Tuesday, November 30, 2004

What is Normal?

Andrew Sullivan links to this BBC site where Iraqis write about their day-to-day experiences. Now Sullivan wants to believe that these are "normal" Iraqis, yet, I have a hard time believing that it is normal for people in Iraq to speak English. Also, this list reveals three of them to be doctors or med students, one a civil servant and one a housewife (plus two UK citizens). This is obviously interesting, but to claim it represents the voice of "normal" Iraqis is like asking a random college professor her opinion on Bush and claiming it represents "normal" Americans.

Brad Delong: "Sex is Magic"

Brad Delong writes:
Sex with near-strangers messes with your head. The chances that both near-strange partners will fall for each other are quite low, but sex is magic, and the chance that one will fall--and wind up, in the end, devastated--are quite high. When body gets out of sync with mind and heart, things are likely to go very wrong, and can go wrong very quickly.

Monday, November 29, 2004

French Values

Le Monde writes about the election of Nicholas Sarkozy to be head of the UMP, Chirac's party. Le Monde argues that the last 30 years has been spent simply in search of power and that now Sarkozy's task is to find ideas. Sarkozy, they speculate, will push values, and traditional values at that. This will allow the party to take a stand on integration (read: opposing Muslims) and other divisive social issues. Sound familiar? The interesting difference is that the UMP is perceived to have lacked ideas, whereas Republican success until recently was perceived to be built on ideas from the vast think tank complex. Odd then that Chirac's government was so vilified by the American Right: they share so much...

Haven't We Gone Over This?

Business Week has a particularly silly article about China's "threat" to American business. So let's get this straight. We've gone through agricultural revolutions, an Industrial Revolution, "downsizing" epidemics, the Information Revolution, opening of import and export markets to Mexico, Japan, and East Asia and our unemployment rate is still around 5%. Clearly technology and free trade do NOT have an effect on employment in the long run.

But, says Business Week, this time is different:

America has survived import waves before, from Japan, South Korea, and Mexico. And it has lived with China for two decades. But something very different is happening. The assumption has long been that the U.S. and other industrialized nations will keep leading in knowledge-intensive industries while developing nations focus on lower-skill sectors. That's now open to debate. "What is stunning about China is that for the first time we have a huge, poor country that can compete both with very low wages and in high tech," says Harvard University economist Richard B. Freeman. "Combine the two, and America has a problem."
Apparently "something very different" threatens our very way of life. The point, however, is that while China's comparative advantage in "knowledge-based" industries is debatable, there are more goods to produce than manufacturing and knowledge goods and the United States will be able to produce one, or more likely many, of them relatively more cheaply than any other country.

Furthermore, as of November 2003 employment in Mathematical and Computer occupations, the "knowledge" industries, included 2.8 million workers, out of 127.4 million. That's only 2.2% of total employment. Even if we lost all of those jobs, unemployment would rise to only about 7.5% which could be cured by expansionary monetary or fiscal policy (although, there are problems with this right now. But I still wouldn't worry about it.) It is patently unlikely, however, that these jobs would simply be lost without being replaced in other, growing industries.

Companies are attracted to China for their low wages. But low wages also mean lower productivity and as productivity rises, so will wages. And, the (hopefully) gradual depreciation of the dollar means that U.S. goods will become cheaper and thus more attractive to other countries as well as domestically. This means more GDP and lower unemployment.

The basic point is that, as history has shown us, trade and technology are not the primary determinants of unemployment. Rather, it's the Fed and fiscal policymakers who have their feet on the gas pedal. Widespread worry has abounded at every new introduction of free trade or new technology and the massive unemployment to which these worries refer has never materialized. It will not in this case either. There is nothing fundamentally different about China.

Becker and Posner Have a Blog

Via Crescat Sententia Gary Becker and Richard Posner will soon have a blog. Cool.

Update: Via Eugene Volokh 'tis here.

Sunday, November 28, 2004

I Wish I Had Noticed This Before

Via Daniel Drezner, two very interesting international economics blogs: Nouriel Roubini and Brad Setser. Both look very good (especially Setser, who seems to post more frequently).


Albert Hirschman has a fascinating discussion of opinions and democracy. He argues that
Recent contributions to the theory of democracy have stressed the role of deliberation in the democratic process: for a democracy to function well and to endure, it is essential, so it has been argued, that opinions not be fully formed in advance of the process of deliberation. The participants in this process -- both the public at large and its representatives -- should maintain a degree of openness or tentativeness in their opinions and be ready to modify them...Without a political process that manifests at least some aspiration toward this admittedly idyllic picture, democracy loses its legitimacy and will thus be endangered
given the basic need for identity in our culture, the forming and acquiring of opinions yields considerable utility to the individual. At the same time, if carried beyond some point, the process has dangerous side-effects -- it is hazardous for the functioning and stability of the democratic order. Under present cultural values these noxious side-effects do not enter the individual calculus -- they are what economists call external diseconomies. Hence there will be an overproduction of opinionated opinion.
And then it gets interesting:
our traditional bias in favor of strong opinions ought to be modified, in part because it might be dangerous to the health of our democracy. The question may therefore be raised whether a similar change is to be recommended for the concept of given tastes. To be sure, tastes are different from opinions: to become effective in the marketplace, they do not have to go through the process of deliberation characteristic of opinions in a democracy. But...many entrenched tastes (for tobacco, for cholesterol-laden foods, for using the automobile rather than public transportation and so on) are being questioned...As part of their education for democracy, consumers should be encouraged to look at their tastes in general in a slightly more questioning mood: any single consumption habit may be easier to rein in or give up once people can no longer consider their tastes as proud possessions that cannot be altered or abandoned without some grievous loss of personality, character, identity, or self.
I want to have something grand and interesting to say, for I feel this merits such a response. Perhaps it says something important about civility in public discourse? Maybe that civility is an indication that our opinions are open to being swayed by rational discussion, and that this is necessary for democracy. So maybe I shouldn't have been so vociferous in opposing civility as an outstanding norm. Yet I want to take seriously Hirschman's suggestion that this says something about tastes. Why do we believe that tastes ought to be held strongly? That to be a real person we should have strong opinions? It's certainly the case that funnier people are faster at reaching judgements, have stronger and quicker opinions. But there has to be more...I'm just not sure what...

Saturday, November 27, 2004

A Counterfactual

Would we be seeing articles like this if Kerry had been elected?
Investors and market analysts are increasingly worried that the last big source of support for the American dollar - heavy buying by foreign central banks - is fading.

The anxiety was on full display Friday, when the dollar abruptly slid to a record low against the euro after a report suggesting that the Chinese central bank might start to reduce its holdings in the American currency.

Though Chinese officials later denied the report, and the dollar recovered, analysts say the broader trend is that foreign governments are becoming less willing to finance the growing debt of the United States government.

On Tuesday, a top official with the Russian central bank said his government had become worried about the sinking value of the dollar and might switch some foreign reserves to euros.

A day later, India's central bank hinted that it was worried about the same issue and might shift some reserves into other currencies.

Japan and China, which together have amassed nearly $900 billion in United States Treasury securities, have both slowed their buying sharply from the frenetic pace in February and March.
Or would foreign governments have given a Kerry Administration the chance to return to fiscal sanity?

Is The Bush Administration TRYING to Have a Debt Crisis!?!?

This article in the Times about how the Bush administration is planning on financing their new Social Security initiative is particularly scary:
The White House and Republicans in Congress are all but certain to embrace large-scale government borrowing to help finance President Bush's plan to create personal investment accounts in Social Security, according to administration officials, members of Congress and independent analysts.
Large-scale government borrowing? Haven't we already embraced that to pay for the rest of the budget? Isn't that what is about to cause a financial crisis once foreign central banks stop buying our debt? No, no, says the White House. Rather, it's a plan for SAVING:
"The president does support personal accounts, which need not add over all to the cost of the program but could in the short run require additional borrowing to finance the transition," Mr. Bolten said. "I believe there's a strong case that this approach not only makes sense as a matter of savings policy, but is also fiscally prudent."
So, if the personal accounts don't add to the cost of the program (they do), why is additional borrowing necessary? And furthermore, how does this make sense "as a matter of savings policy?" Isn't "additional borrowing" exactly what you don't want in a good "savings policy?" Essentially all the Social Security plan does is borrow at low (that is, low right now) Treasury rates and then invest at higher stock market rates. But, the stock market rates are typically higher for a reason: stocks are more risky. And with very high deficits that could send the dollar plunging, interest rates skyrocketing, and the stock market into a tailspin this doesn't seem "also fiscally prudent." Does it? Furthermore,
Proponents say the necessary amount of borrowing could vary widely, from hundreds of billions to trillions of dollars over a decade, depending on how much money people are permitted to contribute to the accounts and whether the changes to Social Security include benefit cuts and tax increases.
If this is how much PROPONENTS say it will require us to borrow, think about how much we will ACTUALLY have to borrow. So what exactly do they mean when they say this is a good idea?
A reasonable amount of borrowing now, the proponents say, would avert a much bigger financial obligation decades later. They say personal accounts would yield higher returns for individuals than the current system and could be a catalyst to broader changes that would bring the benefits promised by Social Security into line with what the system, which is also about to come under intense financial strain from the aging of the baby boom generation and the increase in life expectancies, can afford to pay.
Ahh...the old there IS such a thing as a free lunch argument. Although controversial, most economists have decided that there in fact is not. In other words, if it were profitable to borrow now at treasury rates and invest in guaranteed higher stock market returns, a lot more people would be doing it. In fact, no one would be invested in treasury bonds. Why would they, when they can get a much higher rate in the stock market? If they want to lower benefits, then just do it! They hardly need a catalyst, which will put even more strain on the ability of Social Security to meet its obligations. Some more whacky Republicans in Congress have a worse idea:
Senator John E. Sununu of New Hampshire and Representative Paul D. Ryan of Wisconsin, both Republicans, have sponsored legislation that would allow workers to contribute more to their personal accounts than most other plans proposed by members of Congress and outside groups and would not require tax increases or benefit cuts. But by some estimates it would require nearly $2 trillion in borrowing - and, in the view of its critics, much more - and even then would rely on the idea that the new system would create so much more economic growth that it would partly pay for itself by generating additional tax revenues for the government.
Need I say it again? There IS no such thing as a free lunch! Supply-side "economics" rears its ugly head once again. But, if the economy does have a structural level of output and there is a NAIRU, then any attempt to get the economy to grow beyond its limits will, in the end, only be inflationary. And at a natural level of growth (about 2.5%) there is no way the government can "grow itself out" of any outstanding obligations, certainly not obligations of $2 trillion!

What is most scary about all this is the Bush administration's willingness to mislead the public on economic issues. Specifically, Josh Bolten's comment that massive government borrowing is a good savings policy is total BS. It should be clear to anyone that every dollar increase in private savings from private retirement accounts will come at the cost of a dollar borrowed by the public. Either the OMB doesn't know basic arithmetic or they are deliberately misleading the public as to the costs of this plan. And, the administration's announcement of new large-scale borrowing during this time when central banks are slowly but surely purchasing less of our debt and financial markets could decide to cut off funds at any moment reflects a carelessness with the US economy that is stunning.

Did Someone Forget to Tell...

...David Brooks that globalization helps the poor? It seems he just found out. You'd think he would at least read Thomas Friedman.

Congrats Josh Marshall

...on four years of blogging. Josh also notes that
Not only could this site not exist without its readers (that goes for every publication)
That is, every publication except yours truly.

Friday, November 26, 2004

Is economics a science? III

Anyway, my last two posts have probably been totally incoherent, but now that all the arguments are on the table, what conclusions can we draw?

Well the first conclusion is probably that the discussion has significantly shifted away from the question "Is economics a science?" to some other question, perhaps "What is economics?" I'd just like to say a few words about a number of things I think are salient to what economics is.

Primarily, the aspect of modeling. I completely agree with Paul Krugman's view on formalism in economics:

What is true, however, is that many economists use mathematics not merely as a way to check the internal consistency of their ideas, but as an "intuition pump"; they start with a vaguely formulated idea, try to build a model that conveys that idea, and allow the developing model in turn to alter their intuitions.
Also with the qualification that
Of course, this gain in intuition sometimes comes at a cost: the modeler can become a prisoner of the assumptions embodied in his model. One often hears accusations, in particular, that model-based economics inevitably biases the field toward standard economic assumptions like constant returns, perfect competition, and perfect information. Yet this need not be true. In fact, economists like myself (and many of the others on that list of Clark winners) who have worked at length on imperfect markets have found modeling an essential discipline in the process of exploring new territory.
Modeling is a very powerful tool and is best at getting at key insights into economic phenomena. Equivalent to models are the kinds of silly stories economists weave to try and explain something. Simplification, abstraction, etc, are all part of the same sort of thing. If you are addicted to Paul Krugman like I am, read his story about a failed baby-sitting co-op and his World's Smallest Macro Model. The two together contain perhaps the key insight of Keynesian economics. This insight is not a simple counterfactual, if X then Y. It's something hidden between the mathematics, the narrative, and the reality of the situation. We can express it as a simple aphorism, "money matters," but it doesn't do justice to the beauty of the result. Only a extra portion of hard thinking does. Combine this ability of economics to nail down an insight into social and economic phenomena with clarity and the ability of economists to do very good empirical work, and the resulting tensions between the two can be very productive.

Is economics a science? II

Marcus and Jason Stanley were guest bloggers (on Leiter Reports) and had a great deal to say about the subject of my previous post. Marcus' first post asks the question, not "is economics a science?" but rather "[d]oes economics do a better job of that than untutored common sense and/or the other social 'sciences' and humanities?" He thinks that, yes, economics does contribute valuable, unobvious counterfactuals to human knowledge, and further expounds upon the strengths of economics in this post. In his third post, Marcus makes the very interesting point that
I really do see economics as an interpretive discipline, though a heavily quantitative one. Quantification and measurement instead of verbal description. Formal, mathematical theories are used to express the "stories" that make sense of social interaction. Formalisms discipline the process of narrative description, forcing clarity about both assumptions and processes.
This is a very good view of what economics does. As Paul Krugman writes frequently, economics, and formal economics in particular, works to draw out intutitions and clarify them, often in surprising and unexpected ways. Marcus' fourth post explores the failure of economists to view capitalism in a broader cultural sense. His final post highlights the growing importance of psychology and society in economics. As he says:
economics is starting to make exciting moves toward the other social sciences in ways that go beyond boring extensions of stripped down rational actor models. At times I think that some of this work is still too individualistic and continues to "evade culture" (in the sense that it does not try to look at the the structure of shared interpretive meanings that communities develop), but it is worthwhile and innovative stuff.
The whole thread is interesting, I encourage everyone to read it.

Is economics a science?

Over at Leiter Reports, guest bloggers Marcus and Jason Stanley are having an interesting discussion about whether or not economics is a science. Much of this depends on semantics, how is a science defined? If you are like Tyler Cowen then a science is defined by "[producing] empirical knowledge which is subject to [a] process of testing, [broad interpretation], and feedback" as well as maybe having controlled experiments. Certainly there are a number of methodological similarities between economics and other disciplines that are considered sciences, like physics and chemistry. To name a few,
  • Economics makes falsifiable claims, which are then
  • tested empirically
  • and are refined using mathematical models.
But for Brian Leiter, "this isn't, however, what 'science is all about'
on any plausible account." So what is science all about?
It is important to remember that a lot of the credibility of economics depends precisely on its claim to be a science, in the precise sense of generating successful predictions. (Predictive power may be neither a necessary nor sufficient condition for science, but economists generally view it as what makes their discipline "scientific.")
There are two points to make here. First, I don't think that most economists view the ability of economics to generate successful predictions is the valuable part of economics. At least to me, the important part is understanding human behavior in a clear and consistent manner. Some fields are good at making predictions (macro, financial, etc.) But many are not.

The second point here is that Leiter has now shifted the debate from whether economics is a science to whether economics can make good predictions. Despite the fact that he states that "Predictive power may be neither a necessary nor sufficient condition for science." He proceeds to use the remainder of his lengthy post to make three basic points. First, that economics is based on assumptions that are not realistic and thus cannot make predictions about reality. Second, that economics cannot make quantitative predictions, only qualitative. I'm prepared to concede the second, but not without giving a litany of reasons why this is true in economics and not in the natural sciences:

  • On most economic phenonmena, economists can't experiment. Instead economists rely on nature and society to set up experiments. This is a haphazard way of conducting empirical research.
  • Humanity is significantly more complex than, say, a chemical reaction. Everyone wants something different out of society and this makes studying it very difficult.
  • Part of why it is difficult is that so often economists are forced to deal with things that are hard to quantify, like utility and preferences.
  • Furthermore, society will not sit still. Everything is constantly changing, which makes setting up experiments even harder.
  • Very realistic models of economies would not be very pretty. This creates disincentive effects, since most people would like to study elegant and clear models.
  • Physics is lucky enough that very nice models are also very realistic. Economics also has very nice models, but while every science has to deal with complexity, economic complexity is located closer to the heart of economics. Whereas a physicist can model a missile flight very easily, since the complexity only arises when one approaches the extremes of physical behavior, an economist modeling a market must deal with complexity in the very heart of the market.
  • In economics, there are many more important variables to consider. Economists must deal with demand schedules instead of nice vector measurements of velocity and acceleration.
  • Lastly, and most interestingly, what we write affects how people act. The very object of study is affected by how economists study it. Indeed this is the driving force behind rational expectations, and it is a valid one. If economists offer some new insight into the workings of the economy, this changes the perceptions and strategies of economic actors, which in turn changes the way in which the economy functions. No other science has this problem.
On the first point, that economics makes unrealistic assumptions and thus cannot even make qualitative predictions, I refer you to the great Paul Krugman:
But of course there is no such model. Worse yet, not only don't I know of any such model, I don't even know how one might begin to create one. My perplexity is not, I believe, a reflection of my ignorance of political science, or sociology. Economists may make lots of bad predictions, but they do have a method - a systematic way of thinking about the world that is more true than not, that gives them genuine if imperfect expertise. (That is also, of course, why lay commentators and other social scientists tend to hate them). Other social sciences haven't yet found anything remotely equivalent. Oh, there are bits and pieces, and some of them are very exciting; try taking a look at Robert Axelrod's stuff. But basically when it comes to most of the questions that I am really interested in, one man's view is as good as another.

When I was young and naive, I used to imagine that my career as an economist could eventually branch out into one as a general social scientist. And I still love to read and think about the broader questions - a book like Jared Diamond's Guns, Germs, and Steel can keep me happy as a clam for weeks. But the clarity and power of economic analysis can spoil you: once you have a taste of what it means to have a really insightful model, you tend to be inhibited about looser speculations.

Overall, I was not impressed by Leiter's criticisms, they seem to me to be rather banal, which is coincidentally what he thinks about economic theory. After all, his chosen field of analytical philosophy has its own problems with being useful and worthwhile. Is this a case of the pot calling the kettle black?

Dollar Depreciation

This article in the Times gives a nice rundown of the dollar situation. There is also an op-ed piece today which gives the reasons why a dollar depreciation, one which is well-managed and gradual, would be a good thing. I tend to agree...whatever happened to "beggar-thy-neighbor?" It used to be that depreciations were exactly what countries wanted since it increased exports and thus income. But now it seems that all the talk is about a "strong dollar." Bring on the weak dollar, if it means that jobs lost in the past four years will return. With monetary policy fairly ineffective in stimulation (except for stimulating a nice housing bubble) of the economy and fiscal policy tied up in suboptimal tax cuts, perhaps a depreciation of the dollar is exactly what the economy needs at this point.

Clarity and Stupidity

Alex Tabarrok posts on the costs of laser eye surgery pointing out that the cost of such surgery has fallen by 38 percent in nominal terms since 1998. Compared to other medical procedures which have generally increased in expense this is striking. He draws the following lesson:
Why the price decline in this market and not others?  Could it have something to do with the fact that laser eye surgery is not covered by insurance, not covered by Medicaid or Medicare, and not heavily regulated?  Laser eye surgery is one of the few health procedures sold in a free market with price advertising, competition and consumer driven purchases.  I'm seeing things more clearly already.
We are supposed to take from this that an entirely free market in health care would be an improvement. I'm not quite sure how this follows. Laser eye surgery is an "elective," "lifestyle" procedure. Thus, it has none of the problems of the rest of health care where doctors create their own demand because patients are not in a position to know what they need and etc. It is rightly left to the private sector: we don't think anyone has a right to live without glasses and there is not much ambiguity in how to treat someone with bad eyesight, people know what they need done. Such a market has the right dynamics. But most other forms of health care do not operate in this way: people don't know what they need, they can't necessarily shop around and etc. So it doesn't make sense as a free market. I certainly don't know what the right answer is, but a free market is not it.

Thursday, November 25, 2004

Let It Be Registered...

...that in the September 30, 2002 issue of The New Republic, MIchael Walzer in arguing about possible strategies in Iraq wrote
Without access to U.S. intelligence it is hard to judge how grave a threat Saddam poses. But let's make some commonsense stipulations: First, the Iraqis have developed chemical and biological weapons and are trying to develop nuclear weapons; second, our government isn't certain about how close they are to having a usable nuclear weapon, but as of this moment they don't have one; third, Iraq has used chemical weapons in the past, though only on its own territory during the war with Iran and in efforts to suppress the Kurds; and fourth, the Iraqi regime is sufficiently brutal internally and hostile externally -- to some of its neighbors and to the United States -- that we can't rule out its readiness to use such weapons again and more widely or to use nuclear weapons if and when it develops them.
Whatever we may say about the run-up to the war, it was an unquestioned assumption that Iraq had WMD of some sort. Could the Administration have allowed dissenting voices to be heard? Certainly, Should it have? Yes. But no one outside government was seriously arguing that Saddam did not have WMD so it is not surprising that no one in government was making that case either. We like to imagine government has some sort of omniscient body filled with brilliant beings. Yet government is made up of mortals quite like you and me: smart, perhaps, but certainly not infallible. And if there was no one outside government questioning this assumption (which a sample size of one does not prove, but I don't remember it, and Walzer would have qualified his statement if there were) then how can we expect the government to? Perhaps the intelligence was questionable, but it seems to have been questionable as to Saddam's intentions (was he actually trying to acquire materials for nuclear weapons etc.) rather than to the fact that Iraq actually possessed WMD. This is certainly not meant to be an unqualified defense of the administration, but it is meant to remind us of the context in which the debate occurred. And that the positions people took make much more sense if you remember what was known and what was not known.

Justice, Risk and the Possibility of Humanitarian Intervention

I've been reading Michael Walzer's Arguing About War. What's striking is his emphasis on the importance of a country -- its troops -- bearing risk on the battlefield. That is, that the requirement for a just form of war (jus in bello) is that soldiers bear risk. This is so that, in a true war, they minimize damage to civilians, and, in a humanitarian intervention, that they can actually stop the killing; Walzer argues that killing happens at the house level, so the intervention, in order to be effective, has to occur at that level as well. The effect of this is that you have to be willing to accept casualties among your soldiers in order for a war or an intervention to be prosecuted in a just manner. Basically, justice requires that once you are fighting that it be effective -- it is not worth fighting a half-assed war.

The U.S., however, does not appear willing to carry out wars and interventions in this manner. And thus its wars and interventions do not necessarily meet the requirements of morality. This raises several issues. First, economists have a lot to say about risk and have quite a good understanding of how risk operates: it makes sense to me. I can tell you that in general people are risk averse and that forcing people -- a country -- to bear risk is very costly. Knowing that ten people will die is less costly than expecting that ten people will die, that lack of certainty has a cost. So we can understand the necessity of bearing risk in prosecuting wars and interventions as imposing a (significant) cost on the U.S. Second, once risk is understood as cost it nicely coincides with the argument of Feguson, among others, that the U.S.'s problem in world affairs is that its ambition exceeds its willingness to bear the costs. Thus, America cannot work as an empire, or a humanitarian intervener because it, like most countries is risk averse, and so does not want that cost. It will then be incapable of intervening in a just fashion. Third, understood this way, we see that arguments about how the U.S. is so much more "muscular" than a weak Europe are bullshit. Both parties are unwilling to bear this risk.

Where does this risk-aversion come from and can it be overcome? If the answer to the latter is no, then we have to question any argument ever put forward for war or humanitarian intervention by America. Even if the cause itself is just, if America is incapable of bearing that risk in the battlefield then the actual fight will be unjust, and that is more important. Walzer explains this as follows:
We have armies that can't, or can't easily, be used. There are good democratic and even egalitarian reasons for this. Obviously, U.S. national security is not at stake in Kosovo (nor is the security of any of the European nations, but i will focus now on the United States), and so it isn't possible to moibilize citizens to defend their homes and families. In other countries, in earlier times, wars in faraway places were fought by the lower orders or by mercenaries, people without political clout. But though the United States is still, even increasingly, an inegalitarian society, no soldier's mother or father is without political clout. This is an advance for Americans, since our political leaders cannot send soldiers into battle without convincing the country that the war is morally or politically necessary and that victory requires, and is worth, American lives. But there is an easier path for these same leaders. They can fight a war without using armies at all and so without convincing the country of the war's necessity. An easier path, which leads, however, to a moral anomaly: a new and inequality makes its appearance. We are ready, apparently, to kill...But we are not ready to send American soldiers into battle...But this is not a possible moral position. You can't kill unless you are prepared to die.
The risk aversion comes from the fact that each person who might die has relatives with a political voice, they are not anonymous peasants or well-compensated mercenaries. And Walzer seems skeptical of our ability to overcome this problem: it is a fundamental feature of democracy that you cannot inflict risk on individuals. Only a monarch can claim some higher purpose than its people. Due to the fact that each individual has some say, democracies are incompatible with sacrifices (especially the ultimate sacrifice) for a purpose outside its own well-being: humanitarian intervention cannot work.

Free Trade Is Bad!

Or at least bilateral free trade agreements.

Continuing our Milken Institute posts, Greg Rushford has a convincing article about Free Trade Agreements: that bilateral ones are bad because they distort trade flows and too easily become political footballs. This makes initutive sense: when trade agreements are bilateral rather than some form of universality as is a WTO agreement, you a) move trade flows toward that country and b) offer another opportunity for "special interests" to intervene in the process -- especially because the U.S. is such a dominant partner so it can push a lot of unpleasant provisos into an agreement with a country.

I had not realized that pre-Bush administration the U.S. only had three bilateral free trade agreements. And that the Bush administration has pushed through agreements with another 12 countries and has negotiations for agreements with another 45. The article argues, and it seems rightly so, that the administration is using these agreements partially as a way of putting pressure on countries involved in the Doha Round at the WTO -- if you don't agree to this broader, multilateral agreement, we'll just sign it with other countries, and leave you out. But it is also clearly a way of emphasizing American power and American interests rather than Western power and Western, liberal, interests. Whatever objections you may have to the WTO, at least that is a slightly less corrupt and slightly more transparent process than these bilateral agreements.

But it would be unfair to the Bush administration to lay it entirely at its feet. The negotiations for many of these agreements were started under Clinton -- and would have continued under a Kerry administration. Perhaps to a lesser degree and with less egregious problems, but they still would have happened. This offers confirmation for Gilpin's claim in Global Political Economy that one possible form of globalization is regionalism rather than true globalization. That is, countries will form smaller coalitions rather than having a truly open international system. From an economists' viewpoint, this is sup-optimal -- free trade good! limited trade bad! But the political dynamics are very appealing; and politicians make policy, not economists. Maybe we'll look back on this moment as having been determinate in pushing the world away from an ideal of all open borders and towards regionalism.

Iraq's Economy

By odd happenstance, I ended up with "The Milken Institute Review," whose Fourth Quarter 2004 issue is quite good. Most interestingly, it has an article by Robert Looney on "Iraq as a Transition Economy." We often forget when reading day to day accounts of military struggle in Iraq, that people's lives go on and thus, their economic activities. What's interesting to figure out is how reconstruction has been going, how those day-to-day activities outside the excitement of armed conflict have been repairing or changing themselves. The answer, in brief, is not well.
In sum, Iraq's current economic malaise has its origins in a series of miscalculations by the Coalition Provisional Authority. Too many decisions were made without examining the economic dimension. Once unemployment got out of control, violence and insurgency increased, the economy suffered, and aid flows dried up due to the lack of safety, creating a vicious cycle that the belated reforms could not correct.
The most striking error is that of inflexibility and the incoherence of actions. The CPA instituted low across the board tariffs with the generally correct belief that openness is good for an economy. The CPA also doubled the salaries in many state-owned firms -- to buy try to buy political support. You have sudden competition from foreign imports as you double the cost of the main input. This is not a recipe to make these firms successful; they probably weren't that efficient to begin with, and now they have an additional expense. It is not surprising that the factories are running far less than at full capacity. I'm not a huge fan of protection, but this is a clear-cut case where either the CPA should not have tried to buy off workers, or it should have protected the industries. But the simple fix is so attractive; and the non-ideological answer takes too much thought.

Wednesday, November 24, 2004

Estate Tax

Holtz-Eakin talked a bit about what he had been working on before moving to Washington: the estate tax. He pointed out that while economists have a very good understanding of what the effects of an income tax or an excise tax are, the effects of the estate tax are poorly understood; and thus be wary of any claims by economists as to what it will do (this debate will come up in relation to making the estate tax reductions permanent, it is set to revert to 2000 levels in 2011, after having been phased out by 2010). Unlike other taxes where it is pretty transparent what motivates people -- at least in an economic sense -- accumulating an estate has unclear economic motivations. It is obvious why raising the marginal income tax rate might cause me to slightly reduce my hours worked, given that I work to generate income and this reduces income (although this substitution effect might be balanced out by the income effect and labor market rigidities). But it is unclear, from an economic standpoint why people acquire estates. Why should I want to have millions of dollars lying around when I die? In terms of my own utility, doesn't that seem to be something of a waste? So it is very hard to theorize about what it means to people to know that their estates will be taxed. How this will affect their behavior. If it turned out that people acquired estates by accident, that is, they just couldn't spend all their money and so it was lying around, then the estate tax has no impact on their behavior when they are alive. But if all estates are acquired with perfect awareness, then a high estate tax would change behavior: perhaps reduce savings among the elderly (or increase it, if they have a target of what they want to leave to the next generation); maybe people won't take as many risks if they know that their "legacy" wouldn't be as large. Speculation is quite interesting.

Douglas Holtz-Eakin

Douglas Holtz-Eakin, director of the Congressional Budget Office, spoke here on Monday. I heard him give much the same speil last year, but it remains as pressing as ever. Once he got beyond his lines about how the budget doesn't look so bad over the next five years if nothing else changes, he got into the rather depressing news about how things look 10, 20 or 30 years out. And they don't look good. First tax cuts: if the tax cuts become permanent, then that creates a permanent deficit of 2% of GDP. Second, social security. I don't necessarily think that the solution is so complicated, but if nothing is donem after 2030, things become quite problematic. Basically, it is no longer self-financing and will suck money from the rest of the federal budget. He emphasized that any solution has to pay out about $12 trillion (!) in what people have already payed in, or something like that, and that while politicians will try to avoid this reality, it cannot happen. Third, medicare and medicaid will become increasingly expensive. Historically, those costs have increased 2.5% per year faster than GDP and there is no reason to suspect that this will change. Then by 2020, Medicare and Medicaid would be about 20% of GDP (not government, so the same size as government is today). He pointed out that this seems to unreal, that people think something has to be wrong with the numbers and so don't take it seriously, but it is serious! Also, in questions someone asked about socialized medicine. He sort of avoided the question, but in doing so pointed out that those European countries have seen their costs rise at a rate similar to the U.S. So while socialized medicine may have other benefits, namely, keeping level of health care expenditures down, it is not a simple solution to keeping the change over time in health care costs down. Finally, defense spending, not including the war in Iraq and the war on Terror, is set to increase dramatically in the next fifteen years. In the 1990s, the military cut back on replacing equipment, thus the peace dividend, but now that has to be done. ALso, the Pentagon wants to transform the military with investments in new technology. This will cost much. Add in expenditure on Iraq, and that's a hell of a lot more money than we currently have flowing through the system.

The take away message was that if nothing is done, what makes America great -- small government, low and efficient taz system, and flexibility in the economy -- will be placed in jeopardy. And he said, maybe this Congress will address Social Security, but the odds of it addressing more pressing and dangerous things, like health care, are quite slim. So there you have it: the man who delivers bad news.

UN and Moral Legitimacy

Patrick Belton has been running a series of posts on the latest corruption scandals at the UN and strongly implying that this undermines any claim to moral legitimacy claimed by it, and thus, perhaps, that it should have no ability to confer moral legitimacy on state actions. Maybe, then, one is to take from this that the U.S. should not feel constrained by the need to gain the imprimateur of the UN for whatever foreign policy actions it wishes to take. But I'm not sure that that argument goes through. There is a distinction to be made between how the world views the UN as a group of people actually doing things and how the world views the UN as a group of countries supporting the actions of another country. In the first case, these scandals (peacekeeping soldiers raping women, among other things), clearly undermine moral legitimacy the UN might have in its actions -- and reinforce, as Belton says, the need for more accountability. But this has very little immediate impact on its moral legitimacy to sanction the state actions. That is, even if UN peacekeepers no longer seem so pure, the legitimacy of a UN resolution is not affected, at least in the short run.

Isn't it ironic...

...that in the 18th century it was thought that emphasizing economics in international relations would be a good thing because "interests" were more rational than "passions" and so this would reduce the risk of war (la doux commerce), yet today we sneer at people who think in terms of interests because really, we should be concerned about morality. This is especially striking when thinking about humanitarian intervention. People complain that states act only in their own interests and that we should care about these other countries, but isn't this, perhaps, better than them being capricious and responding to random moral messages? Perhaps realism has something going for it?

IR Porn

You always suspect that academic language has an underutilized erotic potential.
Daniel Drezner contributes to the rectification of this ill in IR theory:
Diane had longed to bandwagon with Jack since their first year in grad school. In their own prisoner's dilemma, she now knew that she wanted more than just tit-for-tat -- she had to have Jack's grim trigger. This wasn't just a one-shot interaction for her. She wanted repeated play -- and although she would never say this out loud, she sensed that Jack had a very long shadow of the future.

It was taboo as a realist not to prefer balancing. If word got out, her reputation among the guns & bombs crowd would be ruined. But Jack's social constructivism was too seductive for her feeble rationalist defenses.

"Oh... Jack," she whispered into his ear, "I give in -- reconstitute my identity!"

He smiled and slowly began his discourse....

Afterwards, she turned to him and purred, "Now that's what I call utility maximization." He laughed.

Then her tone changed. "Seriously, I've never had such a shared meaning with anyone before. It was so.... intersubjective."


Sunday, November 21, 2004

Debt Forgiveness

The New York Times reports that
The world's leading industrial nations agreed Sunday to cancel 80 percent of the nearly $39 billion debt owed them by Iraq, a critical step in rebuilding the country's devastated economy and an important precedent for its other creditors to follow.
I frequently argue that cancelling debt to developing countries is a counterproductive policy because of the clear moral hazard problem (once I cancel your debt, why shouldn't you just run up that much debt again? There's no reason not to, it will just get cancelled again. Empirically, this is what happens). But in this case I'm happy to make an exception. Whatever we may say about Iraq's new government, this represents a clearly new sovereign, and one which is not continuous with the previous sovereign, so cancelling debt does not introduce moral hazard issues. Yay!

This does not leave the new Iraq entirely in the clear. There is still the demand of $100 billion in reparations from Kuwait, Saudi Arabia and other Middle Eastern countries left over from the first Gulf War. It is a credit to the Bush administration that it can get European countries to forgive debt. But it is much more significant what happens with Middle Eastern countries. Getting other countries in the Middle East to support the new Iraqi government by dropping demands for reparations would bode well for future stability in the region by demonstrating that they at least partially accept the legitimacy of the new government (although it might actually be about American power...).

Downloading Music

The Times' Economic View has an article that talks about lost sales from music downloading. This is a more interesting problem than Daniel Gross has time to explore. How does standard micro theory respond to this problem? The cost of buying music has fallen, from $15 to whatever time it takes to download an album. So the price of music falls and rational agents consume more music.

Mitch Bainwol, chairman and chief executive of the Recording Industry Association of America, has this brilliant quote: "The most basic notion of economics is this notion of perfect substitution. You have two products that are in essence substitutes, so the market drives toward the freebies." But what's interesting is that people continue to buy CDs even after they can get them from free. The CD case and liner notes probably aren't valued at $15. What's important here are cultural values. It's not culturally acceptable to give a gift of a CD that is burned, for example.

In November 2002, Peter D. Hart Research Associates found that when 19- to 24-year-olds were asked about a song they liked, 32 percent said they would download it, while only 9 percent said they would buy it.
This can be integrated into the theory easily. We simply add a parameter to the utility function that is increasing in proportion of CDs purchases rather than downloaded, or something similar. But this is strange too. Let's estimate the cost of buying a CD at $15 and the cost of downloading a CD at $1. Then for a given CD, say worth $20 to our rational consumer, the net benefit from buying the CD is $20-$15=$5 and the net benefit from downloading the CD is $20-$1=$19. This means that a dollar estimation of the cultural value of buying CDs instead of stealing them is that it is at least $19-$5=$14!!! Seems a bit high, doesn't it? But this is what it costs when you buy a CD.

But what about the people who buy some CDs and download some CDs? Then it becomes harder and it is unclear whether this can be accounted for in a rational agent framework. If the cultural benefit of buying a CD is constant, we can think of this as raising the total cost of a downloaded CD. If this total cost is greater than $15, the agent only buys CDs; if it is less, the agent only downloads CDs. So in order to account for people who do both at different times, the cultural benefit of not stealing music must vary.

Perhaps it varies with time, whether they are with their friends or not, etc., But one interesting implication of this is that it varies with quality. If the agent really likes a CD the cost of stealing may increase. Intuitively, this seems accurate. People want to support bands they like and don't care about ripping off bands they don't. Then this is a mechanism for weeding out bad music or at least music people don't like as much, which is in my view a good thing.

Saturday, November 20, 2004

Don't Trust the Times!

In this post I relied on the Times story. Turns out, I should have been more skeptical. Via Brad Delong, the CNN story, which reports that
Greenspan said it is therefore important that the U.S. budget deficit be cut, a move that would reduce the current account deficit.

"Reducing the federal budget deficit (or preferably moving it to surplus) appears to be the most effective action that could be taken to augment domestic saving," he said. "Corporate saving in the United States has risen to its highest rate in decades and is unlikely to increase materially. Alternative approaches to reducing our current account imbalance by reducing domestic investment or inducing recession to suppress consumption obviously are not constructive long-term solutions."
. So scratch my last post: Greenspan isn't a total fool, he realizes that the budget deficit has to be cut too. Which makes one wonder how the Times could cite anonymous analysts saying that this should be viewed as helpful to the Bush Administration.

Friday, November 19, 2004

Moderate Republicans

Daily Kos has this on the future of moderate Republicans:
That “civil war” that some predicted if Republicans won the election is obviously something that didn’t just begin November 3. Some of its roots can be traced to Barry Goldwater’s 1964 defeat, and especially, the presidency of Richard Nixon, which, whatever negative can be said about it, ushered in the EPA, OSHA and détente with Bejing, none of these items on the conservative agenda.

It could be argued that the “major combat” phase of that internecine war is over, and all we’re witnessing at present are mopping-up operations as the radical conservatives – both neo and fundi – take over completely. As we discussed here a few days ago, that’s certainly the way Concerned Women for America see it. But there’s still a smidgen of moderation and pragmatism to be found in the Grand Old Party.

Indeed, moderate Republicans still exist. ModerateRepublicans.net shares these qualities of a true moderate Republican:
A passion for civil liberties;
A disdain for conformity and suspicion of authority;
A belief that the Constitution is a living, breathing document with timeless values that must be made relevant in a modern age;
A commitment to protect the environment and not engage in mindless exploitation of the nation's natural beauty. A spirited case must be made for reusable energy sources like solar power. Modern technology provides many options before the earth is harshly, brutally, and needlessly pillaged.
A strong belief that diversity -- gender, racial, social, sexual, ethnic, and religious -- should be celebrated because it gives the United States moral strength. Diversity -- in the long-term, encourages respect, understanding, and a greater sense of community;
A commitment to fiscal prudence and limited government;
A recognition that government does have a basic social responsibility to help those in need;
A belief that the nation does have international responsibilities;
A belief that God and religion have a very important place in America -- at the dinner table and in churches, temples, and mosques. But it should never be used by politicians to advance a narrow moral agenda;
A belief that the national government should be used in a limited manner to advance the common good;
A commitment never to put party above country; and
A responsibility to publicly criticize those who call themselves Republican when the situation merits. Moderate/Progressives have a duty to vote against the party line when it doesn't serve the greater good. Doing so doesn't make them less Republican; it demonstrates that they have the honor, political courage, and intellectual honesty to put nation above party.
Wow! Sounds like something I could sign to! But wait...aren't people who believe in these things called Democrats? Well, a lot of them did vote for Kerry. After all, it's very nice to uphold the Traditions of Ike and Teddy Bear, but why not jump ship before it sinks? It seems clear to me that the Democratic party is much closer to the above beliefs than the current Republican party. Well, this may happen. Michael Cudahy writes:
In Pennsylvania, respected Republican senator Arlen Specter narrowly survived a Club for Growth-financed $2 million primary challenge from conservative congressman Pat Toomey. Moore saw the Pennsylvania effort as “serving notice to Chafee, Snowe, Collins and Voinovich and others who have been problem children that they will be next," referring to moderate Republican senators Lincoln Chafee of Rhode Island, Olympia Snowe and Susan Collins of Maine, and George Voinovich of Ohio.
Note that these are all Blue states (with the exception of Ohio) and all are states in which a right-wing Republican would have a very hard time winning. So my hope is that the Club for Growth will make good on its pledge ["They will learn to conform to our agenda or they will be driven from our party..." -Stephen Moore] to run primary candidates against moderate Republicans. This will either force them to switch parties or give the seat to a Democrat. Throw in Arlen Specter of Pennsylvania and these five are enough to get the Senate back to 50-50. (Of course Specter is now prostrating himself before the Party leadership.)

An infusion of moderate conservatism may be exactly what the Democratic party needs to get itself on its feet again.

Greenspan II

What's odd about Greenspan's proclamation that he's going to let the market take care of the dollar (by letting it slide), is that it seems to contradict his own actions. The Fed just raised rates which, in the simplest open economy story, should cause the dollar to strengthen by making U.S. bonds and other assets more attractive; this, of course, is the opposite of what he's telling the Europeans. Maybe the rate raise is responding to some other concern, and he won't raise rates (defend the dollar) any more, but it's still slightly queer.


Alan is rational! Or at least aware of basic economics: massive current account deficits cause a currency to lose value. He is mostly right to say that an intervention isn't ideal: laissez-faire has to prevail and attempts to prop up a massively overvalued currency have tended to end badly (see, well, developing countries in the early 1980s, developed world in 1973, England in 1992...). The article says, however that
analysts did not interpret Mr. Greenspan's remarks as a rebuke of the White House, which has indicated it will seek to make the deep tax cuts of its first term permanent. If anything, they said, his speech had a laissez-faire tone - leaving events in the hands of the market.

As always, we wonder who these "analysts" are. It is worrying if this is true, because it implies that the Administration has no intent of trying to close the budget deficit. A problematic thing. For a falling currency can close the trade deficit by making imports more expensive and making exports cheaper, reducing imports and increasing exports. But that does not close the budget deficit, so we will still have a fundamental overhang. And it is unclear how this is supposed to be resolved by the market -- unless the Administration would welcome some sort of mass exodus of capital from the country, a very bad thing. So Greenspan's logic is only half consistent: the trade deficit could be resolved by the market, and it wouldn't necessarily be the most terrible thing for us, although it would screw the economies that export to us; but something has to be done about the budget deficit or else things do not look happy. Yet the administration is obviously intent on remaining oblivious to this danger: when budget deficits are a big problem, making tax cuts permanent is the thing to do.

Thursday, November 18, 2004

Irrational Culture

Jane Galt wonders why paying schoolchildren for performance won't play politically. The answer is twofold: because we, at least we who think education matters, tend to have this weird ideal of education as something that is done purely for itself. That kids should love learning and that if they don't, well too bad for them. If they come from a family that won't reward/encourage good performance, too bad for them. It seems to sully the purity of education, and educational achievement, to pay for it. This is, of course irrational and inconsistent: we want people to be doing better in school not because we think that learning is good, but because we recognize that human capital is important in improving both individuals' futures and our nation's future.

But there is another seeming objection from a purely economic point of view which William Easterly makes in reference to developing countries. That the best way to generate school attendance and performance and human capital investment in general, is not to build schools, but to change expectations that people have for the future. I work "hard" at school because I know that I will enter an economy which will reward this performance. But if the economy is terrible, corrupt, and arbitrary, then my incentive to do well is reduced. It won't make sense to invest in my education. Simply paying me a few bucks here and there wouldn't change the fact that there is no point in my getting an education. But apparently these programs work. Then paying for performance implies that the reason students do poorly isn't because they are acting rationally in seeing that they have no prospects, but that they are being "irrational" for some cultural reason. Investing in education would pay off for them, but they refuse to take advantage of it. It is not popular to imply that a certain population does poorly in life because of choices that they make, or choices their culture makes. Neither is it popular to imply that a few bucks here or there can dramatically reduce the "irrationality" of that culture.

See also Marginal Revolution and Matthew Yglesias.


The Washington Post reports that the White House is "eying" James Poterba to replace N. Gregory Mankiw as head of the Council of Economic Advisors. Hopefully Poterba will resist temptation for very few people pass through the Bush administration with their reputations still intact -- and his reputation, at least to me, is quite high: he does pretty cool stuff with taxation and household financial decisions and has an admirable empirical emphasis. This reputation-killing effect seems strong among the econ. folk: Mankiw and Taylor both have been pretty disgraceful, especially Taylor with his recent talk on the currency.

Via Marginal Revolution.

Wednesday, November 17, 2004

Two Americas?

Via Andrew Samwick, Patrick Ruffini, the Webmaster for the Bush-Cheney campaign, has an interesting post on how Bush did in the Northeast. For today, he discusses New York City:
In New York City, Bush's vote surged from 399,627 to 492,629. In Long Island and Westchester, it went from 607,224 to 720,719. Out of over 3,100 county units in America, Richmond County (Staten Island), home to more than its fair share of police and firefighters, turned in Bush’s 32nd strongest swing in the nation -- a spot usually reserved for tiny rural outliers. (The swing to Bush in the Rockaways, once we get the precinct results, must have been remarkable.) Looking at Bush’s most improved counties from 2000, you have to scroll down the list to Hidalgo County, Texas (12.76% swing to Bush) and Honolulu, Hawaii (12.23% swing) to find a county with more than 100,000 votes cast that isn’t in New York or New Jersey.
The analysis by vote count is quite misleading (what matters is the percentage, to a certain extent). If population growth was large enough, then the "surge" in votes is simply New York growing and retaining the same proportion of Democrats and Republicans. But population growth was not significant enough to explain this, so there was in fact a swing. Ruffini also links to an article by Robert David Sullivan. The heart of this, as it relates to New York is
Nationally, four of the five counties with the biggest GOP gains, in raw votes, were those that make up Long Island. Kings (Brooklyn), Queens, Nassau, and Suffolk counties all went for Kerry, but his margin there was more than 250,000 votes short of Gore's in 2000. At the same time, Staten Island flipped from 57 percent for Gore to a 50 percent win for Bush, while New Jersey's Ocean County (which has a high retiree population) went from a 49 percent plurality for Bush in 2000 to a 60 percent landslide this time.
Our neat division of the U.S. into Kerry coasts and a Bush center doesn't quite hold. There was something of a 9/11 effect. Perhaps basing an analysis around assuming two Americas is misleading. Maybe there aren't such dramatic cultural differences from one part of the country to another...

Mergers: Good or Bad?

The Times has this article on the K-mart/Sears merger. So what will the effects be on the average consumer?

Well, the two companies have said that brand names will remain the same and each chain will retain its original identity. But, there are clearly economies of scale to be exploited here. Wal-Mart, as the largest retailer, is able to offer the same goods at far cheaper prices. K-mart and Sears will now be that much closer to competing with Wal-Mart. Arguably, Sears provides a different retail product that Wal-Mart does. But K-mart provides virtually the same product, and will now be able to provide it at lower cost (assuming that the economies of scale actually come through.) This is a good thing, and, if anything, actually increases competition in the retail market.

Free Trade

A good thing, in general.

The Dismal Science

Kieran Healy writes:
When you’re a Sociologist like me, and your field has no credibility, people just assume you’re stupid and don’t bother sending you their Final and Completely True Theory of X in the first place. On the other hand, it does invite people to assume the answer to any problem you are studying is simply obvious common sense.
There certainly is a stereotype in popular culture that sociologists are given large government grants to study silly and mundane questions. John Quiggin responds:
But sociology is a victim of its own success here. All of the big insights of sociology, from its beginnings in the 19th century up to 1950s work like that of Erving Goffman are indeed common sense, not because they were already known, but because they have been incorporated into the intellectual baggage of everyone in Western societies, educated or not. No one, for example, would be accused of talking academic jargon if they raised the problem of “peer group pressure” at their local school, or made a reference to ‘social status’.

By contrast, almost nothing in economics has managed to become common sense. Something as basic as comparative advantage, a concept developed nearly 200 years ago, remains as counter-intuitive as quantum physics to most people. Opportunity cost also at least a century old, similarly requires years of intensive training before it becomes common sense rather than a memorised definition.

Has nothing in economics been accepted as common sense? Certainly comparative advantage has not. But the issue of trade is not so one-sided as to be solved by simply stating the theory of comparative advantage. And since it is multi-dimensional and controversial, the common sense that is comparative advantage has been overlooked or lambasted, despite its simple truth. But long before its conception as an economic theory, people used comparative advantage. For example, the division of labor has been around since hunters and gatherers. Early man realized that some were better suited for hunting and others for gathering nuts and berries.

And opportunity cost? Why is this concept so hard to grasp for so many people? After all, people make decisions based on it all the time. If I go to the concert, I can't write my paper. If I buy a t-shirt I won't be able to buy a CD. Etc.

So why is John Quiggin so sure that economics hasn't contributed to common sense? Well, because it hasn't. The vast majority of economic insight takes common sense that already exists and formalizes it. Even though people may not realize it, they make decisions based on opportunity cost every day. And any kind of specialization is based on comparative advantage. The difference between economics and sociology in this context is that whereas sociology seeks to add to common sense by studying behavior, economics studies common sense and draws conclusions about behavior by assuming that people generally act according to common sense.

Investor Rationality

The New York Times reports that
Shares of Google, the newly public Web search company, fell 6.7 percent yesterday as selling restrictions were lifted on 39 million shares held by employees and early investors.
This bothers me for it reveals that stock prices are, in some short-term, based simply on supply and demand characteristics, rather than the fundamentals of the stock. Yesterday, investors knew that there existed these 39 million shares and so the fact that they are traded today should not have an impact on the share price: a share yesterday owned the same amount of the company as a share today. So the fact that the amount of supply moves stocks is troubling in view of investor irrationality (this is a point made by John Cassidy in dot.con). Also, it troubles the assumption of rational expectations: investors knew that these shares would be released, so the possible fall in stock price should have already occurred, given that the stock price is supposed to reflect a valuation on the company.

Of course, this just shows that stocks can sometimes behave like commodities -- in which case the price reflects something, what people are willing to pay, but does not necessarily behave as stock as reflecting-all-possible-information theory would seem to indicate.

Tuesday, November 16, 2004


I did not hear Peter Deutsch speak (writing a paper) but I'll make some comments based on Isaac's account of the talk.

Maybe this was rectified during the talk, but Deutsch seems to have weird inconsistent views about the importance of personality in politics. First he asserts that personality is what lost Kerry the election. Arguably, "nice personality" is disjoint from "has well-defined views on every issue." Then he says that Clinton's success was not due to his charisma and personality. So the personal doesn't matter. Yet somehow Clinton's coalition failed because of Clinton's personal problems. So the personal does matter. I am confused.

Substantively, I'd agree with Deutsch on the Kerry issue. People simply didn't know who he was or what he stood for. But as I said above, I don't think this is really an issue of personality. Regarding Clinton, I don't think that either Clinton's radiant personality nor his marital difficulties were much of a boon or a hindrance. Certainly, they helped. But if Clinton had run on John Kerry's policies he would not have done as well as he did. I think the reason he succeeded was because of the coalition he was able to form, but I think the reason he failed (temporarily, I hope) is because the Democratic party ultimately decided to reject moderate politics. I believe that when this is rectified there will once again be hope. But we may have to wait for Barack Obama.

Monday, November 15, 2004

Who is Andrew Sullivan Talking About?

He says that if Condoleezza Rice becomes Secretary of State
She will become the second most powerful African-American woman in America. And she will become that as a Republican icon. That has to have an impact on the way at least a small minority of black voters will view Bush (and not a few other minority voters)
Who is the most powerful African-American woman in America?

Update: Apparently the answer is Oprah.

Peter Deutsch

I heard Peter Deutsch speak (D-Fla.) speak. He's served in the House for 12 years but lost the primary for Senate so will leave office January 2. His self-presentation was sort of funny: a nice-Jewish boy from the Bronx kind of thing. And not the brilliant one, as his resume (Horace Mann, Swarthmore, Yale Law) would seem to imply, but rather the dumb, well-intentioned one. Apparently that persona went over well with the South Florida voters. He said four interesting substantive things:

1) His personality view of politics. You are campaigning to be hired, so if you don't connect with people, they won't hire you. He argued that Kerry lost simply because he didn't connect with voters -- he wasn't well-defined. He said, tell me who John Kerry is? You can't. But you can tell me who George Bush is. You may disagree with what he stands for and etc., but at least you know who he is. But you don't know that about John Kerry. He also pointed out that on the five main issues that decided the election -- economy, security, health care, and two others (no, not values) -- people agreed with Kerry. And that thirteen weeks ago people seemed not to like George Bush. It's just that they never "bought" Kerry.

2) He argued that Clinton saw himself as a Roosevelt-like figure. In that Roosevelt was able to come up with a combination of people -- a coalition -- that included more than half of America. And that this coalition sustained itself for 50 years: the Democrats finally lost Congress in 1994, after more than 50 years of continuous rule. Deutsch thinks that Clinton didn't win because of personality, but because he was able to piece together an agenda that appealed to a majority of Americans. Third-way, centrist, politics can garner a majority in this country. And that it was Clinton's personal failings that prevented this coalition from sustaining itself. This leaves the country in flux: no coalition clearly dominates American politics -- and so the next five to ten years will probably see the creation of a coalition that could be sustainable. It is not clear that Clintonite politicies are the only possibility.

3) His take on the values issue: while he disagrees that it played a major role in the election, he did think that in general religion matters. He claimed that about half of Americans claim to be born-again, which obviously influences their world view. People vote based on world view -- an understanding, perhaps half-formed, of how the world works. Being born-again means, in part, that you don't think that everything has a rationale, which runs counter to what, he claims, the Enlightenment teaches us (and, being my father's son, I might disagree with his factual claim. At any rate...). That everything in the world happens for a reason. That people are rational and etc. So if someone's world view is that Enlightenment describes how the world is, that this conflicts with a born-again person's view that the Enlightenment is simply an explanation for how the world works. This may seem trivial, but it makes it difficult to connect with people. It implies that Enlightenment rationality and values, valuing competence and expertise and wonkishness, may not connect with everybody. Competence is a cultural value. Being "reality-based" may not be effective politically.

4) He said that the effects of this election will be felt for 40 years because Bush will appoint three or four Supreme Court Justices and that they will be youngish people (in their 40s) who will serve for a long time. Despite this, he layed an air of optimism over his presentation -- saying that the Republic will survive and etc. More interestingly, he said that as minority member in the House, he had zero power, so the Democrats will be able to do little. As an example: he was Minority Chairman of the committee in charge of health care issues and the like, yet had zero input on the prescription drug bill. Absolutely none. It was not clear if this is unique to the current Congress or something institutional. Although this Boston Globe series (part 1, part 2, part3) would seem to indicate that it is uniquely strong under the current congress.

Perhaps later on I'll post my thoughts on all this...

Sunday, November 14, 2004

Blue State Elitism: Part II

The New York Times continues its elitism with the second paragraph of the ramen story, where it writes
"Ramen?" you ask. "That plastic-wrapped block of dry noodles and powdered soup?"
Doesn't the Times realize that ramen, especially in packaged form, is one of the best foods on earth. The ideal balm for a morning throat; a food to go down easily whenever a snack is in order. In short, the food of the heartland. Why does the TImes hate Red America?

Blue State Elitism

At the beginning of a story on ramen, the New York Times observes that "remote towns in Hokkaido (the Japanese equivalent of, say, northern Wisconsin)" as if northern Wisconsin is the embodiment of remoteness and obscurity. As a proud south-central Wisconsinite, I take offense at that. Hasn't the food page gotten the message that they are supposed to be solicitous of the rural outposts that constitute the real America?

The Electoral College Again

Josh Marshall has this which quotes a rather silly editorial in the Sarasota Herald Tribune. Here's a tidbit:
The states Kerry won, due solely to votes in just one or two cities each, are California, Illinois, Maryland, Michigan, Iowa, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Washington and Wisconsin. The cities that out-voted the rest of their state or adjacent areas are the District of Columbia, New York City, Philadelphia, Chicago, Detroit, Los Angeles, San Francisco, Milwaukee, Minneapolis, Portland and Seattle.


On the "mandate" issue, with Bush winning 42 states, by 55 percent to 45 percent, and his opponent winning just eight states and 11 cities, there should be no question.

Josh Marshall rightfully makes fun of this piece. It's clear to me why they are upset that city voters almost elected Kerry, but why this justifies a disproportional vote for rural America is not. Take a look at this map of GDP as it is created throughout the country (from Bill Nordhaus.) How exactly is rural American justifying their right to disproportional voting again? And then there's this:
To red-state voters, to the rural voters, residents of small, dying towns, and soulless sprawling exburbs, we say this: Fuck off. Your issues are no longer our issues. We're going to battle our bleeding-heart instincts and ignore pangs of misplaced empathy.
You can see the rest at http://www.urbanarchipelago.com. It's a fun read.

Why Oh Why Does Brad Delong Need To Nitpick? (Danny Okrent Edition)

Brad Delong writes about Danny Okrent's Public Editor piece in the Times' Week In Review:
Danny Okrent writes:
The New York Times > Week in Review > The Public Editor: It's Good to Be Objective. It's Even Better to Be Right: Reporter Jodi Wilgoren provoked a flood of complaints when she described John Kerry in April as "a social loner" without attributing her characterization to anyone -- as if her own experience covering the senator, and discussing him with scores of his friends and associates, were not evidence enough.
I know some "social loners." Some social loaners are friends of mine. No one who is a social loner has "scores of friends and associates"--to not have scores of friends and associates is what it means to be a social loner. No one who is a social loner could ever get elected a United States senator, just as nobody petrified of heights could make a career as a trapeze artist.
Never mind that Okrent's article agrees with and confirms every point about the media that Brad Delong has made in his blogging career. Instead of praising the article for taking the right stance on the media, he finds this silly but irrelevant detail to make fun of...why Brad Delong, why??

Isaac Missed the Point

The point I was trying to make in my post below is not that the Republican party is "destined to fracture after 2008," as Isaac seems to think, but rather that the Democrats are in a position in which they will have the opportunity to pull previously disparate constituencies together. Indeed, this is what they will have to accomplish in order to regain power.

But on the more substantive point, I do think (perhaps contrary to popular wisdom) that the Republican party today would be in disarray were it not for the fact that they are in power and that the Party leadership has an uncanny ability to silence dissent within its own ranks. Newt Gingrich, Dick Armey, Trent Lott, and Bob Dole were very different kinds of conservatives than those in the leadership now. Remember the Contract with America? Let's examine how well the Bush Republicans have held to its tenets:

1. THE FISCAL RESPONSIBILITY ACT: A balanced budget/tax limitation amendment and a legislative line-item veto to restore fiscal responsibility to an out- of-control Congress, requiring them to live under the same budget constraints as families and businesses.
Wait a second? You're saying that the Republican party supported this only 10 years ago?
6. THE NATIONAL SECURITY RESTORATION ACT: No U.S. troops under U.N. command and restoration of the essential parts of our national security funding to strengthen our national defense and maintain our credibility around the world.
Credibility? Clearly this part of the Contract has been thrown to the wayside.
7. THE SENIOR CITIZENS FAIRNESS ACT: Raise the Social Security earnings limit which currently forces seniors out of the work force, repeal the 1993 tax hikes on Social Security benefits and provide tax incentives for private long-term care insurance to let Older Americans keep more of what they have earned over the years.
Giving seniors more money? Keeping Social Security around? It can't be!

Looking back over the Contract it makes me yearn for the days in which Republicans would stick to these relatively moderate proposals. Clearly the Contract has been discarded. Even those parts which do not directly contradict current Republican policy have not been pursued under the current administration. But those Senators and Representatives who were elected under the auspices of said Contract have not disappeared. They still hold office and it is very likely that they are simply grinning and bearing it, waiting for 2008. Perhaps this is not the coalition most Democrats would be interested in, but some sacrifices must be made. Especially if we have a debt crisis in the next four years, a party dedicated to fiscal conservatism (while still keeping around essential parts of the welfare state) could be successful.

Maybe The Democrats Would Have More Luck...

...if the presidential election was determined by coin toss too. Via Kos.

Saturday, November 13, 2004

Isaac Can't Read*

Henry surmises that the Republican party is destined to fracture after 2008 in a pool of cross-cutting interests. For example, the socially conservative and the fiscally conservative (libertarian) wings will have trouble finding common ground. This is a nice story to tell, and I'd certainly like to agree. But it is unclear how this argument can be supported. Yes we can play the historical analogy game and compare this moment to the Democrats in 1964, but beside the surface similarites, the underlying historical forces which caused the Democrats to self-destruct do not seem in evidence today.

More broadly, there is an argument around that the Republican Party is too incoherent to survive a loss in its current form. That somehow it is held together by power and that it would fall apart without it. But it is unclear if the Republican Party of the 1990s was any more coherent than the one today. And that Party managed to unite behind a candidate not because he was so inspiring but just because he was, well, someone. While it is pleasant to imagine that a party must maintain ideological consistency and in-touchness with masses, and that the Republicans are doomed because they lack it, this seems too happy of a scenario. Certainly things that can't last won't, but they might last a hell of a lot longer than we want. Drawing a parallel with 1964 puts a far too optimistic spin on the Democrat's current position.

*For maybe I misread Henry's post.

The Times Doesn't Know Cycling

The New York Times has an odd human interest story of the cyclist Tyler Hamilton's positive tests for blood transfusion. Odd because he is obviously guilty: he has tested positive twice -- once at the Olympics -- and the only reason he wasn't stripped of his gold at the Olympics was because of a screw-up in lab procedure. So why does the Times have to paint him in such a positive light. Why is the story "oh poor Tyler, victimized by some unknown force," rather than, "damn, Tyler is a cheat. The asshole!" as it should be. This is normal for the Times' cycling coverage: Samuel Abt, who covers the Tour for the Times, makes stupid little errors of fact, or in interpretation of strategy, and is also a bad writer. But how can they be so credulous: cycling is notorious for doping. At the competitive level any little physical advantage makes a huge difference and there are so many ways to get that advantage that it is probably safe to assume that everyone dopes -- some just do it better than others and some do it in legal ways (like using high altitude tents, as Armstrong does). Why do they give so much credibility to Hamilton's doubts about lab procedure? You know once someone learns a great deal about the minutiae of something that they obviously can't refute the conclusion, they just want to get away on a technicality. Perhaps because he's an American and successful American cyclists are few and far between -- he may be a bastard, but he's our bastard? Yet that's such a stupid reason to write such a stupid story and yet, I fear, that it's true.

History and the Future of Politics

The Times' Week in Review has this very interesting article about historical political situations similar to the one we are in now. There's a lot of meat in this one and a lot of fun things to think about, even if it is pure speculation. The article does make a convincing case that Bush is a McKinley-esque character. But who is the Teddy Roosevelt to Bush's McKinley? Certainly not Dick Cheney. Some would say that a McCain or Giuliani will lead the party out of its current conservatism to a more moderate stance, but I am not as optimistic that they are indeed moderates. A closer historical parallel, in my view, is the 1960's:
Bill Clinton was a charismatic Democrat who managed to win the White House for two terms, but afterward it slipped back to the Republicans; Dwight D. Eisenhower broke a 20-year Democratic monopoly in 1952, but John F. Kennedy retook the White House in 1960.
In both situations we begin with a long reign of one party, the Democrats from 1932-1952 and the Republicans from 1980-1992. This trend is broken by a newcomer who can appeal to the whole country, Eisenhower in 1952 and Clinton in 1992. After eight years of moderate politics, the country splits evenly between two candidates. In both 1960 and 2000 the "incumbent" vice-president was defeated, but in both cases by very slim margins. The post-mortem votes in Chicago which may have put Kennedy over the top are reminiscent of more recent shenanigans in Florida. There are a number of similarities between Kennedy and Bush. Both came from strong political families, both had brothers in the same job they had before becoming President, both diverted from their party predecessors, both cut taxes, both became involved in contentious and unpopular wars abroad.

Segueing from Kennedy to LBJ, who won by larger margins when he ran in 1964, we get Bush's second term. As happened in Vietnam, the situation in Iraq will likely deteriorate into more of a mess than we have now. What happened after could provide needed insight into what may happen politically in our country over the coming years. In 1968, LBJ decided he would not run again (as is guaranteed to happen with Dick Cheney) and the Democratic party was thrown into turmoil. A schism formed between those who wanted a pro-war candidate and those who wanted out of Vietnam. Could we see a similar split forming in the Republican party? It certainly doesn't seem likely right now, but if the nature of the war changes drastically it isn't completely implausible that we could see such a divide. In any case, there will be a fight in 2008 over who gets to define the future of the Republican party between the Bush followers who held power and moderates like McCain and Giuliani who may see a different path for the party. The divide could even come from the more traditionally conservative wing of the party that feels marginalized in this era of a "conservative" president not vetoing one spending bill and running larger-than-ever budget deficits.

On the Republican side in 1968, Nixon rose from the political dead (after his loss to Kennedy in 1960) and his successful "Southern Strategy" set the scene for elections in the next 40 years. What the Democrats will need is essentially their own "Southern Strategy." The focus should not be on finding a Clinton-esque candidate - Dick Nixon was no Barack Obama. But what Nixon did was bring together the Goldwater fiscal conservatives with cultural conservatives upset over the Democrats support of civil rights, two constituencies which had previously been on different sides of the political spectrum. Will we see Al Gore return and lead the Democrats to a new generation of leadership? That all depends on whether the Democrats can formulate a plan to bring together new constituencies in the next election. That all depends on what Bush does in the next four years. He is likely going to pursue very controversial policies. Some of these policies will no doubt alienate some portion of the Republican party. This has already started on some level. Fiscal conservatives are not happy with Bush's uncontrollable spending. Those living in Western states are not happy with Bush's immigration policy. The Buchanan wing of the party is not happy with Bush's interventionist foreign policy. No doubt his policies in his second term will exacerbate these faults and create new ones. The Democrats must be willing and able to cleverly take advantage of these divides and run with them. If they can, they will form the context for the next 40 years of politics as Nixon did in 1968 for the last 40.

The Dead of Iraq

The Washington Post has this very powerful memorial to those American soldiers who have died in Iraq. Via Josh Marshall.