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June 2007

Risks in the CDO Market

Felix Salmon:

Finance Blog - Market Movers by Felix Salmon: Unpacking the Risks in the CDO Market - I think it's worth teasing out exactly what the different risks in the CDO market are...[:]

First, there's the risk that holders of subprime mortgages will default on their loans. This is a known and relatively easy to quantify risk. Subprime mortgages issued in 2005 and 2006 already have high default rates, and those rates are likely to rise even higher when the mortgages reach their second birthday and higher adjustable rates start kicking in.... [T]he key risk in the market for any mortgage-backed security is not default risk but prepayment risk, and that a high mortgage default rate, in and of itself, is not necessarily particularly worrisome from the point of view of a CDO holder.

Second, there's the risk that CDO tranches, especially the riskier equity tranches and the ones with relatively low credit ratings, will start to default.... A key problem here is one of transparency: with many CDOs investing largely in other CDOs, it's very difficult often to get a handle on what the underlying cashflows are and how likely they are to be impaired.

Third, there's the discount which investors are currently demanding in order to buy illiquid securities with precious little transparency. There's talk in the market that triple-A rated CDO tranches – which, we can reasonably assume, are very unlikely to actually default – are getting bids at 270 basis points over Treasuries, or more. That huge spread is not a credit spread; rather, it's a good old-fashioned wide bid-offer spread on extremely illiquid securities. CDOs are similar in some ways to private equity, in that they tie up money for a long period of time and hope to provide excess returns over that time. They're not designed to be instruments which can be liquidated easily or quickly. If investors start being forced to liquidate their CDOs, then the price they receive might well be much lower than the actual credit risk on those CDOs might suggest.

Fourth, there's what used to be called rollover risk. If investors start liquidating their CDOs, that means there's going to be a pretty large supply of cheap CDOs on the secondary market. In turn that means that there's going to be much less demand for expensive CDOs on the primary market.... This is the credit crunch that many people are so worried about.... These four risks form a nice little circle.... But while all the risks are real, the linkages between them all are far from clear, and the different risks don't necessarily cascade onto and exacerbate each other in this way. They might – or they might not. If investors turn out to have reasonably strong stomachs, they might not want to liquidate at prices well below their entry points. And CDOs themselves, even the ones based on subprime mortgages, might not default nearly as much as homeowners. And without the passthrough mechanism of risks two and three, the vicious cycle loses a lot of its teeth.

So there is cause for concern, to be sure. But there isn't cause for panic.

The Undervaluation of the RMB

Brad Setser:

RGE - The Economist still isn't convinced the RMB is undervalued ...:Half a trillion dollars apparently doesn't get the respect it used to. Neither the author of last week’s Economics Focus column nor Morgan Stanley’s Stephen Jen think that the Chinese yuan (or RMB) is undervalued, despite annual reserve growth that would have been around $350b last year but for $100b or so of debt purchased by Chinese state institutions and that could approach $500b this year. The Economist, for all its free market barnstorming, apparently doesn’t mind massive government intervention in the foreign exchange market – intervention that necessarily means governments will be big players in a host of asset markets.

Indeed, it often seems that the larger China’s current account surplus (it looks set to rise above 12% of China’s 2006 GDP), the faster China’s reserve growth, the faster Chinese exports growth (30% y/y in the latest data) and the more net exports contribute to growth (2-3% of GDP in q1, about the same as in 2006), the more the Economist (and, to be fair, some economists) insists that China’s exchange rate isn’t truly undervalued. 

The Economist includes many different voices. This week's leader on the lessons from the 1997 crisis includes a welcome call for China to let its exchange rate move more.  But I think it is fair to argue that its main editorial line consistently has emphasized that the RMB isn’t obviously undervalued even as China's trade surplus soars -- while suggesting that other currencies (the Saudi riyal, the Japanese yen) are....

[R]ather than encouraging China to mark the RMB to market, the last week's Economist argues we should all mark the RMB to a model, and specifically to a behavioral equilibrium exchange rate model.   Fair enough.  But marking-to-model poses its own risks, not the least the challenge of picking the right model.  I cannot quite figure out what a behavioral equilibrium exchange model tells us about the currency of a country that manages its exchange rate as heavily as China.   Movements in China’s real exchange rate clearly have been shaped more by central bank policy – notably the dollar peg – rather anything else. 

The behavioral equilibrium exchange rate approach – at least as I understand – says that it is impossible to determine whether an exchange rate is under or over-valued based on macroeconomic fundamentals, so it is better to instead to try to find variables that help explain how the country’s real exchange rate has moved in the past:  "This [approach] does not attempt to define long-term economic equilibrium. Instead it analyses which economic variables, such as productivity growth, net foreign assets and the terms of trade, seem to have determined an exchange rate in the past, and then uses the current values of those variables to estimate a currency's correct value."

Given China’s policy decision to peg to the dollar, though, the variable that will appear to drive movements in China’s real exchange rate will be the variable that moves when the dollar moves. If a weaker dollar leads to higher net foreign asset growth (because it produces a weaker RMB), the model might argue that the even higher foreign asset growth implies an even weaker RMB....

I do not doubt that determining whether or not a currency is misaligned is difficult – and different models produce different results.  But some cases are easier than others.  $500b [a year] in intervention does provide a bit of a clue...

A Note on "Al Qaeda"

Jim MacDonald:

Making Light: The Latest Iraq Surge: Have y’all noticed that over the last two weeks the word from everyone (Bush, at the Naval War College for example, where everyone in the audience already knew better) is that we’re fighting Al Qaeda in Iraq. Everyone who’s resisting is Al Qaeda. Everyone who’s fighting is Al Qaeda. Everyone who’s killed is Al Qaeda.

What’s with that? They aren’t insurgents any more. Or Sunni fighters, or Shiite militias. or even Baathist dead-enders. All the bad guys are Al Qaeda.

Kinda reminds me of Vietnam:

“How do you know he’s Viet Cong?” “He’s dead, isn’t he?”

Six years after 9/11 this is the only card left in Bush’s hand.

If he’s so hot on Al Qaeda isn’t it time to find Osama bin Forgotten? Y’know, the guy who actually attacked us?

Joe Klein

A Note on Al Qaeda - Swampland - TIME: Several readers have been grumbling about the increased use of "Al Qaeda" to describe the enemy in Iraq. There is, I think, good reason for this usage, but only in the context of the current U.S. offensive. The group in question is actually Al Qaeda in Mesopotamia, what the military calls Al Qaeda in Iraq (AQI), which represents the most dangerous sliver--no more than 5%--of the Sunni insurgency. This is also the group, founded by Abu Musab al-Zarqawi, that is the spine of the so-called Islamic State of Iraq.

In the past, AQI has had a close working relationship with many of the indigenous Sunni insurgency cells.... [I]t has offended the Sunni tribes and the Baathist remnant of the insurgency. As I'll explain in the coming edition of the magazine, AQI has been pretty much kicked out of al-Anbar province because it tried to impose a Taliban-like rule--forced marriages, Sharia etc--on Sunnis mostly pissed off at the U.S. for invading their country and imposing a Shi'ite regime. These more secular elements of the Sunni insurgency have turned on AQI and are providing the U.S. with--for the first time in this war--actionable intelligence. And so, the current nationwide operation, Phantom Thunder, is focused upon this insurgent sliver--the 5% represented by AQI.

There is a belief, which I don't buy, that the rest of the Sunni insurgents will now reconcile with the Shi'ite government....

Meanwhile, the Shi'ites have a lunatic fringe of their own: the Mahdi Army Special Groups.... (As I learned first hand--I found myself underneath a table during dinner as missiles landed nearby on my first night in Iraq--the Mahdi Army Special Groups, not Al Qaeda, are the people shelling the Green Zone most nights, according to military intelligence sources.)

So, bottom line: Others may be painting with a broader, and inaccurate, brush, but when I refer to Al Qaeda in this context, it only means the enemy in the current phase of battle, one particular sliver of the Sunni insurgency. There are other enemies of stability in Iraq, and other battles to come. I remain convinced, as I was before I went to Iraq, that our ability to influence these battles is minimal at best... and that a careful drawdown of troops, starting now, remains our best option.

John Ward Anderson:







McClatchy Washington Bureau | 06/29/2007 | Bush plays al Qaida card to bolster support for Iraq policy: Jonathan S. Landay: WASHINGTON — Facing eroding support for his Iraq policy, even among Republicans, President Bush on Thursday called al Qaida "the main enemy" in Iraq, an assertion rejected by his administration's senior intelligence analysts.

The reference, in a major speech at the Naval War College that referred to al Qaida at least 27 times, seemed calculated to use lingering outrage over the terrorist attacks of Sept. 11, 2001, to bolster support for the current buildup of U.S. troops in Iraq, despite evidence that sending more troops hasn't reduced the violence or sped Iraqi government action on key issues.

Bush called al Qaida in Iraq the perpetrator of the worst violence racking that country and said it was the same group that had carried out the Sept. 11 attacks in New York and Washington."Al Qaida is the main enemy for Shia, Sunni and Kurds alike," Bush asserted. "Al Qaida's responsible for the most sensational killings in Iraq. They're responsible for the sensational killings on U.S. soil."

U.S. military and intelligence officials, however, say that Iraqis with ties to al Qaida are only a small fraction of the threat to American troops. The group known as al Qaida in Iraq didn't exist before the U.S.-led invasion in 2003, didn't pledge its loyalty to al Qaida leader Osama bin Laden until October 2004 and isn't controlled by bin Laden or his top aides....

"The only way they think they can rally people is by blaming al Qaida," said Vincent Cannistraro, a former chief of the CIA's Counter-Terrorism Center who's critical of the administration's strategy...

Media Matters Is Shrill!

Media Matters on the clown show that is Fred Hiatt's Washington Post editorial board:

Media Matters - Will Wash. Post reconsider its Supreme Court endorsement criteria after Roberts, Alito?: In September 2005 and January 2006, The Washington Post editorial board endorsed the nominations of John G. Roberts Jr. and Samuel A. Alito to the Supreme Court, asserting in both instances that Democrats should defer to President Bush's choices.... On September 18, 2005, the Post endorsed Roberts, praising him as "overwhelmingly well-qualified, possess[ing of] an unusually keen legal mind and practic[ing] a collegiality of the type an effective chief justice must have."... The Post's January 15, 2006, endorsement of Alito made similar arguments.... A president's "well-qualified" judicial nominees are "due deference," and "Judge Alito is superbly qualified. His record on the bench is that of a thoughtful conservative, not a raging ideologue. He pays careful attention to the record and doesn't reach for the political outcomes he desires."...

However... this term... the Post has repeatedly excoriated opinions written or supported by Roberts or Alito.... A June 29 editorial blasted the court's decision in Parents Involved in Community Schools v. Seattle School District No. 1.... In a June 26 editorial on... Federal Election Commission v. Wisconsin Right to Life.... A June 17 editorial on the case of Keith Bowles.... In an April 19 editorial on the Court's decision in Gonzales v. Carhart...

It's not as if the impact of adding Roberts and Alito to the Supreme Court was unpredictable or unpredicted, was it? Will the means and you will the end.

links for 2007-06-30

Felix Salmon of Portfolio Blogs a Bit More of Our Afternoon Coffee at Strada, at Bancroft and College

Felix muses on Murdoch's acquisition-to-be of Dow Jones and the Wall Street Journal. I interject comments:

Finance Blog - Market Movers by Felix Salmon: Why Murdoch Can Make Money On His Dow Jones Investment - Brad DeLong and Paul Krugman both cogitate today on the implications of Rupert Murdoch buying the Wall Street Journal. Krugman is unenlightening: his argument is basically "Fox News is bad, therefore Murdoch is bad, therefore Murdoch buying the WSJ is bad"...

Paul Krugman may be boring, but that doesn't mean he is wrong. Fox News is bad. Murdoch is bad. Whether his acquisition of the Journal is good or bad from the standpoint of those of us who want to see a flourishing Habermasian public sphere of thoughtful and well-informed citizens depends on the exact form his badness takes, and whether it does more to undermine the good or the bad aspects of the Journal. And I think it more likely than not that the acquisition is bad news for those of us who want to see, et cetera.

Felix goes on:

DeLong is more interesting. Is Murdoch basically just a multibillionaire buying himself a new toy? If that's the case, then watch out.... Is Murdoch, on the other hand, a multibillionaire buying one of his sons a new toy? If that's the case, "then the Murdoch purchase is probably good news.".... And there's a third possibility...

the one that Salmon likes, and that he argued for. As I put it:

Rupert Murdoch thinks that in the age of new-media convergence the Wall Street Journal has the brand and the authority and the staff to make it an excellent launching pad, worth a $2 billion bet. Can Murdoch synergize the Journal's brand on TV and via new media in a way to further boost his fortune? Perhaps.... Why, Murdoch may be asking himself, should the biggest fortune be made by Michael Bloomberg and not by him?...

But, I say:

if Murdoch had a real chance at the synergies, there would be other bidders by now.

Felix Salmon parries:

DeLong's an economist, which means he's naturally predisposed to arguments which say that if some course of action is profitable, then the market would have done it already. But I think there's a strong case to be made that News Corp is one of the very few entities capable of turning the WSJ into a powerful global electronic platform.... Why? One answer is... Roger Ailes. Much as the likes of Paul Krugman despise him, the fact is that he's a visionary and a genius.... News channels are a dime a dozen; only one has managed to beat CNN....

The other answer is that the WSJ needs to be run by a newspaper company... [which] simply don't have the cashflow to invest in... domination of the electronic world.... [P]ublic companies who don't own newspapers don't have Murdoch's time horizon... as NBC Universal CEO Jeff Zucker told the FT.... It's a bit embarrassing, but true, that the 76-year-old Murdoch has a longer time horizon than a public company which will almost certainly exist in some form for many generations yet.... Yet it explains why Murdoch can profitably spend $5 billion on Dow Jones even when no one else can.

Well, I am an economist. And I am naturally predisposed to arguments which say that if some course of action is profitable, then the market would have done it already. It does seem possible that $5 billion ($2 billion net, after selling off the pieces of Dow-Jones Murdoch doesn't really want) is low enough that it makes it profitable for Murdoch but high enough that it makes it unprofitable for everybody else. But is it likely? What, exactly, does Rupert Murdoch do with the Journal to make new-media synergy money that nobody else could do in his stead?

Breaking the Story of the Psychotic Cheney Administration (Why Oh Why Can't We Have a Better Press Corps?)

Joshua Micah Marshall watches as the Washington Post writes as if it has just broken the story of the psychotic Cheney administration:

Talking Points Memo: by Joshua Micah Marshall: June 24, 2007 - June 30, 2007 Archives: (June 29, 2007 -- 11:33 AM EDT // link): Yesterday David Broder wrote a column which one TPM Reader, more or less fairly, described as Broder's expression of shock, shock at just what Dick Cheney has been up to over the last six-plus years. And this is a good opportunity to say that the Post's 'Angler' series seems to be becoming the trigger for that transition moment where consensus establishment opinion goes from seeing the vice president as the powerful administration heavy with a sometimes creepy but largely comic penchant for secrecy to an altogether more nefarious force who has used his unprecedented power as vice president to advance an agenda of official secrecy, non-accountability, untrammeled executive power, legitmized torture and general degradation of the rule of law.

But this is far too easy. Because the simple fact is that we've known almost all of this for years.

Don't get me wrong. I'm not knocking the series, which is quite good. In journalism, details, the specifics are all. But the story in general has been out there for years, as well as a good number of the specifics, strewn over hundreds, probably thousands of newspaper and magazine articles, online and off.

In other words, when it comes to recognizing Cheney's profoundly damaging effect on American constitutionalism as well as his guiding role in essentially all of the administration's most disastrous policies, the train already left the station some time ago.


Well, I will knock the claims that the Post makes for the series. The Post ought to be ashamed of the way it is selling it. Gellman and Becker are building on a lot of work by other, better journalists and commentators earlier. They ought to acknowledge that. Their honor is at stake.

Thus, when David Broder writes that: [T]t would have been nearly impossible to duplicate the Cheney series reporting until after the reelect of the Bush-Cheney ticket...


It took a year of digging by Bart Gellman and Jo Becker to begin to crack the cone of secrecy around Cheney...

I say: what about Ron Suskind? Remember Ron Suskind's book, The Price of Loyalty. What does it say about Cheney?

Archive Entry From Brad DeLong's Webjournal: Notes: Quotes from Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill.

Ron Suskind (2003), The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill (New York: Simon and Schuster: 0743255453).

Mr. Cheney welcomed Mr. O'Neill and Federal Reserve Chairman Alan Greenspan into the foyer of his two-story brick town house, where boxes were packed for the move to the vice president's mansion. It was late in the afternoon of Jan. 14, the Sunday of the final week of the transition. They settled at the kitchen table, three men in ties, blazers, and slacks, CEO casual, making final preparations for the coming era.... Two hours passed. Mr. Cheney moved to close the circle. The shape of things to come? Tax cuts, Mr. Cheney said, front and center. A task force on energy, which he would run. And everyone stay in close touch about the condition of the economy. All other matters would move on a slower track. Mr. O'Neill left the meeting with a glimpse of the future: that Mr. Cheney would be the most powerful vice president of modern times...

[January 14] All this became clear to Paul O'Neill and Alan Greenspan at the same instant, midway through the waning afternoon. When the centerpiece of the President-elect's plan for America--the $1.6 trillion, ten-year tax cut--was discussed, neither man felt comfortable mentioning the secret "trigger" pact [to make the tax cuts conditional on continued surpluses] to Dick Cheney. They couldn't be sure what Dick would think...

[January 23] [T]he third day of the Bush administration.... Bush had O'Neill's memo--Paul figured they'd talk about that--and then they'd discuss whatever came up.... O'Neill... offered a fifteen minute overview on what he considered the informed opinion (that is, his and Greenspan's) [about the economy].... O'Neill referred to items of his memo.... There were a dozen questions that O'Neill had expected Bush to ask. He was ready with the answers. How large did O'Neill consider the surplus, and how real? How might the tax cut be structured? What about reforming Social Security and Medicare, the budget busters?... Bush didn't ask anything. He looked at O'Neill, not changing his expression, not letting on that he'd had any reactions.... O'Neill decided therefore to move from the economy to a related matter. Steel tariffs.... The President said nothing. No change in expression.... "I wondered, from the first, if the President didn't know the questions to ask," O'Neill recalled, "or did he know and just not want to know the answers? Or did his strategy somehow involve never showing what he thought? But you can ask questions, gather information, and not necessarily show your hand. It was strange"...

At this point in mid-March 2001, a very different model was becoming apparent. it caused confusion for senior officials like O'Neill, Powell, and Whitman.... Was it possible, O'Neill wondered, that the country thought it had elected a centrist when in fact it had empowered an ideologue? The incident with Whitman was the start of what O'Neill later called "a rolling revelation of the way this administration was operating." "What became clear to me at that point," he said... not long after he left office, "is that the presence of me and Colin and Christie helped convince people that this would... be an administration that would look hard for best solutions.... That's what the three of us were known for.... Thinking back about how all of us started to be banged up so early on, from the inside, it now seems like we inadvertantly may have been there, in large part, as cover"...

O'Neill began to view Mr. Lindsey as a partisan for deep tax cuts rather than an honest broker of competing proposals -- an advocate of one point of view who would soon sit about 30 feet from the Oval Office and a president with no experience managing national economic policy. It would be important to pick his moment carefully to make his concern known. It was late on a weeknight. Two lifelong workaholics were still at their posts: Mr. O'Neill and Dick Cheney.... "Dick, I think we need to talk," Mr. O'Neill said. He reasoned that Mr. Cheney would understand the importance of establishing sound processes to manage the White House and executive branch -- entities that were truly beyond human scale. Mr. O'Neill said that he was concerned that Mr. Lindsey was masquerading as the honest broker and was anything but. Without strongly positioned honest brokers and a rigorous, disinterested vetting of various proposals, Mr. O'Neill said, "all you've got are kids rolling around on the lawn." The need to really "run the traps" on every potential presidential move was more important for this Bush than for his father or Gerald Ford, both of whom had vast experience in the federal government. God knows, Mr. Cheney would understand that as well as anyone. Mr. Cheney listened, nodded, listened some more. Dick was not a talker. It was easy to paint what you hoped to see on Dick's concerned, pensive mien. But you could never be certain what he was thinking or what he would do. Mr. Cheney thanked Mr. O'Neill for his insights, and Mr. O'Neill left feeling that he had done his duty...

Sitting in his office in mid-July, Mr. O'Neill sketched some notes for another serious talk he wanted to have with Mr. Cheney about effective process -- a way to handle decision making so that policy didn't get served half-baked and larded with political calculations. In his personal experience, the president didn't appear to have read even the short memos he sent over. During his weekly one-on-one with Mr. O'Neill, Mr. Bush sat, often for an hour, offering no response. He rarely asked questions in meetings. "The only way I can describe it is that, well, the president is like a blind man in a roomful of deaf people," Mr. O'Neill said. "There is no discernible connection." Mr. O'Neill thought about how to add fiber to the policy process in this White House, and about how to persuade Mr. Cheney to take the lead. "I realized it would be hard to find things we did with Nixon or Ford that would be applicable for this president," Mr. O'Neill said later. He recalled Mr. Bush's unresponsiveness in large and small meetings. "This president was so utterly different from those men." He stopped by Mr. Cheney's office. The fears he had harbored during the transition -- about "kids rolling around on the lawn" -- had been confirmed, he said. "You can't just move on instinct. You end up making too many mistakes," Mr. O'Neill told the vice president. "We need to be better about keeping politics out of the policy process. The political people are there for presentation and execution, not for creation." As before, Dick nodded. He thanked Paul, as always, "for his sharp insights."

One problem was that [O'Neill] didn't have a chair in the White House senior staff meeting... each morning at 7:30. Robert Rubin... had considered attendance at this meeting... among his most important victories. It placed Rubin's finger on the White House's pulse each morning.... Summers.... O'Neill wasn't going to ask, himself; he had his chief of staff, Tim Adams, inquire several times whether the Secretary could attend. "There was foot dragging and then no response..." While no one would head-on confront an official as powerful as the Secretary of the Treasury...

[Budget Director] Mitch Daniels became agitated. He blurted out, "Well, yes, but if you can't do the right thing when you're at 85 percent approval, then when can you do the right thing? I think it's time to say no." Everyone looked with surprise at Daniels--he has a way of expressing what others are thinking but don't say. Often, he'd find himself doubling back when he got an arched brow from Cheney or Rove...

On Sunday, Feb. 10 [2002], Mr. O'Neill and Mr. Greenspan went to the vice president's house for lunch.... During the campaign, Mr. Cheney had made a commitment of support to steelworkers in West Virginia, a state the ticket carried. Karl Rove, the White House political director, was looking at Pennsylvania, Ohio and Michigan as crucial states in the upcoming midterm elections. They were inclined to impose major tariffs on imported steel, as a way of helping domestic steelmakers and protecting jobs in those states. What's more, the White House legislative staff was hoping that it could trade support for steel tariffs for a vote or two in the Senate for legislation giving the president authority to reach trade agreements largely without congressional tinkering. Mr. Cheney told Mr. O'Neill and Mr. Greenspan that Mr. Bush and he were going to make a decision on the steel issue. But, clearly, Mr. Cheney didn't want to end up in open debate with Mr. O'Neill, whose stance opposing curbs on steel imports was well informed, or with the unmanageable Mr. Greenspan, chairman of an agency independent of the White House. So, he had granted them an audience. They were getting in early.... Now was their chance, Mr. Cheney told them, to discuss their view of "the right thing to do." Their positions would be duly noted; there would be little more that they needed to say. Mr. Cheney said, "We'll make our decision and, then, that'll be that." Mr. O'Neill and Mr. Greenspan both made the case that the largely bipartisan consensus on free trade was one of the great victories of the last decade; that the president would confuse many constituencies by flouting that consensus. Mr. O'Neill explained that tariffs would do little to offer long-term support to the U.S. steel industry. Mr. Greenspan pointed out that tariffs might actually violate certain World Trade Organization agreements. Mr. Cheney didn't show his hand. Mr. O'Neill left concerned that the meeting was largely tactical -- that the vice president had already made up his mind...

This is what Mr. Cheney had been hoping to avoid -- a split. In fact, it was anything but a split. Nearly everyone seemed on one side; Mr. Cheney and Mr. Zoellick were on the other. A consensus on sound policy was colliding with a political favor. Secretary of State Colin Powell spoke. "Why are we thinking about doing this?" he asked in frustration. "I have heard good reasons today not to do it, but I haven't heard one good reason to move forward with tariffs. We can't even say this will improve our steel industry." Finally, it came back to Mr. Cheney. He mumbled that "imports are, in fact, way down from the surge. ... Our minimills are competitive," all arguments against tariffs. But then he added that whatever we do, the tariff-empowering statute says "we can review this in 18 months." In other words, if what we do now is go with tariffs, it will be political bait, and in 18 months -- after the 2002 midterm elections -- we can effect the switch. Meeting over...

Mr. Cheney had shown up at a few of the regular meetings of the economic team. He didn't say much -- he never said much.... Now, the group was meeting on the vice president's turf. As the meeting in Mr. Cheney's office progressed, it became clear that the vice president was ready to weigh in on what the president should do to bolster the economy, and his standing with voters worried about the economy, as the second half of his term began. A package of tax proposals, led by a 50% cut in the individual tax on dividends, had been all but buried since Mr. O'Neill took his stand against it in early September.... After the midterms, though, Mr. O'Neill could sense a change inside the White House.... Now Mr. Cheney mentioned them again, how altering the double taxation of dividends would provide some economic stimulus. Mr. O'Neill jumped in, arguing sharply that the government "is moving toward a fiscal crisis" and then pointing out "what rising deficits will mean to our economic and fiscal soundness." Mr. Cheney cut him off. "Reagan proved deficits don't matter," he said. Mr. O'Neill was speechless, hardly believing that Mr. Cheney -- whom he and Mr. Greenspan had known since Dick was a kid -- would say such a thing. Mr. Cheney moved to fill the void. "We won the midterms. This is our due." Mr. O'Neill left Mr. Cheney's office in a state of mild shock.... The inscrutable Mr. Cheney had finally shown himself...

Seems to me that Ron Suskind, back in 2003, had done more than "begin to crack the cone of secrecy around Cheney." Honorable men and women should not be ashamed to give him credit.

P.S.: One of the few moments--no, it turns out it's the only moment--Bush says anything substantive in the entire book:

p. 71 ff: President Bush echoed this view: "We're going to correct the imbalances of the previous administration on the Mideast conflict. We're going to tilt it back toward Israel. And we're going to be consistent. Clinton overreached, and it all fell apart. That's why we're in trouble," Bush said. "If the two sides don't want peace, there's no way we can force them." Then the President halted. "Anybody here ever met [Ariel] Sharon?" After a moment, Powell sort of raised his hand. Yes, he had. "I'm not going to go by past reputations when it comes to Sharon," Bush said. "I'm going to take him at face value. We'll work out a relationship based on how things go." He'd met Sharon briefly, Bush said, when they had flown over Israel in a helicopter on a visit in December 1998. "Just saw him that one time. We flew over the Palestinian camps," Bush said sourly. "Looked real bad down there. I don't see much we can do over there at this point. I think it's time to pull out of that situation."

And that was it, according to O'Neill and several other people in the room. The Arab-Israeli conflict was a mess, and the United States would disengage. The combatants would have to work it out on their own. Powell said such a move might be hasty. He remarked on the violence in the West Bank and Gaza and on its roots. He stressed that a pullback by the United States would unleash Sharon and the Israeli army. "The consequences of that could be dire," he said, "especially for the Palestinians."

Bush shrugged. "Maybe that's the best way to get things back in balance." Powell looked startled. "Sometimes a show of strength by one side can really clarify things," Bush said...


Duncan Black points out how easy it would be for Washington reporters to be journalists:

Eschaton: Journalism!: McClatchy:






There, see how easy it is?Everyone should bookmark McClatchy's new page, btw.

Felix Salmon on the iPhone

He quotes Paul Kedrosky on the iPhone as a disruptive, non-crippled technology:

Finance Blog - Market Movers by Felix Salmon: iPhone to Support Wifi Calling - Paul Kedrosky has an interesting op-ed in the WSJ today, saying that the reason people desperately want the iPhone is that it isn't crippled:

These people want to be liberated either from bad phones or from bad phone companies. They want to choose a device that does all the things they want to do -- calling, being entertained, consuming information -- not all the things their phone company thinks they should do (and then be charged $5 a month per feature for the privilege). They want phones that make it possible to do calls over wi-fi, to the point that cellular companies could potentially become irrelevant.

The massive upwelling of grassroots support for the iPhone shows that a revolution has been building for some time. Now it's here. Cell phone carriers are going to have to respond by cutting the length of contracts and eliminating exclusivity, and most important, by finally being responsive to their market. If not, iPhones (or their successors) will finish them off.

Of course, the irony here is that the iPhone is exclusively locked in to AT&T for the next five years; that it requires a two-year contract; that it won't make calls over wi-fi; and that in general it's not half as revolutionary as Kedrosky seems to imply that it is. But we're only at iPhone 1.0, today. Will wi-fi calls and the like come in the future? Surprisingly, the answer seems to be yes, according to an interview with Steve Jobs and AT&T CEO Randall Stephenson, also in the WSJ:

Mr. Jobs: We obviously thought about VoIP. You still need a cellular phone because you're not always going to be in a Wi-Fi hotspot. One you have a cellular phone plan, it costs you zero incremental dollars to use it when you're making the next phone call. VoIP, while an interesting technology, didn't seem to be a big breakthrough to us. But others might feel differently, and others may make Web-based VoIP clients available for the iPhone – I think someone's already working on that...

Mr. Stephenson: Absolutely -- in fact Wi-Fi is just an enhancement to your existing wireless capability.... You could not have thought of VoIP on a wireless handset until you start thinking about Wi-Fi capabilities on these handsets. That doesn't intimidate us at all. I think it's a very nice enhancement to an existing service.

This is great news. As Jobs knows full well, the incremental cost of the next phone call is not zero on a cellular phone plan: not if that phone call would take you over your allotted minutes, and certainly not if the phone call is international. It seems that Jobs and Stephenson are OK with wi-fi based calling, which will be a godsend to people who travel or call a lot internationally.

Broderism Watch: Congressional Approval Ratings

Robert Moomaw writes:

As has been pointed out before, Congress as a whole traditionally gets lower approval ratings than the President for the simple reason that people on BOTH sides of the ideological aisle can disapprove of it -- the people backing the minority party will naturally disapprove of it, but a lot of the people backing the majority party will also say THEY disapprove of it because they don't think their party is doing an enthusiastic enough job of trampling the opposition underfoot. (Indeed, it's almost unprecedented for a President to come as close to having a lower approval rating than Congress as Bush has managed to do.) So, if you really want to know what the voters now think of the two parties in Congress, you have to ask them separately whether they approve of the Congressional Democrats and the Congressional Republicans -- a question which actually does get asked fairly frequently.

Well, the latest pollster to ask it is Fox News today -- and, like all other post-2006 election polls on the subject, they indicate that at the moment the Dems have very little to worry about, election-wise. The voters, as a whole, do disapprove of the Congressional Dems by a 13-point margin -- but they disapprove of the Congressional GOP by a 26-point margin: the same type of huge difference we've seen in recent ABC and Harris polls:

In short, the Effortfully Balanced Broder-type critics among the Talking Heads still don't know what they're talking about.

Ronald Reagan on the Caribbean!

From Douglas Brinkley, ed. (2007), The Reagan Diaries (New York: Harper Collins: 9780060876005).

Wed Jan 28 1981: Visit by P.M. Seaga of Jamaica, his wife and members of his admin. Our 1st state luncheon. He won a terrific election victory over a Cuban backed pro-communist [Michael Manley]. I think we can help him and gradually take back the Caribbean which was becoming a "Red" lake.

Thur Jan 14 1982: Jeanne K. tells me a Soviet ship designed to neutralize efforts to detect presence of Soviet Nuclear Subs has reached Cuba. First time such a ship has ever been in Am. waters. This definitely is an offensive weapon--thus a violation of '62 agreement.

Fri Jan 15 1982: An NSC meeting re Cuba. My own thought is that we should create a plan to urge Cuba and yes Castro to come back into the orbit of the Western Hemisphere. Castro is in trouble--his popularity is fading, the ec. is sinking and Soviets are in no position to help. We could start a campaign to persuade him and the disenchanted Cubans to send the Russians home and once again become a member of the Latin Am. community.

Ronald Reagan on Free Trade!


Thur Mar 19 1981: The auto task force met with Cabinet--still some disagreement about any quotas on Japanese imports. Some even with regard to a Japanese voluntary cutback. The V.P. summed it up nicely. He said we're all for free enterprise but would any of us find fault if Japan announced without any request from us that they were going to reduce their export of autos to America?

There was no dissent. I told them I'd heard enough I would make a decision. Privately I told Al Haig to call Amb. Mansfield and have Mike advise "Ito" before his visit that we were threatened by a bill in Cong. to set a quota. An announcement by Japan of a voluntary cutback could head that off. We'll see what happens. Al then told me he felt he was being undercut by other agencies etc. I worry that he has something of a complex about this. Anyway I've arranged that he and I meet privately 3x a week.

Kennedy Center in the evening for "Little Foxes" starring Liz Taylor. She was darn good--so was the show.

Ronald Reagan on the Imminent Coming of the Lord!


Fri May 15 1981: Met with Botha--F. Minister S. Africa. Then with the F.M. of Romania. An NSC meeting with Lebanon on the table. Latest message from Habib does not sound good although he said to make no decisions for a few days. Begin was more flexible than Assad of Syria (bolstered by Soviets) Habib going to Saudi Arabia to see if they'll lean on Assad. Sometimes I wonder if we are destined to witness Armageddon.

Ronald "I Never Wanted to Trade Weapons for Hostages" Reagan!


Fri Aug 23 1985: That was also the day I received a "secret" phone call from Bud Macfarlane. It seems a man high up in the Iranian govt. believes he can deliver all or part of the 7 Am. kidnap victims to Lebanon sometime in early Sept.... I had some decisions to make about a few points--but they were easy to make. Now we wait.

Fri Nov 22 1985: Back to the office for a brief NSC. Subject was our hostages in Beirut. We have an undercover thing going by way of an Iranian which could get them sprung momentarily.

Thur Dec 5 1985: NSC Briefing--probably Bud's last. Subject was our undercover effort to free our 5 hostages held by the terrorists in Lebanon. It is a complex undertaking with only a few of us in on it. I won't even write in the diary what we're up to.

Sat Dec 7 1985: I then had a meeting with Don R., Cap W. and Bud M., John P., Geo. Shultz and Mahan of CIA. This has to do with the complex plan which could return our 5 hostages and help some officials in Iran who want to turn that country from it's present course and on to a better relationship with us. It calls for Israel selling some weapons to Iran. As they are delivered in installments by air our hostages will be released. The weapons will go to moderate leaders in the army who are essential if there's to be a change to a more stable govt. We then sell Israel replacements for the delivered weapons None of this is a gift--the Iranians pay cash for the weapons--so does Israel.

Thur May 27 1986: Well let's start by saying we still don't know whether our hostages will be freed. Bud's call revealed that 2 of the Iranians who had involved us were on the phony side. However through them Bud was put in touch with a rep. from the PM's office.... [T]hey got back to the original price--sale of some weaponry--now we'll know possibly in the next 48 hours.

Sat Dec 6 1986: Radio script was on Iran. I admitted there were mistakes in the implementation of policy but not in the policy itself.

Dr. Dow-Jones and Mr. Wall Street Journal and Rupert Murdoch

Rupert Murdoch is about to buy the Wall Street Journal. This is a big deal. But I think that almost everybody is thinking about what this means in the wrong way.

To understand what Rupert Murdoch's forthcoming purchase of the Wall Street Journal means, you need to start with the fact that there is a good Wall Street Journal and a bad Wall Street Journal. The good Wall Street Journal is the news pages as built up by Norman Pearlstine, with past and present stars like Al Hunt, Davie Wessel, Alan Murray, Ron Suskind, Walt Mossberg, Greg Ip, and a galaxy of others: the finest, smartest, hardest-working, and most professional group of star news reporters in the world. The bad Wall Street Journal is the editorial page of ethics-free right-wing--no, not right-wing, Republican wingnut--partisan hacks. As Ken Auletta put it in an excellent New Yorker article a couple of years ago, describing the bad Wall Street Journal:

Annals of Communications: Family Business: The New Yorker: the opinion page... Robert Bartley.... From 1972 to 2002... ran the editorial page... as if Bartley owned and operated his own private newspaper... a non-stop campaign on behalf of supply-side economics, a return to the gold standard... and prosecuting the Cold War.... The predominantly Democratic Bancroft family... would have preferred “a less acerbic editorial voice.... There is a lot that I think is beyond the pale.”... [T]he editorial page... omitted facts that contradicted its assertions.... crossed a line in advancing its ideology...

Henry Kissinger once famously said of a statement that "it had the added advantage of being true." For the bad Wall Street Journal of the editorial page--at least when I have dealt with them--truth is simply irrelevant: to show them person-to-person that they are factually wrong makes no impact at all. Few like the bad Wall Street Journal, not even those who usually find it useful. Here's one view:

On the Wall Street Journal Editorial Page: ...smug rich-guy arrogance... blithe indifference to actual human nature... "arrogant elites"... out in the open, brazen and unashamed... dubious factual assertions... mischaracterize... our views... hostile and insulting... [we need] to correct the record because [of] you and... [your] friends...

That's the perspective from National Review.

The contempt for the bad Wall Street Journal is returned. Here's Auletta from the New Yorker again, quoting Bartley on Norman Pearlstine, the head of the good Wall Street Journal:

When I asked Robert Bartley, the Journal’s former editorial-page editor, to describe Pearlstine’s legacy, Bartley... carved up his former colleague.... “[C]irculation was down. Advertising was down.... [R]eporters won prizes for writing books beating up on our subscribers and advertisers.... Norm’s a very creative guy--the three-section newspaper was his.... I don’t think he’s good at sustained effort”...

Bartley's criticism of Pearlstine's Wall Street Journal, in a nutshell, is that Pearlstine had forgotten what he was paid to do: Pearlstine thought he was paid to report the news and inform the subscribers, but in Bartley's view that was wrong--what Pearlstine was paid to do was to deliver eyeballs to advertisers by printing stuff that made subscribers and advertisers feel good and righteous.

Dr. Jekyll, meet Mr. Hyde.

Some Journal insiders--even some on the news side--say that this Jekyll-and-Hyde relationship is all to the advantage of the good Dr. Jekyll. Nobody serious believes the editorial page, they say; it serves as a comics page for the older and more-wingnutty subscribers, a source of daily comfort food for those who still denounce, "that Communist, Franklin Roosevelt," and who have always thought that the depth and duration of the Great Depression were the fault of the New Deal--that if the free-marekt tidal wave of falling wages and massive bankruptcies had been allowed to purge the economy for 1933 and 1934, by 1935 and 1936 all would have been well. But, this faction says, the editorial page delivers up perhaps half a million extra subscribers a year, and that money flow pays for the finest news-reporting operation in the world.

Other Journal insiders say that it is the bad Mr. Hyde that is sucking the blood of Dr. Jekyll. Nobody would pay attention to the wingnuts of the editorial page, they say, were it not for the fact that they come at the back of a very, very good newspaper. 50,000 people a month read the American Spectator, where Bartley's crew belongs. 1,000,000 people a day at least glance at the Wall Street Journal editorial page. The reporters in the news division are thus in a morally ambiguous position as journalists: the stories they write inform the public, and the public they attract then turns to page A16--and is there misinformed.

We outsiders speculate and argue about which of these perspectives is closer to the truth. We do not know. But we do know that this is the shape of the organization that Murdoch wants to capture.

Now Rupert Murdoch of the News Corporation has pulled a chair up to this poker table, and wants to buy the Wall Street Journal. Figure that he can sell off other parts of Dow Jones, Inc. for enough money that the long-term net investment by News Corp. will be on the order of $2 billion. Why might Murdoch want to spend so much money to do such a thing?

One possibility is that Rupert Murdoch likes to keep what he has and that he has sons: the thirty-something Lachlan and James (and a daughter, Elizabeth). His sons will already be rich beyond the wildest dreams of avarice. Giving his sons roles at News Corp. has proven difficult: he still wants to run the show, and people whom Murdoch has hired and had long-term relationships with want to go around them if they don't like what his sons are doing. But there is nobody at the Journal with strong personal ties to Murchoch. If Murdoch buys the Wall Street Journal and spins it off, then at least one of his sons can become an independent global power broker in his own right without Murdoch having to loosen the reins at News Corp. It's like a medieval German emperor creating his son Duke of Swabia: it's a real job, an important job, a very powerful job, and a job that keeps the son occupied without forcing the father to begin the surrender of his own power before he is ready. That might be what is going on. But if it is Murdoch is playing his cards very close to his vest.

A second possibility is that Rupert Murdoch thinks that in the age of new-media convergence the Wall Street Journal has the brand and the authority and the staff to make it an excellent launching pad, worth a $2 billion bet. Can Murdoch synergize the Journal's brand on TV and via new media in a way to further boost his fortune? Perhaps. Many fortunes will be made in financial news when the technological shift that has replaced the Mergenthaler and wood pulp with the microchip and the fiber-optic cable finally shakes itself out. Why, Murdoch may be asking himself, should the biggest fortune be made by Michael Bloomberg and not by him? That might be what is going on. But if it were, and if Murdoch had a real chance at the synergies, there would be other bidders by now.

A third possibility--by far the most likely, IMHO--is that Rupert Murdoch is one of the boys who just wanna have fun. It would be more fun shaping the opinions of the world through both News Corp.'s current properties and the world's preeminent global financial newspaper than through just News Corp.'s current properties alone--plus it would be more fun receiving the bowing and scraping that the world's powerful would engage in to placate the owner of News Corp. plus the Wall Street Journal than just the bowing and scraping that accrues to the owner of News Corp. alone. That is probably what is going on.

Which of these three possibilities is truest has implications for what is likely to happen to a Journal under Murdoch ownership, and whether the Murdoch purchase is a good thing.

If the first possibility is true--if the best analogy to what is going on is that this is the equivalent of a medieval German emperor creating a son Duke of Swabia--then it is surely good news for the world. A relatively young, energetic proprietor with deep knowledge of the news business--and Murdoch's children fit that bill--would in all likelihood be as good a steward of the excellent social asset that is the Wall Street Journal's news section. And it can't be bad for the editorial pages. Whatever happens to them has to be an improvement.

If the second possibility is true--that Murdoch wants to keep the Journal's strengths as he uses the brand as a new-media synergy launching pad--then the Murdoch purchase is probably good news for the world. Murdoch will then leave the news pages--the Journal's major strength--intact. And although Murdoch is as right-wing as Bartley and company, there is a key difference: Murdoch can be bought, or at least rented. A Journal editorial page run by Murdoch might well wind up supporting a Tony Blair or a Hillary Rodham Clinton: it would be wignutty when that was in Murdoch's interest; sane right-wing when that was in Murdoch's interest; centrist when that was in Murdoch's interest. A Journal editorial page run by the current regime would be wingnutty 24/7, as it is today. Neither would be a source of news or information--both would bear a completely random relationship to the truth--but the Murdoch version would be less destructive.

But by far the most likely is the third possibility. And if the third possibility is true, then Murdoch's purchase is probably bad news. It is true that the Wall Street Journal's editorial page will improve, as its positions are aligned less with winguttery and more with the interests of whoever has rented Murdoch for that particular afternoon. But the news pages will deteriorate. Murdoch will tell China's State Council and other political interests with whom he seeks to deal that the situation is delicate, that he cannot interfere openly with the news process, that it will take time, and so forth, but that if they make it worth his while he will do what he can do--and in the long run if they give him rope they will not be disappointed. Murdoch will tell his employees on the Journal news desks that he is under enormous pressure, that he understands the importance and delicacy of the situation, that it will take time, and so forth, but that they need to be patient and give him rope and they will not be disappointed. In reality, Murdoch will use the rope they give him to hang one or both of these groups--but which we will not discover for a while: Murdoch is a professional at this, after all.

So: as the Murdoch acquisition of the Journal moves forward, watch carefully. If Murdoch's children wind up being the effective proprietors of an organization run separately from News Corp., be happy. If Murdoch spends his time and energy leveraging the brand in new media space, reshaping things into the editorial pages to please his political contacts, and leaving the news pages alone to run themselves, then be happy.

But if Murdoch starts running the Journal the way he runs his other properties, be alarmed. Be very alarmed.

links for 2007-06-29

The Highest Broderism of All: Keeping Ones Eyes Closed for Six Years as a Favor to Dick Cheney (Why Oh Why Can't We Have a Better Press Corps?)

David Broder of the Washington Post writes on Thursday morning:

David S. Broder - Cheney Unbound - [W]hen presidential candidate George W. Bush chose Dick Cheney as his running mate, I applauded the choice.... Boy, was I wrong..... Cheney... used the broad authority given him by a complaisant chief executive to bend the decision-making process to his own ends and purposes, often overriding Cabinet officers and other executive branch officials along the way.... [H]e outfoxed even the veterans of past administrations when it came to the bureaucratic wars... shaped all of those decisions with his recommendations to the president -- often in ways that were unknown to the other players and unseen by Congress and the public.... Treasury secretary Paul O'Neill... [t]he secretary of state, the national security adviser and the chairman of the Federal Reserve Board also discovered to their surprise that Cheney had gone behind their backs to get his way with the president... used his intelligence and his grasp on the levers of power -- and most of all he used secrecy -- to outflank and outwit others and thereby shape the Bush administration's agenda.... [U]ltimately the president is responsible for... the resulting wreckage of foreign policy, national security policy, budget policy, energy policy and environmental policy under Cheney's direction and on Cheney's watch...

Broder has learned this today, June 28, 2007. He has learned this because he has read the news--which is a:

breathtakingly detailed series in The Post this week by reporters Barton Gellman and Jo Becker... a year of work that reveals more about the inner workings of this White House than any previous reporting.... Cheney shaped all of those [Bush] decisions... in ways that were unknown to the other players and unseen by Congress and the public. Secrecy was one of his tools and weapons.... [O]ther policymakers... discovered to their surprise that Cheney had gone behind their backs to get his way.... [A] political entrepreneur of surpassing skill operating under an exceptional cloak of secrecy. Thanks to Gellman and Becker, some of that secrecy has been removed.

Broder is going to have an online chat tomorrow, June 29, 2007. I have a question for him:

Dear Mr. Broder:

I was surprised to read you writing yesterday.... I was surprised because it seems to have been something that Gellman, and Becker, and you could have written back in July of 2001.

For it was back in July of 2001 that Bush subcabinet officials told me that:

  1. Cheney had overruled Treasury Secretary O'Neill and Federal Reserve Chair Greenspan on budget policy
  2. Cheney had overruled EPA Administrator Whitman and Treasury Secretary O'Neill on global-warming policy
  3. Cheney had overruled Secretary of State Colin Powell on North Korea policy
  4. George W. Bush had neither the patience nor the intelligence to master the issues
  5. it looked as though Bush had decided to rely on Cheney's opinion on pretty much everything.

Even before 911, as we learned no later than the end of 2003 when Ron Suskind published his Price of Loyalty, senior Republicans inside and outside the administration were having a great many quiet "what has happened to Dick?" conversations about Cheney's dysfunctional role. And we also learned that Cheney had blocked Greenspan and O'Neill again in their attempts to stop the steel tariff. And we also learned that Cheney had made Rumsfeld fire aides who actually were prepared to rebuild Iraq. And we knew--we knew an awful lot of stuff.

So why didn't you write about this back in July 2001? Are my sources--from Berkeley, 3000 miles away from you and Washington--really that much better than yours?


Brad DeLong

Let me put my cards on the table. I think that Broder--like me--knew pretty much the story back in July 2001. I think that he didn't write about it because it didn't suit his purposes and interests for him to inform his readers what he believed to be the case about the workings of the White House. Now it suits his purposes and interests to pretend that Gellman and Becker are bringing a lot of genuinely new information to the table, rather than just filling in the details of a picture that has been known in broad outline for six years.

This raises the obvious question: Why should anybody get their news six years late from the Washington Post? Shouldn't people get the news earlier from more aggressive and less corrupted reporters who value their reputation as news disseminators like Ron Suskind, and perhaps from webloggers who feel honor-bound to tell the truth?

The Weak Link Theory of Economic Development

Hoisted from Comments: Bruce Wilder on the weak link theory of economic development:

Some years ago, I was privy to the efforts of a company trying to build maritime shipping containers in China.

A shipping container is not a particularly sophisticated manufactured product -- more sophisticated than simple textiles, certainly, but most shipping containers include no motorized machinery. The most sophisticated aspects are the forged corner parts, which bear weight and must interlock with mounting hardware, and the requirements for dimensional consistency. The sides are pressed from rolled steel, and the floors are hardwood (at the time, teak was still used, when available), and the structure is riveted, bolted and welded together.

Despite rock-bottom wages, the container plant in China was consistently unprofitable. Why? Parts did not arrive on schedule. The quality of steel, forgings, other parts and finishes (paint) sourced locally was irregular. The local power grid was unreliable: power failures interrupted production and voltage spikes and brownouts damaged equipment. Local workers required a lot of training and supervision, and there was considerable turnover. Industrial services necessary to maintain the production equipment were difficult to obtain. Parts and repairs for the production equipment could be time-consuming to obtain. The purity of local water supplies impacted production quality. The list went on and on, with always the same result: finished output and productivity in the plant sucked big-time.

The venture changed hands and I lost track of them, but I would assume that successors eventually succeeded.

Such a concrete example may be instructive in reminding that high productivity is a result of getting very nearly everything right in a complex system.

CDOs: Mark-to-Model and Donner-Party Economics

Saskia Scholtes and Gillian Tett of FT on mark-to-model:

Saskia Scholtes and Gillian Tett of FT: As head of the financial stability unit at the Banque de France, Imène Rahmouni-Rousseau travelled to America this month to look at the current turmoil in the US subprime mortgage world. Although initially that had seemed an all-American saga, Ms Rahmouni suspected that French and other European investors also held assets linked to subprime securities. So on behalf of her central bank she wanted to assess the risks. What she discovered surprised her. There was little confidence about how to value the holdings. “Pricing data are difficult to obtain,” she says. It is a discovery being shared by numerous other policymakers and investors around the world as the fallout widens from a subprime lending boom, in which US banks provided vast amounts in home loans to financially stretched borrowers who put little money down and gave no proof of income. Among the casualties have been two hedge funds run by Bear Stearns, the Wall Street investment bank.

Until recently, when late payments and defaults on these mortgages spiked higher, the problem drew little attention. This was because, through the magic of so-called structured finance, risky assets such as subprime mortgages could be packaged into attractive investment products. These elaborately constructed securities, called collateralised debt obligations (CDOs), are designed to yield juicy returns while also carrying high credit ratings. They have proved popular with hedge funds as well as with longer-term investors such as pension funds and insurance companies, many of which have bought billions of dollars of such securities in recent years – thus providing the liquidity that was then channelled into mortgage loans.

But heavy losses incurred at the two Bear Stearns hedge funds as a result of such financial haute couture have prompted fears that the CDO emperor may turn out to have no clothes. Such a revelation could threaten the value of investor portfolios around the globe – not just in the mortgage sector but in the way many sorts of company fund themselves. This is because unlike stocks listed on an exchange or US Treasury bonds, CDOs are rarely traded. Indeed, a distinct irony of the 21st-century financial world is that, while many bankers hail them as the epitome of modern capitalism, many of these new-fangled instruments have never been priced through market trading.

Instead, products such as CDOs, which are designed to be held until they mature, have often been valued in investor portfolios or on the books of investment banks according to complex mathematical models and other non-market techniques. In addition, fund managers and bankers often have broad discretion as to what kind of model they use – and thus what value is attached to their assets.

So when Wall Street creditors last week threatened fire sales of CDOs seized from the stricken Bear Stearns funds, thus creating a market price for them for the first time, they also threatened to create a wider shock for the system. Fire sales rarely realise anything close to the previously expected value of assets. But if these deals went ahead, they would provide a legitimate trading level that would challenge current portfolio valuations.

In the event, Bear Stearns’ creditors sold only a fraction of the assets put up for auction. Market participants suggest that this was in part because bids fell far below expectations, with traders increasingly reluctant to take on CDOs tainted with subprime exposure. But the crisis at Bear’s funds has left investors, brokers and regulators asking an uncomfortable question: can the pricing models that have provided the foundations for this new financial edifice really be trusted? Or will valuations turn out to be over-optimistic and result in further investor losses? “Investors are slightly more cautious, becoming more picky and asking more questions,” says Michael Ridley, co-head of high-grade debt capital markets at JPMorgan. “They want us to lift the lid off the box a bit more.”

To an extent, the valuation problem for CDOs reflects the fact that the frenetic pace of innovation seen in the financial industry this decade has outpaced the development of its infrastructure. It has often been the case that when new instruments emerge in the banking world, the market is initially quite illiquid, meaning that the level of trading is low. But the murky nature of new products has rarely had broad systemic implications, because they have typically occupied a small niche.What makes the CDO sector unusual is that it has exploded at such a breakneck pace with bankers packaging bonds, loans and other debts into ever more complex structures. Last year alone, about $1,000bn (£500bn, €745bn) in cash and derivatives CDOs was issued in Europe and the US, according to data from the Bank for International Settlements. More than one-third was composed of asset-backed securities, often including low-grade mortgages.

As this explosion has occurred, some corners of this universe have already become relatively widely traded and transparent. Every day in the London and New York markets, for example, billions of dollars worth of deals are struck involving indices of derivatives on well-known corporate bonds – making it easy to obtain prices.

However, many other such products are created by bankers directly with their clients and then simply left to sit on the books of an investor.

Since such instruments typically last three to five years – and the CDO boom is so recent – many have not come to the end of their life. Nor have they been traded. Christopher Whalen of Institutional Risk Analytics, a consultancy, says: “The lack of a publicly quoted market for CDOs and like assets is exacerbating the liquidity problems for these assets beyond the underlying economics, for example, in subprime real estate.”

To compensate, investment institutions and banks use a variety of techniques to assign a value to these instruments in their accounts. In some areas, third-party data groups exist that can offer price estimates. However, the pace of innovation is so intense that it is hard for these providers to keep up with all corners of the market. So in many cases, investors are turning to alternative techniques to create prices. One tactic used by hedge funds entails asking several brokers for price quotes and taking an average. Results vary – not least because dealer banks may hold positions in these instruments themselves.

“It is very easy for hedge funds to shop around to find valuations that suit them best and then book their assets at that,” says one banker who advises hedge funds. “Going back to the bank that sold you a CDO and asking for a price is rarely likely to produce an accurate picture.”

Another approach is to estimate valuations based on the ratings the instruments receive from credit rating agencies. Yet this does not offer a fail-safe valuation method either. The rating agencies have been downgrading bonds backed by subprime mortgages in recent weeks but critics say they have been slow to act and face difficulties in analysing the market.

Christian Stracke, analyst at CreditSights, a research company, says: “With so little truly relevant historical data on the behaviour of subprime mortgages, and with such massive structural changes having occurred in the mortgage landscape in recent years, any time-series analysis approach is little more than a not-so-educated guess.“ Moreover, while ratings attempt guidance on the chance of default, they offer no indication of how market prices could behave – as the rating agencies stress. As the BIS noted in its annual report this week, ratings reflect expected credit losses rather than the “unusually high probability” of events that “could have large effects on market values”.

That means that on the rare occasions that instruments are traded, a large gap can suddenly emerge between the market price and its book value. This week Queen’s Walk Fund, a London hedge fund, admitted it had been forced to write down the value of its US subprime securities by almost 50 per cent in just a few months. That was because when it was forced to sell them, the price achieved was far lower than the value created with the models the fund had previously used – which had been supplemented with brokers’ quotes.

But unless circumstances arise that force a market trade, valuations often remain at the investment managers’ discretion. While managers say they strive to assign honest values, these are often difficult for an outside accountant to verify, since the techniques used are invariably highly complex. Moreover, incentives do not always encourage fair valuations: hedge fund managers, for example, are typically paid a percentage of the profits they book, giving them a vested interest in reporting a high asset valuation. At best, this means that the valuations of CDOs, for example, may often lag behind any swings in broader asset classes; at worst, this ambiguity may enable hedge fund managers or investment bankers to keep posting profits – even when markets fall.

But Amitabh Arora, head of interest rate strategies at Lehman Brothers, points to a further potential impact from the Bear Stearns upheaval. “The bigger risk now is that it calls into question CDOs as a financing vehicle in the corporate credit market – I think in the next six to 12 months we will see a significant reassessment of CDOs as a financial vehicle not just in the subprime world but the corporate world too.”

Adil Abdulali, a risk manager at Protégé Partners, a fund of funds, recently studied the performance of hedge funds and discovered clear statistical indications that they tend to stage-manage their earnings [known in the industry as “smoothing” them] when they trade illiquid instruments. “Conservatively, 30 per cent of funds trading illiquid securities smooth their returns,” says Mr Abdulali.

Some bankers and policymakers argue that this is simply a teething problem that will fade as structured finance becomes more mature. History suggests that most opaque, illiquid markets eventually become more transparent when they grow large enough – and behind the scenes, the Bear Stearns hedge fund problems are prompting bankers and investment managers to re-examine their valuation techniques. “We are getting a lot of calls from worried people,” says one third-party data provider.

However, history also shows that large-scale structural dislocations – such as a serious mispricing of assets – are rarely corrected in an orderly manner. Thus the big risk now is that if thousands of banks and investment groups suddenly have to slash the value of the securities they hold, the wave of accounting losses might at best leave investors wary of purchasing all manner of complex financial instruments. At worst, it could trigger more distressed sales and a broader repricing of financial assets, not just in the subprime sector but in other illiquid markets too.

“If every CDO [manager] was forced to mark to market their subprime holdings, it would be – well, I can’t think of a strong enough word to describe what it would be,” confesses a US policymaker.

These assets do have finite lifetimes. Unless nominal asset values crash over the next five years, CMOs and CDOs held for the next five years until maturity will pay off at or close to their model value. Only those with faulty capital structures who are thus illiquid today are in trouble, and they aren't in big trouble unless the numbers of those willing, rich, liquid enough to take on the risk of holding more CDOs and CMOs and with the analytical capability to price them are small.

As long as underlying asset values don't collapse, this is a redistribution: those hedge and other funds leveraged and without liquidity lose big, and those hedge and other funds that are liquid gain big. The caravan moves on, and the returns of those who make it down the California side of Donner Pass look very impressive, with the flesh-stripped bones of the illiquid and their investors scattered near Donner Lake for future archeologists to examine.

Annals of Government Failure: Silphium Edition

The extinction of silphium:

Damn Interesting » The Birth Control of Yesteryear: Unfortunately, modern science will probably never determine whether... [silphium] was an effective form of parenthood prevention.... By the end of the first century AD, following a fifty year decline in silphium numbers, the Roman historian Pliny the Elder recorded the plant's lamentable extinction.... The cause of the herb [silphium's] eradication is uncertain, however the most widely accepted theory is that over-harvesting coupled with livestock grazing caused the silphium population to decline beyond recovery. This trend may have started around 74 BCE when the region was absorbed into a Roman senatorial province. This change gave control of the laserwort crop to a long series of one-year-term governors who were largely motivated by short-term profits...

The consumer surplus from silphium was enormous:

Damn Interesting » The Birth Control of Yesteryear: Approximately 2,600 years ago--around 630 BCE--the Greek island of Thera was plagued by drought and overpopulation. According to legend, an assortment of settlers were selected to sail south to establish a colony in more hospitable climes. The men and women apprehensively put to sea, and the gaggle of enterprising Greeks eventually erected the city of Cyrene on Africa's northern tip. There, the settlers encountered a local herb which would ultimately bring them and their progeny fantastic wealth.

The prized plant became such a key pillar of the Cyrenean economy that its likeness was stamped upon many of the city's gold and silver coins. The images often depicted a regal-looking woman sitting in a chair, with one hand touching the herb and her other hand pointing at her genitals. The plant was known as silphium or laserwort, and its heart-shaped fruit brought the ancient world a highly sought-after freedom: the opportunity to enjoy sex with very little risk of pregnancy.

The silphium plants were giant fennels which grew wild along the dry hillsides of the Mediterranean coast. It didn't take long for the Greek settlers to discover its value as a food source, and the vegetable flesh came to be prized as a delicious garnish, while pleasant perfumes were coaxed from its yellow blossoms. Over time further uses for the wild fennel were found, such as the resin extracted from its stalks and roots which was used to treat cough, sore throat, fever, indigestion, snake bite, "warts in the seat," epilepsy, and a host of other disagreeable ailments. But of all of the plant's virtues, the silphium was certainly most prized for its pregnancy-preventing properties.

As word of the birth-control wonder-herb spread through ancient Europe, Africa, and Asia, a market for the versatile fennel developed rapidly. The seeds became widely used among the world's wealthier nations, including the citizens of ancient Greece, Rome, Egypt, and India. By some accounts the silphium seed was also a potent aphrodisiac, a property which considerably compounded its perceived value. The Roman bard Catullus famously alluded to its sexual properties in one of his love poems, where he declared that he and his lover would share as many kisses as there were grains of sand on Cyrene's silphium shores. More plainly, "We can make love so long as we have silphium."

Despite the efforts of the Cyreneans and their would-be competitors, the silphium industry stubbornly resisted expansion. Men worked long and hard to propagate the plant, but the notoriously cantankerous laserwort mocked all efforts at cultivation. It refused to sprout anywhere outside of its narrow swath of wild growth along the coast of the Mediterranean Sea. Though this limitation necessitated strict guidelines to prevent over-harvesting, the natural scarcity served to maintain the herb's high value. Occasional silphium smugglers penetrated the supply chain, but aside from these rare exceptions the royalty of Cyrene maintained a comfortable monopoly on civilization's contraceptives.

For centuries the north African city thrived on its laserwort bounty. The seeds of the fickle fennel came into such high demand that they were eventually worth their weight in silver. The Roman government went so far as to store a cache of the herb in the official treasury. Most of the primitive silver and gold coins from Cyrene were stamped with images of the silphium, some depicting just a single heart-shaped seed. It is thought by many historians that this ancient icon of unfettered lovemaking is the origin of today's ubiquitous "I love you" heart symbol.

Unlike many other medicines of its time, silphium was not thought of as a mere folk remedy; Scholars and doctors of the day openly praised the plant's effectiveness as a contraceptive. Ancient Rome's foremost gynecologist--a physician named Soranus--wrote that women should drink the silphium juice with water once a month since "it not only prevents conception but also destroys anything existing." Alternatively, a tuft of wool could be soaked in the juice and inserted into the vagina as a pessary. The herb's effectiveness and widespread use is evidenced by the observation that Rome's birth rate decreased during laserwort's heyday, despite increasing life expectancy, plentiful food, and relatively few wars or epidemics....

The extinction of silphium is now considered to be among humanity's earliest environmental blunders. If laserwort was indeed more effective than the alternatives, then the bygone birth control is certainly deserving of its glowing reputation...

I had never known why Cyrene was important enough to warrant a place in the list of "Parthians, and Medes, and Elamites, and the dwellers in Mesopotamia, and in Judaea, and Cappadocia, in Pontus, and Asia, Phrygia, and Pamphylia, in Egypt, and in the parts of Libya about Cyrene, and strangers of Rome." Writing in the fourth century C.E., Ammianus Marcellinus says that Cyrene is a deserted, ruined city.

The Economics of the iPod

Hal Varian writes:

An iPod Has Global Value. Ask the (Many) Countries That Make It: Who makes the Apple iPod?... [A] number of Asian enterprises, among them Asustek, Inventec Appliances and Foxconn... do final assembly.... Greg Linden, Kenneth L. Kraemer and Jason Dedrick... applied some investigative cost accounting to this question....

The retail value of the 30-gigabyte video iPod that the authors examined was $299. The most expensive component in it was the hard drive, which was manufactured by Toshiba and costs about $73. The next most costly components were the display module (about $20), the video/multimedia processor chip ($8) and the controller chip ($5). They estimated that the final assembly, done in China, cost only about $4 a unit....

At each step, inputs like computer chips and a bare circuit board are converted into outputs like an assembled circuit board. The difference between the cost of the inputs and the value of the outputs is the “value added” at that step.... The profit margin on generic parts like nuts and bolts is very low, since these items are produced in intensely competitive industries and can be manufactured anywhere. Hence, they add little to the final value.... [H]ard drives and controller chips have much higher value added....

[T]he $73 Toshiba hard drive in the iPod contains about $54 in parts and labor. So the value that Toshiba added to the hard drive was $19 plus its own direct labor costs. This $19 is attributed to Japan....

The researchers estimated that $163 of the iPod’s $299 retail value in the United States was captured by American companies and workers, breaking it down to $75 for distribution and retail costs, $80 to Apple, and $8 to various domestic component makers. Japan contributed about $26 to the value added (mostly via the Toshiba disk drive), while Korea contributed less than $1.... [U]naccounted-for parts and labor costs involved in making the iPod came to about $110. The authors hope to assign those labor costs to the appropriate countries....

The real value of the iPod doesn’t lie in its parts or even in putting those parts together. The bulk of the iPod’s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain.

Those clever folks at Apple figured out how to combine 451 mostly generic parts into a valuable product. They may not make the iPod, but they created it. In the end, that’s what really matters.

Does China's Rise Make Things Harder for Other Developing Countries? Yes.

Michael Kremer convinced me the answer was "yes." Now Dani Rodrik weighs in:

Dani Rodrik's weblog: Does China make it harder for other developing countries to make it?: Yes, according to FT's Alan Beattie. He writes in today's FT:

Being a developing country used to be easy. You followed leaders - Japan, Hong Kong, Taiwan, South Korea - up a well-trodden ladder from agriculture through manufacturing to services. Starting with tilling the soil, you moved on to turning out T-shirts, then toys, then tractors, then television sets, and ended up trading Treasuries.

The rise of China has made that less straightforward. Not only is the first rung harder to reach, thanks to the hundreds of millions of rural migrants to Chinese cities still willing to work for low wages stitching garments, but also exports of goods from China's coastal industrial fringe are rapidly becoming more sophisticated, threatening those halfway or more up the ladder. While the shoemakers of Italy and the steelmakers of Pennsylvania may complain loudly about Chinese competition, those with more to worry about are middle-income Asian countries geographically and economically close to the Middle Kingdom. So what is a poor developing nation to do? 

There are two schools on thought on this, as Beattie notes. One thinks that government cannot possibly do much and they better get out of the way, after taking care of the usual list of fundamentals of course:

For countries such as the Philippines, without a big arsenal for public investment, policy recommendations from most business people for competing with China involve no magic elixir. Governments should improve logistics, infrastructure, the business climate and education; try, possibly, to spot specialities emerging and support them, but otherwise get out of the way. They warn against governments crashing into the market having decided what the economy is likely to be good at and then promoting it at all costs.

The other school (which includes me) thinks that by following this route you not only remain in a rut, but you also miss out on the most important lesson from China's success: the need for the government to be strategic (and yes also flexible) in supporting industries. You do need an industrial policy--but... not of the traditional type...

The industrial policy that Dani recommends is one that focuses: not on the policy outcomes-—which are inherently unknowable ex ante—-but on getting the policy process right. We need to worry about how we design a setting in which private and public actors come together to solve problems in the productive sphere, each side learning about the opportunities and constraints faced by the other.... [I]ndustrial policy is as a discovery process—-one where firms and the government learn about underlying costs and opportunities and engage in strategic coordination.... It is the information externalities generated by ignorance in the private sector that creates a useful public role.... Yes, the government needs to maintain its autonomy from private interests. But it can elicit useful information from the private sector only when it is engaged in an ongoing relationship with it-—a situation that has been termed “embedded autonomy” by the sociologist Peter Evans (1995)....

[I]nnovation in the developing world is constrained not on the supply side but on the demand side. That is, it is not the lack of trained scientists and engineers, absence of R&D labs, or inadequate protection of intellectual property that restricts the innovations.... [T]he demand for innovation is low... because entrepreneurs perceive new activities to be of low profitability.... [A] useful analogy to keep in mind is with education and human capital. For quite a while, policy makers thought that the solution to poor human capital lay in improving the infrastructure of schooling.... [I]t became evident that the increase in schooling did not produce the productivity gains that were anticipated (Pritchett 2004). The reason is simple. The real constraint was the low demand for schooling—-that is, the low propensity to acquire learning—-in environments where the absence of economic opportunities depress the return to education...

The problem is that we now more-or-less now how to do light-industrial export-led development. We don't know how to do much of anything else. So "adopt a pro-development industrial policy" isn't much help. For China's rise has made it much harder for Mexicos, South Africas, and Perus to take that road.

links for 2007-06-28

The Wall Street Journal Needs to Employ More Dog People

Amy Schatz is clearly not a dog person. If so, she would know that it is extremely unusual and a sign of great distress for a dog to defecate in anything that it regards as its den--like a dog carrier:

Washington Wire - : Romney’s Dog: Riding High: The Boston Globe’s seven-part opus on former Massachusetts Gov. Mitt Romney began this morning with an interesting anecdote:

The white Chevy station wagon with the wood paneling was overstuffed with suitcases, supplies, and sons when Mitt Romney climbed behind the wheel to begin the annual 12-hour family trek from Boston to Ontario.... Before beginning the drive, Mitt Romney put Seamus, the family’s hulking Irish setter, in a dog carrier and attached it to the station wagon’s roof rack. He’d built a windshield for the carrier, to make the ride more comfortable for the dog. Then Romney put his boys on notice: He would be making predetermined stops for gas, and that was it. The ride was largely what you’d expect with five brothers, ages 13 and under, packed into a wagon they called the ‘white whale.’ As the oldest son, Tagg Romney commandeered the way-back of the wagon, keeping his eyes fixed out the rear window, where he glimpsed the first sign of trouble. ‘Dad!’ he yelled. ‘Gross!’ A brown liquid was dripping down the back window, payback from an Irish setter who’d been riding on the roof in the wind for hours.


With five kids, we realize space inside the family station wagon was at a premium. But seriously: he put the dog carrier on the roof instead of the suitcases? Former Wonkette Ana Marie Cox noted the incident on her blog, prompting lots of comments and liberal blogs accusing the Republican presidential candidate of animal cruelty. A campaign spokesman hasn’t responded to requests for comment on the incident. There’s also been no mention of it today on the Romney brothers blog.

Stupidest Woman Alive Nomination: Kathryn Jean Lopez

Brian Buetler nominates Kathryn Jean Lopez for "stupidest woman alive":

Brian Beutler: Almost daily Corner bashing: "Did you know," asks Katheryn Jean Lopez, "That you can read 10 Downing Street's website in Arabic ?"

Did you know, Katheryn, that there are literate Arabs both in and outside the Middle East? That some of them live in England? That it's to Downing Street's benefit when those people know what the government is saying about things? That this "makes them safer"?

I guess not.

Why Oh Why Can't We Have a Better Press Corps? (Yet Another Washington Post Edition)

Robert Waldmann watches Barton Gellman and Jo Becker not name Bush administration names:

Robert's Stochastic thoughts: The second article of the very excellent Gellman and Becker series on Cheney includes a minor but extreme example of generous granting of anonymity....

The Justice Department delivered a classified opinion on Aug. 1, 2002, stating that the U.S. law against torture "prohibits only the worst forms of cruel, inhuman or degrading treatment" and therefore permits many others.... Distributed under the signature of Assistant Attorney General Jay S. Bybee, the opinion also narrowed the definition of "torture" to mean only suffering "equivalent in intensity" to the pain of "organ failure... or even death."

When news accounts unearthed that opinion nearly two years later, the White House repudiated its contents. Some officials described it as hypothetical, without disclosing that the opinion was written in response to specific questions from the CIA.

Hmm[. W]ho might [those "some officials"] have been (and might one of them have been under oath at the time)?...

Text Ashcroft Comments on Anti-Terror Policy: Tuesday, June 8, 2004....

[SENATOR] KENNEDY: In the front page of the Times, it has this quote, "A team of administration lawyers concluded in a March 2000 legal memorandum, President Bush was not bound either by international treaty prohibiting torture or by federal anti-torture law because he has the authority as commander in chief to approve any techniques needed to protect the nation's security." Do you agree with that conclusion?

[ATTORNEY GENERAL] ASHCROFT: Senator Kennedy, I'm not going to try and issue hypothetical...

[SENATOR] KENNEDY: I'm not asking hypothetical. This is a memoranda that, again, was referred to today in the Post. "August 2002, Justice Department advised the White House that torturing Al Qaida terrorists in captivity abroad may be justified and that international laws against torture may be unconstitutional if applied to interrogations." Do you agree with that?

[ATTORNEY GENERAL] ASHCROFT: I am not -- first of all, this administration rejects torture.

[SENATOR] KENNEDY: I'm asking you whether this is -- these are -- there are three memoranda, January 9, 2002, signed by John Yo (ph), the August 2002 Justice Department, the (inaudible) amendment memo and the March 2000 -- the interagency working group. Those are three memoranda. Will you provide those to the committee?


[SENATOR] KENNEDY: KENNEDY: On what basis? Under what basis?

[ATTORNEY GENERAL] ASHCROFT: On the basis that the long-standing established reasons for providing opinions provided to the executive branch...

[SENATOR] KENNEDY: General, the executive privilege is not a legitimate basis of withholding memoranda from this committee. This Congress is investigating the prisoners' abuse that have occurred. Immense importance -- we have specific need of the documents that have allowed these abuses to occur. The memoranda issued did not involve confidential communications between the Justice Department and the president, but instead legal advice that was widely distributed throughout the executive branch. There are many examples of executive privilege that have been waived or over-written.... President Reagan, on November 4, 1982, issued guidelines on executive privilege. Ronald Reagan issued executive privilege memoranda to heads of the executive to "comply with congressional requests for information to the fullest extent consistent with the constitutional statutory obligations of the executive branch," and added that "executive privilege would be used only in the most compelling circumstances, and only after careful review demonstrated that assertions of the privilege was necessary." Now, are you invoking executive privilege here and denying us those memoranda? You've had 72 hours to think about this, General. This has been in the newspapers, you had information about it. You've had 72 hours to think about that you were going to be asked about this. I'm a member of the Armed Services Committee. We've been investigating and looking into this. The courageous act of the chairman, John Warner. And we're entitled to know whether that information is going to be available to the committees.

[ATTORNEY GENERAL] ASHCROFT: Well, the confidential memoranda provided -- any confidential memoranda provided to members of the executive branch...

[SENATOR] KENNEDY: This was generally circulated.

[SENATOR] HATCH: Let him answer the question.

[ATTORNEY GENERAL] ASHCROFT: considered by the department to be important that we maintain it, that we not provide it outside the executive branch. And let me just say that we're at war, and to talk about the powers of the president....

[SENATOR] HATCH: Senator, your time is up. But if you'd care to answer.

[ATTORNEY GENERAL] ASHCROFT: Well, I do care to answer because the senator raises very serious issues. And I think they deserve an answer....


I'm not doing anything other than to say that there is a long-established policy reason grounded in national security that indicates that the development and the debate of hypotheses and practice of what can and can't be done by a president in time of war is not good government....

[I]t seems to me that Ashcroft is definitely saying the memoranda were hypothetical and, thus, is lying [under oath] and a felon.

Gellman and Becker have done a great job, but shouldn't they have named the people who lied in public?

It's a minor form of corruption that Gellman and Becker are engaged in--telling their Washington Post readers that they promised not to reveal the names of the administration officials who falsely described the memo as "hypothetical" instead of writing "Attorney General Ashcroft and other officials." But it is a form of corruption nevertheless.

The American Scene

If you are still subscribing to the New Republic or the Nation or to National Review or to others of that ilk, consider that you could improve the world by (a) redirecting your attention to the website of the newly-revamped American Scene: An ongoing review of politics and culture, and (b) sending your subscription dollars to the American Scene instead. (But this doesn't apply to the American Prospect: the American Prospect is, I think, at the moment best-of-breed.)

Smart. Reality-based. The reality they see is a very different reality from the one I see, but they are out to inform rather than to mislead.

Eddie Lazear Has Jumped the Shark

It may be time for Eddie Lazear to leave the President's Council of Economic Advisers and come back to Stanford: an economic adviser who finds himself not advising but being advised by a vice president is doing no good at all:

A Strong Push From Backstage | Cheney | Lazear, who is otherwise known as a fierce advocate for his views, said that he may argue a point with Cheney "for 10 minutes or so" but that in the end he is always convinced. "I can't think of a time when I have thought I was right and the vice president was wrong."

This is not good.

Ronald Reagan on the Budget Deficit!


Interesting how Reagan never asked his economic advisers: "Well, isn't what you are telling me now inconsistent with what you told me last year?" Easy to bamboozle. And nobody appears to have tried to unbamboozle him:

Tue Sep 8 1981: Back on schedule--9 AM in the office. First of what will be several budget meetings. Hi interest rates are going to force more budget cuts or we won't meet our 82, 83, and 84 targets. I've given the order--we'll cut and we'll meet the goals we set for ourselves. We have to convince the money market that we mean it and that means some cuts in defense. But we have to do that in such a way that the world sees us as keeping our word to restore our defense strength. It can be done.

Thur Sep 10 1981: Dropped in on meeting of Ec. Advisors--a roomful of our country's greatest economists. None of them could explain why interest rates are so high.

Sun Oct 17 1981: Over to the cabinet room for a 10 AM meeting. Another bomb--the latest figures on deficit projections--bad. It seems our success is actually hurting us. Inflation is a tax. We have brought inflation down so much faster than we anticipated that tax revenues will be lower than we figured. We force the prospect of low inflation and lower interest rates--all of which is good--but gigantic deficits and that's bad.

Fri Nov 6 1981: We're going to have to build in more open time around meetings with Congressional leaders. Met 1st with Sen. leaders and meeting went 45 min. over time. Then the House Leadership which of course started late but ended later. The meetings were about the economy. With our plan barely started unforeseen things such as the high interest rates, etc. have increased the estimated deficit and make a balanced budget by '84 look unlikely. On the hill they automatically start thinking of tax increases. We differ and I think with good reason. I believe we reduced the differences between us but the press is going wild with its usual irresponsibility.

Thur Nov 12 1981: It looked like everything was going wrong today. The "Big 3" were waiting with a "what to do about Stockman" question. Before we could get into that--had a meeting with leadership Repub. of the House and Sen. on the budget--Stockman present. He asked for the floor--got up and told them he'd made a stupid mistake, etc and they applauded.

Back in the Oval Off met with staff, George B. and Don Regan. I didn't go along with one or two who wanted to fire Dave--nor did Don R. or George B.

Dave came over he and I had lunch. I had lunch--he couldn't eat. He stood up to it and then tendered his resignation. I got him to tell the whole thing about his supposed friend who betrayed him, then refused to accept his resignation. Told him he should do a "mea culpa" before the press and clear the misconceptiono that had been created by the tory. He was all set to go and did--taking their questions head on.

Tue Dec 8 1981: First a meeting to hear the 1st 1983 budget review. We who were going to balance the budget face the biggest budget deficits ever. And yet percentage wise they'll be smaller in relation to GDP. We have reduced Carter's 17% spending increase to 9%. The recession has added to costs and reduced revenues however so even with that reduction in govts. size we fact a large deficit.

Thur Dec 10 1981: Met with Council of Ec. advisors. While one or two spoke of possible tax increases after 1982 the others (majority) said no. Tax increases don't eliminate deficits they increase govt. spending. The general consensus was that our plan is the proper medicine for the recession and we should stick to it. That's what I intended to do all the time. [I.e., doesn't know that the (outside the administration) Economic Advisory Council isn't the (inside the administration) President's Council of Economic Advisers...]

Mon Dec 14 1981: Met with Paul Volcker. I'm not sure he sees the need to let the increase in money supply go forward in the upper range of their moderate schedule. The recession is because they slammed the door in April and kept it closed until Sept.--almost Oct. Our plan will get the Ec. moving again only if the Fed. allows--not an upward surge--but a moderate growth geared to Ec. growth.

Thur Dec 22 1981: A budget meeting. We've finally come together on the cuts--probably won't get all we ask for from Congress. They're so used to spending (for votes) they're getting edgy with '82 being an election year. The recession has worsened, throwing our earlier figures off. Now my team is pushing for a tax increase to help hold down the deficits. I'm being stubborn. I think our tax cuts will produce more revenue by stimulating the economy. I intend to wait and see more results.

Mon Jan 11 1982: Repub. House leaders came down to the W.H.--Except for Jack Kemp they are h--l bent on new taxes and cutting the defense budget. Looks like heavy year ahead.

Wed Jan 20 1982 The day however was a tough one. A budget meeting and pressure from everyone to give in to increases in excise taxes tied to Federalism program. I finally gave in but my heart wasn't in it.

Tue Apr 20 1982: Met with Repub. Cong. Leadership. The budget was the subject. I think they were relieved to learn that I'm willing to compromise some in return for a bi-partisan program. I called Tip O'Neill--I'm not sure he's ready to give. Tip is truly a New Deal liberal. He honestly believes that we're promoting welfare for the rich.

Fri Nov 19 1982: Back to a Cabinet meeting on the budget. Our deficits are structural as well as recession caused. We have a built in increase in the budget which is automatic--we must deal with it.

Mon Jan 3 1983: A tough budget meeting and how to announce the deficits we'll have--they are horrendous and yet the Dems. in Cong. are saying there is no room for budget cuts. Met with a group of young Repub. Congressmen. Newt Gingrich has a proposal for freezing the budget at the 1983 level. It's a tempting idea except that it would cripple our defense program. And if we make an exception on that every special interest group will be asking for the same.

Tue Jan 4 1983: Brkfst. with GOP leaders (Sen.). Gave them bad news about deficits. They agree the law that says we must project 5 yrs ahead is crazy but we still have to do it. No economist can predict more than 1 yr. ahead (if that) with any degree of accuracy.

Mon Apr 18 1983: A Budget briefing by Dave S. If the Dems. have their way the recovery will be over before it starts. They must give us the spending cuts we want or we face a trillion dollar deficit over the next 5 yrs.

Mon Jun 15 1987: A meeting with bipartisan Cong. leaders--Byrd, Jim Wright, Bob Michel, Bill Armstrong etc. We talked mainly about the budget and the Dems. of course took no blame for the deficit. I sort of corrected them on that with the 50 year history of deficit spending under Dem. control.

The Small Place of Economists in a President's Mind


It is interesting--but depressing--to recognize that Ronald Reagan did not know the difference between a group of prominent outside economists brought in to the White House compound for a day or so--an economic advisory council--and the economists on his personal staff who worked for him--the Council of Economic Advisers, a group of three who were headed during the Reagan administration by Murray Weidenbaum, Marty Feldstein, Bill Niskanen, and Beryl Sprinkel:


Justin Fox on the Washington Post's take on Cheneynomics

Compared to the rest, this is boring--but important:

The Curious Capitalist: Today brings us the economic-policy chapter of the big Washington Post series on how Dick Cheney runs America. It's not nearly as dramatic or sinister.... Economic policy is like that, I guess.

One big takeaway is that economic policy in the Bush administration is run not by the Treasury Secretary... but by the Vice President.... [P]olitical considerations, combined with a very facile supply-side view of how the economy works, that drove Cheney's thinking on the subject.... Cheney leaves behind on the economic front... persistent budget deficits (albeit, I always feel obliged to point out, much smaller deficits relative to GDP than those of the 1980s and early 1990s), an economy that's still growing and dynamic but has clearly seen better days, and a bunch of huge, as-yet unresolved problems, from the U.S. trade relationship with China to the future funding of Social Security and especially Medicare. Apparently Cheney was against the expensive new Medicare drug benefit, but he was accommodating enough to let the President have his way on that.

Oh, and one other interesting moment in the article. Ed Lazear apparently needed Cheney to tell him that the mortgage-interest tax deduction is popular:

When Edward P. Lazear, chairman of the White House Council of Economic Advisers, broached the idea of limiting the popular mortgage tax deduction, he said he quickly dropped it after Cheney told him it would never fly with Congress. "He's a big timesaver for us in that he takes off the table a lot of things he knows aren't going to go anywhere," Lazear said...

This is really too bad. One role of the CEA is to keep chipping away at issues that are not politically possible now, but may become so in ten years. Curbing the mortgage interest deduction is one of these.

Good News for the Newsweek Readers of the World!

Tom Bozzo Ken Houghton says that Newsweek is hiring Dan Gross:

Marginal Utility: Does This Mean They're Getting Rid of "NOT Paul"?: Via Economics Roundtable, Daniel Gross will sooon having a larger readership:

I am delighted to announce that Daniel Gross will be joining Newsweek on July 1 as a business columnist for the print edition of the magazine and for

Dan will write a biweekly column for the print edition of the magazine, additional pieces for our website and for Slate each week, and will contribute longer articles from time to time. He will also create a blog on

Ronald Reagan on Survivable Total Thermonuclear War!


Thur Dec 3 1981: NSC meeting--I approved starting a Civil Defense buildup. Right now in a nuclear war we'd lose 150 million people. The Soviets could hold their losses down to less than were killed in WWII.

I don't know which is sadder: that he was so easily bamboozled, that he was surrounded by people so eager to bamboozle him, or that nobody found that they had either a material or a moral interest in unbamboozling him.

Ronald Reagan on Ambassador Hinton!


Thur Feb 17 1983: Jeanne Kirkpatrick reported on her trip to Central America. A grim story. Our Ambas. Hinton under the direction of the same kind of St. Dept. bureaucrats who made Castro possible are screwing up the situation in El Salvador. I'm now really mad. Bill C. is bringing George S. up to date and then I'm determined heads will roll, beginning with Ambas. Hinton...

Thu Jun 9 1983: Ambas. Hinton just relieved as Ambas. to El Salvador, stopped by. He's a good man and did a fine job under extremely difficult circumstances. I hope he can convince some of our left leaning Congressmen how wrong they are...

I have little patience for those who say that Ronald Reagan was oriented to time, place, and identity. When you fire somebody, it's not hard to remember that you were the one who fired him.

There is the deeper question: just what did George Shultz think that he was doing in letting Jeanne Kirkpatrick talk to Reagan without a handler present?

The Social Impact of Microsoft Once Again

Here's a comment on Robert Barro's claim that the social value contributed by Bill Gates is roughly equal to Microsoft's total revenue:

Bill Gates's Charitable Vistas - In 2006, [Microsoft's] revenue was $44 billion, with earnings of $13 billion. This money was generated by creating something consumers value. Only Microsoft's competitors could believe that this much market value, revenue and earnings would have been created by delivering products that have little value to society. Suppose that a copy of a new version of Windows sells for $50 (and is typically charged as part of the price of a personal computer). Microsoft's revenue from Windows would then equal $50 multiplied by the number of copies consumers snap up. Microsoft's earnings are the revenue less production and development expenses. But that's not the social value. That comes from the increase in productivity created when businesses and households use the software. The social benefit equals the value of the extra product, less the total paid for the software. Almost by definition, the benefit has to be positive. Otherwise, why would consumers willingly pay for Windows? A conservative estimate, in a model where software serves as a new variety of productive input, is that the social benefit of Microsoft's software is at least the $44 billion Microsoft pulls in each year.... Mr. Gates is free to do what he wishes with his $90 billion. But I think he is kidding himself if he believes that the efforts of the Gates Foundation are likely to provide society anything like the past and future accomplishments of Microsoft. And, frankly, I would have preferred to get the $300 per person "Gates Grants."

Barro's defense of this claim is at

I don't buy it. Barro's model doesn't address the major issues that have to be dealt with in assessing the social utility of Microsoft: Whether the net social value of Bill Gates is positive or negative depends on his impact in creating and shaping Microsoft: relative to its competitors and to its alternative paths of development, did he make it more of a lockin-breaking innovator or a death zone-creating predator? Did he do more to make Microsoft a company that takes advantage of economies of scale or more to make Microsoft a company that raises profit margins? I'm on the side that thinks that Microsoft has been a considerable net plus. But others I respect see it is a net minus...

And I don't think Barro uses his own model correctly. He gets to the conclusions that the ratio of the social value of Microsoft to its total revenue is (a) roughly one, (b) does not depend on how substitutable Microsoft's products are with those of other intellectual-property holders, and (c) depends primarily on the share of "idea factors" relative to "standard factors" in the economy's production function. These seem to be wrong: artifacts of an extra term Barro adds to the production function in order to get a balanced-growth path out of the model.

Proper use of Barro's model leads, I think, to the conclusions that:

  • The ratio of the social value of Microsoft to its revenue could be very big--much more than one--or very small--much less than one--and there is certainly no reason to think that it is about one.
  • The ratio will be large to the extent that Microsoft's goods are radically different from those of others, and small to the extent that Microsoft's goods have close substitutes made by others.
  • As long as Microsoft's goods are not radically different from those of its competitors, the share of "ideas" in the economy's overall production function has relatively little to do with this ratio.

But, as I said, the big issues with Microsoft have to do with its effect on the pace of innovation. Was it a lockin-breaking innovator that provided a platform--shoulders on which others can stand? Or was it a death zone-creating predator that discouraged innovation and experimentation in broad market segments? My reading is that it was more of the first. But I am happy to be educated.

Ezra Klein: Every Man A Doctor, Purchaser, and HMO

Oh, this is funny--in a sick sort of way:

Ezra Klein: Every Man A Doctor, Purchaser, and HMO: It's pretty funny to watch Michael Cannon explain how, if you didn't hurt yourself too badly, and you happen to be a professional health care expert deeply steeped in theories of consumer cost control, you can use an HSA to bring down costs on your torn ACL. So we get lines like "I heard a tear, not a crack — which suggested soft tissue damage, but no broken bones. The only reason I used that information to rule out an X–ray was because I had a financial incentive to avoid unnecessary spending." That's all for the good, when it's all for the good. On the other hand, that's just a hop, skip, and a jump away from "She had shortness of breath, but no radiating arm pain, so she decided to wait through the weekend because she couldn't afford the ambulance ride. She died."

That's not my collectivist impulses spinning some implausibly hellish scenario, by the way. A recent study looked into what happens if you increase cost sharing on pharmaceuticals in Medicare. In other words, what happens when the patients have what Cannon calls a "financial incentive to avoid unnecessary spending." The answer? "[S]ubjects whose benefits were capped had higher rates of nonelective hospitalizations, visits to the emergency department, and death. In addition, subjects whose benefits were capped had lower pharmacy costs but higher hospital and emergency department costs, with no significant difference in total medical costs between the two groups."

They did try and bargain down care, and even skip some pharmaceuticals. But their choices led to neither better outcomes nor lower spending. Instead, they died more often, and we paid for their ambulance rides more frequently. Everyone's a loser!

What is the true social marginal cost of an x-ray, given that Michael Cannon is already using the doctor's time for a diagnosis? $50? Is there a chance an x-ray might pick up something bad that an MRI wouldn't? Does Michael Cannon really want to gamble on his ability to distinguish a "tear" from a "crack" in the middle of a soccer game? Apparently he does.

links for 2007-06-26

Poor John Updike. Poor New Yorker. The Great Depression Once Again

Oh, this is sad. Really sad. Depressing. And pathetic. It is really too bad that the New Yorker gave Amity Shlaes's book about the Depression, The Forgotten Man to John Updike to review. A competent editor would have chosen a reviewer who knew economics and history. But Updike is lost from the start:

Laissez-faire Is More: [Shlaes tells us that the 1929] crash preceded an underlying problem, deflation, caused by not enough money in circulation as banks failed and shut their doors; a number of dollar-starved communities—Salt Lake City; Ventura, California; Yellow Springs, Ohio—issued their own scrip, while Presidents Hoover and then Roosevelt supported policies, like the gold standard, aimed at a nonexistent inflation...

We need to stop right there. Roosevelt abandoned the gold standard. That Updike thinks that Roosevelt spent the 1930s clinging to the gold standard to control "a nonexistent inflation" is the first sign that he has lost the game of intellectual three-card monte Amity Shlaes is playing with her readers. If Milton Friedman were here, he would blow the whistle at that point.

Updike goes on:

[T]he gravest problem, as Shlaes sees it, was government “intervention, the lack of faith in the marketplace.” Both Presidents tried to lift wages, when letting them sink would have liberated businesses to start hiring and resume business as usual. Business knows best...

Once again, Milton Friedman would blow the whistle if he were here. The main thing reducing the stock of money was bank failures. The main thing causing bank failures was falling prices of all kinds--of real estate, of consumer goods, and of labor. More of what Milton Friedman's teacher Jacob Viner called "unbalanced deflation" would have produced an even deeper depression.

If only Updike knew this. If only Updike knew that nearly all economists--from Milton Friedman to Ben Bernanke to John Maynard Keynes to John Kenneth Galbraith on left--believed that further and faster deflation would have made the Great Depression worse! Here's John Maynard Keynes's argument: "Changes in Money Wages" It was written in 1936, and still reads very well today. But nobody told Updike.

Hoove... was a dynamo... he favored government intervention, as long as it didn’t violate his sense of the Constitution, and sought control over economic events that would, according to Shlaes, have gone better if left alone.... Shlaes pursues her thesis through the thirties, few heroes emerge, and the most highly placed two are not apt to figure in many liberal pantheons: Calvin Coolidge and Andrew Mellon. Coolidge... is presented as a kind of Zen saint, a pillar of inaction.... [Shlaes] underlines Mellon’s honorableness, private generosity, and public spirit...

But she doesn't tell Updike that at the bottom of Mellon's personality was a pronounced social-darwinist streak, a belief that you had to be cruel to be kind. And Updike, of course, doesn't know. So he cannot quote Herbert Hoover's retrospective judgment of Mellon, that the policies Mellon had convinced him to follow made the Great Depression much worse:

[T]he “leave it alone liquidationists” headed by [my] Secretary of the Treasury Mellon... felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”...

Updike forges on, lost in the swamp, so lost that he is unable to protest Shlaes's libel that that Roosevelt was practically a fascist and her argument--argument--a very serious argument that has never been made in such detail or such care--that Roosevelt wanted to make the government boss people around because he couldn't use his legs:

Shlaes, in a bold stroke of psychologizing, lays the hyperactivity to “the restlessness of the invalid.” She goes on, “Like an invalid, the country took pleasure in the very thought of motion.” More ominous was Roosevelt’s totalitarian tendency: “His remedies were on a greater scale and often inspired by socialist or fascist models abroad.”

Updike watches Shlaes make the claim that that communist Roosevelt hired other commies as New Dealers:

One of Shlaes’s chapter-length detours deals with a junket... to investigate and report on conditions in the Soviet Union.... [T]he economic commentator Stuart Chase.... Stuart Chase upon his return wrote, “Laissez-faire rides well on covered wagons, not so well on conveyor belts and cement roads.” Collectivism was the inevitable direction. After all, Chase wrote, “why should Russians have all the fun remaking a world?” The poisoned chalice was passed around...

But then she doesn't:

But “few New Dealers were spies or even communists,” she reassures the reader....

At the end of his review, Updike tries to fight back:

[T]he Depression slogged on, ending only in 1940, as the government decisively hiked defense spending.... My father had been reared a Republican, but he switched parties to vote for Roosevelt.... The impression of recovery-—the impression that a President was bending the old rules and, drawing upon his own courage and flamboyance in adversity and illness, stirring things up on behalf of the down-and-out—mattered more than any miscalculations in the moot mathematics of economics. Business, of which Shlaes is so solicitous, is basically merciless.... Government is ultimately a human transaction, and Roosevelt put a cheerful, defiant, caring face on government at a time when faith in democracy was ebbing throughout the Western world. For this inspirational feat he is the twentieth century’s greatest President, to rank with Lincoln and Washington as symbolic figures for a nation to live by.

A better New Yorker editor would have chosen a reviewer who at least knew what an aggregate demand curve was. Here's my take: I, at least, think that as far as recovery was concerned the macroeconomic good done by the New Deal vastly outweighed the structural bad. Any reasonable counterfactual involving no New Deal that I can see has things a good deal worse in the middle and late 1930s than they were in our reality.

But there is an argument to be made that an even better New Deal would have been possible, and ought to have been attainable.

Had Milton Friedman been special assistant to and whispering in the ear of Fed Chair Marriner Eccles in 1936-1938, he would have successfully headed off Eccles's boneheaded idea of raising reserve requirements on banks. Then the late 1930s would have been a much happier time. Had FDR given his baton in 1933 to trustbuster Thurman Arnold rather than to cartelizer Hugh Johnson and had the initial round of the New Deal increased rather than decreased the degree of competition in the American economy, then... well, the neoclassical part of my brain thinks that 1934 and 1935 would have been somewhat happier--but the Fundie Keynesian part of my brain thinks that Hugh Johnson's NRA was irrelevant because aggregate demand was a much bigger problem then than aggregate supply....

The New Deal essentially dusted off and implemented the unsuccessful Progressive Era program for the reform of American finance that had been pushed by the likes of Louis Brandeis during the 1900s and the 1910s. And Louis Brandeis was definitely on the side of the upwardly-mobile and the smart and technically competent, as opposed to the side of old wealth and new thrift.... Financial markets function well for the economy only when they do a good job of seeking out and transmitting information.... This requires that people be incentivized to seek out and uncover important pieces of information by being able to profit handsomely from doing so--which requires that there be a bright visible line between what you can do and what you can't, between legitimate research and illegitimate insider trading. The SEC as born in the New Deal has always found it relatively difficult to draw such a bright visible line....

[On the other hand] financial markets also function well only when they mobilize great masses of savings from scattered individuals by giving them confidence that their investments are liquid in that they can be bought and sold at a fair price.... Smart financial regulation attains a point of balance. There is... a general worry that the system the New Deal has left us pays too much attention to the desirability of a level playing field for buyers and sellers, and not enough to the desirability of having truly informed buyers and sellers....

[L]et's not lose sight of the fact that even badly-handled as it was, really-existing deposit insurance [implemented during the New Deal] was a mammoth improvement over no deposit insurance at all. I think that that is a good thumbnail summary of the entire New Deal: badly-handled, but a vast improvement over the preceding system and over the politically-viable alternatives--with the exception, I would argue, of Agriculture Support and the NRA, which did little if any good at immense long-run cost...

Links: I like J. Bradford DeLong's Journal of Economic Perspectives article and his still unpublished attempt to get at the guts of the economic advice Joseph Schumpeter and others were giving in 1933 John Maynard Keynes called "extraordinary imbecility." An online for-pay version of Joseph Schumpeter et al. (1934), The Economics of the Recovery Program is at<>. Schumpeter and company were fiercely critical of the New Deal. A contemporary review of their book by Princeton's Otto Nathan is here

Wikipedia has good background entries on Huey Long, the Bonus March, and Father Coughlin

For Eichengreen and Sachs on abandonment of the gold standard--which Roosevelt did in 1933--as the key to even partial recovery from the Great Depression: "Exchange Rates and Economic Recovery in the 1930s"

Ben Bernanke's analysis of the role played by unstemmed financial panics, industrial bankruptcies, and bank closings is Ben Bernanke (1983), "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review, 73, (June) pp. 257-76 at google scholar >>. Ben has a nice speech about money, gold, and the Great Depression

Milton Friedman and Anna Schwartz's account of the role played in the Great Depression by gold-standard and other policies that contributed to the sharp decline in the money supply is in the "Great Contraction" chapter of their Monetary History of the United States


Ken Silverstein provides us with yet more reasons why we would be better off without the Washington Post. What other news organization would employ Howard Kurtz of the Lobbyists' Rights Party?

"Kurtz on Undercover Journalism: “The horror!”": Earlier this year, when I was working with my editors to plan out a story about lobbyists willing to work for the Stalinist regime in Turkmenistan, I predicted that after the story was published Washington Post columnist Howard Kurtz would write a hand-wringing, tut-tutting column about our tactics. Right on schedule, Kurtz delivers his opinion. “No matter how good the story,” he writes, “lying to get it raises as many questions about journalists as their subjects.”

Kurtz seems to be condemning almost all undercover reporting, from the Chicago Sun-Times Mirage tavern sting, to ABC’s Food Lion investigation, which revealed that the grocery chain was using bleach to cover up the smell of rotting beef it was selling to consumers. NBC, however, gets a nod of approval for targeting sexual predators, because Dateline tags along with the cops to get the story. Kurtz is a reliable champion of “balanced” coverage—such as the Post’s own 27-part series earlier this year on one of the lobby shops discussed in my story, Cassidy & Associates. That series came in with a whimper on March 4 and went out with a whimper five weeks later. A classic of “he-said, she-said” journalism, it uncovered little besides touching anecdotes about little Gerald Cassidy’s boyhood and, from what I can tell, was barely read and had little impact. (It’s interesting to note the silence of Cassidy & Associates in the debate over my story. As APCO takes the heat, Cassidy keeps a low profile. Corrupt dictators shopping for a full-service D.C. lobbying firm should take note—Cassidy may be more expensive, but they’re smarter too.)

People should, of course, read the Kurtz column, read my piece, and come to their own conclusions, and as I have said before, those uncomfortable with my tactics are free to dismiss the story’s findings. Despite the concerns of Kurtz, most readers seem to understand why I went undercover. From a website comment that followed Kurtz’s column:

As Howard Kurtz falls over himself defending the greed-infested and immoral sleaze-meisters at APCO, Cassidy & Associates (and the lobbying/bribery industry in general), he misses the irony of the headline . . . the true Web Of Deceit is spun by these firms that purport to be run by honest and ethical people who just happen to sell lies for a living in their service to any brutal, murdering dictator that can fork over enough cash. Anything for a buck, Mr. Kurtz?

Incidentally, APCO Associates told Kurtz that it had actually decided not to represent the regime and was still evaluating the situation. This was a demonstrable lie, as I showed in my post yesterday with e-mails APCO had sent me, but Kurtz apparently didn’t intend to run their claim past me. In fact, the only reason I was able to get a reply into his column was that I already knew APCO had been pressing that argument to others, and I asked Kurtz if they had made that claim to him. When he acknowledged it had, I asked to respond.

I read Kurtz the APCO emails but couldn’t offer copies to him on Wednesday, when he called me, because I had already promised an exclusive to the Bill Moyers Journal. On Saturday, after the Moyers interview aired, I contacted Kurtz to offer him the emails but he declined, saying he had already filed his story.

Except that story wasn’t published until today. I know the Washington Post is Old Media, but surely Kurtz had time to review the emails and cite them in a story that was running two days later. He ultimately wrote only that “Silverstein says APCO pursued him hard and expressed disappointment at being turned down,” so it was my word against theirs, despite a plethora of evidence that APCO had been ready and willing to sing the praises of Turkmenistan (assuming the checks cleared).

In the same column where he discussed my story, Kurtz criticized reporters for making political contributions (a story that has been blown wildly out of proportion, as Matthew Yglesias summarizes. The comments on regarding this part of Kurtz’s column are even more entertaining. For example:

While Kurtz is wringing his hands about reporters’ campaign contributions, it might be nice of him to disclose who his wife is and what she does for a living. Google ‘Sheri Annis‘ for insight into the non-partisan Kurtz household. Maybe Howie should rename his TV show “Resourceable Liars”...

Thinking About the Unfortunately Thinkable: Iran--and Bush

It is widely believed that the ruling regime in Iran is seeking to build nuclear weapons.

Perhaps this is not true. Perhaps the ruling regime in Iran is merely seeking to persuade everybody that it is seeking to build nuclear weapons. A country's political leverage is maximized when it is nearly able to acquire nuclear weapons but has not yet done so. Its neighbors and the world's great powers then have powerful incentives to persuade it not to do so. It can, theoretically at least, extract significant concessions in return for abandoning its nuclear ambitions. And because it does not yet have nuclear weapons, it is not yet an imminent threat to the survival of its neighbors, and very far indeed from being an imminent threat to the great powers.

Let us hope that the ruling regime in Iran is merely seeking to persuade everybody that it is seeking to build nuclear weapons in order to extract concessions in return for abandoning nuclear ambitions that it does not have. But let us not bet on that hope: it is a hope that is likely to be in vain. It really does look as though the ruling regime in Iran is attempting to acquire nuclear weapons.

This is too bad. If Iran's ruling regime were thinking straight, they would not want to have nuclear weapons. Nuclear weapons do provide an element of deterrence, yes. A country with nuclear weapons is unlikely to suffer an all-out attack by a neighbor aimed at conquering it and overthrowing and hanging its government. A country with nuclear weapons is unlikely to suffer a surgical attack by a great power--an attack either endorsed or not endorsed by the Security Council--that has lost its patience and seeks cheap and easy "regime change." A country with nuclear weapons will find that its soldiers, diplomats, heads of state, and heads of government will be treated with extra respect. These are all advantages to the regime of possessing nuclear weapons.

But there are also disadvantages to the people and to the regime of possessing nuclear weapons. If your internal decision-making processes become deranged enough to carry you to or over the brink of pointless war--as Egypt's did in 1967, Pakistan's did in 1970, Argentina's and Israel's did in 1982, Iraq's did in 1979 and again in 1991, Israel's did in 2006, and so on--then the situation is much more dangerous and much more likely to end in genocide or near-genocide if you have nuclear weapons than if you do not. You also need to fear your own majors and colonels with their fingers on the button. And if you acquire nuclear weapons, your neighbors will too. Then you need to fear not just your own internal decision-making processes and your own majors and colonels but their internal decision-making processes and their majors and colonels as well.

Most of the time things will go well when neighboring countries are able to shatter if not destroy and inflict megadeaths on each other in less than half an hour. Human beings, after all, live in close contact with and are nearly all capable of using deadly force on each other. Yet very few of us are killed by our next-door neighbors. Most of the time we live out our lives in peace with our neighbors even though every kitchen in the world contains weapons of personal destruction. Can't we comfortably expect nations to do the same? If Khrushchev and Kennedy and Eisenhower, Nixon and Brezhnev and Mao could have but not use nuclear weapons on each other, can't we be comfortable with a world of mass proliferation and multilateral mutual deterrence?

Perhaps not. There are two reasons to fear. The first is that countries are not run by normal people. Many countries most of the time, and all countries some of the time, are run by extremely aggressive individuals who are at the extreme edge of human personality types: testosterone-crazed devil-apes whose aggression is not their servant but their master. Almost all humans live in peace with their neighbors. Leaders of nations are not "almost all humans."

Second, many people in our world today are God-maddened. God-maddened people do strange things. Cast your mind back 420 years to 1587. Back then the world's preeminent military superpower was trying to suppress a stubborn insurgency of religious fanatics. A neighbor of the insurgents wondered if it should stick its oar in: provide arms and money and special forces and perhaps even "Revolutionary Guards" to the insurgents. They decided to go ahead--that they ran next to no risk from thus tweaking the world's then-preeminent military superpower. Why did the Privy Council of Elizabeth I Tudor decide to aid the revolt of the Protestant Netherlands against Spain? One reason was confidence that God was on their side: that if Phillip II Habsburg were to, in response to English intervention, send an Armada into the English Channel, that Jesus Christ and the Archangel Michael would come down to fight for the English alongside Sir Francis Drake, Richard Hawkins, and Lord Howard. And ther Privy Councxil of Elizabeth I Tudor were some of the canniest poiticians of any age, presided over by the canniest ruler England ever saw.

We are very likely to lose a city to nuclear fire over the next half century. There will be some stupid miscalculation--most likely the confidence of some God-maddened colonel that divine intervention will protect him and his people or the fear of some general that such a God-maddened colonel is about to press the button. The city--hopefully only one--is likely to be named Tehran or Islamabad or Delhi or Tel Aviv or Washington or London or Paris or Moscow or Beijing or Pyongyang or Seoul. For a small country, the best way to get your capital city off that list, the best way to protect your people, is to not have nuclear weapons in the first place.

The best resolution of the Iranian nuclear problem would be for all powers in the region--India, Pakistan, Iran, and Israel--to do what makes their people safest: for all to give up their nuclear weapons programs. The second best resolution of the Iranian nuclear problem would be for Iran to do what makes its own people safest: for it to give up its nuclear ambitions, whether or not it receives substantial security guarantees that deter the possibility of attacks on Iran in return. Even if Israel and Pakistan keep their nuclear weapons, the devastating consequences for Israel and Pakistan of using nuclear weapons against Iran is a more effective deterrent than an Iranian nuclear arsenal would be.

But we are unlikely to get to a good resolution.

In a world without George W. Bush we could argue that abandoning its nuclear ambitions is safer for both the people of Iran and the current Iranian regime. But George W. Bush proclaimed an "axis of evil" consisting of Iraq, North Korea, and Iran. The first did not have a nuclear weapons program, and its regime was overthrown. The second did have a nuclear weapons program, and its regime survives. The Iranian regime can do the math, and the math says that a nuclear program is a source of safety for the regime, especially as long as Israel holds onto its own nuclear weapons.

Our best shot is to have the world's great powers bind themselves to oppose any change of regime in Iran other than through peaceful, democratic, internal means, and then to argue that Iran should abandon its nuclear ambitions for the sake of its people. But our best shot is not a very good one.

Gramscian Hegemony in Action

Ezra Klein directs us to Larry Bartels:

Ezra Klein: Political Science Abstract of the Day: Larry Bartels: Economic Inequality and Political Representation:

I examine the differential responsiveness of U.S. senators to the preferences of wealthy, middle-class, and poor constituents. My analysis includes broad summary measures of senators’ voting behavior as well as specific votes on the minimum wage, civil rights, government spending, and abortion. In almost every instance, senators appear to be considerably more responsive to the opinions of affluent constituents than to the opinions of middle-class constituents, while the opinions of constituents in the bottom third of the income distribution have no apparent statistical effect on their senators’ roll call votes. Disparities in representation are especially pronounced for Republican senators, who were more than twice as responsive as Democratic senators to the ideological views of affluent constituents. These income-based disparities in representation appear to be unrelated to disparities in turnout and political knowledge and only weakly related to disparities in the extent of constituents’ contact with senators and their staffs.

And Ezra Klein comments:

And it should go without saying that the more focused politicians are on the preferences of their affluent constituents, the more their legislation will entrench and augment inequality, further erasing the preferences of the poor and middle class from consideration. That said, I would like to remind people that in 2001, we had a terrorist attack, and there's a war going on, and everything is different now, and there's really no time for procedural niceties like listening to the bottom third of the country.

Scott Eric Kaufmann Is Procrastinating Again!

Strangely enough, he does not seize the Moral High Ground:

Acephalous: BLOGWARS! (An Interactive Humor MUD): You are standing near the Moral High Ground. To your South are Theists (or Theorists). To your North are Atheists (or Anti-Theorists). To your East and West are scorched earth, battered egos and hurt feelings.


You see scorched earth, battered egos, hurt feelings and hear the unmistakable whine of the dissertator. The earth, though scorched, shows signs of heavy travel. At your feet is a book with as many Post-Its as dog's ears.

manhandle book

Londonesque solution!

Sorry, I don't know how to manhandle. Please try again.

Skim book in superficial manner

You are surprised to see the book skip lightly over the surface of the Sea of Faith to your West, before eventually sinking. Now where did that come from?


Shore of the Sea of Faith

The water looks warm and inviting. The beach is a slippery slope.

To the west is the Waters of Lethe. To the North is a rocky path. To the South is an Intelligent Designer.