of losses have come from these two categories. These loans were vulnerable not because the borrowers were poor low-credit individuals that the government was taking pity upon but because the loan concepts were predicated on rising or at least stable housing prices.

Fact Six: Areas with the largest collapse in home prices have accounted for most of Fannie and Freddie losses. Refer to the same graph above. This is further evidence that it was the collapse of the bubble and not betting on people who were poor credit risks that induced major losses at Fannie and Freddie....

The wave of housing price increases was kicked off by changes in private label securitization. These changes left Fannie and Freddie with a smaller market share and lower absolute level of securitizations. Fannie and Freddie attempted to adjust their basic business practices to stay competitive in bubble markets and among aggressive borrowers. These adjustment left Fannie and Freddie exposed to a large decline in housing prices....

In short, attempting to subsidize the American dream for low and moderate income families may be a fundamentally bad policy. However, it does not appear to be either the origin of the housing bubble or the source of Fannie and Freddie’s trouble.

## Krugman and Rajan

Paul Krugman responds:

Fannie Freddie Further: OK, some readers want to know my answer to Rajan’s defense on the FF issue. So, first of all, the first time I wrote about FF, I got something wrong — I was unaware of their late in the game rush into subprime.

But Rajan’s other point, that securitization numbers — which show a much reduced role for FF at the height of the bubble — are misleading, is just wrong.... Rajan makes much of the fact that the GSEs sometimes buy whole mortgages, rather than securitizing them. But as a quantitative matter, that’s just not important....

During the peak of the housing bubble, Fannie and Freddie basically stopped providing net lending for home purchases, while private securitizers rushed in. Yes, very late in the game FF increased their share of subprime financing, as they tried to play catchup; but that’s really off point. The real question is, who was financing the bubble — and it wasn’t GSEs.

Rajan asks why the government was boasting about how it was expanding low-income home ownership, if it really wasn’t. Does that really require an answer? Governments always try to take credit for stuff, and remember than in 2004 subprime was considered a good thing.

Finally, why are we so hard on Rajan? Because the central theme of his book is that the financial crisis was caused by government efforts to help low-income families — which he treats as an established, undeniable fact. But it’s by no means an established fact — on the contrary, most non-AEI analyses find government policy mainly innocent here. So his whole thesis is a structure built on foundations of sand.

## Todd Gitlin on Marty Peretz

Todd Gitlin:

This Manichaean Moment: When the margins crawl with insanity, it is all the more important for the vital center of calm, reasonable, evidence-based thought to hold. But some minds that ought to know better are cowed, while others are playing with fire. When Martin Peretz, the editor-in-chief of this magazine, declared that “Muslim life is cheap, most notably to Muslims,” and “wonder[ed] whether I need honor these people ['those Muslims led by the Imam Rauf'] and pretend that they are worthy of the privileges of the First Amendment, which I have in my gut the sense that they will abuse,” he crossed a line.

Then, reminded by Nicholas Kristof and James Fallows among others that such sentiments are for yahoos, not editors-in-chief of liberal magazines, he apologized for that much—while holding to his insistence that “Muslim life is cheap, especially for Muslims.” “This is a statement of fact, not value,” he clarified. Not for jihadis, or some Arab governments, but “for Muslims.” Muslims in general. Muslims across the board. The Muslim women, too, who are oppressed, “honor-killed,” by Muslim men? When in 2003, Jose Saramago wrote that the West Bank occupation revealed “the Jew” in his essential awfulness, he was rightly excoriated by many, including this writer, for spewing plain Jew-hatred. It was easy to recognize reductive xenohysteria when the Jews were the target. One rightly expects enlightened opinion to rule this sort of thing out of bounds. And now?

I should add that I write more in sorrow than anger, for once upon a time—it seems like centuries ago—Marty Peretz was my political friend and teacher (approving, along the way, my adolescent wanderings in quasi-Marxism). Even across political divides of later years, I have (ill-advisedly) bitten my tongue after reading his diatribes against “the Arabs” over the years. But in the thick of a xenohysteria that stands to worsen as the country churns in panic and miasma, I think it essential to underscore that those with the privilege of the public ear are obliged to take intellectual standards seriously. The life of the mind is not the life of the spleen.

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

## Liveblogging World War II: September 21, 1940

Convoy 41 ships. First sighting On 20 Sep 1940 by U-47. EscortfFrom 21st September: Escort Group (Cdr. Knapp) with: Sloop Lowestoft. Destroyer Shikari, Corvettes La Malouine, Calenduala, Heartsease. From 22nd September the destroyer Scimitar and Skate

U-boats: U-29, U-32, U-43, U-46, U-47, U-48, U-65, U-99, U-100

The battle: After sighting the convoy by U-47 the BdU tried to bring additional boats to the convoy, but not all ordered boats managed to reach it. U-47 had been for the last days serving as a weather boat and had only one torpedo on board. U-99 under Kptlt. Kretschmer reached the convoy as the first boat and sank 3 ships in the night of 20/21 Sept. On the morning of 21 Sept U-48 under Kptlt. Bleichrodt sank the Blairangus. The next evening U-100 under Kptlt. Schepke reached the convoy and sank during the night 7 ships for a total of 50,340 tons.... 11 ships sunk (72,727 tons) and 3 ships damaged (18,178 tons).

## Daniel Shaviro Speaks Sense

Dan Shaviro:

Start Making Sense: Late to the fray: Xxxx Xxxxxxxxx... from what appears to be a classic U of C pro-markets and anti-regulatory perspective, has been having a rough time over the last few days... because of a blog post in which he complained about being potentially subject to a tax increase if the expiring Bush tax cuts are not extended for top-bracket taxpayers. Xxxxxxxxx got into hot water by rightly interpreting a lot of the rhetoric about not extending the top-bracket tax cut as pertaining to how "rich" people should be taxed, as compared to those who are "middle class." The latter group's tax cuts both parties are eager to extend (leaving aside the chance that the Republs will hold their tax cuts hostage to those of the top bracket). Hence, Xxxxxxxxx thought it germane to note how the circumstances of his life prevent him from feeling "rich," even though he is a law prof at a leading school and his wife is a doctor, making for two six-figure professional-level salaries.... The word "whining" has been used, and Xxxxxxxxx has been condemned for lack of empathy with people in that portion of the U.S. population (99.5 percent or so) whose households earn less, and in most cases at least 80 percent less, than his, and yet somehow seem to get by. But show me a non-whiner and I'll show you someone who isn't fully human. The important thing is what perspective one ends up taking towards one's own inclination to whine.... Frankly, I can identify emotionally with Xxxxxxxxx's complaint.... Emotionally though not intellectually, I very much feel the same way as he does about the "who's rich" question....

The reason why is identified by Krugman, as well as by Brad DeLong. The way our society operates these days, people in Xxxxxxxxx's and my tier see those above them who (at least as it seems to us) live way higher on the hog and have no financial worries whatsoever. Suppose I take a long flight on a business trip to Europe or Asia and find myself in the cattle cars, a.k.a. coach. Do you think I close my eyes while staggering with my bag through first and business class? Of course not. We often encounter, and psychologically are inclined to care about, what people above us have (and recall that the income gap between us and the top has skyrocketed over the last 20 years). Plus, we find ourselves strongly encouraged and inclined to want and even expect a whole bunch of things that add up to more than we can easily afford, even if we're in the 99th percentile. But then again, economics is the "dismal science" because it's about choice under scarcity.

Equally or more importantly, there's sufficient economic segregation going on to ensure that many of those in our tier will not get to see a whole lot from the inside regarding the lives of the 99+ percent of households that earn less than we do. (Well, I personally DO get to see some of this, and am emotionally inclined to keep it in mind, but that's just me.) So the feeling Xxxxxxxxx had is understandably widespread in his (and my) socioeconomic tier. Where he really went wrong, but with substantial encouragement from the rhetoric surrounding the extend-the-tax-cuts debate, is in thinking that the case for allowing top bracket rates to rise rests on the notion that all these people are "rich," a claim that necessarily depends on one's frame of reference. But this is the impression that non-tax and budget experts might have been expected to derive from Obama Administration rhetoric....

Brad DeLong's takedown nails this pretty hard, noting the horrific long-term budget problems that we face, which make huge tax increases inevitable. Brad also notes this isn't just because the Democrats like a big public sector - Bush did more than all preceding presidents put together (or at least the net of them) to make the fiscal problem a huge one. But of course this goes to show that the so-called middle class tax cuts shouldn't be extended either....

So let me try this quasi-defense (?) of Xxxxxxxxx, who after all could have been my colleague had I stayed at Chicago. The commonly offered public rationale for permitting his annual tax liabiity to go up, via non-extension of the top bracket tax cuts, which is that he is "rich," doesn't jibe with how most (I would surmise) people in his socioeconomic position feel about their lives. This admittedly reflects their myopia, but of a sort strongly encouraged by the circumstances in which they (we) commonly live. But in fact the question of who is "rich" in the proper comparative sense is really beside the point....

As a matter of brute political reality, taxes are going to have to go up, and indeed a lot, for way more than just the "rich" by anyone's definition. Extending the so-called middle class tax cuts is insanity as well (leaving aside the case that the current recession calls for delaying the effective date of rate hikes, at least given other political constraints on fiscal policy). And the Obama Administration (albeit under political duress) has helped perpetuate the misunderstanding that this is all about who's "rich," because no one in politics - and Republicans even less than Democrats - has the incentive or the nerve to speak in full candor about the long-term budget picture, its causes, and likely or feasible solutions.

## We *Are* the Rich

Since the "We Are the Super Rich" post is gone from the "Truth on the Market" weblog, I have grabbed it from the Google Cache and put it here. Anyone who wants the comments--which are remarkable, in many ways--should email me.

And having rescued it from Google Cache, I cannot resist a Parthian shot. The post makes three points:

(1) Failing to extend the upper-bracket Bush tax cuts will harm aggregate demand because those taxed are--like him--people who are "just getting by." They will cut back on their spending, and the economy will suffer from diminished aggregate demand. I understand the "just getting by" problem, but it is "just getting by" in the sense of occasional cash-flow crises--which I understand: believe me, I am so there too--it is not "just getting by" in the sense of not having the income to buy what you want. The answer to this is that he (and I) are atypical. Nearly all people in our income range are not "just getting by" in the sense that a small negative shock to our income will produce a one-for-one fall in our spending. Indeed, that is not true for most people. Because it is not true, Doug Elmendorf and his CBO in the chart to the right rank income tax cuts as among the least effective ways to reduce unemployment as far as bang-for-buck is concerned. To boost employment we would be much better advised to raise income tax rates and devote the extra money to boosting unemployment insurance, or giving employers a break on payroll taxes, or giving a break on payroll taxes to employers who are hiring. The argument that we need to respond to the planned expiration of the Bush cut in the tax rate on the high bracket by renewing it in order to keep unemployment from rising fails.

(2) His taxes should be cut because he can spend his money better than the government can. This is an argument that I feel strongly about, but what I feel strongly about is that he has no standing to raise it. It may be true, it may be false, but the moment to raise it would have been in 1981, when Ronald Reagan pushed an unfunded increase federal spending on defense, and in 2003, when George W. Bush rammed the unfunded Medicare Part D through the congress. As Milton Friedman liked to say, to spend is to tax: if you don't object to the spending, you cannot object to the taxes to pay for them. Members of the Rubin wing of the Democratic Party like me--people who have been fighting for decades for rational fiscal policy, for PAYGO, for balancing the government's income and outgo--have standing to object when government is not right-sized, when it is either too big or too small. People who were deserters from the war for fiscal sanity throughout George W. Bush's regime simply don't have standing. When he willed the spending, he willed the taxes to pay for them. No backsies.

If they want to stand up and say that he made a horrible mistake in supporting George W. Bush and all the other Republicans he has voted for who believe that you can increase spending and never pay for it through increased taxes, then we can talk.

But until he does, he needs to remain silent.

And this is something I feel strongly about.

This brings us to his last argument:

(3) I am not rich. Other people can afford to pay higher taxes. But not me. You need to quote it at length in order to get the full flavor:

The rhetoric in Washington about taxes is about millionaires and the super rich, but the relevant dividing line between millionaires and the middle class is pegged at family income of $250,000. (I’m not a math professor, but last time I checked$250,000 is less than $1 million.) That makes me super rich and subject to a big tax hike.... I’m the president’s neighbor in Chicago.... I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning.... [W]e are just getting by despite seeming to be rich. We aren’t.... [T]he president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay. The problem is, we can’t afford it....$100,000 in federal and state taxes.... our mortgage.... We chose to invest in the University community and renovate and old property, but we did so at an inopportune time. We pay about $15,000 in property taxes.... My wife has school loans of nearly$250,000 and I do too.... Since we care the education of our three children, this means we also have to pay to send them to private school... We try to invest in our retirement by putting some money in the stock market, something that these days sounds like a patriotic act.... Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby so we can both work outside the home. At the end of all this, we have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget....

[W]e can cut back.... The (legal) immigrant from Mexico who owns the lawn service we employ... the (legal) immigrant from Poland who cleans our house... cancel our cell phones and some cable channels, as well as take our daughter from her art class at the community art center, but these are only a few hundred dollars per month in total.... If these cuts don’t work, we will sell our house – into an already spiraling market of declining asset values – and our cars, assuming someone will buy them. The irony here, of course, is that the government is working to save both of these industries despite the impact that increasing taxes will have.

The problem with the president’s plan is that the super rich don’t pay taxes – they hide in the Cayman Islands or use fancy investment vehicles to shelter their income. We aren’t rich enough to afford this – I use Turbo Tax. But we are rich enough to be hurt by the president’s plan. The next time the president comes home to Chicago, he has a standing invitation to come to my house (two blocks from his) and judge for himself whether the Xxxxxxxxxs are as rich as he thinks.

On what appears to be roughly nine times American median household income...

## We Are the Super Rich

For my part, I marvel at nine things I am still struck by--and marvel at--nine things about University of Chicago Law Professor Xxxx Xxxxxxxxx:

1. Xxxxxxxxx's eagerness to engage in class war against those richer than he is: his anger at the "super rich [who] don’t pay taxes... hide in the Cayman Islands or use fancy investment vehicles to shelter their income..." who include his own more senior colleagues at the University of Chicago Law and Business Schools.

2. Xxxxxxxxx's eagerness to engage in culture war against Barack Obama: "I’m the president’s neighbor in Chicago, but we’ve never met. I wish we could, because I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning.... [L]ike many Americans, we are just getting by despite seeming to be rich. We aren’t.... [T]he president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay..."

3. Xxxxxxxxx's ignorance about American government policy. He talks about "the vast expansion of government [Barack Obama] is planning..." But if you look at the laws that Barack Obama has lobbied for and gotten Congress to pass, in the long run they don't expand but shrink the government relative to what it would otherwise be. Quantitatively, the biggest legislative initiative by Obama so far has been very large long-run cuts in Medicare spending. Henderson is either so ignorant that he does not know this, or so mendacious that he doesn't want his readers to know this. I bet on ignorance.

4. Xxxxxxxxx's lack of standing to complain about the fact that taxes are going up. He was a big supporter of George W. Bush, whose two major initiatives were to expand federal spending via his wars of choice and the unfunded Medicare Part D. As the late Milton Friedman liked to say, to spend is to tax: once you spend you must then tax, and you can tax smart or you can tax stupid, but tax you must. Once again, I don't know whether Henderson knows that to spend is to tax and is simply mendacious in trying to keep his readers from thinking about the consequences of the Bush policies he supported, or whether he is so ignorant that he doesn't know that to spend in the past. Here I bet on mendacity.

5. Xxxxxxxxx as an unreliable narrator. On the one hand, he says that his income exceeds the $250K/year threshold "but not by that much"; on the other hand, he says that his taxes will go up "significantly" and that his current annual tax bill is "nearly$100K". Those are grossly inconsistent. If his household income is near $250K/year, his taxes are not now$100K/year and they will not go up significantly. If his taxes are now $100K a year and will go up significantly if the about-to-expire lower top marginal rate is not reenacted, then his income is way more than$250K/year.

6. Xxxxxxxxx's insistence that the things he spends money on--a 4700 sq ft house in Hyde Park with a lawn big enough to need a gardener, private schools, house cleaners, etc.--aren't things that only rich people buy.

7. Xxxxxxxxx's insistence that he is "just getting by" with a household income that I compute (if his claims about the taxes he pays are accurate) at about nine times American median household income.

8. Xxxxxxxxx's insistence that he "can't afford" to pay higher taxes--even though he has no problem with raising taxes on those richer than him, and had no problem supporting a president (Bush) whose policies created the necessity for general tax increases because, after all, to spend is to tax.

9. I genuinely do not understand why Xxxxxxxxx has his job.

Let me explain that last at greater length.

J.W. Verret wrote:

Todd Henderson will be missed: I am saddened that our co-blogger Xxxx Xxxxxxxxx is putting up his blogging hat.  He leaves us with an academic reputation that is unsurpassed, unfortunately I can’t say that the reputation of everyone involved has held up very well in light of the very personal nature of attacks.... I do think, however, that this is a good opportunity to focus the world on the wide range of scholarly work from Professor Henderson.... Here are a few papers of his on ssrn worth reading (this certainly won’t be the last time we link to his work at TOTM):

In "Insider Trading and CEO Pay," Prof. Xxxxxxxxx examines the effectiveness of insider trading as a compensation device using a study of 10b5-1 trading plans.  His findings are in line with Henry Manne’s original thesis from nearly 40 years ago that insider trading didn’t diminish firm market value on net and may serve a useful purpose as an executive compensation device to motivate managers to maximize the value of the firm...

To which my first reaction is simply: Huh?!

And my second reaction is: No! No! No! Ten-thousand times no! That is simply wrong.

Giving firm managers the freedom to use information they privately have as a result of their jobs to decide when to buy and sell shares of stock does not motivate managers to manage the firm in the interest of shareholders.

If managers free to engage in insider trading know that the next piece of news to be released will cause the stock price to rise, they will buy. If they know that the next piece of news to be released will cause the stock price to fall, they will sell and then buy back later. They don't care whether the news is good or bad--either way they will profit, and either way they will profit equally.

What the ability to engage in insider trading does is that it gives managers an incentive to make the price of the stock vary--they don't care which way. Thus it cannot "serve a useful purpose as an executive compensation device" and cannot "motivate managers to maximize the value of the firm" to shareholders.

Insider trading makes executives' portfolios' long not the company but long the volatility of the company. And shareholders don't want executives making decisions that make the value of companies they own more volatile: stock market investments are risky enough as it is without giving executives reasons to boost the volatility pot.

This claim that freedom to engage in insider trading aligns executives' interests with those of shareholders is so basically wrong, so obviously erroneous, so simply stupid that--well, words fail me.

So here is the original post:

Enough people have linked to this that it is a significant loss for the conversation to delete it, so I am reposting it here from Google's webcache:

We are the Super Rich « Truth on the Market: Posted on September 15, 2010

The rhetoric in Washington about taxes is about millionaires and the super rich, but the relevant dividing line between millionaires and the middle class is pegged at family income of $250,000. (I’m not a math professor, but last time I checked$250,000 is less than $1 million.) That makes me super rich and subject to a big tax hike if the president has his way. I’m the president’s neighbor in Chicago, but we’ve never met. I wish we could, because I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning. A quick look at our family budget, which I will happily share with the White House, will show him that like many Americans, we are just getting by despite seeming to be rich. We aren’t. I, like the president before me, am a law professor at the University of Chicago Law School, and my wife, like the first lady before her, works at the University of Chicago Hospitals, where she is a doctor who treats children with cancer. Our combined income exceeds the$250,000 threshold for the super rich (but not by that much), and the president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay. The problem is, we can’t afford it. Here is why.

The biggest expense for us is financing government. Last year, my wife and I paid nearly $100,000 in federal and state taxes, not even including sales and other taxes. This amount is so high because we can’t afford fancy accountants and lawyers to help us evade taxes and we are penalized by the tax code because we choose to be married and we both work outside the home. (If my wife and I divorced or were never married, the government would write us a check for tens of thousands of dollars. Talk about perverse incentives.) Our next biggest expense, like most people, is our mortgage. Homes near our work in Chicago aren’t cheap and we do not have friends who were willing to help us finance the deal. We chose to invest in the University community and renovate and old property, but we did so at an inopportune time. We pay about$15,000 in property taxes, about half of which goes to fund public education in Chicago. Since we care the education of our three children, this means we also have to pay to send them to private school. My wife has school loans of nearly $250,000 and I do too, although becoming a lawyer is significantly cheaper. We try to invest in our retirement by putting some money in the stock market, something that these days sounds like a patriotic act. Our account isn’t worth much, and is worth a lot less than it used to be. Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby so we can both work outside the home. At the end of all this, we have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive. If our taxes rise significantly, as they seem likely to, we can cut back on some things. The (legal) immigrant from Mexico who owns the lawn service we employ will suffer, as will the (legal) immigrant from Poland who cleans our house a few times a month. We can cancel our cell phones and some cable channels, as well as take our daughter from her art class at the community art center, but these are only a few hundred dollars per month in total. But more importantly, what is the theory under which collecting this money in taxes and deciding in Washington how to spend it is superior to our decisions? Ask the entrepreneurs we employ and the new arrivals they employ in turn whether they prefer to work for us or get a government handout. If these cuts don’t work, we will sell our house – into an already spiraling market of declining asset values – and our cars, assuming someone will buy them. The irony here, of course, is that the government is working to save both of these industries despite the impact that increasing taxes will have. The problem with the president’s plan is that the super rich don’t pay taxes – they hide in the Cayman Islands or use fancy investment vehicles to shelter their income. We aren’t rich enough to afford this – I use Turbo Tax. But we are rich enough to be hurt by the president’s plan. The next time the president comes home to Chicago, he has a standing invitation to come to my house (two blocks from his) and judge for himself whether the Xxxxxxxxxs are as rich as he thinks. ## Oh Dear... I was not going to write any more about Xxxx "Just Scraping by at$400K+ a Year in Family Economic Income" Xxxxxxxxx, but now I am sent this:

Deleting one's posts--especially if they have been referred to by many and are part of the conversation--is something that calls for some heightened scrutiny...

But you can still read other things by him:

Raising Objectivists:

Raising Objectivists « Truth on the Market: I’ve read and enjoyed all of Ayn Rand’s fiction, especially “We the Living,” but I’ve always wondered how I can convey her ideas to my children before they are able to read the books for themselves. What is a Randian to do when the hippies at the local playground sermonize about sharing and winning not mattering? Finally, here is a helpful guide for how to raise your child as an Objectivist. A taste: “You should never feel guilty about your abilities. Including your ability to repeatedly peg a fellow Xxxxler with your Elmo ball as he sobs for mercy”...

Morons of the world, unite!:

Morons of the world, unite! « Truth on the Market: My wife makes me subscribe to the New York Times, and occasionally it is worth it. Take this recent essay by Roger Cohen. It is difficult to get past the faux-intellectual babble — “As it is, everyone’s shrieking their lonesome anger, burrowing deeper into stress, gazing at their own images” — but if you can resist laughing or immolating yourself...

The dark side of altruism:

The dark side of altruism « Truth on the Market: Have you ever been tempted to buy a beggar a cup of coffee or a sandwich instead of giving money? If so, you have, like a young Anakin Skywalker, taken your first step to the dark side of altruism. Don’t get me wrong, I’ve been there too. The reason I offered food instead of (money for) vodka is because I wanted to “help” the beggar. From my lofty perch (that is, sober, housed, and employed), I wanted to impose my values on him. Like a father choosing broccoli instead of ice cream for his kids, I thought I knew better what was good for the beggar — what he really wanted if only his thought processes were rational.

At some level, this is sensible. If I am paying, either directly in the form of the handout or indirectly in the form of the obvious externalities from the beggar (e.g., crime, stink, etc.), then it makes sense for me to try to reduce these costs. But the dark side of caring is the perversity of this control. Once we start thinking this way, the creep towards totalitarian nannyism is hard to resist...

Union-boss compensation:

Union-boss compensation « Truth on the Market: There are hundreds and hundreds of academic articles in law, finance, economics, business, and other social sciences discussing the issue of executive compensation broadly and down to the smallest detail. There are none — actually, one working paper in draft form on one issue — that I can find on the issue of how much and how union bosses are paid. There are scattered news reports here and there, but nothing systematic. This is shocking. The problems are the same — agency costs and the potential for self-serving behavior — as in the corporate context. Although the amounts are likely lower than for CEOs, the agency costs may be higher. I’m working on trying to make some progress on these issues, but the lack of data may make them tough to get at.

Part of the problem may be a lack of disclosure. Although CEOs (and the other top corporate managers) must disclose every penny of pay, the same is generally not true for union chiefs. The Department of Labor collects some data — although a recent Obama Administration order reduces the amount unions must disclose — but it pales in comparison with what we know about CEO pay. There are occasionally news stories describing allegedly exorbitant union pay, but it is hard to know whether these are outliers or part of a troubling pattern. In addition, if we don’t know how much leaders are paid, how are union members supposed to know or get answers to these questions?

Are union bosses paid for performance? How much do they make compared with the average union worker? How much do they make compared with foreign equivalents? (I had two librarians in law and business scour libraries and online sources for two days, and they couldn’t find any data on foreign union pay. If anyone knows any sources, please let me know.) Is the way union leaders are paid efficient or better explained by agency costs?

Stay tuned for some preliminary answers...

Credit derivatives don’t kill countries, politicians do:

Credit derivatives don’t kill countries, politicians do « Truth on the Market: Looking for something to blame for the Greek debt crisis, some observers are pointing their fingers at credit derivatives. An article in yesterday’s New York Times makes the case that credit default swaps (CDS), and specifically their sale by Goldman Sachs, are somewhat to blame in part for Greece’s problems.

As I explain in this paper, credit derivatives are merely a financial tool that can be used by those exposed to credit risk, say a default by the Greek government or General Electric, to share that risk with others. This lowers the costs of borrowing and helps spread risk. In addition, third parties with no exposure to the particular credit risk can bet on whether the Greeks will default. These secondary-market transactions are the same as an individual buying stock in General Electric betting it will rise. Importantly, these bets provide a liquid market for credit risk, which lowers the cost of hedging for those with primary exposure, and provides the market with better information about whether Greece or General Electric is a good credit risk. Those who might lend to the country or company, those conducting other business with it, and those who might face the risk of default in other ways, can use this information to better plan their activities. For instance, those disbelieving a country or company’s claim of financial soundness, say because of funny accounting (think: Enron or, dare I say, America) can use credit derivatives to short debt, something that was impossible before credit derivatives were invented. This makes debt prices more accurate and holds borrowers, be they sovereigns or corporations, better to account.

Of course, there is the possibility for abuse.... The existence of the potential for abuse, however, is no more an indictment of credit derivatives generally than it is of the stock market or any other useful tool of society than can sometimes be abused...

Obama on Koran burning:

Obama on Koran burning « Truth on the Market: Today the president pressured a pastor to stop the planned burning of Korans on the ninth anniversary of 9/11. On TV this morning, the president said: “If he’s listening, I hope he understands that what he’s proposing to do is completely contrary to our values as Americans.” I’m not an expert on the Constitution, but, as one of my favorite professors used to say, that just can’t be right...

On income inequality:

On income inequality « Truth on the Market: Slate.com presents a nice set of charts on the issue of growing income inequality. It seems there is a reasonable debate to be had about whether this is a good or bad thing.... But I want to put aside this debate to get at the question of why we’ve seen an increase in inequality. The Slate.com charts and accompanying article tell us one very interesting thing — tax cuts are not to blame.... So what caused the increase in income inequality? I’m not an expert in this area, but I noticed something interesting about the income inequality curve presented in the article... a striking parallel between the shape of this curve and the shape of the curve of executive compensation.... The small number of executives cannot explain the change in income, but rather is some evidence of the underlying cause.... The cause of the change of executive compensation is well understood. Starting in the early 1980s, executives started to be paid like shareholders (that is, with stock options) instead of bureaucrats, and the rising curve of executive compensation is explained entirely by the growth of the stock market over the same period.... [I]t may be that the growth of income inequality is driven by the top 1 percent getting more income from investments. If this is the case, then policies like Social Security and defined-benefit pension plans (pushed by labor unions) are somewhat to blame...

Paul Krugman spouting nonsense:

Paul Krugman spouting nonsense « Truth on the Market: In this morning’s New York Times, Professor Paul Krugman laments the state of America, and, as a remedy, proposes . . . surprise! . . .  more government spending. He writes: “When we save a schoolteacher’s job, that unambiguously aids employment; when we give millionaires more money instead, there’s a good chance that most of that money will just sit idle.” I’m not an economist, but this sentence seems horribly flawed for someone who is. I agree that in a world with zero interest rates and 10 percent unemployment, some government priming of the pump might make sense. Macro-economic conditions need to be changed, and the government is uniquely positioned to do this. After all, it sets the rules, prints the money, sets the level of taxes, and determines through public policy where investment will flow. But the question is how and where to act. Krugman believes taxing us to raise money to pay teachers is part of the answer. I doubt it, for several reasons. “Saving” a schoolteacher’s job is not unambiguously a good thing. Money spent to pay her is money not spent somewhere else...

Should schools teach Hayek?:

Should schools teach Hayek? « Truth on the Market: The Texas Board of Education recently decided to add F.A. Hayek to the high school economics curriculum.... To the Times, this is evidence of the Board’s desire to put a “conservative stamp on . . . economics textbooks.” As usual, the Times gets it wrong.

Hayek is the most courageous and important critic of social planning, and if we are going to expose high school students to the poison of Marx, we must give them the antidote of Hayek.... I offered my own defense of sorts in a 2005 paper for the inaugural issue of the New York University Journal of Law & Liberty. I look at citations to Hayek and other famous “economists” in law journals and by judges. Hayek is the ninth most cited economist, behind only Mill, Smith, Coase, Becker, Stigler, Arrow, Marx, and Friedman. Hayek has been quite influential on law, and like Mill, Smith, and Friedman is accessible to high school students wrestling with big-picture ideas about economics and society.

I do agree with Wolfers’s skepticism about school boards generally and some of the specific decisions of the Texas Board. I also agree that Hayek would be skeptical about attempts to impose knowledge from above. But, since these decisions must be made, it is nice to see some balance being brought to economics education.

Of course, much of this shouldn’t matter. Education starts at home, and I can say that no matter what the high school curriuculum at the University of Chicago Laboratory Schools (where my kids will attend), they will learn about Hayek in the Xxxxxxxxx House...

The shareholder wealth maximization myth:

The shareholder wealth maximization myth « Truth on the Market: In a recent speech at the Netroots Nation, Senator Al Franken tried to frighten the crowd by trotting out the corporate bogeyman that greedily makes decisions without regard to anything other than profit. Franken told them: “it is literally malfeasance for a corporation not to do everything it legally can to maximize its profits.” Individuals across the political spectrum share this common canard. Those on the right, like Milton Friedman, argue that the shareholder-wealth-maximization requirement prohibits firms from acting in ways that benefit, say, local communities or the environment, at the expense of the bottom line. Those on the left, like Franken, argue that the duty to shareholders makes corporations untrustworthy and dangerous. They are both wrong.

While the duty to maximize shareholder value may be a useful shorthand for a corporate manager to think about how to act on a day to day basis, this is not legally required or enforceable. The only constraint on board decision making is a pair of duties – the “duty of care” and the “duty of loyalty.” The duty of care requires boards to be well informed and to make deliberate decisions after careful consideration of the issues. Importantly, board members are entitled to rely on experts and corporate officers for their information, can easily comply with duty of care obligations by spending shareholder money on lawyers and process, and, in any event, are routinely indemnified against damages for any breaches of this duty. The duty of loyalty self evidently requires board members to put the interests of the corporation ahead of their own personal interest.

Under this legal regime, it is not malfeasance for boards or corporate chiefs to make decisions that do not maximize shareholder value. Boards are protected by the so-called “business judgment rule” from claims that their decisions were the wrong ones. The business judgment rule protects corporate decisions unless the plaintiffs can show a breach of one of the two duties. In other words, unless there is a plausible story the board’s decision was woefully uninformed or was tainted by self interest, a shareholder challenge to a corporate decision will fail.

The business judgment rule means that decisions that turn out badly for firms are protected. This encourages risk taking and avoids the hindsight bias of litigation in cases where well-meaning and rational decisions do not maximize shareholder value. It also gives boards wiggle room to take more than just profit into consideration when setting corporate policy...

## Draft Economics 1 Midterm Exam: A Question

Is there any way I can make this question easy enough that I dare ask it on the Econ 1 midterm I am giving on October 4?

Suppose that it is December 2008. You are Berkeley Professor Christina D. Romer. You have been called to Chicago to audition for a cabinet-level post in Barack Obama’s forthcoming administration and to advise him on the proper size of an economic fiscal stimulus program, if any.

You forecast that, were 2010 to be a normal business-cycle year, that the level of GDP in 2010 would be $15.5 trillion/year. You are conducting your analysis in the income-expenditure framework where: Y = C + I + G + NX, C = co + cyY. You believe that cy = .5. You project that NX will be on trend during the recession—that imports will fall as U.S. purchasers shrink their spending, but exports will fall by about as much because there is a recession in the rest of the world as well. You project that there will be little change from trend in consumer confidence co. You project that there will be three years—2009, 2010, and 2011—during which the economy will be depressed. And you project that, even with U.S. Treasury and Federal Reserve support for financial markets to increase the supply of and reduce the demand for safe assets, the scramble for safety will cause financial and non-financial businesses to shrink their business investment spending by$375 billion/year as they cut back spending on risky assets and try to move their portfolios into safer asset vehicles.

You are asked to advise the president-elect on what, if anything the government should do in the way of Passing a Reinvestment and Recovery Act to boost its level of purchases G over the next three years 2009-2011.

1. Suppose that your goal is to achieve balance—to keep total economy-wide spending on trend during the three years that you forecast investment spending will be depressed. What total boost to government purchases G over the next three years should Obama propose and ask his allies in congress to enact in the form of a three-year fiscal stimulus Reinvestment and Recovery Act?

2. The President-Elect’s assistant for economic policy, Harvard Professor Lawrence Summers, writes that it would be a mistake to propose a stimulus program to fill the entire spending gap—that the Recovery Act proposal should be crafted as “an insurance package against catastrophic failure.” Why might he make such an argument? What are the risks of an "excessive" stimulus?

3. Suppose that the President-Elect endorses Lawrence Summers’s argument and asks you to plan a Reinvestme and Recovery Act to fill half the spending gap.. What is the total three-year boost to government purchases G that you propose?

4. Suppose Chief-of-Staff Rahm Emmanuel warns you that congress will take a quarter of the sum you propose and waste it on measures that are actually extremely ineffective at boosting the economy. If you seek to fulfill the charge to close half of the spending gap, how large a program do you advise the President-Elect to propose?

5. In the end, the Reinvestment and Recovery Act as passed contained perhaps $600 billion of true stimulus—increases in government spending G—spread out over three years. Yet the level of GDP in 2010 is not$15.5 trillion but $14.6 trillion. Two things went wrong: first, state and local governments unexpectedly cut their contributions to government purchases G by an extra$100 billion per year that you had not planned on. Second, the flight to safety and hence the reduction in business investment spending turned out to be significantly larger than you had forecast in December 2008. If you maintain your belief that your analysis of the effects of a fiscal stimulus Reinvestment and Recovery Act were accurate, what is your forecast of what the level of GDP in 2010 would have been had the Reinvestment and Recovery Act been filibustered and died in the Senate in February 2009?

## The Marty Peretz Situation: Ta-Nehisi Coates Reprints Stephen Glass's "Taxi Cabs and the Meaning of Work"

The excellent TNC:

Taxi Cabs and the Meaning of Work: I didn't expect to get this many e-mails requesting the article, which--as far as I can tell--is not available at TNR's site. The whole thing is after the jump. Given that the piece is cooked, in terms of modern journalism, it is by far the most racist article I've ever read.

"Taxis and the meaning of work" Glass, Stephen.  The New Republic.  Washington:Aug 5, 1996.  Vol. 215,  Iss. 6,  p. 20 (5 pp.)

Abstract (Summary)

In the last two decades, the taxi business has changed from a respected profession to one that is scorned. Immigrants have largely taken over the business, because others view it as shameful work.

Full Text (4249  words). Copyright New Republic Aug 5, 1996

Sex, violence, Allah and the American dream.

Step into Edward Murdock's cab and you step into a different decade. The vehicle is immaculate. Light jazz-and the aroma of his English cigarettes create a soothing atmosphere. Calling cards are available in a dispenser on the dashboard. Murdock wears a tweed jacket, tie and fedora. He calls passengers sir or madam and engages them in polite conversation about politics, sports or history. If they appear busy, he remains silent. Passenger after passenger, without prompting, remarks about the service. "This is like the taxis my father used to take me to see baseball in, during the '50s," says Earl, an elderly Atlantan in Washington on business. But Murdock, who has been driving a cab for fifty-six years, doesn't consider Earl's comments a compliment. "It's really an indication of how far we've fallen," he says.

Murdock recalls his entry into the business. He points to his polished shoes and talks about standing barefoot in a bread line with his father during the Depression. "My feet were killing me," he says, drawing on his cigarette. "They were scraped and cut. Bleeding between the toes. My only pair of shoes were only worn for church." When Murdock turned 18, back in 1938, he concluded that the only way to insure his family against such destitution was to open his own business. He quit his dollar-a-day job delivering ice and became a hack. Working tirelessly, he saved a small fortune and-despite only a seventh-grade education-became the first in his family to own his own home. He paid for five of his six children to attend college. The sixth joined the army.

In the last two decades the taxi business has changed radically, from a respected profession to one so scorned that the dispatcher lingo for "driver" is "dog." Twenty years ago, Washington D.C.'s cabbies were primarily American blacks. Today, the local United Taxicab Operators Association estimates, less than 10 percent of the city's cab drivers are U.S.-born blacks, and almost all of them are middle-aged or older. Instead, as any standup comedian will tell you, it is immigrants-largely from south and central Asia and Africa-who pilot America's taxis.

Only thirteen years ago, a Hollywood sitcom could still depict cabbies as overwhelmingly American-born. In James L. Brooks's "Taxi," Judd Hirsch was the philosopher of the road, earning a blue-collar income and forging family-like ties with his coworkers. Many of Hirsch's fellow hacks at the Sunshine Cab Company were boynext-door types: one moonlit at an art gallery, another was a washed-up but charming boxer, a third was a struggling actor. The only buffoonish character was the garage's sole immigrant, Andy Kaufman's Latka Gravas, a mechanic who became famous for speaking in unintelligible English. But today, the all-American image is gone and the Latkas-and the Rajas, Rafiks and Mohammeds-have taken over the business.

Edward Murdock has an explanation for this. Today's poor African American youth, the largest underemployed working-age population in big cities like Washington, don't make the calculation that Murdock and his equally disadvantaged contemporaries made: that grueling work, like cab-driving, is better than no work; that even if the short-term benefits of such toil are meager, the long-term gains are worth waiting for. "If they took up driving," Murdock says of poor black youths today, "they could get out of the ghetto. It's a confusion of respect and the dignity in working hard."

Lately, the meaning of work has become central to what politicians and pundits like to call "the national conversation": in the debates over welfare, worker retraining, the rejuvenation of the AFL-cIo under a new leadership, or the threats of downsizing and immigration. It would appear that work-any work, since all work brings dignity and economic reward-has become an overwhelming priority throughout American society. Or almost any work. When it comes to hard work, physical work or dirty work, the attractions are no longer quite so obvious. In 1978, at the American Enterprise Institute, Jesse Jackson explained that dirty work was better than no work, since it paid in long-term benefits. But his advice has not been universally accepted, not least in his own community. Take household jobs, like maids and gardeners. It used to be that these jobs were the first rung to financial security and social acceptance. People toiled at them so they, or their children, could gain full membership in the larger community. Among poor Americans, however, this is no longer the general rule.

It is immigrants from India, Pakistan and Ethiopia-who have filled the void. Jobs such as cab driving, they say, are the wav to become American. The Washington licensing commission doesn't keep demographic information on hacks, but the Operators Association estimates more than 85 percent of all Washington drivers are foreign-born-up more than 60 percent in the past twenty-five years.

In pursuing their American dream, immigrant taxi drivers endure grueling and dangerous work-the most dangerous work in America, according to the National Institute for Occupational Safety and Health. Hacks often drive seventeen hours a day, six days a week, in cramped cars. Those who get stiffed by a passenger are thankful they weren't mugged; those who get mugged feel lucky they weren't killed. For decades, native-born blacks also accepted such risks in pursuit of upward mobility. Why don't they anymore?

Of all taxi systems, Washington is perhaps the best place to examine this question. With little regulation and-unlike most major cities-no cap on the number of licenses, nearly anyone can get a hack permit. Here, unlike in New York and Chicago, the shift in demographics can't be blamed on $150,000 licenses or discrimination. Turf wars between rival companies are comparatively rare and, with more business travelers and tourists arriving each year, business is brisk. Becoming a taxi driver in Washington begins in a second-floor classroom at the University of the District of Columbia's satellite campus, a shabby room bathed in shades of green: the walls are the color of hospital scrubs, the chairs lime green, the desks a hue akin to toothpaste. The chalkboards are, of course, green. An equally tattered-looking 68-year-old black teacher presides. A dozen men, ranging in age from 25 to 65, are oblivious to one another, most of them sitting about three seats apart. "MR. FRED TURNER. TAXICAB DRI\ ER'S PROGRAM. CAPITOL CAB #155" is written on the board. "Welcome to cab school," Turner grumbles as he begins the routine he repeats with each new class. "Tell me who you are, where you're from, and why you want to be a taxi driver." In barely audible speech the dozen students identify seven foreign countries. Eight of the twelve have to repeat themselves to be understood. A few say they want to make more money, others want flexible hours, two want to be their own boss and one begins a complicated story about his mother before realizing he can't express the details sufficiently in English. Turner nods without really acknowledging them. Having clocked nearly a half-century driving cabs, none of the exotic homelands is new to him. "Too bad there is no one from Sierra Leone," Turner laments in a stage whisper. "I would have given them an A for sure." He explains his cryptic comment, speaking loudly and deliberately, pausing between words like an American tourist lost abroad. "Let's be honest. You are foreign. It is a permanent condition. They will know it. If you are lucky, they will ask you where you're from," he says. "Most will just tell you to go back. Tell them you are from Sierra Leone. They're annoyed with drivers from Pakistan, Ethiopia, India, Afghanistan and all the other places you're from. But Sierra Leone.... Reminisce about beautiful sand beaches with topless women." Turner, a burly man, raises his hands above his head and does a slight hula dance in his chair, "Make it a fucking honeymoon," he recommends, as much for his own amusement as for the edification of his pupils. "They'll tip you better." During the class's bathroom break, Turner elaborates. "I want to help," he says, sympathizing with the immigrant drivers. "They'll never be respected, so their best bet is to confuse." After the intermission, Turner begins the next subject: personal hygiene and its correlation with tips and sex. Would-be cabbies have to be taught the basics. "There are some very good people, wonderful people, who do not take baths often enough," the textbook states. "They do not use deodorant.... They fail to change their underwear." Turner makes it clear: you should not be one of these "wonderful people." He urges student drivers to play a sexy jazz station on the radio and wear cologne to get a bigger tip. "Plus, if you're not clean," he adds, "you'll never get to touch her meters." When the students have left, Turner says he's dismayed at what's happened to the black community. Like Edward Murdock, he believes that young blacks view cab driving as shameful work. "The smartest of us," he says, "have become doctors and lawyers. The others dream of being basketball stars or something. They don't really want to work as hard as I do." The comment has an air of selfcongratulation, like any grandfather-type grousing about kids these days. But it contains some truth as well. Ethiopian-born cabbie James Smith has witnessed the change in hack demographics firsthand. Fresh out of agriculture graduate school, Smith was analyzing crops at a Virginia farm when communists seized his hometown. His mother told him to stay in America until peace was restored. Despite his graduate degree, Smith had trouble finding professional work and bounced between dishwashing and low-level airport jobs. In 1977, he got his hack license. Soon after, Smith took the English name to fit in with American-born black drivers, who at the time dominated the industry. Smith demonstrates the change by flipping on his two-way radio. Amid the fuzz, drivers words crackle in Punjabi, Urdu, Arabic and Twi. The only English on the channels are proper nouns and new words like "Internet" and "microwave." While Smith is not ashamed of being an immigrant, he plays it down when driving. He keeps the radio's volume to a minimum and talks about his years in Washington. "You do this job because you know it's the right thing to do here," Smith says, pointing to his heart. Jim, on the other hand-a dashing African American in his mid-30s from Anacostia-drove a cab five years ago but has since changed jobs. "I was sick of smelling all those curry people," he sneers. "It is low class." His neighbors, he says, would point and laugh when he parked his taxi outside his home. Now he drives for one of Washington's largest limousine companies, where he chauffeurs senators and diplomats, the capital's upper crust. "Now," he says of his peers, "they respect me.... If I pull up in this baby," he adds, caressing the hood with one hand and pointing at a beautiful woman with the other, "I can get that babe. Wanna see me try?"Jim shuffles up to the slinky blonde. He speaks to her. She responds. They talk some more. She nods. She walks over to the car and examines the limo's luxurious interior and wet bar. I interrupt. Would she be equally attracted to a taxi driver? I ask. "What am I on? Some TV show?" she asks, startled, and clomps away. Jim, annoyed, cuts off our interview. While Jim's alleged successes may be little more than locker-room boasting, his rationale for shunning taxis for limos is nonetheless telling. His professional calculus is external and immediate. It is what a 62-year-old black driver called the "woo quotient: How fast can you get in someone's pants?" Another reason many young black men disdain cabdriving, according to Slippy-a 28-year-old black highschool dropout who has been a hack for one yearis the "Driving Miss Daisy mentality." In the hit offBroadway show and movie, a black chauffeur and his elderly white employer form a friendship unalterably limited by the barriers of privilege and race. "Most of my peers want to know why they should drive a lot of rich white people everywhere they want to go," Slippy says. "For generations this is the only job blacks could get, now they don't want to do it." While this resentment keeps blacks out of the drivers' seats of cabs, he says the trappings of limo driving-particularly the car and access to power-compensate. When I press Slippy for details about this resentment, he says that other inner-city options are far more esteemed than taxi-driving. "Haven't you reporters taken economics? If you can sell something," he says slyly, "and make much, much more money and probably not get caught, and not be dissed, who wouldn't? Well, a lot of people do that equation every day. And cab driving is lot more dangerous." On a ten-hour day, Slippy grosses between$40 and $80; he says no friends respect his job. Respect for the drug dealer, however, comes not from the work itself but from what it produces: a bulging wallet, an expensive car, nice clothes and women. For Edward Murdock and the entrepreneurial immigrants in Fred Turner's class, the goal is to own their own business, to be their own boss, to find an inherent dignity in the possibilities their work affords, not in the admiration of others. While Jim, the blonde-chasing limo driver, enjoys boasting that he is no longer driving a "hot box" cab, few immigrant cabbies would trade places with him. Taxi driving, unlike limousine chauffeuring, is for entrepreneurs. While few chauffeurs own their limos, cabs offer immigrants their own businesses-cheap. Few people have the capital to start a small shop, but many more can afford the$100 for taxi school. After they pass, the new drivers can buy a used car for several thousand dollars, or rent one for about $150 a week. This open-entry cab system has been so successful that nearly 90 percent of the city's taxis are driven by their owner. Most pay a small monthly fee to rent a large company's colors and radio dispatch services. Everyone benefits. Drivers appreciate the low hurdle to cab ownership. Passengers like the cheapest fares in the country. According to the International Taxi Association, the average three-mile ride costs$6 in Los Angeles and $3.70 in New York, but only$2.45 in D.C. What's more, there are more cabs per capita in Washington than in any other major city. New York has 1.6 cabs for every thousand people; Washington has 12.3 per thousand.

"It's so much work, but I'm rewarded for it. It's the American dream," explains Raja Afan, a new cab driver. When the 59-year-old Pakistani moved to the United States several years ago, he took a job behind the counter at, yes, a 7-11 convenience store. "It wasn't that hard, but where was I going?" he says. Some friends brought him to taxi school, he passed the exam, and he now rents a cab. If he saves his money, Man thinks, he'll be able to own a taxi in a year or two. On average, two days of work pays the taxi's weekly rent. After Tuesday, every fare is money he can pocket.

Afan has big plans. Someday, he'd like to own a fleet of cabs. Meanwhile, though, he drives eighty-five hours a week to save. When he gets bored, tired or discouraged, he replays in his mind his vision of Afan Cab Service. He knows it may never happen and if it does, it won't be easy, but that doesn't deter him. "I want to be an American," he says. "And this is what it takes."

It's not that immigrants like Afan receive much recognition for their labors among passengers or the culture at large, but they have other, internal support systems. Intricate social networks and a heavy dependence on religion-common to immigrants in many industries-are obvious to even the most casual hack observer. Without them, the risks inherent in taxi driving might prove unbearable.

Sayed Farid, a short balding Pakistani driver, was robbed at knifepoint two years ago by a passenger who also ate Farid's lunch and dumped the hapless driver in a forest thirty miles outside Washington. Farid was back on the road the next day. He says he's lucky because he isn't Asad Alanan. Alanan, a dead ringer for Farid except that he's taller, points to his scarred ear, which was grazed by a bullet fired by a passenger annoyed that Alanan didn't have more cash on hand for him to steal. Then again, Alanan thinks he's lucky because he's not Ejay Eswan. Four months ago, a 17-year-old held a gun to Eswan's head while his girlfriend performed oral sex on the gunman. The couple then stole Eswan's money and, for kicks, locked him in his trunk. He was found fourteen hours later. Yet, believe it or not, Eswan, too, feels lucky, simply to be alive.

Like almost all offenses against cabbies, none of these crimes was reported. Since all three men were driving illegally, either in friends' or relatives' cabs, they feared getting fined or jailed themselves if they went. to the police. A National Institute of Occupational Health and Safety study released in July found taxi driving the most dangerous job in America-almost four times more deadly than being a police officer. From 1990 to 1992, nearly twenty-three of every 100,000 hacks were killed on the job. That's up from fifteen in 1980s. Security guards rank less than six.

One night, around midnight, Imran-a Pakistani hack in his mid-40s-became sick of waiting in the airport's taxi pit for a delayed flight to arrive. After losing two games of chess, he got into his car and pulled out of line. The day's earnings had been lighter than he had hoped, less than $50, and a friend to whom he owed money was coming by the next morning to collect. Imran hoped to round up another couple of fares before calling it a night. Suddenly, his luck seemed to change. Passengers outside bars in Dupont Circle and Adams Morgan flagged him down. They had short trips to neighboring zones, but the tipsy customers were being generous. After several runs, and well after the time he told his wife he'd be home, Imran stopped at a bank machine to withdraw the remaining cash he needed to pay his friend. I was riding with Imran that night, and he was about to drop me off at home when a black man in his early to mid-20s hailed the taxi. It was late. The man on the corner was listening to a walkman. The cab's headlights illuminated his bright white high-tops. This is the type of fare Imran would normally refuse. But there was a pair of police cars on the neighboring corner, and Imran said he didn't want to risk getting a ticket for passing up a rider based on his race. As in many other cities, to insure against discrimination, Washington has deemed it illegal for a cabbie to pass up any customer. Imran pulled up. From the front passenger seat, I could hear the music banging through the passenger's headphones. Unable to judge the volume of his voice, the rider screamed, "Martin Luther King and V," located in one of Washington's poorest neighborhoods, as his destination. Over the next ten minutes, Imran and I became engrossed in a conversation about his children, ignoring our backseat companion. We passed the White House. Imran's son is in the third grade. Georgetown Law was on our right. The boy has a knack for math. Union Station was coming up on our left. But Imran was worried about his older daughter. Now heading toward Eastern Market. I began to ask, "What grade.... " "Pull over, cocksucker!" " . is she in?" "Shut the fuck up, you motherfucker." That sentence was directed at me. I didn't notice, at first, the knife our passenger was now holding up to Imran's neck. Imran was cool and mechanical. He pulled the car over to the right and reached into his breast pocket, handing over the neatly folded bills. The mugger made Imran stop the car and throw the keys out the window..He ran off. A few minutes later Imran recovered the keys. "These things happen," Imran said coldly on the drive back downtown. "I give them whatever they want. I just want my life." For the next hour or so, Imran and a couple of friends drink beer. This crime, like the others, would never be reported. "If I tell the cops, it'll take all day, and they'll do nothing. Then he'll have stolen two days of my pay." Crimes such as these could be financially crippling, but Imran's friends lend him money so he won't have to tell his wife. He doesn't want her to know how dangerous his job is. The conversation among Imran and his friends turns to the legend of Kae Bang, a Korean cabdriver-turned-vigilante who is to the D.C. cab community what Stagger Lee was to the Mississippi Delta. As Kae Bang's story goes, the cab driver was, one sticky summer night, bludgeoned`on the head by three brick-wielding black teenagers. Bang quickly recovered and, using his martial arts expertise, struck back at the would-be thieves, hurting them badly. Everyone knows Bang's story, or at least a version of it-in some, he is a Chinese immigrant, in others he's hit with a pipe-but no one knows how to find him. Everyone knows someone who claims to have once met him, but those leads typically turn up just more names of other people who have supposedly met Bang. Bang is not registered to drive with any taxi company. While he is listed in the Maryland suburban phonebook, messages are never returned. Eventually I found him, due mostly to luck. After hours of watching for him in a diner that he's rumored to frequent, I decided to head home. The cab I hailed was his. Bang is Washington's most respected taxi driver. A loner, he is largely unaware of the legendary status of his fight. Years later, he still wears the beige zip-up jacket he wore that day. A stitched rip near the right shoulder is the only remaining evidence of where the brick struck him. Bang's speech sounds as if it has been dubbed. Each syllable is painfully sounded out. "There is no respect for nobody in this country. What did I do wrong to them, the robbers?" Many drivers can't understand why muggers would be compelled to take their money. "Don't they understand I worked hard for it?" one cabbie asked me, touchingly bewildered. Among drivers, mugging isn't seen as a way for a desperate poor person to get a quick buck; it's an attack on the system. The criminals show no respect for what is theirs. "You have to want the American dream bad, real bad," Rafik Remzan says, sitting on the hood of his car in the bowels of Washington's National Airport. Remzan and many of the other drivers in National's taxipit-the same garage where Imran was spinning his wheels before my hair-raising adventure with him-make only airport runs. While the dead time waiting in line is high, and fares are frequently low, drivers say the risk is substantially reduced. Just off the tarmac, under an American Airlines gate, is one of the city's least known temples. Here, in the bilevel cement garage, countless taxis are penned in for hours on end. Packed bumper to bumper, the garage sometimes looks as if it's about to burst. Yet a small plot in one corner always stays empty. Four times a day, Muslims congregate there to pray to Allah. (The garage doesn't open early enough for the dawn ritual.) Nearly every driver participates, although some, seeking privacy, pray in the backseats of their cars. Some dispatchers hold off releasing cabs to the terminal until the prayers are done. Muhammad, a 48-year-old accountant-turned-hack from Afghanistan, prays here every evening before making his overnight run. He says he can't overstate the importance of religion to the profession. Cab bumper stickers herald Allah. Taxis line up outside Muslim mosques. Icons grace nearly every dashboard. According to Muhammad, Islam is what keeps hacks on the road. "The world gives us nothing. It spits on us," Muhammad says. "But we find honor in God. He tells us to work, and that is enough." Muhammad describes the disparate nationalities and ages of drivers as evidence of Islam's power to unite. "These people come from nations that hate each other, like Ethiopia and Eritrea. But here they are one, in the service of God. Our common- language is religion." Religion also allows the drivers to find a higher purpose in their work. It justifies delaying their gratification. When I spoke with the elusive Kae Bang, I asked him his plans for the future. For such a legendary figure, they are surprisingly mundane-not all too different from Edward Murdock's. He says he plans to return to South Korea when his daughter finishes college. He meticulously saves his money so she can afford law school and become a "real American professional." Bang is pained by the embarrassment his daughter feels about his job. On her college application, she did not fill in the blank asking her father's occupation. "She'll go to Harvard Laws, and then I go home. In Korea, I will not be an animal." In the meantime, says the devout Baptist, he's relying on God to keep him alive. . Why oh why can't we have a better press corps? ## Here Is Why We Don't Have a Better Press Corps: Ta-Nehisi Coates and James Fallows on the Marty Peretz Situation The excellent TNC: On The Cheapness Of Life: Andrew and Jack Shafer's reminiscence over the legacy of Martin Peretz, and quasi-defense of his bigotry, motivated me to do some of my own reflecting. To the present business, there is no actual defense of the statement "Muslim life is cheap, particularly to Muslims." African-Americans are overrepresented among both the perpetrators and victims of homicide. And yet had a writer for The New Republic, in the midst of asserting that blacks should not enjoy constitutional protection, argued that "Black life is cheap, particularly to blacks," and then doubled down on the assertion, I don't think we'd be having this debate. Emphasis on "think." On close reading, neither Andrew nor Jack are offering a defense so much as they are changing the subject. The question at hand is something along the lines of, "Does Martin Peretz exhibit a pattern of bigotry?" Andrew and Jack, instead, are addressing a question along the lines of "Is Martin Peretz a great journalist?" With respect for both Andrew and Jack, this is obfuscation. Ty Cobb was both a great baseball player and a bigot. The notion that we must chose between the two, that one mitigates the other, that good people don't do deplorable things, that deplorable people don't great things, emanates from our own inability to understand that bigotry it is not strictly the preserve of orcs. That said, I would not have Peretz's legacy forgotten. But I would have it considered fully. Andrew asserts the following: ...Marty owned a magazine that pioneered the military and marriage debate that transformed a civil rights movement; or race, where his insistence on airing the really tough issues helped shift the debate, in my view, for the better. TNR's brave pioneering of welfare reform made a huge difference. Peretz' alleged courage on race is a peculiar sort. Andrew may well be thinking of Peretz' assent to his stewardship of the infamous "Bell Curve" cover questioning the innate intellectual aptitude of African-Americans. He could also be thinking of Ruth Shalit's 1995 story which asserted that Affirmative Action was degrading the quality of The Washington Post. The story was filled with errors which Shalit dismissed as "a handful of unfortunate but minor inaccuracies" and "one major error." Repeated charges of plagiarism ultimately doomed Shalit at the The New Republic. Or Andrew could be thinking of the magazine's 1996 cover story "Taxis, and the Meaning Of Work." Here is the central thesis of the piece: In 1978, at the American Enterprise Institute, Jesse Jackson explained that dirty work was better than no work, since it paid in long-term benefits. But his advice has not been universally accepted, not least in his own community. Proceeding from there, the article goes on to contrast the flagging work ethic of African-Americans, with hard-working immigrant taxi-drivers--many of them Muslim. The article ends with a flurry of spectacular reportage, in which the journalist witnesses the robbery of one of his cab-driving subjects by a black man, and then tracks down a folk-hero of the local cab-driving community--Kae Bang "a Korean cabdriver-turned-vigilante who is to the D.C. cab community what Stagger Lee was to the Mississippi Delta." Bang, an expert martial artist, attracted his flock after he beat down "three brick wielding black teenagers" who'd assaulted him.[1] The story was a whirlwind of spectacular "gets" which could only have been executed by a crack reporter on his best day, or an outright liar willing to invoke every stereotype from Steppin Fetchit to Bruce Lee to Willie Horton. Martin Peretz put "Taxis and the Meaning Of Work" on the cover of The New Republic, a first for the article's author, Stephen Glass. Glass's name comes up whenever the latest instance of gumshoe malfeasance arises. What should not be forgotten is that one of the greatest fraud sprees in modern journalistic history, was aided and abetted by The New Republic's belief in shiftless, dangerous blacks and the immigrant avenger Kae Bang. Washington Post editor Len Downie, stung by Shalit's piece, once suggest "Looking for a qualified black since 1914" as a motto for The New Republic. I don't know the magazine's employment record in regards to people who are not white, but I do know that the magazine field--political and otherwise--is probably the whitest field in all of journalism. And not simply American white--but privileged, coastal, Ivy League white. (I include my present employer in that assessment.) Peretz is oft-saluted for bringing different perspectives under the same roof. In all my time of reading The New Republic, it's been clear that very few of those perspectives originate in communities of color. My sense of the diversity question has never been one of simple egalitarianism, but of the kind of humility that makes you question your courage on race, when your newsroom looks a graduate seminar at Harvard. Or worse. By my lights, every newsroom needs someone willing to ask, "Who the fuck is Kae Bang?" And so it is, 15 years later, with a magazine whose effective co-editor defends the statement "Muslim life is cheap," and within weeks skips off to be honored at Harvard. This is all about firepower. The fact is that Peretz has the social and economic guns to be a bigot, to then be defended by even those who acknowledge his bigotry, and finally honored at the highest levels of American academia. But that aside, I would be very interested in precisely how much "Muslim life" is presently ensconced in The New Republic's venerable offices. It's very easy to raise tough questions, when you don't have to endure even tougher answers. [1] "Taxi Cabs and The Meaning of Work" no longer appears on The New Republic's website. I tracked the piece down myself, and will gladly e-mail it to anyone who doubts its existence, or the parts quoted. Just send me a note. UPDATE: I'd also be remiss to not link to Fallows' thoroughly convincing posts on all of this. The latest of which includes this incredible piece written during the Iraq War: I actually believe that Arabs are feigning outrage when they protest what they call American (or Israeli) "atrocities." They are not shocked at all by what in truth must seem to them not atrocious at all. It is routine in their cultures. That comparison shouldn't comfort us as Americans. We have higher standards of civilization than they do. But the mutilation of bodies and beheadings of people picked up at random in Iraq does not scandalize the people of Iraq unless victims are believers in their own sect or members of their own clan. I'm really amazed by the inability to call this what it is. If Peretz is not a bigot, then the word has no meaning. My sense is that the latter is actually true for people whom we believe to be respectable. James also links to a Peretz apology. I'm not convinced, but I'm not the one who needs to be. Maybe I will be after I think about it more. And James Fallows: More on 'Muslim Life is Cheap': I've already had my say on the merits of this one. My purpose now is to summarize several developments in the "Muslim life is cheap" controversy surrounding Martin Peretz, editor in chief of The New Republic. Subsequent installments will include samples from the large quantity of eloquent comments I have received, both pro and con the argument I was making. Listing the "for the record" developments: (1) On the occasion of Yom Kippur, Martin Peretz wrote an "Atonement" on the New Republic's site saying that he regretted his "wild and wounding language, especially hurtful to our Muslim brothers and sisters." (2) Harvard groups representing Islamic, Latino, and African-American students have issued a letter protesting an upcoming honor for Peretz at Harvard, and have posted a related petition for signature. A similar letter from students, faculty, and alumni of Brandeis, Peretz's undergraduate alma mater, is here. (3) The Harvard letter includes a link to something I had not seen before, and which seems no longer to be on the the New Republic site. (I could not find it on a site search.) According to this web.archive.org link, in 2006 Peretz wrote, concerning levels of bloodshed in Iraq and the vicinity: I actually believe that Arabs are feigning outrage when they protest what they call American (or Israeli) "atrocities." They are not shocked at all by what in truth must seem to them not atrocious at all. It is routine in their cultures. That comparison shouldn't comfort us as Americans. We have higher standards of civilization than they do. But the mutilation of bodies and beheadings of people picked up at random in Iraq does not scandalize the people of Iraq unless victims are believers in their own sect or members of their own clan. (4) The initial Harvard response to the controversy was not one of the university's more impressive efforts. In an Emily Litella-like statement to Benjy Sarlin of the Daily Beast, a university spokesman said, "It is central to the mission of a university to protect and affirm free speech, including the rights of Dr. Peretz, as well as those who disagree with him, to express their views." Of course no sane person has questioned Peretz's right to express his views. The disagreement involves the university's planned honor for him and his work. (Also from Sarlin here.) (5) A few days ago Matthew Yglesias forcefully argued that the impending Harvard fellowship named for Peretz was unlikely to be jeopardized, for reasons involving the fundamentals of university finance. (5a) A logical extension of Yglesias's argument is that Harvard and its donors might most effectively be urged not to revoke this fellowship but to create another, matching one, preferentially for Muslim students from the U.S. or abroad. Growing-pie solution; win-win-win. To the best of my understanding, many fellowships that are preferentially for people from certain geographic, racial, or even religious backgrounds already exist at Harvard. (6) My colleague Ta-Nehisi Coates goes straight at the argument that, whatever Peretz's excessive views, he has been a wonderful influence in journalism. Worth reading very carefully... Now, let's move to reader comments... a Westerner with childhood experience in an Islamic culture... writes: My father was one of the last British officials of the Raj. After partition, he worked for ten years as a district official for the new Pakistan government and I spent my early years in a tolerant Baluchistan, safe and happy. Decades passed and I found myself a US citizen and living in Florida on 9/11. Then, despite a generally liberal constitution, I spent several years loathing the name of Islam and the fact that moderate Muslims had seemingly failed to prevent the tragedy. Now comes a further turn in my life: the latest upsurge in Islamophobia has brought me back to my philosophical roots. While not fully able to account for the phenomenon, I am appalled by its manifestation. My inclination is to blame a combination of a bad economy and demagoguery from the likes of Glenn Beck. When we so desperately need them, where are the moderate Republicans of stature to put a stop to this foul nonsense?... The answer to this last question, of course, is that there are damned few moderate Republicans of stature who are not also cowards. ## Pity the Poor Couple Who Make$450,000 Per Year (Yet Another Failure of Our 'Elite' Educational System)...

Mike the Mad Biologist enters the list, driven even further into shrill unholy madness by Xxxx Xxxxxxxxx with:

He reprints two classic statements of what having difficulty making ends meet in America today really means:

Ian Welsh:

When I was poor and working in lousy jobs I used to look in the mirror and see myself at 50, or 60. I expected to still be working at grindingly hard jobs, being treated badly by bosses (because there is no rule more iron than that the worse you are paid the worse your employer will treat you), and still being paid little more than minimum wage. That was the future I saw for myself.

And when I was on welfare, after having failed to find a job for 6 months, and even being turned down by McDonalds (in the middle of the early nineties recession) I wondered if I'd even ever have a shitty job again. I ate cheap starchy food, turned pasty and put on weight. My clothes ran down. When my glasses broke beyond the point where tape would keep them together I literally had to beg the optometrist to make me his cheapest pair and I'd pay him later. (I eventually did.) My life was a daily grind of humiliation.

And that's what I expected my life to be....

Living without that safety net, knowing that if something goes wrong, that's just too bad, changes you. Living without any real hope of the future, knowing that the shitty job you've got now is probably about as good a job you're ever going to have, changes you.

And it changes your sense of what hard work is, of what it means to be deserving....

And they know that they're one bad break away from losing even the little they have--one illness, one plant closure, one argument with their boss.

They don't have a lot of hope for the future, except that it won't get worse. The life they live now is the best it's probably gonna get.

Living like that changes you. It makes you see people differently. You understand that there are a lot of bad jobs out there, and that someone's going to be stuck with them. You know that most of those jobs are either hard or humiliating, and often both. You know that for too many people, a shitty job where they're abused by their boss is as good as it gets.

And John Scalzi:

Being Poor « Whatever: Being poor is knowing exactly how much everything costs.

Being poor is getting angry at your kids for asking for all the crap they see on TV.

Being poor is having to keep buying $800 cars because they’re what you can afford, and then having the cars break down on you, because there’s not an$800 car in America that’s worth a damn.

Being poor is hoping the toothache goes away.

Being poor is knowing your kid goes to friends’ houses but never has friends over to yours.

Being poor is going to the restroom before you get in the school lunch line so your friends will be ahead of you and won’t hear you say “I get free lunch” when you get to the cashier.

Being poor is living next to the freeway.

Being poor is coming back to the car with your children in the back seat, clutching that box of Raisin Bran you just bought and trying to think of a way to make the kids understand that the box has to last.

Being poor is wondering if your well-off sibling is lying when he says he doesn’t mind when you ask for help.

Being poor is off-brand toys.

Being poor is a heater in only one room of the house.

Being poor is knowing you can’t leave $5 on the coffee table when your friends are around. Being poor is hoping your kids don’t have a growth spurt. Being poor is stealing meat from the store, frying it up before your mom gets home and then telling her she doesn’t have make dinner tonight because you’re not hungry anyway. Being poor is Goodwill underwear. Being poor is not enough space for everyone who lives with you. Being poor is feeling the glued soles tear off your supermarket shoes when you run around the playground. Being poor is your kid’s school being the one with the 15-year-old textbooks and no air conditioning. Being poor is thinking$8 an hour is a really good deal.

Being poor is relying on people who don’t give a damn about you.

Being poor is an overnight shift under florescent lights.

Being poor is finding the letter your mom wrote to your dad, begging him for the child support.

Being poor is a bathtub you have to empty into the toilet.

Being poor is stopping the car to take a lamp from a stranger’s trash.

Being poor is making lunch for your kid when a cockroach skitters over the bread, and you looking over to see if your kid saw.

Being poor is believing a GED actually makes a goddamned difference.

Being poor is people angry at you just for walking around in the mall.

Being poor is not taking the job because you can’t find someone you trust to watch your kids.

Being poor is the police busting into the apartment right next to yours.

Being poor is not talking to that girl because she’ll probably just laugh at your clothes.

Being poor is hoping you’ll be invited for dinner.

Being poor is a sidewalk with lots of brown glass on it.

Being poor is people thinking they know something about you by the way you talk.

Being poor is needing that 35-cent raise.

Being poor is your kid’s teacher assuming you don’t have any books in your home.

Being poor is six dollars short on the utility bill and no way to close the gap.

Being poor is crying when you drop the mac and cheese on the floor.

Being poor is knowing you work as hard as anyone, anywhere.

Being poor is people surprised to discover you’re not actually stupid.

Being poor is people surprised to discover you’re not actually lazy.

B>eing poor is a six-hour wait in an emergency room with a sick child asleep on your lap.

Being poor is never buying anything someone else hasn’t bought first.

Being poor is picking the 10 cent ramen instead of the 12 cent ramen because that’s two extra packages for every dollar.

Being poor is having to live with choices you didn’t know you made when you were 14 years old.

Being poor is getting tired of people wanting you to be grateful.

Being poor is knowing you’re being judged.

Being poor is a box of crayons and a $1 coloring book from a community center Santa. Being poor is checking the coin return slot of every soda machine you go by. Being poor is deciding that it’s all right to base a relationship on shelter. Being poor is knowing you really shouldn’t spend that buck on a Lotto ticket. Being poor is hoping the register lady will spot you the dime. Being poor is feeling helpless when your child makes the same mistakes you did, and won’t listen to you beg them against doing so. Being poor is a cough that doesn’t go away. Being poor is making sure you don’t spill on the couch, just in case you have to give it back before the lease is up. Being poor is a$200 paycheck advance from a company that takes $250 when the paycheck comes in. Being poor is four years of night classes for an Associates of Art degree. Being poor is a lumpy futon bed. Being poor is knowing where the shelter is. Being poor is people who have never been poor wondering why you choose to be so. Being poor is knowing how hard it is to stop being poor. Being poor is seeing how few options you have. Being poor is running in place. Being poor is people wondering why you didn’t leave. ## Xxxx Xxxxxxxxx's Century-Ago Predecessor: G.H.M in the Atlantic Monthly in May 1905 Hoisted from the Archives: Comment on G.H.M. (2005), "What Should College Professors Be Paid?" Atlantic Monthly (May), pp. 647-50: The past is a different country. Even the relatively recent past of, say, a century ago is a very different country. In 1905 "G.H.M.", an anonymous college professor, wrote a four-page article for the Atlantic Monthly in which he pleaded for more money for college professor salaries, and claimed to be vastly underpaid. The first thing to note is the relative level of professorial salaries back then: he claimed that the "average college professor’s salary"--the salary that he saw as clearly inadequate and unfairly low--"is about$2,000." Stan Lebergott's estimates in the Historical Statistics of the United States are that the average annual earnings of an employee in America in 1905 were $490 dollars if employed for the entire year--or$451 taking account of the hazards of unemployment. What G.H.M. says is the average college professor's salary is more than four times annual average earnings of the time.

Today's professors don't make such large relative salaries (except in business, law, and medical schools). In order to match turn-of-the-century college professors in terms of income relative to the national average, a professor today would have to make an academic salary of roughly $250,000--a height far above any professorial average, and one attained only by academic celebrities.[1] The second thing to note is that our professor sees himself as a reasonable and badly underpaid man. He is not asking for what he would see as the "large salar[y], commensurate with what equal ability would bring in other lines of work ($10,000 to $50,000)"--or 20 to 100 times the then-current average level of GDP per worker, the equivalent today of between$1,100,000 and $5,500,000 a year. At 50 times average GDP per worker (roughly the mid-point of G.H.M.'s range, corresponding to a salary of$2.5 million a year), we are down to perhaps 4000 households in today’s United States (according to Piketty and Saez (2001)). That an "ordinary" professor could feel that his talents ought, in some sense, to earn such an enormous multiple of the average income is a sign of how unequal an economy and society the turn of the twentieth century U.S. was. Yet G.H.M.'s feeling of being sharply constrained by material necessity is real: as this professor goes through his budget, he expects the highly-literate and elite readers of the Atlantic Monthly to nod and agree (and we modern readers do indeed nod and agree) that his family is strapped for cash.

The first large expense G.H.M. lists is for personal services: "We must pay $25 a month for even a passable servant," and add to that$10 a month for laundry (for the regular "servants will do no laundry work") $1 a month for haircuts, and$2 a month for a gardener. Already, on personal services alone, we are up to $445 a year--the average annual earnings of a manufacturing worker in 1905. G.H.M. offers two rationales for these large personal-service expenditures. The first is that they are necessary to keep the load of domestic work from sending his wife to an early grave. "Shall we expect our wives to bear and rear children, do all of the housework, sustain their social duties, and remain well and strong?" The second rationale is that these expenditures are required for him to face the world without shame. For the professor, however, these expenditures on personal services are completely non-negotiable. If he doesn't spend, his household will fail to make a properly upper-middle-class impression: the lawn must be trimmed, the house dusted, the clothes cleaned, and the children washed. He has no gasoline-powered lawnmower, no electric hedge clippers, no vacuum cleaner, no dishwasher, and neither a washing machine nor a dryer. Consumer durables take the place now of what took servants' sweat (at least for college professors' households) a century ago. G.H.M.'s food bills average$55 a month on food--enough back then to buy 170 lbs. of veal cutlets (present market value perhaps $1000), or 500 pounds of chuck roast (present value perhaps$1200), or 1000 lbs. of bread (present value perhaps $1300). Note that$55 a month works out to be $660 a year, again considerably more than a year’s average GDP per worker. G.H.M. spends more than 100% of an average worker's budget on food alone. In general it was hard to economize on food at the start of this century: food and fuel consume almost half of consumer expenditure for the average household in 1885, but only a sixth of consumer expenditure today. It is the same for G.H.M.: his food bills are roughly a quarter of his annual expenditure, while my non-restaurant food bills are less than a twelfth of mine (and I buy a lot of food at a much more advanced stage of preparation today than G.H.M. could back a century ago). A third thing to note is the cost of (effective) medical care:$1200 to treat a single case of appendicitis. That's nearly three years' worth of an average worker's income--the same share of GDP per worker then that $160,000 would be today. Appendicitis today is a serious illness--but think what it was like before antibiotics, before laproscopy. And a fourth thing to note is G.H.M.'s plea for culture: he and his wife's long and sophisticated education "has given us a refined appreciation of the drama, and we have a knowledge of and love of the best music. The annual football game is a social event which every loyal member of the college community is supposed to attend. We cut this out long ago. Grand opera exists for us only in the memory of our German days. Let us keep the spark alive by taking our wives once a month to a cheap concert; say$1." $12 a year--perhaps 1 1/2 percent of annual per-worker spending--to to hear perhaps 18 hours of live music played by professional musicians. And how little his family gets for it! The overall impression to us is one of grinding poverty. And the overall feeling that G.H.M. has is of near-poverty--of being just one racing shell-length ahead of the working class, of being barely able to afford the necessities and some of the conveniences of life. Yet according to GHM the average college professor stood in 1905 in roughly the same relative position in the distribution of income in America then as somebody in roughly the 99.5 percentile does today... G.H.M. (1905), "What Should College Professors Be Paid?" The Atlantic Monthly 95:5 (May), pp. 647-50. A great deal has been written of late, especially in the annual reports of college presidents, regarding the inadequacy of the compensation received by university teachers. The writer, to whom the question is one of vital importance, has seen many of these general statements, but has failed to find any which has taken up the matter in conclusive form. This he hopes to do here concisely. Primarily the question is one of standard of living. If a grocery clerk can maintain his family in a suitable degree of decency and comfort on seventy-five dollars a month, have we a right to expect that a college instructor can do the same? The answer to this involves the demands which society makes upon the respective individuals. To get at this point the writer analyzed the itemized household accounts which his wife has kept for the past nine years, during which time he has been connected with one of our large and wealthy universities. Two years were spent as an instructor, two as assistant professor, and the next five as associate professor. Summing up his total expenditures for these nine years, and in like manner his salary for the same period, he finds his expenditures have been to his salary in the ratio of 2.1 to 1. His average annual expenditure has been$2794.27.

His average salary has been $1328.15 For the privilege of teaching he has paid the difference, of$1466.12 annually, from private means.

Even the unbusinesslike professor must pause before such a state of affairs, and try to fathom the reason for this discrepancy, when his firm belief is that he is living on as low a scale of economy as is possible for him in his position.

In order to find out where the bad management might be, -- if bad management there was, -- he divided his expenditure account into thirty-one separate items, arranged in tabular form under the following heads: --

1. Household Furnishing and Repairs.
2. Groceries, Meat, Fruit, Vegetables, etc.
3. Servants.
4. Fuel.
5. Light and Water.
6. Gardener and Grounds.
7. Laundry.
8. Taxes.
9. Life Insurance.
10. Fire Insurance.
11. Rent, or Interest on House and Lot.
12. Bicycles and repairs.
Horse, care and feed.
13. Doctors and Dentists.
14. Hospitals, Nurses, Drugs.
15. Death Expenses.
16. Legal Services.
17. Interest on Borrowed Money, for running expenses.
18. P.O. Box, Postage, Stationery, Telegrams, Telephone, Express, etc.
19. Newspapers, Books, and Periodicals.
20. Clothing, Dry Goods, Shoes, etc.
21. Learned Societies and Social Clubs.
23. Typewriting, Printing, and Mimeographing.
24. Children's Tuition and Pocket Money.
25. Subscriptions and Charity.
26. Theatre, Concerts, Athletic Sports
Entertainment of Friends.
28. Wine, Beer, Tobacco, Candy, and other Luxuries
29. Personal and Toilet Supplies
30. Business and Recreation Trips, Hotels, R.R. Fare, Carfare, etc.
31. Family Obligations, or Payment of Educational Debt.
32. Savings, other than Life Insurance, looking toward old age.

He believes that, assuming that a college professor has the right to marry and have two or three children, there is not a single one of these items which may be omitted from a consideration of expenses to cover a period of years. The whole question, then, resolves itself into this: how much per year is it reasonable to allow for each of these items?

In the community in which he lives, with a family of two adults, two children, and one servant, at the present high prices of the necessities of life, he believes that the sums he mentions are the very least upon which his household can be conducted. And he bases this belief upon a most accurate analysis of fully itemized accounts.

Taking up the items in detail: --

1. Household furnishing and repairs. This item must cover, for a period of years, the original cost of household furniture of all descriptions. In addition, it must look after natural wear, tear, and breakage of furniture, glass, dishes, kitchen utensils, rugs, curtains, bedding, etc., as well as carpentry, plumbing, and the like. It must also provide for pictures, "works of art," and household adornments in general. Does $75 a year seem excessive for this? Say$6 a month.

2. For five persons a grocery bill of $25 per month, a meat bill of$15, milk $5, fruit, vegetables, butter and eggs,$10, or a total of $55 ($11 per person), should not seem unreasonable.

3. We must pay $25 a month for even a passable servant. Shall we expect our wives to bear and rear children, do all of the housework, sustain their social duties, and remain well and strong? 4. Kitchen, fireplace, and furnace fuel will aggregate$120 per year, or $10 a month. 5. Light and water average with us just$5 a month.

6. The labor of a gardener one day a month is $2. 7. Our laundry averages just$10 monthly. Our servants will do no laundry work.

8. An investment of $5000 in house and lot, together with personal property and poll tax, makes this$10 a month. If there were no house owned, the rent item (11) would have to be increased.

9. To protect the family of a man who is not in a position to save, $5000 life insurance is not too much. The monthly premium on this amount, assuming a twenty-payment ordinary life policy, will be$10.

10. $3000 insurance on house, and$2000 on personal property, makes $18 per year, or$1.50 a month.

11. Six per cent on $5000 invested in house and lot is$300 annually, or $25 a month. This does not provide for depreciation, maintenance, and repairs. No desirable house on the campus can be rented for less than$35.

12. Not caring to pay so large a rent, we live off the campus and use bicycles. Their depreciation and repairs average $2 a month. Keeping a horse would cost$8 a month.

13. An experience of ten years shows us that not less than $10 a month may be set down for doctors and dentists for the family. A single attack of appendicitis in ten years will take the whole of this. 14. Hospitals, nurses, and drugs average$5 a month.

15. Since the average duration of life is about forty years, in a family of four individuals one death is to be expected every ten years. this item may be set down at $2 a month. 16. Occasional notary and minor legal services average$1 a month.

17. Certain expenses, like life insurance and taxes, being payable in large amounts, necessitate loans from the bank, which are gradually repaid. This item may be set down at fifty cents monthly.

18. For a live family with connections, postage, stationery, telegrams, telephones, express, freight, cartage, and allied items, will aggregate $3 a month. 19. Newspapers, books, and periodicals. A college professor is supposed to revel in this kind of thing. Suppose we allow him$5 a month.

20. To clothe four individuals neatly and completely cannot cost less than $180 a year, can it? This is$15 a month.

21. Learned society and social club initiation fees and dues must amount to at least $2 monthly. 22. University gifts and supplies, typewriting, etc. We are constantly going into our pockeets for small items which the university will not or cannot furnish without unbearable delay; or we may be working on lines of investigation that call for outlay. Say$1 a month.

23. In our case, our children are of the kindergarten and primary school age, so this item is only $9 a month. Older colleagues, whose children have advanced to the music lesson and preparatory school age, say they must allow$50 to $60 monthly. 24. Some families belong to a church. We all have charitable instincts, we are of that class to which the call of needy or suffering humanity appeals. May we allow$2 a month?

25. Our education has given us a refined appreciation of the drama, and we have a knowledge of and love of the best music. The annual football game is a social event which every loyal member of the college community is supposed to attend. We cut this out long ago. Grand opera exists for us only in the memory of our German days. Let us keep the spark alive by taking our wives once a month to a cheap concert; say $1. 26. We have children and friends; there are birthdays and anniversaries; as well as Christmas. Is$50 a year too much? This is $4 a month. Dinners, receptions, and the like, are not for us. 27. Occasionally a man is jaded; he has a wild desire to "blow himself." May he have$1 a month pocket money, to share with his wife?

28. Most of us can shave ourselves, but we cannot cut our own hair, although we may invert a bowl over the heads of our youngsters, and trim around the edges. Here is another $1. 29. When summer comes, a teacher is pretty nearly always exhausted. His work is trying and confining. His family requires an occasional change of air. His professional needs may call for a long journey to attend an important meeting of fellow workers, etc. For an average geographical location$100 a year, or $8.50, is not too much to cover these items. For an exceptional location, like the extreme Pacific coast, this item should be trebled. 30. The writer has known many colleagues whose educational expenses had put them under obligations which they were pledged to repay. In most cases it takes ten years to wipe out these obligations. Sometimes at the end of this period not even the beginning of discharging the debt has been made. Our college professors often come from families whose means are small. The support of aged parents or other relatives may have to be borne by them in common with their brothers or sisters. Every man is apt to have some such claim on himself or his wife. To cover these items let us allow him$10 a month.

31. A few, a very few, of our colleges pay pensions to their old and worn-out teachers. In such cases perhaps there is no need for a man to lay aside something for his old age, or to make provision for his children's start in life. Perhaps he owes a duty to his children to give them as good an education and chance as he himself received. If so, he must begin to lay aside for it. Where there is no pension, should he not aim, after thirty years of faithful service, to have $10,000 laid aside? He is not in a position to know of places where he can get large returns on his small investments. Shall we allow him$250 a year to put aside (providing there are no "exceptional and unusual" expenses that year, as there always are)? Let us say $20 per month. SUMMARY These are certainly not great demands. Yet, summing them up, taking the smaller of the two when two sums are mentioned, we have$262.50 monthly, or $3150 per year. Let us talk no more of bad management, -- we and our wives face an impossible problem. CONCLUSION If this seems extravagant to those who have to determine upon the proper minimum compensation for a man of long training, education, and refinement, we must ask them to look over these items carefully, one by one, and put down what they think a fair sum for each item for a family of the college professor's social status. Then let them foot up the total. The average college professor's salary, in the United States, is about$2000. The inevitable deduction from the table of analyzed expenses, borne out by the experience of the writer and of all his colleagues whom he has consulted, is that this must be increased sixty per cent, -- the increase to be uniform in all grades, from instructor to head professor.

If the profession of teaching is to attract the highest type of efficient manhood, a living salary must be paid. A man who devotes his life to the cause of the advancement of education must feel a "call" to it. He should be of a type which joyfully relinquishes all desire to accumulate worldly wealth or to live in luxury. Large salaries, commensurate with what equal ability would bring in other lines of work ($10,000 to$50,000) might be just, but would be undesirable, as they would tend to serve as bait to attract mercenary and lower types of men.

but a man fit to occupy a chair in a university shoul dbe paid enough to enable him to live in decency and comfort, rearing and educating his children, and retiring in his old age to something other than absolute penury.

The writer would commend a careful study of his table to all college trustees.

Can a man, whose energies are spent in so unequal and impossible a struggle to make both ends meet, maintain freshness and vigor in his work, be an inspiration to his students, and fulfill in scholarship the promise of his early years? The alternative demanded by the conditions is celibacy.

---- [1] And, of course, the joke is on me: when I first wrote these words--back in 1987--college professor salaries of $250K a year were completely out of the question. Now... it is, I think, what Professor Xxxx Xxxxxxxxx of U. of C. Law School pulls down once one counts health insurance, employer matches to retirement contributions, health insurance, school subsidies, and other fringe benefits... ## Paul Krugman on the Displaced (and Misplaced) Ressentiment of the Merely Rich UPDATE: Professor Xxxx Xxxxxxxxx attacks Paul Krugman: Now I know I must be right: Putting aside the false claims [Krugman] makes (e.g., that I make$450,000 per year) that I’ve already pointed out, the dear professor says I’m engaging in self-pity and am “a sorry-for-myself person” because I might pay about 2 percent more of my income next year in taxes. This was not the point of my post. Some observations: First, two percent of $450,000 (again, not even close to our income on the high side) is nearly$10,000. That is real money. Not so much relative to gross income, but it is relative to income after taxes, housing, food, debt, and other fixed costs...

We have a problem here--basically, Professor Xxxx Xxxxxxxxx is what we call an unreliable narrator.

On the one hand, Professor Xxxx Xxxxxxxxx says that his household income exceeds the $250K/year threshold "but not by much." On the other hand, he says that Obama's failure to reenact the4.6% unfunded Bush-era reduction in the top income tax rate from 39.6% to 35% will raise his taxes "significantly." He cannot have it both ways. The arithmetic says so. Professor Xxxx Xxxxxxxxx says that this failure to reenact a 4.6% marginal rate reduction will cost him$10,000/year.

This rate applies only to marginal taxable incomes in excess of $250,000/year. We can thus use an equation to figure out what Professor Xxxx Xxxxxxxxx's taxable income Y is: (Y -$250K/year) * .046 = $10K/year Y =$467K/year

That is taxable income. Add on exemptions, deductions, compensation shielded by tax-preferred savings vehicles, employer matches to retirement savings, the break on Lab School tuition given to University of Chicago faculty, health care, etc.--and we are well over $500K a year in household income, possibly in excess of$600K/year.

I think that there are two scenarios: (i) Professor Xxxx Xxxxxxxxx is lying when he says that his total household income is only a little more than $250K/year, because it is more like twice that; (ii) Professor Xxxx Xxxxxxxxx is actually not going to be dinged by the top rate increase--but is sufficiently innumerate and ideologically blinded that Republican campaign operatives have convinced him he is. Neither scenario would seem to be a credit to the University of Chicago, to legal academia, or indeed to the academy in general... Paul Krugman: Have You Left No Sense Of Decency?: Let me recommend, once again, Brad DeLong’s superb discussion of how it is that people at the 99th percentile, despite making twice what their counterparts made in 1980, feel poorer now than they did then. On reflection, however (and discussion with Robin), it seems to me that there’s something Brad didn’t say that’s worth mentioning — the change in social norms. Even in 1980, there were surely many people at or near the 99th percentile who felt sorry for themselves, at least some of the time. It happens to everyone, after all: I lead a very privileged life (yes, I’m well into the range that will pay higher taxes under the Obama plan), yet even now I find myself experiencing occasional flashes of green-eyed envy. (What? You’re driving me back to the airport in Sao Paulo, in all that traffic? Don’t I rate a helicopter?) But 30 years ago people with high but not super-high incomes generally felt ashamed of themselves for griping — or at least, felt that they would be ridiculed if they gave voice to their gripes. Today, all restraints are off. The fuss over Messrs. Xxxxxxxxx and Stein is the exception that proves the rule: they wouldn’t be providing this spectacle if they didn’t normally swim in social circles where complaining that you only have 9 or 10 times median family income is considered totally acceptable. Pretty soon, we’ll be having serious, completely un-self-conscious discussions in major magazines about the servant problem. He also complimented me here: Rat Race America: Brad DeLong’s post on Xxxx Xxxxxxxxx, the already-infamous whining Chicago professor who appears to be near the 99th percentile but feels poor, is worth reading for more than the takedown. Brad isn’t the first to make this point, but his discussion of how rising inequality at the top — a fatter right tail in the income distribution — makes the objectively rich feel poor is exceptionally fine.... What Brad doesn’t say, but is also true, is that the status anxiety created by high inequality means that the rich-but-not-rich-enough often lead worse lives than their somewhat poorer counterparts did a few decades ago: they work longer hours, take fewer vacations, and spend more on things that don’t give them pleasure but that they hope will impress others. Or let’s just quote Gordon Gekko: Wake up, will ya pal? If you’re not inside, you’re outside, OK? And I’m not talking a$400,000 a year working Wall Street stiff flying first class and being comfortable …

To which I replied:

I should probably 'fess up: I have no special insight into what Professor Xxxxxxxxx feels, and when I say "Professor Xxxxxxxxx" in the passage that Paul quotes, I mean "me."

I try to fight against feeling relatively deprived because we just have a 3400 sq ft house east of Berkeley--and don't also have a pied-a-terre in San Francisco, a cottage in Carmel, and a condo in Cabo--but I am not always successful. And the days are rare when I am able to pull myself back to sanity and recall that I am not underpaid...

And took on the subject in this morning's column:

Op-Ed Columnist - The Angry Rich and Taxes/a>: [I]f you want to find real political rage... [y]ou’ll find it instead among the very privileged, people who don’t have to worry about losing their jobs, their homes, or their health insurance, but who are outraged, outraged, at the thought of paying modestly higher taxes.

The rage of the rich has been building ever since Mr. Obama took office. At first, however, it was largely confined to Wall Street. Thus when New York magazine published an article titled “The Wail Of the 1%,” it was talking about financial wheeler-dealers whose firms had been bailed out with taxpayer funds, but were furious at suggestions that the price of these bailouts should include temporary limits on bonuses. When the billionaire Stephen Schwarzman compared an Obama proposal to the Nazi invasion of Poland, the proposal in question would have closed a tax loophole that specifically benefits fund managers like him.

Now, however, as decision time looms for the fate of the Bush tax cuts — will top tax rates go back to Clinton-era levels? — the rage of the rich has broadened, and also in some ways changed its character.

For one thing, craziness has gone mainstream. It’s one thing when a billionaire rants at a dinner event. It’s another when Forbes magazine runs a cover story alleging that the president of the United States is deliberately trying to bring America down as part of his Kenyan, “anticolonialist” agenda, that “the U.S. is being ruled according to the dreams of a Luo tribesman of the 1950s.” When it comes to defending the interests of the rich, it seems, the normal rules of civilized (and rational) discourse no longer apply.

At the same time, self-pity among the privileged has become acceptable, even fashionable.

Tax-cut advocates used to pretend that they were mainly concerned about helping typical American families. Even tax breaks for the rich were justified in terms of trickle-down economics, the claim that lower taxes at the top would make the economy stronger for everyone.

These days, however, tax-cutters are hardly even trying to make the trickle-down case.... Instead, it has become common to hear vehement denials that people making $400,000 or$500,000 a year are rich. I mean, look at the expenses of people in that income class — the property taxes they have to pay on their expensive houses, the cost of sending their kids to elite private schools, and so on. Why, they can barely make ends meet.

And among the undeniably rich, a belligerent sense of entitlement has taken hold: it’s their money, and they have the right to keep it. “Taxes are what we pay for civilized society,” said Oliver Wendell Holmes — but that was a long time ago.

The spectacle of high-income Americans, the world’s luckiest people, wallowing in self-pity and self-righteousness would be funny, except for one thing: they may well get their way....

You see, the rich are different from you and me: they have more influence. It’s partly a matter of campaign contributions, but it’s also a matter of social pressure, since politicians spend a lot of time hanging out with the wealthy. So when the rich face the prospect of paying an extra 3 or 4 percent of their income in taxes, politicians feel their pain — feel it much more acutely, it’s clear, than they feel the pain of families who are losing their jobs, their houses, and their hopes.

And when the tax fight is over, one way or another, you can be sure that the people currently defending the incomes of the elite will go back to demanding cuts in Social Security and aid to the unemployed. America must make hard choices, they’ll say; we all have to be willing to make sacrifices.

But when they say “we,” they mean “you.” Sacrifice is for the little people.

Paul is, of course, talking about Xxxx Xxxxxxxxx and his ilk:

Xxxx Xxxxxxxxx (recall that counting the Lab School tuition discount, U. of C. college tuition benefits, and really generous employer pension matching that it looks like the income of Professor Xxxxxxxxx's household is about $500,000 a year: We are the Super Rich: The rhetoric in Washington about taxes is about millionaires and the super rich.... That makes me super rich and subject to a big tax hike if the president has his way. I’m the president’s neighbor in Chicago, but we’ve never met. I wish we could, because I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning. A quick look at our family budget, which I will happily share with the White House, will show him that like many Americans, we are just getting by despite seeming to be rich. We aren’t. I... am a law professor at the University of Chicago Law School... my wife... is a doctor.... Our combined income exceeds the$250,000 threshold for the super rich (but not by that much)[1]... the president plans on raising my taxes.... [W]e can’t afford it. Here is why.

The biggest expense for us is financing government. Last year, my wife and I paid nearly $100,000 in federal and state taxes.... Our next biggest expense, like most people, is our mortgage. Homes near our work in Chicago aren’t cheap.... We pay about$15,000 in property taxes, about half of which goes to fund public education in Chicago. Since we care the education of our three children, this means we also have to pay to send them to private school. My wife has school loans of nearly $250,000 and I do too.... We try to invest in our retirement by putting some money in the stock market.... Like most working Americans, insurance, doctors’ bills, utilities, two cars, daycare, groceries, gasoline, cell phones, and cable TV (no movie channels) round out our monthly expenses. We also have someone who cuts our grass, cleans our house, and watches our new baby so we can both work outside the home. At the end of all this, we have less than a few hundred dollars per month of discretionary income. We occasionally eat out but with a baby sitter, these nights take a toll on our budget. Life in America is wonderful, but expensive. If our taxes rise significantly, as they seem likely to, we can cut back.... The (legal) immigrant from Mexico who owns the lawn service we employ will suffer, as will the (legal) immigrant from Poland who cleans our house a few times a month. We can cancel our cell phones and some cable channels, as well as take our daughter from her art class at the community art center, but these are only a few hundred dollars per month in total. But more importantly, what is the theory under which collecting this money in taxes and deciding in Washington how to spend it is superior to our decisions? Ask the entrepreneurs we employ and the new arrivals they employ in turn whether they prefer to work for us or get a government handout. If these cuts don’t work, we will sell our house – into an already spiraling market of declining asset values – and our cars, assuming someone will buy them.... [T]he super rich don’t pay taxes – they hide in the Cayman Islands or use fancy investment vehicles to shelter their income... [1] As I noted elsewhere, it looks as though the family economic income of Professor Xxxxxxxxx's household is twice the$250K/year threshhold.

## Felix Salmon on Whinging in Public...

Felix:

The whining rich: Xxxx Xxxxxxxxx’s whine about how he’s only scraping by on $450,000 a year in his million-dollar Chicago house is causing quite a stir in the blogosphere.... Tyler says that the rich have just as much right to whine as the poor, which is a fair point. But it’s also reasonable to examine this particular law professor’s argument closely.... [W]hat’s very clear here is that Xxxxxxxxx doesn’t feel rich. As DeLong says, he’s not comparing himself to the hundreds of millions of people who earn less than him: instead he’s comparing himself to the handful of people who earn vastly more than he does. People who don’t seem to worry about money at all. Who have multiple houses. Who charter jets. He looks at those people and thinks that they are rich, and that therefore he, with his monthly budget, isn’t. There’s no doubt that people earning$250,000 or more are rich. The simple ability to dismiss a whole class of expenses as “only a few hundred dollars per month in total” makes you rich.

But by the same token, many rich people don’t feel rich, and so describing them that way gets their backs up. And in fact it’s good that the rich don’t feel rich: it means they have more incentive to keep on earning and producing and adding value.

So maybe we shouldn’t be so rude about the likes of Xxxx Xxxxxxxxx: without rich people constantly striving for extra dollars, America would be in an even worse position than it is. But equally, we shouldn’t take their pleas seriously.

For most people, “rich” starts at roughly double whatever their own household income is. It’s the hedonic treadmill: you race towards it, but you never achieve it — even when you’re living in a million-dollar home and pulling down something north of $400,000 a year. Or, I daresay, when you’re living in a$4 million home and making \$1 million a year. It’s just that above a certain income, people (Ben Stein, of course, always excepted) tend to have the good sense not to whine in public about how hard their life is.

## Deja Vu on That 1937 Feeling

In the winter of 2009 Christina Romer tried to lay down a marker: no withdrawal of economic stimulus until the recovery was well-established: no "1937s". I had thought she had gained general asset. Apparently not.

Martin Wolf watches the train wreck:

The risks of premature tightening: Mervyn King, the governor of the Bank of England, is among the world’s most influential central bankers and leading policy economists. I greatly admire both his intellect and his integrity. Mr King has also played a big part in persuading the UK’s coalition government of the urgency of what he calls “a clear and credible plan for reducing the deficit”. To his great credit, he has just said this to the Trades Union Congress, the most unfriendly audience he could find. He went on to say: “I would be shirking my responsibilities if I did not explain to you the risks of failing to do so.” Indeed, he should say what he thinks. But is he right to think as he does? I have doubts.

That will come as little surprise to those who read my endorsement of points made by Ed Balls.... I am more fiscally hawkish than Mr Balls, as I said at that time. But I am not as hawkish as Mr King. Yes, I agree that there are risks to cutting the fiscal deficit too slowly. However there are also risks in cutting it too fast. Similarly, while there are risks in not having a credible plan, there are also huge risks in having an inflexible one....

What is the core of Mr King’s argument? It is that:

market reaction to rising sovereign debt can turn quickly from benign to malign.... It is not sensible to risk a damaging rise in long-term interest rates that would make investment and the cost of mortgages more expensive. The current plan is to reduce the deficit steadily over five years – a more gradual fiscal tightening than in some other countries. As a result of a failure to put such a plan in place sooner, some euro-area countries have found – to their cost – a much more rapid adjustment being forced upon them....

I have argued before that the UK is in a very different position from, say, Greece: it has a far lower ratio of debt to gross domestic product; it borrows in its own currency; it has the means to promote its own recovery, which is vital for managing public debt; it has a modest current account deficit; it has a history of managing its public debt well; and current indebtedness is lower, relative to GDP, than the average of the past three centuries. Markets have also been remarkably relaxed about funding these deficits: interest rates on index-linked gilts have been 1 per cent, or less, for more than a year; the yield on 10-year gilts has remained below pre-crisis levels and is now close to 3 per cent; and spreads over German bunds have been 1 percentage point, or less, throughout the crisis....

None of this would matter if the risks went only one way – from a failure to tighten rapidly. This is not so. The danger on the other side is that the economy weakens sharply under a structural retrenchment averaging 1.6 per cent of GDP a year over five years. This would be bad for output and jobs. It would also offset the structural fiscal tightening with cyclical loosening: the UK would have to run to stand still....

As Andrew Smithers of London-based Smithers & Co has noted, one possible – even likely – offset to rapid fiscal tightening would be a collapse in corporate savings or, in other words, profits. In the context of a sharp fiscal tightening, with interest rates at rock bottom, that seems a far more plausible outcome than a surge in corporate investment as a way of achieving the needed reduction in the corporate financial surplus, which was 6.1 per cent of GDP in the first quarter of 2010. Why would that be a good thing?

It would be far more sensible to make plans for fiscal retrenchment that are explicitly contingent on how the economy recovers.... Such a flexible plan would ultimately be more credible, not less: it is quite hard to convince markets one is prepared to commit political suicide. The Chinese say one should “cross the river while feeling the stones”. When we know as little as we do, that sounds excellent advice.

## Newt Gingrich Is an Evil Fungus

Marc Ambinder:

Newt Gingrich Is So Off, He's Not Even Wrong - Politics - The Atlantic: Obama told his friend that growing up in Indonesia, he came to know the fundamental limits of American power as exercised simply because he saw people whose life America had never touched. He saw a culture (and subcultures) that struggled to become more like America when they began to learn about the great country. Where his worldview is unique, he told his friend, is that he probably has a better sense of what actually happens when America, the country or its culture, touches another people.

So, yes, he incorporated his outsider's view of America into his American view of its power. Arguably, a president with a sense of America's limits -- not negatives, but limits -- is something that a small-c conservative would respect. When Obama speaks about the interests of other countries and is keen on making sure that other countries' peoples feel like they can live in a world with America (and not just against America), the young Indonesian Obama (born, of course, in Hawaii) is influencing the adult American President.

Now is not the time to make the case that Obama's policies are profoundly within the tradition of American political liberalism, or that his health care proposal explicitly rejected socialism, or that the economy was falling off a cliff and even Republican economists wanted a demand-side injection ... or that, perhaps, one of the reasons why Obama is suddenly hesitant about oil drilling is because it turns out that the oil drilling regime is much less regulated than Obama believed when he expressed support for off-shore oil drilling before the BP disaster.

If you're looking for bones to pick with Obama and his policies, try his spending plans, his aim to make government effective and larger, his social liberalism, his unwillingness to extend the Bush tax cuts for the rich, his infrequent flights of populism, his preference for insurance industry reform (something that, ironically enough, many conservatives have long wanted, or HAD long wanted, because it would preserve the private health insurance system in America), the increase in deficits as a percentage of GDP, perhaps even his involuntary smile when he shook hands with Hugo Chavez -- these are all legitimate. It will be interesting for Gingrich to try to portray the President, who has sanctioned the expansion of CIA and special forces operations worldwide to hunt and kill anti-Western Islamic jihadists worldwide, as somehow blindly obeying a command by his unconsciousness to weaken America because he believes in socialism and in reducing America's power. From a global perspective, D'Souza's argument seems to be an effort to legitimize unformed beliefs about Obama's otherness ... to try to create an explanation for what people view as Obama's aberrant conduct that incorporates doubts about his fundamental American-ness.  Newt Gingrich is an intensely smart man given to peregrinations of crazy. He can be a legitimate presidential candidate, or he can be a demagogue. For 2012, perhaps in this political climate, he is signaling that he is going to be both.

Newt Gingrich himself is sufficient reason that no American patriot should ever vote Republican.

## Hoisted from Comments: Ken Houghton on How the Bosses of the Washington Post Throw the Good Work Their Good Reporters Do into the Toilet

the task force concluded that GM's commitment to the UAW was legally binding on a taxpayer-owned post-bankruptcy GM -- just as binding as its other pension obligations, which the task force had agreed to leave untouched. This is plausible, legally.

"Plausible" is apparently reporter-speak for:

We don't have the slightest coitusing idea about what we're writing.

In point of fact, that structure was negotiated between GM and the UAW precisely because of the possibility of bankruptcy--there were wage and worker concessions made, as well as leaving the obligation itself relatively underfunded. (This is no surprise, since GM chronically underfunded its pension requirements even in The Good Days.)

WaPo auto industry reporters know this. And now they know how devalued their reporting is within their own paper.

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

Are there any auto industry reporters left at the Washington Post? They certainly never filled John Berry's Federal Reserve reporting slot...