## Friday March 4, 2011: The Value of Global History for Modern Political Economy

Topic:

There is a growing faction in the academy arguing that education for global citizenship requires that students learn some "global history." Certainly our Political Economy major here at Berkeley has placed a lot of its chips on this bet. But is this argument true? What is the value of "global history" for the student and analyst of modern political economy issues, anyway?

Panel:

• Chair, J. Bradford DeLong, UCB Economics
• Speaker, Alan Karras, UCB International and Area Studies
• Speaker, Mark Healey, UCB History

Location: Blum Hall Plaza Level

Time: 2:10-2:40: Panelists. 2:40-3:10: Discussion. 3:10-4:00: Reception.

DB:

The Origins and Severity of the Public Pension Crisis | Reports: There has been considerable attention given in recent months to the shortfalls faced by state and local pension funds. Using the current methodology of assessing pension obligations, the shortfalls sum to nearly $1 trillion. Some analysts have argued that by using what they consider to be a more accurate methodology, the shortfalls could be more than three times this size. Based on these projections, many political figures have argued the need to drastically reduce the generosity of public sector pensions, and possibly to default on pension obligations already incurred. This paper shows: • Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009. • The argument that pension funds should only assume a risk-free rate of return in assessing pension fund adequacy ignores the distinction between governmental units, which need be little concerned over the timing of market fluctuations, and individual investors, who must be very sensitive to market timing. • The size of the projected state and local government shortfalls measured as a share of future gross state products appear manageable. ## DeLong Smackdown Watch: Closed Cabal Edition Johnny Baltimore writes: Ryan Thomas McNeely Has a Weblog... - Grasping Reality with a Sharp Beak: I'm sure this young man is smart and personable. But isn't this a perfect example of upper class privilege in action? We have a 20%+ U6 rate and Brad is featuring a kid from an upper middle class town who went to an elite university, then worked for another product of elite parents and universities(Yglesias)then attended another elite university. Alex is correct- Jesus wept. It's hardly "upper class." I'm not getting him a job at Goldman Sachs. The primary original purpose of this weblog was as my archive of interesting things and tickler file, and I do want to be sure to go back and look at what RTM has written in a few months. Is there somebody else starting out--somebody smart, deserving, etc.--who did no intern for MY who I should be looking out for instead? Yes. Who are they? I do not know: if I knew I would link to them... ## DeLong Smackdown Watch: Lexicographic Preferences Nemi writes: Robert Murphy Joins the "It's Immoral to Tax Americans to Destroy an Asteroid" Caucus - Grasping Reality with a Sharp Beak: From what I´m reading on this blog – you seem to be an excellent economist. But, your blind spot towards your own profession is something that is repeating itself over and over again. What about “We economists do not like lexicographic preference…”. Really? Wow! Do you honestly believe that these kind of libertarian lunatics (who would answer like Volokh, at least in private) is LESS common among economists compared to the population at large (or any other group for that matter)? I´m not saying that most economists are libertarians – I think they are very few – but the ratio is certainly a lot bigger than among any other group of people. I´m sure there exist studies on this - if anyone know of one that support or falsify my hypothesis, please share. We economists commit many sins, but IMHO lexicographic preferences is one of the few that we do not commit. There are always tradeoffs, and we are always optimizing between alternatives along some margin... ## David Leonhardt: German Cuts, American Stimulus, Private Hiring, and Government Layoffs DL: Private Hiring and Government Layoffs: [G]overnment employment and private sector employment have both fallen during the last two years. Over just the last year, private employment has risen — though more slowly than the population has been growing — while government employment has continued falling. These numbers make clear that a surge of government hiring can’t be the economy’s problem right now — because there has been no surge.... It’s hard to look at these numbers and believe that the laying off of more government workers will somehow cure the economy’s troubles. And: Germany’s Cuts vs. America’s Stimulus: Germany’s economic growth surged in the middle of last year, causing commentators both there and here to proclaim that American stimulus had failed and German austerity had worked.... Well, it turns out the German boom didn’t last long... he United States — where the stimulus program has been bigger and longer lasting — has recovered.... Yet many members of Congress continue to insist that budget cuts are the path to prosperity. The only question in Washington seems to be how deeply to cut federal spending this year. If the economy were at a different point in the cycle — not emerging from a financial crisis — the coming fight over spending could actually be quite productive.... The immediate problem, however, is the fragility of the economy.... A big round of federal cuts will only make things worse. So if the opponents of deep federal cuts, starting with President Obama, are trying to decide how hard to fight, they may want to err on the side of toughness. Both logic and history make this case. Let’s start with the logic. The austerity crowd argues that government cuts will lead to more activity by the private sector. How could that be? The main way would be if the government were using so many resources that it was driving up their price and making it harder for companies to use them. In the early 1990s, for instance, government borrowing was pushing up interest rates. When the deficit began to fall, interest rates did too. Projects that had not previously been profitable for companies suddenly began to make sense. The resulting economic boom brought in more tax revenue and further reduced the deficit. But this virtuous cycle can’t happen today. Interest rates are already very low. They’re low because the financial crisis and recession caused a huge drop in the private sector’s demand for loans. Even with all the government spending to fight the recession, overall demand for loans has remained historically low, the data shows. Similarly, there is no evidence that the government is gobbling up too many workers and keeping them from the private sector. When John Boehner, the speaker of the House, said last week that federal payrolls had grown by 200,000 people since Mr. Obama took office, he was simply wrong.... Without the government spending of the last two years — including tax cuts — the economy would be in vastly worse shape. Likewise, if the federal government begins laying off tens of thousands of workers now, the economy will clearly suffer. That’s the historical lesson of postcrisis austerity movements. The history is a rich one, too, because people understandably react to a bubble’s excesses by calling for the reverse. When Franklin Roosevelt was running for president in 1932, he repeatedly called for a balanced budget. But no matter how morally satisfying austerity may be, it’s the wrong answer.... “It’s really quite striking how well the U.S. is performing relative to the U.K., which is tightening aggressively,” says Ian Shepherdson, a Britain-based economist for the research firm High Frequency Economics, “and relative to Germany, which is tightening more modestly.” Mr. Shepherdson adds that he generally opposes stimulus programs for a normal recession but that they are crucial after a crisis.... By all means, though, don’t follow the path of the Germans and the British just because it feels morally satisfying. ## Simon Johnson: Geithner’s Gamble SJ: Geithner’s Gamble: Tim Geithner laid out his view of the nature of world economic growth and the role of the US financial sector. It is a deeply disturbing vision, one that amounts to a huge, uninformed gamble with the future of the American economy – and that suggests that Geithner remains the senior public official worldwide who is most in thrall to the self-serving ideology of big banks. Geithner argues that the world will now experience a major “financial deepening,” owing to growing demand in emerging markets for financial products and services. He is thinking, of course, of “middle-income” countries like India, China, and Brazil. And he is right to emphasize that all have made terrific progress and now offer great opportunities for the rising middle class, which wants to accumulate savings, borrow more easily (for productive investment, home purchases, education, etc), and, more generally, smooth out consumption. But then Geithner takes a leap. He wants US banks to take the lead in these countries’ financial development. His words are worth quoting at length: I don’t have any enthusiasm for…trying to shrink the relative importance of the financial system in our economy as a test of reform, because we have to think about the fact that we operate in the broader world.... It’s the same thing for Microsoft or anything else. We want US firms to benefit from that…Now, financial firms are different because of the risk, but you can contain that through regulation. There are three serious problems with this view. First, Geithner ignores everything that we know about the pattern of financial development.... It is very rare for financial systems to develop without major crises.... Second, Geithner assumes that risks at the largest US firms can be contained through regulation, when all our knowledge points directly to the contrary.... And third, Geithner completely overlooks what has brought significant parts of Europe to its economic knees. He should spend more time with the authorities in Iceland or Ireland or Switzerland, countries where “financial globalization” allowed banks to become big relative to the economy.... Geithner is a very smart and experienced public servant. His views concerning the future of finance will help shape what happens. And that is why we are headed for trouble. ## Steven Pearlstein: Wisconsin's Union Showdown Steve Pearlstein: Steven Pearlstein - Making sense of Wisconsin's union showdown: Rather than playing Reagan to Wisconsin's truant teachers, Walker overreached, refusing to give up his union-busting even after the unions agreed to his benefit-cutting demands. Now that he has allowed the unions to reframe the issue from one of greedy public servants to one of political revenge, Walker has single-handedly succeeded in bringing more attention, unity and sympathy to the union movement than it has had since . . . well, since Ronald Reagan took on the control tower. A mischievous columnist might even take this opportunity to speculate whether this is the beginning of the revival of labor's fortunes. Back when I was working at Inc. magazine in the mid-1980s, we loved nothing better when approaching a public-sector issue than to ask how the private sector would handle it. Faced with the situation in Wisconsin, we would have called up Tom Peters or Peter Drucker and posed the example of a new chief executive brought in by the shareholders (i.e., the voters) to rescue a company suffering from operating losses (budget deficit) and declining sales (jobs). Invariably, they would have recommended sitting down with employees, explaining the short-and long-term economic challenges and working with them to improve productivity and product quality in a way that benefits both shareholders and employees. Now compare that with how Wisconsin's new chief executive handled the situation: Impose an across-the-board pay cut and tell employees neither they nor their representative will ever again have a say in how things will be run or get a pay raise in excess of inflation. A great way to start things off with the staff, don't you think? Remember that the next time you hear some Republican bellyaching at the Rotary lunch about why government should be run more like a business... ## Berkeley Political Economy Colloquium: February 18, 2011: "Austerity" Well, that went quite well, I thought... Download Audio 20110218 colloquium.pdf February 18, 2011: "Austerity" Topic: For nearly 200 years economists from John Stuart Mill through Walter Bagehot and John Maynard Keynes and Milton Friedman to Ben Bernanke have known that a depression caused by a financial panic is not properly treated by starving the economy of government purchases and of money. So why does "austerity" have such extraordinary purchase on the minds of North Atlantic politicians right now? Panel: • Chair: J. Bradford DeLong, UCB Economics • Speaker: Joseph Lough, UCB Political Economy • Speaker: Rakesh Bhandari, UCB Interdisciplinary Studies Location: Blum Hall Plaza Level Time: 2:10-2:40: Panelists. 2:40-3:10: Discussion. 3:10-4:00: Reception. J. Bradford DeLong: Let me speak as a card-carrying neoliberal, as a bipartisan technocrat, as a mainstream neoclassical macroeconomist--a student of Larry Summers and Peter Temin and Charlie Kindleberger and Barry Eichengreen and Olivier Blanchard and many others. We put to one side issues of long-run economic growth and of income and wealth distribution, and narrow our focus to the business cycle--to these grand mal seizures of high unemployment that industrial market economies have been suffering from since at least 1825. Such episodes are bad for everybody--bad for workers who lose their jobs, bad for entrepreneurs and equity holders who lose their profits, bad for governments that lose their tax revenue, and bad for bondholders who see debts owed them go unpaid as a result of bankruptcy. Such episodes are best avoided. From my perspective, the technocratic economists by 1829 had figured out why these semi-periodic grand mal seizures happened. In 1829 Jean-Baptiste Say published his Course Complet d'Economie Politique..." in which he implicitly admitted that Thomas Robert Malthus had been at least partly right in his assertions that an economy could suffer from at least a temporary and disequliibrium "general glut" of commodities. In 1829 John Stuart Mill wrote that one of what was to appear as his *Essays on Unsettled Questions in Political Economy in which he put his finger on the mechanism of depression. Semi-periodically in market economies, wealth holders collectively come to the conclusion that their holdings of some kind or kinds of financial assets are too low. These financial assets can be cash money as a means of liquidity, or savings vehicles to carry purchasing power into the future (of which bonds and cash money are important components), or safe assets (of which, again, cash money and bonds of credit-worthy governments are key components)--whatever. Wealth holders collectively come to the conclusion that their holdings of some category of financial assets are too small. They thus cut back on their spending on currently-produced goods and services in an attempt to build up their asset holdings. This cutback creates deficient demand not just for one or a few categories of currently-produced goods and services but for pretty much all of them. Businesses seeing slack demand fire workers. And depression results. What was not settled back in 1829 was what to do about this. Over the years since, mainstream technocratic economists have arrived at three sets of solutions: 1. Don't go there in the first place. Avoid whatever it is--whether an external drain under the gold standard or a collapse of long-term wealth as in the end of the dot-com bubble or a panicked flight to safety as in 2007-2008--that creates the shortage of and excess demand for financial assets. 2. If you fail to avoid the problem, then have the government step in and spend on currently-produced goods and servicesin order to keep employment at its normal levels whenever the private sector cuts back on its spending. 3. If you fail to avoid the problem, then have the government create and provide the financial assets that the private sector wants to hold in order to get the private sector to resume its spending on currently-produced goods and services. There are a great many subtleties in how a government should attempt to do (1), (2), and (3), and how attempts to carry out one of the three may interfere with or make impossible attempts to carry out the other branches of policy. But that is not our topic today. Our topic today is that, somehow, all three are now off the table. There is right now in the North Atlantic no likelihood of reforms of Wall Street and Canary Wharf to accomplish (1) and diminish the likelihood and severity of a financial panic. There is right now in the North Atlantic no likelihood at all of (2): no political pressure to expand or even extend the anemic government-spending stimulus measures that have ben undertaken. And there is right now in the North Atlantic little likelihood of (3): the European Central Bank is actively looking for ways to shrink the supply of the financial assets it provides to the private sector, and the Federal Reserve is under pressure to do the same--both because of a claimed fear that further expansionary asset provision policies run the risk of igniting unwarranted inflation. But there is no likelihood of unwarranted inflation that can be seen either in the tracks of price indexes or in the tracks of financial market readings of forecast expectations. Nevertheless, you listen to the speeches of North Atlantic policymakers and you read the reports, and you hear things like: “Obama said that just as people and companies have had to be cautious about spending, ‘government should have to tighten its belt as well...’” Now there were—and perhaps there still are—people in the White House who took these lines out of speeches as fast as they could But the speechwriters keep putting them in, and President Obama keeps saying them, in all likelihood because he believes them. And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, as a mainstream neoclassical economist. Right now the global market economy is suffering a grand mal seizure of high unemployment and slack demand. We know the cures--fiscal stimulus via more government spending, monetary stimulus via provision by central banks of the financial assets the private sector wants to hold, institutional reform to try once gain to curb the bankers' tendency to indulge in speculative excess under control. Yet we are not doing any of them. Instead, we are calling for "austerity." John Maynard Keynes put it better than I can in talking about a similar current of thought back in the 1930s: It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again. I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity... I do not understand it either. But many people do. And I do not understand why such people think as they do. So let me turn it over to the first of our speakers, Joseph Lough, to try to provide some answers. Joseph Lough: I too can think of no better place to begin a discussion such as this than Mr Keynes’ complaint against austere and puritanical souls. The only problem is that from our lips, or in any case from mine, this complaint cannot help but sound a bit hollow. What, practically or theoretically, do I know about "austerity"? What do I know about "puritanism"? Really. We might therefore do well to ask: does Mr Keynes’ complaint amount to anything more than ad homonym. Austerity is foolish; puritanism is silly—less so now perhaps than in Lord Keynes’ day—when none was a Keynesian, but when all, thank God, not excluding Chicago’s own Frank Knight and Jacob Vine, were—how should I put it—godless. The retreat of secularism and humanism—we must admit—has blunted Keynes’ criticism: austerity? foolish? puritanism? silly? Not any more. Let me see if I can therefore put the discussion on a different footing. Not Lord Keynes’ ad hominem, but, rather, the solid ground of science. Because, unless I am mistaken, there is something indubitably self-evident about economic austerity—something us salt-water types are liable to overlook. Don’t get me wrong. Although a product of Chicago, I am not myself Chicago. I am as salty as the next guy. But I do feel that, when we ask our audience to embrace one or another variety of profligacy, however packaged, we are, my friends, beating our heads against the storied brick wall. And since a substance metaphysics does not match the experience of any save the most metaphysical among us, we will beat and beat and beat until we bleed and then some more. Immanuel Kant won this debate over two centuries ago. It went something like this: if you attribute the state of your soul to the material, bodily, conditions of your life, then you must kiss ethics, religion, and, with it, all law and justice down the road. For there can be no condition placed on true freedom. This, my friends, is the turnkey to fresh water (Chicago) economics. Without it, Chicago economics melts into a pool of mush. And, with it, all talk of austerity and belt-tightening. This was Amartya Sen’s message to us—a message for which he was duly awarded a Nobel Prize. Do we embrace a negative, purely abstract, notion of freedom—freedom as the absence of constraint? Or do we embrace a positive, substantive, notion of freedom—freedom as the conditions of the good life? Aristotle or Plato? Hegel or Kant? But this really doesn’t solve our problem, does it? For, as Professor DeLong has pointed out, there is a long list of economists quite willing, ready, and able—Deontological Ethics or None—to point out precisely where, empirically, austerity is simply wrong-headed. But, wrong-headed for what? Surely, wrong-headed for long-term economic growth and full employment. Wrong-headed as well for general social welfare. Ahhh. But, what about freedom? But, you say, we weren’t talking about freedom. Oh, yes, we were. Or, rather, should I say, yes THEY were and are. For, really, it has always been about freedom. Even when Uncle Gary [Becker] and Uncle Milty [Friedman] secreted us away into Graduate Course 301, it was always about freedom—meaning, of course, the absence of constraint. At which point, we could have—we should have—pulled out our big guns; not Karl Marx or John Maynard Keynes; not Locke and Hobbes. What I mean is Aristotle. Aristotle’s Politics, Book I, Chapter 1, the very first page. The heart and soul of western thought and culture. The very core of the Core Curriculum itself. Surely, even Hutchens could not object to our sources. This is the Great Books Tradition. So, is the ruler of a republic simply the ruler of a somewhat larger private oikos, private economy, private enterprise? No? Why not? Because, says Aristotle, the ruler over a private enterprise, an oikos, is a despotes, a despot, the ruler over subordinates, dependents, workers, women, children and slaves. Therefore, writes Aristotle, you should never ever, ever allow a businessman to rule over a republic. No. The ruler over a republic is not the ruler over a somewhat larger private enterprise. The ruler over a republic is a ruler over others who like himself (or herself) is a substantive beneficiary of substantive freedoms. But freedom here—as Amartya Sen points out—is not the absence of constraint. Freedom here is the substantive condition of its own possibility. You know it. You are its beneficiaries. A good education. Freedom from fear. Good health. Leisure—the time to read, to go to the opera, the theater, the ballet, MOMA, the symphony, to help your children with their homework, to go on bike rides, to work in the garden, to conduct research, the freedom to fail and to learn without the fear of losing one’s living. These freedoms—so different, so nearly opposite the freedoms that govern the private oikos, the private enterprise—are the freedoms that compose the public sphere in a republic. But, at the very instant that we began to understand these freedoms—was it in 1944 or 45, was it with Karl Polanyi or Franz Neuman, Herbert Marcuse or Hannah Arendt?—at that very moment we began to cede the field of economics to forms of thought and modes of research ill-suited to anything but Kant’s deontological absence of constraint. At that moment—and this is pure Kant—substantive freedom lost its footing in economics. Not that we didn’t continue to talk about it and recommend it. But absent a coherent and compelling theory of substantive freedom, our talk and research lost out to their theory. We can cry in justice till we are blue in the face. We can yell—and we are right to yell—that families should not have to choose between health, safety, and education. But until we realize that morality for most of us intuitively entails the absence of constraint, we will almost certainly be preaching to the choir. So. What is the answer? I don’t know. How do we begin to shift the weight of experience, at least where freedom is concerned, from the absence of constraint, to the conditions of freedom? How do we shift our own research perspectives from quantitative documentation and modeling, to qualitative, critical, interrogation? Which brings us back, I feel, to the question of profligacy. All of you, I am sure, have heard the story about the Prodigal Son who receives and squanders his share of his father’s inheritance. His father—who, in the story, represents God—is bereft and bereaved at his loss. But then his son returns, sick and broke. And what does the father do? The older son, the good son, counsels austerity and puritanical punishment. But what does the father—who, in the story, represents God the father—what does the father do? He slaughters the fattened calf. He throws a party. He welcomes his son with open arms. How utterly irresponsible. Or not. Will$1.2T (or is it now $2T) of fiscal stimulus via expanded government purchases lead us to full employment? I don’t know. But, is that the right question? Maybe the right question is instead: do you miss your son? Rakesh Bhandari: We should not confuse the description of a general crisis with its explanation. Of course theoretical blinders may make it difficult to observe what is plainly happening. Until the error of the classical economists’ conflation of barter with the money-mediated circulation of commodities was openly recognized, it would prove difficult to countenance the possibility of and thus recognize the actual eventuation of a general crisis, caused by the general attempt to sell without the intention to buy commodities. But the mediation of the circulation of commodities by money only creates the possibility of a general crisis. It does not explain why the course of accumulation is in fact punctuated by such crises. We need to move beyond a phenomenology of crises to a structural explanation thereof. Today there is much talk of a Minsky crisis; such a crisis is rooted in the financial sector. Marx was skeptical of monetary theories of crisis. Vaguely hinting towards an endogenous theory of credit avant la lettre, he believed that crises would only appear to be caused by a shortage of circulating media (he would thus have been skeptical of quantitative easing as sufficient for the overcoming of general crises, though he certainly agreed that crises often appeared to be the result of insufficient circulating media). For Marx the shortage of money was however a result of weakness in the real economy. Marxists to this day have no agreement as to what Marx thought the fundamental weakness in the real economy was—underconsumption caused by a maldistribution of income; disproportionalities resulting from the anarchy of production; or an insufficiency of surplus value to finance and motivate further accumulation caused by a falling rate of profit even as the total investment increases. But I find it highly doubtful that Marx was an unconsumptionist. Hayek’s main frustration with Keynes (though it should have been with the Keynesians) was his putative belief that crises are caused fundamentally by deficient mass purchasing power. Harold Mouton, Robert Reich and Branko Milanovic have all thought this in different ways. But I am skeptical. Many today find the acceptance of austerity puzzling because they cannot see how investment demand will recover unless and until the prospects of final consumption brighten. But is this social democratic shibboleth true? Well, then, why do crises often break out just when purchasing power is at its height? If deficient purchasing power is the cause, then it should have been falling before the onset of the crisis, not as a result of it and the contraction of consumer credit associated therewith. To be sure, Branko Milanovic and others have offered reasonable underconsumptionist arguments (see http://yaleglobal.yale.edu/content/two-views-global-crisis). Pointing to accentuation of inequality in many forms over the last three decades, Milanovic asserts that the highest income earners found little reason to invest in expanded production, given the weakness of mass purchasing power. Flush with funds, they got caught up in a speculative mania that could lift the economy only as long as the speculative run in mortgage backed securities and derivatives generally lasted. Behind the fictitious prosperity and its dissipation Milanovic finds disturbed relations of distribution. But would the redistribution of income (or deficit financed creation of jobs) and thus the strengthening of the marginal propensity to consume and thus of final demand really bolster private investment, the most volatile component of aggregate demand? I am not sure. While businesses may not make replacement investments in times of austerity, they may well make innovatory investments just to cut costs faster than prices are sagging, and as James Galbraith (no Hayekian himself!) suggested more than ten years ago, some high valued added capital goods firms may well prefer low product prices for just this reason. Some firms may decide that it is advantageous to build on the trend and thus take advantage of lower depression prices in materials, wages and possibly interest rates. The more powerful firms may well believe that the damage that a weak economy does to weaker competitors is crucial for their own long-term health. Lastly firms may well think that they are likely to lose new customers to foreign producers in a global market and thus see not see the benefits of greater final demand in relation to the costs of higher taxes presently, and in the future. Disturbed by an unacceptable level of unemployment and human suffering, Professor DeLong has raised the question for us of why we are finding the acceptance of a politics of austerity and thus a needless self-imposition of suffering. After all, Professor DeLong believes Keynesian theory has long shown that a high level of unemployment is not only not necessary for capitalist accumulation but also positively harmful. Government spending can step in and top up when there is a lack of effective demand. After the initial injection of spending, a multiplier process leads to income employment increasing severalfold, and the initial government spending could be recouped in additional tax revenue paid from the extra income. A high level of employment and a high level of profits are reconcilable as long as public investment, which is not motivated by profitability, takes up the slack between saving and private investment when animal spirits are weak (see Lord Meghnad Desai, Marx’s Revenge, pp 180-182 where he reprises arguments made long ago by his teacher Lawrence Klein in The Keynesian Revolution; note also that animal spirits may be weak presently not for fundamentally psychological reasons but due to an objectively depressed marginal efficiency of the capital as Justin Fox has recently argued at http://blogs.hbr.org/fox/2010/11/the-real-story-behind-those-re.html ). But—and here is the point that I have been driving at—it does not necessarily follow that the way to increase aggregate demand in a depressed economy is raise G and C. That is, if we take the standard macro-economic identity of Y=I+C+G+X (income equals Investment plus Consumption plus Government plus Net Exports), it does not follow that the best response to a drop off in I is a compensatory increase in debt-financed government spending and increased consumption through redistribution. There has been for thirty years now a conservative method for managing aggregate demand, as Jawaharlal Nehru University Professor of Economics Amit Bhaduri long ago noted. Drawing more from Michael Kalecki than Keynes, Bhaduri underlines that for monetary profit (the surplus in Marxian terms and savings in Keynes’ framework) can only be realized if there a source of autonomous demand beyond what can be sustained by current income. For example, this autonomous source of demand could be borrowing by a private firm through overdraft facilities from a bank. But according to Kaleckian/Keynesian theory autonomous expenditure will do in situations of deficient private investment demand. It seems to follow government should in such situations undertake the autonomous expenditures required for the surplus to be realized. Even wage increases will not be sufficient because there will be a surplus that needs to be realized over and above current income. Yet as clear as the case seems to be for such autonomous government expenditures, it has been politically marginalized for thirty years. The reason is simple: governments have sought to reignite private investment not by direct governmental creation of an autonomous source of demand but by making private investment more profitable and net exports more competitive. Investment can be made more profitable by pro-corporate tax cuts and by undermining labor, and firms are motivated to invest in such climate by the fear that their competitors will take advantage of it. Net exports can be made more competitive again by wage repression, subsidies, manipulation of the currency—though the US confronts unique problems with the last given the dollar’s position as a reserve currency as recently explained by Professor Eichengreen. I am not at all surprised by today’s politics of austerity. President Obama is as beholden by the conservative program for the management of aggregate demand as the neo-liberals before him (Bhaduri quotes Helmut Schmidt announcing his shift from a social democratic to conservative program for the management of effective demand in 1977!) President Obama probably has some sense that autonomous government expenditures would not stabilize private investment more effectively than pro-corporate and anti-labor policy would; moreover there is always that the risk that government expenditures will leak out of the national economy. Yet the evidence for the conservative program for the management of effective demand is not strong, though the case for it can be made coherently from within the technocratic Keynesian framework. Still it has not greatly stimulated private investment at least not in the short term; and it poses deflationary risks. Moreover, it is simply a fallacy of composition to think that each nation an export its way out of crisis. Yet at the same time I think there is reason to doubt that a more aggressive government stimulus program would have been or would be effective. There is no simple mechanical effect from autonomous government expenditures to rising private investment. It is certainly however worth a try, especially given that the fears of the bond vigilantes remain unfounded. And that raises the political question of why the more liberal governmental program of managing effective demand is giving way to private method. Surely part of the answer has to lie in the division and passivity of the American working class. Without mass protest we prove ourselves willing to tolerate great and troubling levels of human suffering. We have not yet seen massive protests for the creation of government jobs. I suspect that one reason remains racial divisions within the working class. The belief that undeserving minorities and even (god forbid!) illegal aliens are disproportionately represented among those now suffering most sharply still tragically weakens the resolve of too many of us to fight against the labor market conditions that harm workers generally. Prejudice can reconcile us to conditions that over time take on the objectivity of the state of the weather. ## DeLong Smackdown Watch: The Theory of Relativity Matthew Johnson writes: The Theory of Relativity: Is It Time to "Teach the Controversy" in America's High Schools?: "Outside of everyday human experience"? Not so, mon amis, not so. This is why it was such a valuable part of the Caltech experience that my then physics professor started his best lecture of the year by entering the room, turning on the light, and saying, "that was a relativity demonstration"; then he tossed an eraser lightly in the air, so that it would clearly tumble as it fell, and said, "that was a general relativity demonstration". Then he spent the next 20-30 min. or so explaining why these everyday phenomena really ARE "relativity demonstrations", showing that we now understand these phenomena better than ever before now that we understand them in the light of the theories of special and general relativity. ## Liveblogging World War II: February 22, 1941 February 22, 1941: Greek and British discussions in Athens reach agreement on a British commitment of 100,000 soldiers, with artillery and tank support, to defend Greece. Fewer soldiers, the Greek government had maintained, would have been counterproductive, but with 100,000 the German temptation to attack the forces of its British adversary would be outweighed by the difficulty of conquering Greece. ## Xoom, Honeycomb, Flash... Matt Drance: Apple Outsider » Flash on Android 3.0 Isn’t Ready: Engadget reported yesterday that Motorola’s Xoom tablet would initially ship without Adobe Flash 10.1, which has been a marquee feature leading up to the launch. I wondered if the delay was specific to Xoom, or to the new Android 3.0 “Honeycomb” OS. Macworld has noted an Adobe blog post that answers the question: it’s late for Honeycomb, and it’ll be ready “within a few weeks.” Until then, we have a product that can’t view its own website. And people still ask, with a straight face, why Flash isn’t on iOS. Dan Nystedt: Adobe says Honeycomb tablets to get Flash in 'a few weeks' | Tablets | iOS Central | Macworld: Adobe says Flash support for tablets based on Google’s upcoming “Honeycomb” version of the Android operating system will be available “within a few weeks.” Honeycomb is the first version of Android designed for tablets and is eagerly anticipated. Motorola’s Xoom tablet will launch on Thursday as the first to run the software, but initial versions won’t come with Flash support. Verizon, which is putting the device on sale, previously said Flash would be available in “spring 2011.” The vague time reference had people fearing Flash wouldn’t be available until the end of the season, but a posting on Adobe’s blog points to a slightly earlier release. “Consumers are clearly asking for Flash support on tablet devices and the good news is that they won’t have to wait long. We are aware of over 50 tablets that will ship in 2011 supporting a full web experience (including Flash support) and Xoom users will be among the first to enjoy this benefit,” wrote Matt Rozen, on Adobe’s Flash Platform Blog. Adobe said version 10.2 of its Flash Player will be offered as a download or preinstalled on some tablets launching later in 2011. Adobe has said that Flash Player 10.2 will offer users of dual-core tablets and smartphones HD Flash video and up to 30 frames per second video performance. ## Ryan Thomas McNeely Has a Weblog... RTM: R.T. McNeely « Ryan Thomas McNeely: I grew up in Chatham, New Jersey and attended Williams College in Williamstown, Massachusetts. After college I did non-profit work in post-Katrina New Orleans for three years before returning to school, and most recently I had a brief stint interning for Matthew Yglesias at the Center for American Progress. I'm currently pursuing a Master's in Public Affairs (focus on Domestic and Urban Policy) at the Woodrow Wilson School at Princeton University. I'm graduating this May -- please hire me! Do the Motivations of Politicians Matter? « Ryan Thomas McNeely Adele Releases “21″ « Ryan Thomas McNeely Actual Horrible People in Office in America « Ryan Thomas McNeely The Elephant Not in the Room « Ryan Thomas McNeely So I’ve Decided to Finally Try Starting a Blog « Ryan Thomas McNeely ## DeLong Smackdown Watch: "Politics Is Undermining Our Economy" Edition Dean Baker justly complains that I have misread him here: "Politics Is Undermining Our Economy." He does not think that it would have been economically impossible to maintain near-full employment after the collapse of the housing bubble, just that it was politically difficult. When he writes: The Right Prescription for an Ailing Economy: As much as economists like to pretend to be sorcerers, they have no easy way to replace$1 trillion in annual demand. The Obama Administration's 2009 stimulus package went perhaps one-third of the way, but it was nowhere near large enough...

and:

Dean Baker | The Bursting of the Housing Bubble and the Coming Recession: If housing construction and sales fall back to trend levels, it would mean a loss of more than 2 million jobs. The decline in consumption that will result because people can no longer borrow against their homes will have an even more dramatic impact on the economy. The financial system will also be shaken by an unprecedented wave of mortgage defaults. Unfortunately, at this point there is no obvious way to avoid this scenario...

and:

Beating Up On Brad DeLong | TPMCafe: There is nothing in our economist's bag of tricks that gives us an easy mechanism for replacing 9 percent of GDP quickly, which leaves me wondering what the reality grasping Mr. DeLong been smoking?... Exactly what mechanism do we have in the private economy for replacing $1.2 trillion in private demand in a short period of time? he is not throwing up his hands in despair, but rather calling for a boost to total government purchases on the order of four times as great as the boost to federal government purchases in the Recovery Act. ## Politics Is Undermining Our Economy UPDATE: Dean Baker justly complains that I have misread him. He does not think that it would have been economically impossible to maintain near-full employment after the collapse of the housing bubble, just that it was politically difficult. When he writes: The Right Prescription for an Ailing Econom: As much as economists like to pretend to be sorcerers, they have no easy way to replace$1 trillion in annual demand. The Obama Administration's 2009 stimulus package went perhaps one-third of the way, but it was nowhere near large enough...

and:

Dean Baker | The Bursting of the Housing Bubble and the Coming Recession: If housing construction and sales fall back to trend levels, it would mean a loss of more than 2 million jobs. The decline in consumption that will result because people can no longer borrow against their homes will have an even more dramatic impact on the economy. The financial system will also be shaken by an unprecedented wave of mortgage defaults. Unfortunately, at this point there is no obvious way to avoid this scenario...

and:

Beating Up On Brad DeLong | TPMCafe: There is nothing in our economist's bag of tricks that gives us an easy mechanism for replacing 9 percent of GDP quickly, which leaves me wondering what the reality grasping Mr. DeLong been smoking?... Exactly what mechanism do we have in the private economy for replacing $1.2 trillion in private demand in a short period of time? he is not throwing up his hands in despair, but rather calling for a boost to total government purchases on the order of four times as great as the boost to federal government purchases in the Recovery Act. We are live at The Week: Politics is undermining our economy - The Week: There is a line of argument that I do not understand — even though it is made by economists I respect. It is that our current labor-market depression was baked in the cake from the moment that Alan Greenspan decided to keep interest rates low in the early 2000s, declining to stop would-be homeowners from borrowing from would-be mortgage lenders who were eager to lend. I disagree. I think that our current labor-market depression was baked in the cake when we started electing leaders who put other political and policy objectives far in advance of maintaining full employment. Economist Dean Baker's formulation of what I call the household-balance-sheet-recession argument goes roughly as follows: The housing boom created some$8 trillion of fictitious housing wealth — wealth that people thought they had because they believed they would be able to sell their homes at inflated prices. When housing prices collapsed, home owners realized that they were a lot poorer than they had thought. They cut back their spending on consumer goods by $1 trillion a year, and that is the source of our current downturn and high unemployment. With no way to recreate the$8 trillion of fool's gold that was the housing bubble, there is no way to get American consumers spending again. So we were doomed to undergo this depression from the moment Greenspan failed to choke off the housing bubble.

But this argument seems wrong to me. Consumers are not the only spenders in the economy. Businesses can spend as well to boost their productive capacity — although it would be hard to get businesses to spend much to expand their factories if they don't foresee the consumer spending to make those factories profitable. Exporters can lend money abroad to finance the purchase of U.S.-made goods and so pile up wealth in the form of money owed to us by foreigners. The government can borrow-and-spend, and if it spends wisely on human and physical infrastructure to boost our national wealth then it will have no problem repaying its debts in the future.

Yes, the collapse of the housing boom and the consequent $8 trillion reduction in household wealth does mean that consumer spending will be significantly below trend for quite a while to come. But when the consumer stops spending and sits down, the government and the exporter — and also the capacity-building business — can stand up: There is no chain of logical necessity leading from the collapse of the housing boom to a prolonged period of very high unemployment. U.S. households want to save? Then let them save. And let businesses invest in productive capital, let the government invest in infrastructure, and let exporters invest in wealth claims abroad. The re-attainment and maintenance of full-employment, an a commensurate level of aggregate demand, should not be a problem as long as the federal government is willing to spend enough on building infrastructure and human capital, as long as the Federal Reserve can promise markets that it will keep real interest rates low enough for long enough to make building business capacity a no-lose bet, and as long as the Treasury is willing to let the value of the dollar fall far enough that America's exporters can offer foreigners attractive deals on the goods and services we make. Of course, if boosts to economy-wide spending led to inflation instead of increases in capacity utilization, then we would have a very big problem; we would be in the alternative universe of the Hayekians in which we have a fundamental mismatch between the skills of our labor force and the goods wanted by consumers. But there are no signs that we are in that alternative universe — no signs at all. What, then, is our immediate problem? It is political. The Federal Reserve would rather let unemployment remain above 8 percent for a good long while than run the slightest risk of higher inflation. The Treasury would rather let unemployment remain above 8 percent for a good long while than say that a strong dollar is not in America's interest (even though it is not). The Republican decision-makers in Congress would rather let unemployment remain above 8 percent for a good long while than let Obama win legislative victories. Most puzzling, the Obama administration would rather let unemployment remain above 8 percent for a good long while than make what it thinks is likely to be an unsuccessful push that will reveal its lack of control over the government. Perhaps they are right that they have pushed the envelope as far as they can go with respect to Congressional action (although not as far as they could have with quantitative easing, loan guarantees or mortgage restructuring via the Treasury). But until you push, you do not really know. And back in the late 1940s Harry Truman welcomed the opportunity to run against the Republican Congress — to say that these were the policies he advocated, and he was sorry that the do-nothing Congress would not pass them. The Obama administration seems to feel differently: as if they dare not strip off the mask of competence and control to show the conflicted face beneath. The current jockeying on competing budgets is yet additional proof of our political dysfunction. Our urgent problem right now is 9 percent unemployment. We need investment to speed productivity and income growth — and we need it soon. In the long run, we need to control health care program costs. A game of budget chicken does not bring us closer to achieving these goals. ## Robert Murphy Joins the "Reasonable People Differ About Whether It Would Be Moral to Tax Americans to Destroy an Asteroid" "It's Immoral to Tax Americans to Destroy an Asteroid" Caucus UPDATE: I appear to have mischaracterized Murphy. He goes the whole Volokh: it is, he says, simply immoral to tax people to fund the construction of the giant asteroid-killing lasers we need. Wow. No, Bob, reasonable people do not think that it is immoral to tax people in order to blow up an asteroid that is about to annihilate the human race. And reasonable people do not think that reasonable people can think that it is immoral to tax people in order to blow up an asteroid that is about to annihilate the human race. They just don't. Murphy: Empirical Evidence That Brad DeLong Is Completely Obtuse - Robert P. Murphy - Mises Daily: Volokh's position... is an entirely reasonable view, and it is surprising to me that DeLong doesn't even understand it.... [T]here is a general moral prohibition against violating another person's rights.... Volokh's... point should be obvious: Just because an asteroid threatens to destroy all human life, that alone is not sufficient to justify violating people's rights. It is not morally acceptable to engage in theft, if doing so would merely prevent people's deaths from natural causes (i.e., the asteroid strike).... [DeLong] is aghast that someone actually takes seriously the fact that people have rights. The reason DeLong finds Volokh's views "insane" is that Volokh has elevated his precious political principles to such a height that they trump the survival of the human race. What an ideologue! Yet if we go and read Volokh's actual post.... This example of the killer asteroid was indeed designed to test libertarian rights theory. Volokh knows full well the implications of his stance, but he is reporting that he cannot conclude that it is moral to steal from people in order to prevent natural deaths... Just wow. As I already said: We economists do not like lexicographic preference offerings precisely because they lead to catastrophe--to results that nobody can with a straight face say are good or moral. Or, at least, we think that those who do say such are either bullshitting us or are unbalanced in mind. And they are unbalanced in mind--the fact that philosophers and lawyers claim to believe in lexicographic preference offerings is a sign that (a) their minds were unbalanced to begin with or (b) their professional training has unbalanced their minds. And they are unbalanced: the sabbath was made for humanity; humanity was not made for the sabbath. ## Federal Spending in Two Graphs Kash Mansouri writes: The Street Light: Federal Spending Growth: David Wessel shows us the federal fiscal issue in one chart. The chart depicts an estimate of what the Obama administration's budget proposal would mean for spending in each major category over the next five years. The bottom line: Spending on interest, Medicare and Medicaid and Social Security go up – a lot. Spending on nearly everything else goes down. I prefer looking at it slightly differently. I think that when trying to understand the federal government's fiscal situation, at least on the spending side, it is more informative to see how we got to where we are. We now have an on-budget (i.e. excluding the Social Security program, which continued to run a surplus in 2010) deficit of about 9% of GDP. In the early 2000s, the budget deficit was about 4-5% of GDP. That's deterioration in the on-budget deficit of about 4-5% of GDP between 2003 and 2010. Now take a look at the following chart, which shows federal spending on actual goods and services broken into two pieces: spending related to defense, and spending related to everything else. Then I've added federal spending on the two Meds: Medicare and Medicaid. (Note that this latter category is actually a transfer payment, not spending by the government on goods and services, since it takes the form of the government reimbursing individuals for medical spending that THEY have done.) Defense spending has gone up about 2 percentage points since the early 2000s. Med+Med spending has gone up by about 2 percentage points since the early 2000s. All other federal spending has meandered feebly between 2% and 3% of GDP. That slight lift in the green line in the last two years is the "massive" stimulus, or put another way, what "out of control government spending" apparently looks like. If it weren't for increased defense spending and the Meds over the past several years, the federal government's budget balance would have been pretty close to unchanged. Despite the most severe economic downturn in 70 years. I say again: what stimulus? ## Department of "Huh?!": Health Care Reform Edition Outsourced to Jonathan Zasloff: Health Care: The FT Gets Spun... ...so badly that it might not know east from west. Obviously someone from the right wing noise machine has gotten through to FT reporters Jeremy Lemer and Ed Crooks, and given them just the right talking points. For example, when discussing state insurance exchanges, they write: Where they have been used at state level, their record has been mixed; they have failed in Texas, Florida, North Carolina and California. I literally don’t know what they are talking about: Schwarzenegger signed California’s legislation to create its exchange just a few weeks before leaving office. Maybe it’s those high-risk pools that Harold has often criticized: but those are not the same as the insurance exchanges that the ACA will set up in 2014. Then Lemer and Crooks say that the ACA’s promised cost savings might not materialize, which why “business opposition” has materialized. And what might that opposition be? Why, the US Chamber of Commerce, the National Association of Manufacturers, and the National Federation of Independent Business, essentially groups that are allied with the Republican Party. This, of course, is never mentioned by the FT — and neither is the fact that had it not been for such groups, ACA implementation would have occurred earlier, and states would not have to rely on the high-risk pools that they earlier criticize. Meanwhile, Pat Felder, who runs a car parts distributor in Baton Rouge, Louisiana, says her employee insurance premiums went up by 17 per cent last year, and she has been warned to expect a 20 per cent-plus rise this year. She says the insurance companies blame the rise on the new legislation. Well, yes, they would, wouldn’t they? Earlier, Lemer and Crooks noted that for years, rates have been increasing at more than 20%. So why blame this latest one on the ACA? And finally, we get the pure GOP talking points: Critics are offering alternative proposals. Republicans in Congress want to curb medical litigation, which encourages unnecessary tests and procedures to avoid lawsuits. Many businesses favour abolishing regulations that prevent health insurance being sold across state lines, limiting choice. Except that, you know, neither of these things will do anything significant to reduce costs, and just give more power to insurers. Lemer and Crooks never mention this. Funny, I thought Rupert Murdoch had bought The Times, not the FT…. ## Abraham Lincoln Second Inaugural Address: Abraham Lincoln: Fellow-Countrymen: AT this second appearing to take the oath of the Presidential office there is less occasion for an extended address than there was at the first. Then a statement somewhat in detail of a course to be pursued seemed fitting and proper. Now, at the expiration of four years, during which public declarations have been constantly called forth on every point and phase of the great contest which still absorbs the attention and engrosses the energies of the nation, little that is new could be presented. The progress of our arms, upon which all else chiefly depends, is as well known to the public as to myself, and it is, I trust, reasonably satisfactory and encouraging to all. With high hope for the future, no prediction in regard to it is ventured. On the occasion corresponding to this four years ago all thoughts were anxiously directed to an impending civil war. All dreaded it, all sought to avert it. While the inaugural address was being delivered from this place, devoted altogether to saving the Union without war, insurgent agents were in the city seeking to destroy it without war—seeking to dissolve the Union and divide effects by negotiation. Both parties deprecated war, but one of them would make war rather than let the nation survive, and the other would accept war rather than let it perish, and the war came. One-eighth of the whole population were colored slaves, not distributed generally over the Union, but localized in the southern part of it. These slaves constituted a peculiar and powerful interest. All knew that this interest was somehow the cause of the war. To strengthen, perpetuate, and extend this interest was the object for which the insurgents would rend the Union even by war, while the Government claimed no right to do more than to restrict the territorial enlargement of it. Neither party expected for the war the magnitude or the duration which it has already attained. Neither anticipated that the cause of the conflict might cease with or even before the conflict itself should cease. Each looked for an easier triumph, and a result less fundamental and astounding. Both read the same Bible and pray to the same God, and each invokes His aid against the other. It may seem strange that any men should dare to ask a just God's assistance in wringing their bread from the sweat of other men's faces, but let us judge not, that we be not judged. The prayers of both could not be answered. That of neither has been answered fully. The Almighty has His own purposes. "Woe unto the world because of offenses; for it must needs be that offenses come, but woe to that man by whom the offense cometh." If we shall suppose that American slavery is one of those offenses which, in the providence of God, must needs come, but which, having continued through His appointed time, He now wills to remove, and that He gives to both North and South this terrible war as the woe due to those by whom the offense came, shall we discern therein any departure from those divine attributes which the believers in a living God always ascribe to Him? Fondly do we hope, fervently do we pray, that this mighty scourge of war may speedily pass away. Yet, if God wills that it continue until all the wealth piled by the bondsman's two hundred and fifty years of unrequited toil shall be sunk, and until every drop of blood drawn with the lash shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said "the judgments of the Lord are true and righteous altogether." With malice toward none, with charity for all, with firmness in the right as God gives us to see the right, let us strive on to finish the work we are in, to bind up the nation's wounds, to care for him who shall have borne the battle and for his widow and his orphan, to do all which may achieve and cherish a just and lasting peace among ourselves and with all nations. ## Liveblogging World War II: February 21, 1941 Britannica Online: February 21, 1941: The government in Rome slashes rations of fats, olive oil, and butter by 50%. ## Higher-Order Insanity from the Volokh Conspiracy Ilya Somin is unhappy: Brad DeLong Misrepresents My Position on Libertarianism and Asteroid Defense | FavStocks: n a recent post, I expressed my disagreement with co-blogger Sasha Volokh’s view that libertarianism condemns government funding of asteroid defense, pointing out that most prominent libertarian thinkers also disagree with him. Through selective quotation, Brad DeLong tries to make it seem like I endorsed Sasha’s position. He does so by quoting the part of the post where I explained why I don’t think Sasha’s position is ridiculous or “insane”... I deny this. I did not write that Somin endorses Sasha Volokh's view that taxing people to pay for asteroid defense is immoral. Somin's insanity is, rather, a second-order insanity--the insanity of taking first-order insane claims to be questions about which reasonable people can disagree. So: for the record: I nowhere claim that Ilya Somin agrees with Sasha Volokh's bizarre and insane claim that it is immoral to tax people to pay for asteroid defense. I nowhere quote Ilya Somin out of context. I quote him--accurately and in context--as claiming that Sasha Volokh's position is a serious one with which reasonable people can agree or disagree. I simply don't happen to think that Sasha Volokh's position is one with which reasonable people can agree or disagree. And I don't think that the claim that Sasha Volokh's position is reasonable is itself a reasonable claim. And, for that matter, I don't think that Ilya Somin's claim that Immanuel Kant's claim that you have a moral duty not to lie to insane ax murderers about the whereabouts of their would-be victim is a reasonable claim is a reasonable claim. Now if he wants to argue that he is not insane--that the claim that the claim that Immanuel Kant's claim that you have a moral duty not to lie to insane ax murderers about the whereabouts of their would-be victims is a reasonable claim is a reasonable claim is itself a reasonable claim--I would be happy to listen to him. But I cannot imagine how he would make such an argument. In Kant's case the trolley of moral philosophy has run off its tracks and over the cliffs of insanity. And attempts to argue that it has not are simply higher orders of insanity. Can you? Brad DeLong ## Impeach George W. Bush. Impeach Richard Cheney. Impeach Donald Rumsfeld. Impeach Colin Powell. Impeach Condoleeza Rice. Impeach George Tenet. Do It Now ## Hoisted from the Archives with Additions: The Long-Term Budget Outlook: Obama as Deficit Hawk When I read things like this from Clive Crook: FT.com / Comment / Opinion - All in a flap about America’s deficit: Washington is quarrelling its way to a government shutdown, but not to a remedy for its fiscal problems. The reason is simple. Despite the noise and fuss, few politicians in Washington care that much about cutting public borrowing. They care about other things far more, and it might take another financial calamity to change their minds. Barack Obama has explicitly said that he does not care about long-term public borrowing. Having no proposals to deal with the problem is now official White House policy. There is no other way to interpret the budget the president sent to Congress last week. Under this plan, the full-employment fiscal deficit hovers for a while at about 3 per cent of gross domestic product later this decade, then explodes under pressure of rising spending on Medicare and other entitlements... I really don't know what to think. The Affordable Care Act of 2010 was the biggest change in course in federal government borrowing ever--if its cap on high-cost health plans remains (which Obama very much wants it to), if its grants of authority to the Payment Authorization Board to reform Medicare stick (which Obama very much wants them to). You can argue that some future congress could overturn them--but by that logic no president and no congress today can ever do anything to reduce federal government borrowing. Does Clive Crook simply not know what was in the Affordable Care Act? Does he simply not read things like the Congressional Budget Office Long-Term Budget Outlook? Does he simply not care about informing his readers but would rather misinform them? To write that "Barack Obama has explicitly said that he does not care about long-term public borrowing" is a flat-out lie. And I have a very hard time figuring out why people would say something that is a flat-out lie... From last July: Fiscal Policy: The Long-Term Budget Outlook - Grasping Reality with a Sharp Beak: Fiscal Policy: The Long-Term Budget Outlook Let us look at some numbers from the 2009 and 2010 versions of the Congressional Budget Office publication Long-Term Budget Outlook http://tinyurl.com/dl20100711b. The first column shows (i) the date at which the outlook was taken--summer 2009 or summer 2010--and (ii) the period of the forecast--50 years (they also do 25- and 75-year forecasts). The "revenues" column shows what--if the economy performs as forecasted--average federal revenues will be over that period in that scenario. The "expenditures" column shows what average federal expenditures will be. the final column, "fiscal gap" shows the difference: what CBO currently forecasts America's long-term budget problem to be. The "extended baseline scenario" numbers. These are the numbers if from now forward the U.S. Congress sticks to PAYGO: if everything that increases the deficit, either by boosting spending or cutting taxes, is paid-for by savings elsewhere in the budget. The estimated extended-baseline 50-year fiscal gap last summer was 2.6% of GDP. Today it is 0.8% of GDP. That is a big swing to see in a year. Where does this swing come from? It certainly does not come from any more optimistic long-run economic growth forecast by CBO this year than last year. As best as I can figure out, the big moving parts that have produced this 1.8% of GDP improvement in the long-term 50-year fiscal gap are three: 1. CBO's belief that the Obama health care reform bill--the PPACA--will produce a health-care system that (a) is probably more efficient and (b) certainly spends less on Medicare than would have been the case otherwise. It's up to us to see whether the slower rate of growth of Medicare and Medicaid spending now written into the law will be the result of a more efficient system that gets us more health care treatment for the same money or of a system that shuts its wallet on the sick more quickly, but we do now have a slower rate of growth of federal Medicare and Medicaid spending written into law. 2. Offsetting these savings achieved by passing the PPACA, the large pool of subsidy money to make it feasible for America's working poor and lower-middle class to purchase health insurance. These two pretty much offset each other--so expenditures as a share of GDP projected over the next fifty years are much the same now as they were last year. 3. Last, another piece of the PPACA: the excise tax on high-cost health plans to make it painful and costly for insurance companies not to worry about containing costs. This raises a lot of money by 2050 in CBOs projection. The net effect of all of these? Two-thirds of the long-term fifty-year deficit and debt problem that the Congressional Budget Office saw a year ago has been eliminated *if the U.S. Congress now sticks to PAYGO--as it did during the Clinton years--and doesn't pass new programs and amendments to old programs that add to the deficit. You would think that enormous action to bend the curve over the long run in the U.S. government's tax and spending plans--the greatest single act of fiscal conservatism in American history--would have deficit hawks partying in the streets, reeling drunkenly past the Capitol after midnight in conga lines blowing horns, wouldn't you? ## Why Oh Why Can't We Have a Better Press Corps? Chuck Lane Edition Outsourced to DougJ: Balloon Juice » This is repulsive: Charles Lane has written one of the most deeply repulsive things I have ever seen in a major newspaper: Perhaps most disappointing of all is that the president himself, rather than living up to the words he spoke so eloquently in Tuscon, has chosen to fuel the fury on the Great Lakes. He labeled Walker’s legislation “an assault on unions,” while the White House political operation bused in more demonstrators to join those waving Walker = Hitler placards. These are the words and deeds of a partisan politician, not a national leader. If the brave Gabrielle Giffords could speak normally, what would she say about these events? I hope she would agree with me: This is a sad moment for liberalism, for the Democratic Party, and, really, for the whole country. That’s right, Gabrielle Giffords was shot in the head and almost killed, for reasons that may have been related to a right-wing movement that Lane often celebrates. And now he seeks to put words in her mouth; he seeks to make a speechless victim of political violence a spokesperson for his own political philosophy. This is disgusting and demands an apology. ## Frans de Waals: The Moral Animal Interview: THE MDM WONDERLANCE * SCIENTECH * PROF. FRANS DE WAAL: PROF. FRANS DE WAAL: For the past three decades, scientists and popularizers have tried to tell us that we and all other animals are inherently selfish, and that the evolution of morality is an almost impossible affair, since nature cannot provide the caring for others needed for morality. I call this "Veneer Theory," since it assumes that human morality and kindness is just a thin veneer over an otherwise nasty human nature. This is a position that goes back to Thomas Henry Huxley, a contemporary of Darwin, and has been repeated over and over even though Darwin himself disagreed. Darwin saw human morality as continuous with animal social instincts, and my own work is a return to Darwinian thinking. I am supported in this now by many recent studies that indicate that humans (and other animals) are far more altruistic and cooperative than was assumed. The field has radically changed in recent years. Psychologists stress the intuitive way we arrive at moral judgments while activating emotional brain areas, and economists and anthropologists have shown humanity to be far more cooperative, altruistic, and fair than predicted by self-interest models. Similarly, the latest experiments in primatology reveal that our close relatives will do each other favors even if there's nothing in it for themselves. Chimpanzees and bonobos will voluntarily open a door to offer a companion access to food, even if they lose part of it in the process. And capuchin monkeys are prepared to seek rewards for others, such as when we place two of them side by side, while one of them barters with us with differently colored tokens. One token is ‘selfish,’ and the other ‘prosocial.’ If the bartering monkey selects the selfish token, it receives a small piece of apple for returning it, but its partner gets nothing. The prosocial token, on the other hand, rewards both monkeys. Most monkeys develop an overwhelming preference for the prosocial token, which preference is not due to fear of repercussions, because dominant monkeys (who have least to fear) are the most generous. We can learn about the origins of our sociality, both in terms of hierarchies, competition and power games and in terms of empathy and morality. We share both with our animal relatives, both the good and the bad, and should stop blaming everything we don't like about ourselves on our biology ("we're acting like animals!") while claiming all good we do for our noble human nature. All of our tendencies evolved for a reason among the social primates, and once we understand this, we will better understand the dynamics of our own societies. ## Paul Krugman: Misguided Narratives Paul Krugman: Misguided Narratives - NYTimes.com: Wolfgang Munchau has an especially good piece today about how Germany sees the eurozone crisis. The key graf: So while the rest of us are debating how to solve Europe’s banking crisis, and become exasperated by the lack of progress, Ms Merkel is solving a crisis in a parallel universe. The German narrative is the outgrowth of a lie the country’s establishment has peddled ever since debate on the single currency started 20 years ago: that a monetary union can be sustained through a simple set of rules for monetary and fiscal policy; that financial regulation and current account imbalances do not matter. The eurozone crisis has proved this is not the case. But the conservatives cling to this old, comfortable straw. If there is a crisis, then it must be fiscal. And austerity is the answer. Indeed. And it’s not just the Germans. It’s amazing how this whole crisis has been fiscalized; deficits, which are overwhelmingly the result of the crisis, have been retroactively deemed its cause. And at the same time, influential people around the world have seized on the idea of expansionary austerity, becoming ever more adamant about it as the alleged historical evidence has collapsed. And where there is skewed vision, the economy perishes. ## Hu Jintao Is Anxious... Zhang Jing, Jon Kaiman, Jonathan Ansfield, and Andree Jacobs: Chinese Security Officials Respond to Call for Protests: BEIJING — Skittish domestic security officials responded with a mass show of force across China on Sunday after anonymous calls for protesters to stage a Chinese “Jasmine Revolution” went out over social media and microblogging outlets.... The words “Jasmine Revolution,” borrowed from the successful Tunisian revolt, were blocked on sites similar to Twitter and on Internet search engines, while cellphone users were unable to send out text messages to multiple recipients. A heavy police presence was reported in several Chinese cities. In recent days, more than a dozen lawyers and rights activists have been rounded up, and scores of dissidents have reportedly been placed under varying forms of house arrest. At least two lawyers are still missing, family members and human rights advocates said Sunday. In Beijing, a huge crowd formed outside a McDonald’s in the heart of the capital on Sunday after messages went out listing it as one of 13 protest sites across the country. It is not clear who organized the campaign, but it first appeared Thursday on Boxun, a Chinese-language Web site based in the United States, and then spread through Twitter and other microblogging services. By 2 p.m., the planned start of the protests, hundreds of police officers had swarmed the area, a major shopping district popular with tourists. At one point, the police surrounded a young man who had placed a jasmine flower on a planter outside the McDonald’s, but he was released after the clamor drew journalists and photographers. In Shanghai, three people were detained during a skirmish in front of a Starbucks, The Associated Press reported. One post on Twitter described a heavily armed police presence on the subways of Shenzhen, and another claimed that officials at Peking University in Beijing had urged students to avoid any protests, but those reports were impossible to verify Sunday. The messages calling people to action urged protesters to shout, “We want food, we want work, we want housing, we want fairness.” ... President Hu Jintao summoned top leaders to a special “study session” on Saturday and urged them to address festering social problems before they became threats to stability. “The overall requirements for enhancing and innovating social management are to stimulate vitality in the society and increase harmonious elements to the greatest extent, while reducing inharmonious factors to the minimum,” he told the gathering, according to Xinhua, the official news agency. Human rights advocates said they were especially concerned by the recent crackdown on rights defenders, which intensified Saturday after at least 15 well-known lawyers and activists were detained or placed under house arrest. Several of them reached by phone, including Pu Zhiqiang and Xu Zhiyong, said they were in the company of security agents and unable to talk, while many others were unreachable on Sunday evening. Two of the men, Tang Jitian and Jiang Tianyong, remain missing. Many of those subjected to house arrest had met in Beijing on Wednesday to discuss the case of Chen Guangcheng, a blind lawyer under strict house arrest in rural Shandong Province. The plight of Mr. Chen and his family gained widespread attention last week after a video he and his wife made about his arrest emerged on the Internet. Mr. Jiang, one of the missing lawyers, was forced into an unmarked van on Saturday night, his second abduction in recent days, his wife, Jin Bianling, said by telephone. She said the police had also searched the couple’s home and confiscated his computer and briefcase. In an interview after his first detention on Wednesday, Mr. Jiang said that he was taken to a police station and assaulted. Most of those who thronged the McDonald’s in Wangfujing, the Beijing shopping district, said they had no idea what the commotion was about. Some thought that perhaps a celebrity had slipped into the restaurant for a hamburger. But a young man, a Web page designer in his late 20s, quietly acknowledged that he was drawn by word of the protest. Despite the absence of any real action, the man, who gave only his family name, Cui, said he was not disappointed by the outcome, in which police officers tried in vain to determine who was a potential troublemaker and who was simply a gawker. He predicted that many people, emboldened by the fact that an impromptu gathering had coalesced at all, would use social networking technology to stage similar events in the future. “It’s very difficult to do this in China, but this is a good start,” he said. “I’m thankful to be able to participate in this moment in history.” ## Liveblogging World War II: February 20, 1941 World War II Day-By-Day: Day 539 February 20, 1941: Libya, North Africa. Africa Korps patrols make contact with British patrols for the first time in the desert, near Allied forward positions at El Agheila between Benghazi and Tripoli. ## DeLong Smackdown Watch: Ethics of New York Times Reporters Edition Cosma Shalizi writes: Why Oh Why Can't We Have a Better Press Corps? New York Times Pulls Its Punches Story: It's true that Lichtblau and Risen are simply providing a SFW summery of Roston's story, but isn't that something of a public service? He is referring to: Eric Lichtblau and James Risen: Government Tries to Keep Secret What Many Consider a Fraud: Hiding Details of Dubious Deal, U.S. Invokes National Security: WASHINGTON — For eight years, government officials turned to Dennis Montgomery, a California computer programmer, for eye-popping technology that he said could catch terrorists. Now, federal officials want nothing to do with him and are going to extraordinary lengths to ensure that his dealings with Washington stay secret.... In 2009, the Air Force approved a$3 million deal for his technology, even though a contracting officer acknowledged that other agencies were skeptical about the software, according to e-mails obtained by The New York Times. Hints of fraud by Mr. Montgomery, previously raised by Bloomberg Markets and Playboy, provide a cautionary tale about the pitfalls of government contracting...

I don't think that Lichtblau and Risen have any business writing their story without saying--at its top--something like:

Our story is a very compressed and only slightly updated version of Adam Roston's Playboy story of more than a year ago here: http://www.playboy.com/articles/the-man-who-conned-the-pentagon-dennis-montgomery/index.html?page=1

The willingness of reporters for major newspapers and magazines to take the work of others and regurgitate it in summarized form while providing no clues to where it came from or where readers should go to learn more continues to amaze me.

Mark Thoma sends us to Uwe Reinhardt:

In his recent commentary, Professor Mankiw explained the gains from trade even more simply than is done in textbooks. Your driveway is covered in deep snow. Its removal is worth $40 to you. The boy next door, currently engrossed with a game on his Xbox, would give up the game and shovel your driveway for any payment exceeding$20. So if you pay him $30 to shovel your driveway, you will both be better off by$10. Overall social welfare is unambiguously enhanced.... As far as economists are concerned, how can anyone argue with that?...

Now let us think again about... manufactured scarves.... [M]any Americans might balk at the lower-priced scarf if it were offered not by an American but by a low-cost manufacturer in Shanghai or Bangladesh. This nationalist sentiment sets many noneconomists apart from most economists. In their work, economists are typically are not nationalistic. National boundaries mean little to them.... I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade.... Alan Blinder wrote:

I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation. When I say this, many of my fellow free traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind?... That is why I am going public with my concerns now. If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome.

And Mark Thoma:

Saying that everyone could be made better off with increased international trade is not the same as people actually being made better off. There are winners and losers from increased international trade, and while I agree that the gains exceed the losses in almost all cases, the gains haven't been distributed in a way that leaves everyone, or even most everyone, better off (see, e.g., widening inequality and where the costs of these kinds of adjustments fall). When some people are made better off and others made worse off at the same time, economists cannot say it is unambiguously better or worse. If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners

## R. T. Leuchtkafer on Financial Market Ecology: Positive-Feedback Trading

RTL:

Comments of R. Leuchtkafer on 265-26: U.S. Commodity Futures Trading Commission Chief Economist Andrei Kirilenko and several co-authors published a paper called "The Flash Crash: The Impact of High Frequency Trading on an Electronic Market," to date the definitive examination of high frequency market makers. What Kirilenko reported is deeply troubling for U.S. markets, implying structural instability, crashes and liquidity crises large and small, toxic quotes and price discovery in the public markets, and the uncertainty of any order's likely effect on prices. His breakthrough paper is a decisive empirical justification for reforming how high frequency market makers operate in today's markets.... Kirilenko's study is the latest U.S. government agency report on scalpers.... Defining a "scalper" as a firm that "typically buys and sells in large quantities, expecting to hold the trade open only a very short time" and that "intends to be even as to quantities bought and sold at the close of the business day and is reluctant to carry a trade over night."...

In his autopsy of e-mini SP 500 futures trading around the May 6, 2010 Flash Crash, Kirilenko describes how these firms destabilize markets. There's a tipping point in volatile markets when, in an instant, high frequency market makers stampede to rebalance their inventories, even cascading positions from firm to firm, while prices collapse. Kirilenko calls this "hot potato" trading, but it's an interdealer panic, a market maker fratricide. His conclusions extend to any volatile episode, because, as he wrote, high frequency market makers "did not change their trading behavior during the Flash Crash."... Markets crashed when high frequency market makers hit internal inventory limits and unloaded onto the next market maker, which then hit limits and unloaded onto the next one, and so on, driving the market down by almost 1 trillion dollars in a few minutes. Kirilenko studied e-mini trading in the futures market, but the CFTC and U.S. Securities and Exchange Commission staff report on the Flash Crash showed the same behavior at work in the equities markets, doubtless from many of the same firms. The scalper's destabilizing practices are that it can quote as it pleases and trade as aggressively as it pleases and still carry the regulatory imprimatur and privileges of a market maker.... Instead of smoothing buy and sell pressures, as market makers in the equities markets were -- in theory -- once supposed to do, scalpers exacerbate or hide from volatility, as Kirilenko discovered in the Flash Crash.... Registering as equities market makers, given valuable and unique regulatory preferences and access, cozying up with exchanges desperate for business, and then let loose on the stock markets, the scalper's business model makes the stock markets structurally unstable.... A recent study found that high frequency firms post the best price at least 50% of the time in the equities markets. The study's author and high frequency firms pounced on this as strong evidence high frequency firms contribute to price discovery, more so than any other kind of firm. The analysis and conclusion are superficial. A bid or offer has at least four dimensions. Beyond price and size, any resting bid or offer has a lifetime, and the inventory cycle or position resulting from any executed bid or offer has a lifetime. Even if it's at the best price, a bid or offer lasting a fraction of a second hasn't contributed to price discovery, and market makers use the latest technology to post and cancel thousands of bids and offers per second, even in the same stock. An executed bid or offer where the position is unwound quickly and aggressively isn't price discovery either. Kirilenko found high frequency market maker inventory or position half-lives of less than two minutes in the futures market. Some equities high frequency market makers claim as little as 11 seconds in their stocks. Market maker inventory cycles of a few seconds or minutes, enforced by aggressive trading as time or prices go against the firm, actively destabilize prices, especially so in already volatile markets. Of a quote's four dimensions, only one has materially improved in the last 10 years. Because of decimalization, automation and deregulation, quoted spreads have improved for liquid stocks in stable markets. But quote duration is down, time-in-inventory is down, and for many stocks quote size is flat or down. This is all because, to manage costs, high frequency market maker inventory cycles are engineered down to seconds, and these firms keep their capital commitments low. High frequency firms will tell you they're like any other business except that capital is their inventory, and like any other business they make money by turning over their inventory, so they churn it as fast as they can. Frenetic trading isn't a byproduct of their strategies -- it is the strategy. The effect of all of this is that investors looking at a quote today can't predict what the quote means. They can't tell whether the quote will be there when they submit an order against it, and they can't tell when their own buying or selling will trigger a market maker's risk threshold. If they do trigger a threshold, the market maker cartwheels from liquidity supplier to liquidity demander to compete with an investor's own liquidity needs. As it cartwheels, it can shock prices. And when events align so market makers turn as a flock, as they did in the Flash Crash, they can collapse the market.... As has been said, an insight from the Flash Crash is that "volume is not liquidity." A further insight is that, batted about by scalper inventory microcycles, published quotes don't represent genuine liquidity either. A best bid today isn't a bid to own shares at a price, or even a traditional dealer or market maker's attempt to provide liquidity. As much as 50% of the time it's just a firm trying to scalp a few basis points as quickly as possible. When that scalper's bid is executed, it then becomes an unexploded competitive liquidity demand, with the timer set, as Kirilenko found, at about two minutes, or even less. These destabilizing trade practices are a fundamental structural instability behind the Flash Crash.... The equity market reforms and deregulation of the last 10 to 15 years happened for good reasons -- monopoly profits were flowing to intermediaries and exchanges, intermediaries were taking advantage of their customers, innovation was being strangled by entrenched interests -- and it was time for reform. As many of us hoped, new participants, technology and business models sprang up. Nobody wants to undo that progress. By analyzing trade and position data from the futures market, Kirilenko's breakthrough was to show how a dominant class of these business models can be disruptive, and how these models can be destabilizing enough to create systemic risk as an inherent consequence of their design. On a gross basis, these models can be checked by circuit breakers or price limits, and this is one reason price limits are standard in the futures markets. In the equities markets, these models must be checked even before they trigger circuit breakers or price limits because the equities markets are profoundly different from the futures markets. The simplest way to check these models is to put reasonable restraints and obligations on them. A basic function of any market is to produce a quote. The scalper's toxic quotes, thousands of them a second, are a hoax on our equities markets. No one planned it. It happened as an unanticipated consequence of well-meaning reforms to a flawed system. There is no competitive solution to this problem within current regulations so long as quote price is a routing table's first regulatory imperative. Competition simply forces exchanges to publish more and faster toxic quotes, as market power continues to shift from the exchanges to the scalpers. Finally, some have pointed out that regulation didn't work in the market break of 1987, when old-fashioned specialists and market makers shirked their responsibilities and hid from the market, and regulation won't work today. Regulation didn't stop them from shirking their responsibilities, but regulation didn't excuse them either, and regulation didn't encourage them to automate a deadlier game than hide-and-seek -- intermediaries didn't exacerbate the 1987 market break by playing market maker "hot potato," a feat unique to the Flash Crash. And the logic of "regulation didn't prevent 1987, so regulation won't work" is a civic novelty. Should we apply that logic to drunk driving, or to any other misbehavior? Of course not. Please regulate them. ## Rajiv Sethi on Financial Market Ecology: Positive-Feedback Trading Rajiv Sethi: Guest Post: Market Ecology « naked capitalism: The erudite and very readable RT Leuchtkafer has posted yet another comment for the Securities and Exchange Commission to digest. This one was prompted by a paper by Andrei Kirilenko, Albert Kyle, Mehrdad Samadi and Tugkan Tuzun that provides a fascinating glimpse into the kinds of trading strategies that are common in asset markets today and the manner in which they interact to determine the dynamics of asset prices.... [T]he stability of a market depends on the composition of trading strategies, which in turn evolves over time under pressure of differential performance. Since performance itself depends on market stability, and destabilizing strategies prosper most when they are rare, this process can give rise to switching regimes: the market alternates between periods of stability and instability, giving rise to empirical patterns such as fat tails and clustered volatility in asset returns. But the underlying strategies that are at the heart of this evolutionary process are generally unobservable. Since traders have no incentive to reveal successful strategies, these can only be inferred if individual orders can be traced to specific accounts. This is what Kirilenko and his co-authors have been able to do, on the basis of “audit-trail, transaction-level data for all regular transactions in the June 2010 E-mini S&P 500 futures contract (E-mini) during May 3-6, 2010 between 8:30 a.m. CT and 3:15 p.m. CT.” While their primary concern is with the flash crash that materialized on the afternoon of the 6th, their analysis also sheds light on the composition and behavior of strategies over the period that led up to this event. Their analysis accordingly provides broader insight into the ecology of financial markets. The authors classify accounts into six categories based on patterns exhibited in their trading behavior, such as horizon length, order size, and the willingness to accumulate significant net positions. The categories are High Frequency Traders (HFTs), Intermediaries, Fundamental Buyers, Fundamental Sellers, Opportunistic Traders and Small Traders: [Different] categories of traders occupy quite distinct, albeit overlapping, positions in the “ecosystem” of a liquid, fully electronic market. HFTs, while very small in number, account for a large share of total transactions and trading volume. Intermediaries leave a market footprint qualitatively similar, but smaller to that of HFTs. Opportunistic Traders at times act like Intermediaries (buying a selling around a given inventory target) and at other times act like Fundamental Traders (accumulating a directional position). Some Fundamental Traders accumulate directional positions by executing many small-size orders, while others execute a few larger-size orders. Fundamental Traders which accumulate net positions by executing just a few orders look like Small Traders, while Fundamental Traders who trade a lot resemble Opportunistic Traders. In fact, it is quite possible that in order not to be taken advantage of by the market, some Fundamental Traders deliberately pursue execution strategies that make them appear as though they are Small or Opportunistic Traders. In contrast, HFTs appear to play a very distinct role in the market and do not disguise their market activity. Based on this taxonomy, the authors examine the manner in which the strategies vary with respect.... Under normal market conditions they are net providers of liquidity but their desire to avoid significant exposure means that they can become liquidity takers very quickly and on a large scale.... From a liquidity standpoint, a passive order (either to buy or to sell) has provided visible liquidity to the market and an aggressive order has taken liquidity from the market. Aggressiveness ratio is the ratio of aggressive trade executions to total trade executions… weighted either by the number of transactions or trading volume.... HFTs and Intermediaries have aggressiveness ratios of 45.68% and 41.62%, respectively. In contrast, Fundamental Buyers and Sellers have aggressiveness ratios of 64.09% and 61.13%, respectively. This is consistent with a view that HFTs and Intermediaries generally provide liquidity while Fundamental Traders generally take liquidity. The aggressiveness ratio of High Frequency Traders, however, is higher than what a conventional definition of passive liquidity provision would predict. Moreover, the aggressiveness ratio of HFTs is not stable over time and can spike in times of market stress as they compete for liquidity with other market participants: During the Flash Crash, the trading behavior of HFTs, appears to have exacerbated the downward move in prices. High Frequency Traders who initially bought contracts from Fundamental Sellers, proceeded to sell contracts and compete for liquidity with Fundamental Sellers. In addition, HFTs appeared to rapidly buy and [sell] contracts from one another many times, generating a “hot potato” effect before Opportunistic or Fundamental Buyers were attracted by the rapidly falling prices to step in and take these contracts off the market. To my mind, the most revealing findings in the paper pertain to the profitability of the various strategies, and the ability of some traders to anticipate price movements over very short horizons: High Frequency Traders effectively predict and react to price changes... [they] are consistently profitable although they never accumulate a large net position. This does not change on May 6 as they appear to have been even more successful despite the market volatility observed on that day.... Intermediaries appear to be relatively less profitable than HFTs. During the Flash Crash, Intermediaries also appeared to have incurred significant losses... consistent with the notion that the relatively slower Intermediaries were unable to liquidate their position immediately, and were subsequently run over by the decrease in price... HFTs appear to trade in the same direction as the contemporaneous price and prices of the past five seconds. In other words, they buy... if the immediate prices are rising. However, after about ten seconds, they appear to reverse the direction of their trading... possibly due to their speed advantage or superior ability to predict price changes, HFTs are able to buy right as the prices are about to increase… In marked contrast… Intermediaries buy when the prices are already falling and sell when the prices are already rising.... We consider Intermediaries and HFTs to be very short term investors. They do not hold positions over long periods of time and revert to their target inventory level quickly… HFTs very quickly reduce their inventories by submitting marketable orders. They also aggressively trade when prices are about to change. Over slightly longer time horizons, however, HFTs sometimes act as providers of liquidity. In contrast… unlike HFTs, Intermediaries provide liquidity over very short horizons and rebalance their portfolios over longer horizons. What appears to have happened during the crash is that the fastest moving market makers with the most effective algorithms for short run price prediction were able to trade ahead of their slower and less effective brethren, imposing significant losses on the latter. In Leuchtkafer’s colorful language, this was a case of interdealer panic and marker maker fratricide. But regardless of how the gains or losses were distributed in this instance, the fact remains that an overwhelming share of trading activity is based short-run price forecasts rather than fundamental research. Under these conditions, how can one expect prices to track changes in the fundamental values of the income streams to which the assets give title? Markets have always been based on a shifting balance between information augmenting and information extracting strategies, but a computational arms race coupled with changes in institutions and regulation seem to have shifted the balance markedly towards the latter. Unless the structure of incentives is altered to favor longer holding periods, I suspect that we shall continue to see major market disruptions and spikes in volatility. This is not just a matter of academic interest. To the extent that changes in the perceived volatility of stocks gives rise to changes in asset allocations by institutional and retail investors, there will be consequences for the extent and distribution of risk-bearing, and ultimately on rates of job creation and economic growth. ## Why Oh Why Can't We Have a Better Press Corps? New York Times Pulls Its Punches Story Why oh why can't we have a better press corps? Eric Lichtblau and James Risen should have simply said: "Go read Aram Roston for Playboy in December 2009 http://www.playboy.com/articles/the-man-who-conned-the-pentagon-dennis-montgomery/index.html?page=1." It's a much better article, with more detail and much more information. They don't. Instead, Eric Lichtblau and James Risen write: Government Tries to Keep Secret What Many Consider a Fraud: Hiding Details of Dubious Deal, U.S. Invokes National Security: WASHINGTON — For eight years, government officials turned to Dennis Montgomery, a California computer programmer, for eye-popping technology that he said could catch terrorists. Now, federal officials want nothing to do with him and are going to extraordinary lengths to ensure that his dealings with Washington stay secret. The Justice Department, which in the last few months has gotten protective orders from two federal judges keeping details of the technology out of court, says it is guarding state secrets that would threaten national security if disclosed. But others involved in the case say that what the government is trying to avoid is public embarrassment over evidence that Mr. Montgomery bamboozled federal officials. A onetime biomedical technician with a penchant for gambling, Mr. Montgomery is at the center of a tale that features terrorism scares, secret White House briefings, backing from prominent Republicans, backdoor deal-making and fantastic-sounding computer technology. Interviews with more than two dozen current and former officials and business associates and a review of documents show that Mr. Montgomery and his associates received more than20 million in government contracts by claiming that software he had developed could help stop Al Qaeda’s next attack on the United States. But the technology appears to have been a hoax, and a series of government agencies, including the Central Intelligence Agency and the Air Force, repeatedly missed the warning signs, the records and interviews show....

The software he patented — which he claimed, among other things, could find terrorist plots hidden in broadcasts of the Arab network Al Jazeera; identify terrorists from Predator drone videos; and detect noise from hostile submarines — prompted an international false alarm that led President George W. Bush to order airliners to turn around over the Atlantic Ocean in 2003. The software led to dead ends in connection with a 2006 terrorism plot in Britain. And they were used by counterterrorism officials to respond to a bogus Somali terrorism plot on the day of President Obama’s inauguration, according to previously undisclosed documents.... C.I.A. officials, though, came to believe that Mr. Montgomery’s technology was fake in 2003, but their conclusions apparently were not relayed to the military’s Special Operations Command, which had contracted with his firm. In 2006, F.B.I. investigators were told by co-workers of Mr. Montgomery that he had repeatedly doctored test results at presentations for government officials. But Mr. Montgomery still landed more business.

In 2009, the Air Force approved a $3 million deal for his technology, even though a contracting officer acknowledged that other agencies were skeptical about the software, according to e-mails obtained by The New York Times. Hints of fraud by Mr. Montgomery, previously raised by Bloomberg Markets and Playboy, provide a cautionary tale about the pitfalls of government contracting... Not "what many cpnsider to be a fraud." A fraud. Not "hints of fraud... previously raised by Bloomberg Markets and Playboy." Reporting previously done by Aram Roston for Playboy. Here's Aram: The Man Who Conned The Pentagon: The weeks before Christmas brought no hint of terror. But by the afternoon of December 21, 2003, police stood guard in heavy assault gear on the streets of Manhattan. Fighter jets patrolled the skies. When a gift box was left on Fifth Avenue, it was labeled a suspicious package and 5,000 people in the Metropolitan Museum of Art were herded into the cold. It was Code Orange. Americans first heard of it at a Sunday press conference in Washington, D.C. Weekend assignment editors sent their crews up Nebraska Avenue to the new Homeland Security offices, where DHS secretary Tom Ridge announced the terror alert. “There’s continued discussion,” he told reporters, “these are from credible sources—about near-term attacks that could either rival or exceed what we experienced on September 11.” The New York Times reported that intelligence sources warned “about some unspecified but spectacular attack.... By Tuesday the panic had ratcheted up as the Associated Press reported threats to “power plants, dams and even oil facilities in Alaska.” The feds forced the cancellation of dozens of French, British and Mexican commercial “flights of interest” and pushed foreign governments to put armed air marshals on certain flights. Air France flight 68 was canceled, as was Air France flight 70. By Christmas the headline in the Los Angeles Times was "Six Flights Canceled as Signs of Terror Plot Point to L.A." Journalists speculated over the basis for these terror alerts. “Credible sources,” Ridge said. “Intelligence chatter,” said CNN. But there were no real intercepts, no new informants, no increase in chatter. And the suspicious package turned out to contain a stuffed snowman. This was, instead, the beginning of a bizarre scam. Behind that terror alert, and a string of contracts and intrigue that continues to this date, there is one unlikely character. The man’s name is Dennis Montgomery, a self-proclaimed scientist who said he could predict terrorist attacks. Operating with a small software development company, he apparently convinced the Bush White House, the CIA, the Air Force and other agencies that Al Jazeera—the Qatari-owned TV network—was unwittingly transmitting target data to Al Qaeda sleepers. An unusual team arrived in Reno, Nevada in 2003 from the Central Intelligence Agency.... Then they turned into an almost empty parking lot, where a sign read "eTreppid Technologies." It was an attractively designed building of stone tile and mirrored windows that had once been a sprinklerhead factory. ETreppid Technologies was a four-year-old firm trying to find its way. Some of its employees had been hired to design video games. One game under construction was Roadhouse, based on the 1989 movie in which Patrick Swayze plays a bouncer in a dive bar. Other programmers worked on streaming video for security cameras.... The CIA team was there to work with Dennis Montgomery, at the time eTreppid’s chief technology officer and part owner. Then 50 years old, with a full head of gray hair, the street-smart Montgomery stood at about five feet eight inches. Other eTreppid workers, hearing the buzz about the spooks in town, peered through their blinds and watched as Montgomery worked at his desk at the north end of the building. He wore his usual jeans and Tommy Bahama shirt. He could be seen handing off reams of paper to Sid and the CIA. “They would sit in the room and review these numbers or whatever the heck Dennis was printing out,” one former eTreppid employee, Sloan Venables, told me. “We called them Sid’s guys, and no one knew what the hell they did.” Montgomery called the work he was doing noise filtering. He was churning out reams of data he called output. It consisted of latitudes and longitudes and flight numbers. After it went to Sid, it went to Washington, D.C. Then it found its way to the CIA’s seventh floor, to Director George Tenet. Eventually it ended up in the White House. Montgomery’s output was to have an extraordinary effect. Ridge’s announcement, the canceled flights and the holiday disruptions were all the results of Montgomery’s mysterious doings. He is an unusual man. In court papers filed in Los Angeles, a former lawyer for Montgomery calls the software designer a “habitual liar engaged in fraud.” Last June Montgomery was charged in Las Vegas with bouncing nine checks (totaling$1 million) in September 2008 and was arrested on a felony warrant in Rancho Mirage, California. That million is only a portion of what he lost to five casinos in Nevada and California in just one year. That’s according to his federal bankruptcy filing, where he reported personal debts of $12 million. The FBI has investigated him, and some of his own co-workers say he staged phony demonstrations of military technology for the U.S. government. Montgomery has no formal scientific education, but over the past six years he seems to have convinced top people in the national security establishment that he had developed secret tools to save the world from terror and had decoded Al Qaeda transmissions. But the communications Montgomery said he was decrypting apparently didn’t exist. Since 1996 the Al Jazeera news network had been operating in the nation of Qatar, a U.S. ally in the war on terror. Montgomery claimed he had found something sinister disguised in Al Jazeera’s broadcast signal that had nothing to do with what was being said on the air: Hidden in the signal were secret bar codes that told terrorists the terms of their next mission, laying out the latitudes and longitudes of targets, sometimes even flight numbers and dates. And he was the only man who had the technology to decrypt this code.... Over the years Montgomery’s intelligence found its way to the CIA, the Department of Homeland Security, Special Forces Command, the Navy, the Air Force, the Senate Intelligence Committee and even to Vice President Dick Cheney’s office.... Back in Washington, few insiders in government knew where the intelligence was coming from. Aside from Tenet and a select few, no one was told about eTreppid’s Al Jazeera finds. Even veteran intelligence operatives within the CIA could only wonder. “These guys were trying to hide it like it was some little treasure,” one former counterterrorist official told me. The reason the whole thing worked was because Montgomery’s CIA contact was with the agency’s Directorate of Science and Technology. That’s the whiz-bang branch of the intelligence service, where employees make and break codes, design disguises and figure out the latest gadgets. S&T was eventually ordered by CIA brass to reveal its source to small groups from other parts of the agency. And when some experienced officers heard about it, they couldn’t believe it. One former counterterrorism official remembers the briefing: “They found encoded location data for previous and future threat locations on these Al Jazeera tapes,” he says. “It got so emotional. We were fucking livid. I was told to shut up. I was saying, ‘This is crazy. This is embarrassing.’ They claimed they were breaking the code, getting latitude and longitude, and Al Qaeda operatives were decoding it. They were coming up with airports and everything, and we were just saying, ‘You know, this is horseshit!’” Another former officer, who has decades of experience, says, “We were told that, like magic, these guys were able to exploit this Al Jazeera stuff and come up with bar codes, and these bar codes translated to numbers and letters that gave them target locations. I thought it was total bullshit.” The federal government was acting on the Al Jazeera claims without even understanding how Montgomery found his coordinates. “I said, ‘Give us the algorithms that allowed you to come up with this stuff.’ They wouldn’t even do that,” says the first officer. “And I was screaming, ‘You gave these people fucking money?’” Despite such skepticism, the information found its way to the top of the U.S. government. Frances Townsend, a Homeland Security advisor to President George W. Bush, chaired daily meetings to address the crisis. She now admits that the bar codes sounded far-fetched. And, she says, even though it all proved to be false, they had no choice but to pursue the claim. “It didn’t seem beyond the realm of possibility,” she says. “We were relying on technical people to tell us whether or not it was feasible. I don’t regret having acted on it.” The feds, after all, had a responsibility to look into the technology. “There were lots of meetings going on during the time of this threat,” says Townsend. “What were we going to do and how would we screen people? If we weren’t comfortable we wouldn’t let a flight take off.” Eventually, though Montgomery continued to crank out his figures, cooler heads prevailed. The threat was ultimately deemed “not credible,” as Townsend puts it. A former CIA official went through the scenario with me and explained why sanity finally won out. First, Montgomery never explained how he was finding and interpreting the bar codes. How could one scientist find the codes when no one else could? More implausibly, the scheme required Al Jazeera’s complicity. At the very least, a technician at the network would have to inject the codes into video broadcasts, and every terrorist operative would need some sort of decoding device. What would be the advantage of this method of transmission? A branch of the French intelligence services helped convince the Americans that the bar codes were fake. The CIA and the French commissioned a technology company to locate or re-create codes in the Al Jazeera transmission. They found definitively that what Montgomery claimed was there was not. Quietly, as far as the CIA was concerned, the case was closed. The agency turned the matter over to the counterintelligence side to see where it had gone wrong... ## Igor Volsky: Mitt Romney's Consistent And Repeated Support For A National Health Care Mandate Igor Volsky: TIMELINE: Mitt Romney's Consistent And Repeated Support For A National Health Care Mandate | ThinkProgress: TDuring a speech on health policy later this afternoon, likely presidential candidate Mitt Romney is expected to say that while Massachusetts’ 2006 health care law has been successful in expanding coverage to most residents, it should not be duplicated on a national level. Romney will lay out a proposal to encourage states to deregulate insurance markets, repeal the Affordable Care Act, and develop their own unique health care policies. Until recently, Romney has advanced the belief that encouraging Americans to take responsibility for their health care costs, rather than passing the cost of coverage to society, is “the ultimate conservative idea” and “a Republican way.” “The Republican approach is to say, you know what? Everybody should have insurance. They should pay what they can afford to pay. If they need help, we will be there to help them, but no more free ride,” Romney told Fox News’ Neil Cavuto on April 12, 2006 during a national media tour promoting his groundbreaking 2006 health care reform law. Romney was asked many times if he thought his plan for expanding coverage by requiring Americans to purchase health insurance should apply to the nation. He repeatedly either hinted or directly stated that it could or should. It’s a position he first adopted in his challenge to Sen. Ted Kennedy in 1994. At that time, Romney said he would support a mandate on a national level if universal coverage could not be achieved through other means (such as providing tax incentives to purchase care) and would have voted for a Republican alternative to the Clinton plan offered by then Sen. John Chafee (R-RI), which included a national individual mandate. In fact, as recently as December 2007, Romney said that if other states adopted the individual mandate, it would be “a terrific idea… we’ll end up with a nation that’s taken a mandate approach” and endorsed the Wyden-Bennett health care proposal, which also included a national individual mandate: 1994… 1994… 2006… 2007… 2007… 2009… 2009… ###### : http://thinkprogress.org/politics/2011/05/12/165768/romney-mandate/ ## Global Imbalances: Links to Economic and Financial Stability Ben Bernanke: FRB: Speech--Bernanke, Global Imbalances: Links to Economic and Financial Stability--February 18, 2011: [T]he United States--the recipient of the largest capital inflows in the world--has also faced challenges coping with capital inflows. Notably, the failures of the U.S. financial system in allocating strong flows of capital, both domestic and foreign, helped precipitate the recent financial crisis and global recession. Why was the United States, a mature economy, the recipient of net capital inflows that rose to as much as 6 percent of its gross domestic product prior to the financial crisis?... [C]apital flows from emerging markets to advanced economies will tend to be directed to the safest and most liquid assets, of which... there is a relative shortage in emerging markets.... [S]ome emerging Asian economies and Middle Eastern oil exporters did indeed evince a strong preference for very safe and liquid U.S. assets in the middle of the past decade, especially Treasury and agency securities.... European investors [also] placed a high value on safety and liquidity in their U.S. investments.... The preferences of foreign investors for highly rated U.S. assets, together with similar preferences by many domestic investors, had a number of implications, including for the relative yields on such assets. Importantly, though, the preference by so many investors for perceived safety created strong incentives for U.S. financial engineers to develop investment products that "transformed" risky loans into highly rated securities. Remarkably, even though a large share of new U.S. mortgages during the housing boom were of weak credit quality, financial engineering resulted in the overwhelming share of private-label mortgage-related securities being rated AAA. The underlying contradiction was, of course, ultimately exposed, at great cost to financial stability and the global economy.... Our collective challenge is to reshape the international monetary system.... [C]ountries with excessive and unsustainable trade surpluses will need to allow their exchange rates to better reflect market fundamentals and increase their efforts to substitute domestic demand for exports.... [C]ountries with large, persistent trade deficits must find ways to increase national saving, including putting fiscal policies on a more sustainable trajectory... ## Insanity Continues Over at the Volokh Conspiracy... Jonathan Adler: The Volokh Conspiracy: Megan McArdle explores the causes and consequences of academia’s liberal skew.... I am regularly astounded by the number of otherwise-intelligent academics I encounter who are completely ignorant of alternative views. It’s not that they’ve considered and rejected conservative or libertarian arguments. It’s that they fail to understand them, if they are familiar with them at all. This post by Mark Kleiman is a good example, in that it puts forward a laughable caricature of libertarian and originalist constitutional thought that would have been discredited with but a moment’s investigation into the question... And along come Sasha Volokh and Ilya Somin to explain that Jonathan Adler fails to understand their version of libertarian ideas: Sasha Volokh: The Volokh Conspiracy » Asteroid defense and libertarianism: [S]tarvation counts as a natural cause, so federal programs (or any government programs) [to feed the hungry] could only be justified on an attenuated theory like “If people are starving to death, they’ll commit more crimes, and we could control that with more police, but a cheaper way of doing it is with welfare payments”... Ilya Somin: The Volokh Conspiracy: Sasha Volokh’s post arguing that his version of libertarianism might not allow government spending to provide for asteroid defense has drawn predictable howls of outrage, including Brad DeLong’s claim that it proves that “libertarians are completely insane.”... I don’t think that Sasha’s view is necessarily ridiculous or “insane.” Any theory based on absolute respect for certain rights necessarily... lead[s] to catastrophe in some instances.... How about absolute rights to freedom of political speech? If you are committed to them, that means you oppose censorship even if it’s the only way to prevent Nazi or communist totalitarians from coming to power and slaughtering millions... Put me down as believing that any theory of moral action that privileges one particular set of rights or goods lexicographically--i.e., "based on absolute respect for certain rights" and not for other rights or duties--above all others is, ipso facto, insane. Sane thinking starts with taking people as ends in themselves, and not as means to ideological purity. Was the sabbath made for humanity, or was humanity made for the sabbath? ## Can Somebody Tell Me... 1. Why the Nazis attempted Operation Rheinübung in May 1941--why they sent the Bismarck and the Prinz Eugen on a commerce-raiding mission when the two ships might have been very nice to have for shore bombardment in the Baltic in the Russian campaign that was shortly to commence? 2. Why, given that the Nazis had decided on a large-scale surface raid, they did not use all of their ships--Bismarck, Tirpitz, Scharnhorst, Gneisenau, Prinz Eugen--but only two of them? 3. Why, once the Bismarck had been hit by the Prince of Wales and was leaking oil and thus had restricted range and speed, the Nazis decided to head the Bismarck for Brest in the teeth of the British fleet rather than withdraw back through the Denmark Strait and then back to Bergen? ## Matthew Yglesias: People Still Listen to Music MY: The Death of The Recordings-Sale Industry: People still listen to music. People still play music. People who play music even still earn money. But the business of selling recordings of music is shrinking. Which, of course, is exactly what ought to be happening to it. Distributing a digital copy of an album to a person’s computer is much cheaper than manufacturing and distributing a physical CD to a retail store. In a competitive market, the price of a widget ought to approximate the marginal cost of producing an additional widget. That’s one reason why this blog is free to read. Thanks to copyright, a recordings-seller does have some level of market power to allow him to seek monopoly rents. But there’s a pretty high degree of substitutability between different songs, so the competition is still pretty intense and the prices are low. This is one reason why I would discourage bands from trying to underprice tickets at their own shows as a reward to fans. Since digital copies of recordings are non-rival and basically free to make, any non-zero sale price entails some deadweight loss. And since concert tickets are necessarily scarce, any sub-market price entails some deadweight loss. The optimal strategy for a popular band that wants to do something nice is market pricing for concert tickets, plus free recordings. Or even better, you could release your records into the public domain. ## Where the (Budget) Money Is and Where It Is Not Paul Krugman: Willie Sutton Wept: There are three things you need to know about the current budget debate. First, it’s essentially fraudulent. Second, most people posing as deficit hawks are faking it. Third, while President Obama hasn’t fully avoided the fraudulence, he’s less bad than his opponents — and he deserves much more credit for fiscal responsibility than he’s getting. About the fraudulence: Last month, Howard Gleckman of the Tax Policy Center described the president as the “anti-Willie Sutton,” after the holdup artist who reputedly said he robbed banks because that’s where the money is. Indeed, Mr. Obama has lately been going where the money isn’t, making a big deal out of a freeze on nonsecurity discretionary spending, which accounts for only 12 percent of the budget. But that’s what everyone does. House Republicans talk big about spending cuts — but focus solely on that same small budget sliver. And by proposing sharp spending cuts right away, Republicans aren’t just going where the money isn’t, they’re also going when the money isn’t. Slashing spending while the economy is still deeply depressed is a recipe for slower economic growth, which means lower tax receipts — so any deficit reduction from G.O.P. cuts would be at least partly offset by lower revenue. The whole budget debate, then, is a sham. House Republicans, in particular, are literally stealing food from the mouths of babes — nutritional aid to pregnant women and very young children is one of the items on their cutting block — so they can pose, falsely, as deficit hawks. What would a serious approach to our fiscal problems involve? I can summarize it in seven words: health care, health care, health care, revenue.... [A]nyone who is really serious about the budget should be focusing mainly on health care. And by focusing, I don’t mean writing down a number and expecting someone else to make that number happen — a dodge known in the trade as a “magic asterisk.” I mean getting behind specific actions to rein in costs. By that standard, the Simpson-Bowles deficit commission, whose work is now being treated as if it were the gold standard of fiscal seriousness, was in fact deeply unserious. Its report “was one big magic asterisk,” Bob Greenstein of the Center on Budget and Policy Priorities told The Washington Post’s Ezra Klein. So is the much-hyped proposal by Paul Ryan, the G.O.P.’s supposed deep thinker du jour, to replace Medicare with vouchers whose value would systematically lag behind health care costs. What’s supposed to happen when seniors find that they can’t afford insurance? What would real action on health look like? Well, it might include things like giving an independent commission the power to ensure that Medicare only pays for procedures with real medical value; rewarding health care providers for delivering quality care rather than simply paying a fixed sum for every procedure; limiting the tax deductibility of private insurance plans; and so on. And what do these things have in common? They’re all in last year’s health reform bill. That’s why I say that Mr. Obama gets too little credit. He has done more to rein in long-run deficits than any previous president. And if his opponents were serious about those deficits, they’d be backing his actions and calling for more; instead, they’ve been screaming about death panels.... [W]hile the budget is all over the news, we’re not having a real debate; it’s all sound, fury, and posturing, telling us a lot about the cynicism of politicians but signifying nothing in terms of actual deficit reduction. And we shouldn’t indulge those politicians by pretending otherwise. ## A Recommendation of Russell Kirk as a Conservative Who Does Not Sound Insane Today Bruce Bartlett emails: I think Russell Kirk holds up rather well... ## Bill Clinton on America's Jobs Crisis Stephen Gandel: How would Bill Clinton solve America's jobs crisis?: [Clinton] started out by saying we are in a difficult situation. The key lesson from the Great Depression was that you can't stop stimulus spending too soon. It takes a while and it's expensive for government to create jobs. And in the 1930s and 1940s the US went into a lot of debt. The difference, though, Clinton says, is back then America was able to finance its own debt. When the US sold bonds to build bridges, those bonds were bought by other Americans, who had the savings and felt they had the duty to buy Uncle Sam's paper. That's not what happens when America sells bonds now. Instead they are bought by foreign governments... and continues to fuel the global imbalances.... So Clinton says stimulus spending is not the option it once was. So what should we do instead? Clinton has a four point plan. First of all, he said we should emphasize exports more.... Two, we have to restructure unemployment insurance so that it prevents job loss... put a portion of the unemployment insurance premiums that workers pay into a trust that companies can draw on to avoid layoffs. Third, Clinton thinks we need to sign onto global climate trade treaties.... Lastly, the former President said we need to reform our immigration policies. If we have a structural unemployment problem in the US, meaning that we have a mismatch between skills and jobs, then allowing skilled workers to come in from other countries might get companies to hire. Those people get jobs. They spend money. And that creates other jobs. Some of them may start their own companies, in the US, rather than where they currently live... ## "Realism" Henry Farrell: Realism, schmrealism — Crooked Timber: Stephen Walt writes a quite odd post on realism, liberalism and the future of the euro.... Now Stephen Walt is a smart guy, famous, and all those good things. But [his] post seems to me (and not only me ) to be completely wrong-headed. For one, his lumping of people into one or the other side of the debate is peculiar and artificial. Andrew ‘powerful states, not institutions, determine the course of European politics’ Moravcsik is a decidedly unorthodox representative of international relations ‘institutionalism.’ Walt’s second pick, Barry Eichengreen is hardly any better; he argues in the piece that Walt links to that: France and Germany are always the drivers of the process. Decisions may require consensus among the member states, but France and Germany have always been the ones shaping that consensus. Moravcsik and Eichengreen’s beliefs about EU integration stem exactly from their arguments about powerful states’ national interests, not from some belief that institutions e.g. are designed to reduce transaction costs, and are largely innocent of state interest and power relations. This comes out less clearly in the specific Moravcsik piece that Walt links to – but it is pretty clearly outlined in the rest of his work. But then, Walt’s own arguments are not realist arguments either, except under the most anodyne possible definition of realism. He claims: As you’d expect, I’ve tended to be among the bears, in part because I don’t think greater “policy coordination” between the member states can eliminate occasional fiscal crises and because I think nationalism remains a powerful social force in Europe. European publics won’t be willing to keep bailing out insolvent members of the eurozone, and the integrative measures that have been proposed won’t be sufficient to eliminate the need. Fiscal crises, nationalism, the preferences of national publics, and functional economic needs all fit very poorly with modern realist theories of international relations (Walt’s sometime co-author, John Mearsheimer, has a realist theory of ‘hypernationalism,’ but it isn’t at all a good one). For realists, international politics is supposed to be driven by what happens between states, not what happens within them. And this is the problem with Walt’s supposed ‘test of rival paradigms.’ They aren’t rival paradigms (and if they were, they couldn’t really be tested against each other anyway). They’re different arguments in different stages of development about the domestic sources of national interests. If (as Walt seems sometimes to be suggesting in this post), realism is nothing more than the claim that national interests predominate in explaining international outcomes, then realism is theoretically very nearly vacuous. Moreover, the candidate ‘rival paradigm’ explanations are, under this broad definition, actually realist too. They have quite as much to say about state interests, and perhaps more to say about power relations than Walt does. If Walt has an actual realist explanation of what is driving European states apart – one that would presumably be rooted in the security dilemma or some other systemic phenomenon – it would be very nice to know what it is. He certainly doesn’t tell us about it in the post as it stands... ## Liveblogging World War II: February 19, 1941 From onwar.com: Wednesday, February 19, 1941: In Cairo... Eden, Dill (the Chief of the General Staff) and the local commanders, Wavell and Cunningham, meet to discuss whether they can send help to Greece and if so how much. The British political leaders are strongly in favor of sending all that can be spared and Wavell, the military commander who is responsible, believes that this can be done effectively and is, therefore, prepared to recommend it. ## On-the-Job Training for Boeing's Senior Executives Is Very Costly Michael Hiltzik: Boeing 787: 787 Dreamliner teaches Boeing costly lesson on outsourcing: The airliner is billions of dollars over budget and about three years late. Much of the blame belongs to the company's farming out work to suppliers around the nation and in foreign countries: The 787 has more foreign-made content — 30% — than any other Boeing plane.... That compares with just over 5% in the company's workhorse 747 airliner. Boeing's goal, it seems, was to convert its storied aircraft factory near Seattle to a mere assembly plant, bolting together modules designed and produced elsewhere as though from kits. The drawbacks of this approach emerged early. Some of the pieces manufactured by far-flung suppliers didn't fit together. Some subcontractors couldn't meet their output quotas, creating huge production logjams when critical parts weren't available in the necessary sequence. Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave suppliers less detailed specifications and required them to create their own blueprints. Some then farmed out their engineering to their own subcontractors, Mike Bair, the former head of the 787 program, said at a meeting of business leaders in Washington state in 2007. That further reduced Boeing's ability to supervise design and manufacture. At least one major supplier didn't even have an engineering department when it won its contract, according to an analysis of the 787 by the European consortium Airbus, Boeing's top global competitor. Boeing executives now admit that the company's aggressive outsourcing put it in partnership with suppliers that weren't up to the job. They say Boeing didn't recognize that sending so much work abroad would demand more intensive management from the home plant, not less. "We gave work to people that had never really done this kind of technology before, and then we didn't provide the oversight that was necessary," Jim Albaugh, the company's commercial aviation chief, told business students at Seattle University last month. "In hindsight, we spent a lot more money in trying to recover than we ever would have spent if we tried to keep many of the key technologies closer to Boeing. The pendulum swung too far."... That's not to say that outsourcing never makes sense — it's a good way to make use of the precision skills of specialty manufacturers, which would be costly to duplicate. But Boeing's experience shows that it's folly to think that every dollar spent on outsourcing means a cost savings on the finished product.Boeing can't say it wasn't warned. As early as 2001, L.J. Hart-Smith, a Boeing senior technical fellow, produced a prescient analysis projecting that excessive outsourcing would raise Boeing's costs and steer profits to its subcontractors. Among the least profitable jobs in aircraft manufacturing, he pointed out, is final assembly — the job Boeing proposed to retain. But its subcontractors would benefit from free technical assistance from Boeing if they ran into problems, and would hang on to the highly profitable business of producing spare parts over the decades-long life of the aircraft. Their work would be almost risk-free, Hart-Smith observed, because if they ran into really insuperable problems they would simply be bought out by Boeing. What do you know? In 2009, Boeing spent about$1 billion in cash and credit to take over the underperforming fuselage manufacturing plant of Vought Aircraft Industries, which had contributed to the years of delays. "I didn't dream all this up," Hart-Smith, who is retired, told me from his home in his native Australia. "I'd lived it at Douglas Aircraft.... I warned Boeing not to make the same mistake. Everybody there seemed to get the message, except top management....

Albaugh and other executives acknowledge that they've blundered. "We didn't want to make the investment that needed to be made, and we asked our partners to make that investment," Albaugh told his Seattle University audience. The company now recognizes that "we need to know how to do every major system on the airplane better than our suppliers do." One would have thought that the management of the world's leading aircraft manufacturer would know that going in, before handing over millions of dollars of work to companies that couldn't turn out a Tab A that fit reliably into Slot A. On-the-job training for senior executives, it seems, can be very expensive.

## Matthew Yglesias: Government By The Rich

MY:

Yglesias » Government By The Rich: Via Kevin Drum... Martin Gilens... the most important fact about inequality and American politics—when rich people and average folks disagree, rich people always get their way....

I would say the most obvious mechanism here is socialization. The president, the senior White House staff, the cabinet secretaries, the senators, the House members, the senior congressional staff, and the lobbyists, association heads, business executives, governors, mayors, foreign officials, and media celebrities who they interact with are all personally pretty high income. You get into the top decile of the US income distribution with a household income of \$138,000, so the entire congress is in the top ten percent. What’s more, political elites tend to have college roommates, siblings, in-laws, etc. who are also prosperous.

Obviously the fact that rich people have money to spend on politics doesn’t hurt either. But I would never underestimate the human desire to believe that one is doing the right thing, and thus the importance of socialization to determining bias. Nobody in Washington seems to know that the public is clamoring for higher Social Security benefits and more federal spending on health and education largely, I think, because this isn’t what the people they know personally are clamoring for.