A New Year's Message

What are you still doing here? Go have fun!!!

Masters of the obvious

In the field of expensively produced reports "scientifically proving" something that everyone already knew, the 1989 NHTSA report on "Sudden Acceleration Incidents", as chronicled by PJ O'Rourke, clearly stands out as the leader:

In the twinkling of an eye (by the standards of bureaucratic time, which is slower tan geologic time but more expensive than time spend with Madame Claude's grils in Paris) the thing was done. On March 7, 1989, the DOT-NHTSA-ODI-TSC-OPSAD-VRTC (you'd think the initials alone would be enough to slow down any rnaway cars) effort produced an eighty-one page report written by an eight-man group of engineering savants with more than fifty years of college among them. This document presented evidence from exhaustive experiment and analysis that proved what everybody who understands how to open the hood of a car had known all along about SAIs: "Pedal misapplications are the likely cause of these incidents."

Yes, the dumb buggers stepped on the gas instead of the brake . . . the truth was out at last. The government had released a huge report showing that there was no such thing as unintended acceleration in automobiles. Stand by for huge government reports on fairies stealing children and poker wealth gained by drawing to inside straights. Meanwhile cars did not fly away of their own accord. They could be safely left unattended. You can fold up the camp cot and quit spending nights in the garage keeping an eye on the family minivan.

However, it now has some competition:

Children who play sports video games on the Nintendo Wii burn more calories than they would playing regular video games, but not as many than if they played the actual sports, a new study shows.

Drinking problem? I don't have a drinking problem. I drink. I get drunk. I fall down. No problem!

In honor of your New Years celebrations, I offer you this classic on drinking:

Things that make you go hmmmm

The Economist's Certain Ideas of Europe blog notes the boom in year-round operation of bar terraces, supported by outdoor space heaters, that tends to follow smoking bans. This has certainly been the case in DC. But what about global warming?

. . . these outdoor terrace heaters (which have also sprung up like topsy all over Brussels in the last couple of years) are not exactly a brilliant idea, environmentally. The gas ones may be prettily designed with little silver hats to reflect the heat downwards, but they still amount to sticking a bunch of large propane cylinders on the pavement, lighting them, and letting them heat the sky. The electric ones are surely equally wasteful, aren't they?

It is all rather a poser. This blogger, as a selfish non-smoker, confesses to finding bars and pubs in places like Britain much more pleasant since smoking was banned in them. Yet a headlong rush to more and more outdoor heating cannot be a bright idea, either.

How long before the first city council bans smoking in outside bars?

The only safe flight is no flight at all

Alex Massie considers the latest bit of lunacy from the TSA and remarks:

For the love of god... When will these clowns learn that the only way to ensure total security is to prevent people from getting on the plane in the first place?

Please . . . don't give them any ideas.

Mental models of immigration

Glen Whitman ponders the difference between my preferences and Kerry Howley's on immigration:

I won’t weigh in on the topic itself, fascinating though it is. I’m more interested in trying to parse why they disagree. One interpretation of Kerry vs. Megan is that they differ in their preference ordering. Kerry’s preferences look like this:

{more legal immigration}
pref {guest-worker program}
pref {status quo}

whereas Megan’s, apparently, look like this:

{more legal immigration}
pref {status quo}
pref {guest-worker program}.

That is, Kerry and Megan would both ideally like to see expanded legal immigration, but since that’s a political dead letter, they are consulting their second preferences. Their second preferences differ, because Megan thinks the negative consequences of a guest-worker program are bad enough to make it worse than the status quo.

But here’s an alternative interpretation of Kerry vs. Megan: They have the same preferences (both consider a guest-worker program superior to the status quo, as in the first ordering above),but they have different political strategies. Kerry, thinking that expanded immigration is not going to happen, pushes her second preference for a guest-worker program. Megan, thinking expanded immigration might still be in the cards, opposes a guest-worker program because it could siphon support from the superior alternative.

(Clearly, it’s Megan’s position that I’m less clear about.

Economists have a tendency to represent simple verbal things in more complicated jargon, in part because this is occasionally clarifying, and in part because it is fun. And hell, it's New Years Eve, so I can't resist trying my own model.

Let's suppose a simple model where there are five classes of people: foreigners, illegal immigrants, guest workers, permanent legal immigrants, and Americans. Represent them by the letters f, g, i, l and a. Assume that for each there is a population P, with one interesting variable dimension, W. Take as stylized facts that:

W_a > W_l > W_g > W_i > W_f

and population growth is exogenous to American migration flows so that global population can be simply represented by the following equation:

P_f = P_world - (P_a + P_l + P_g + P_i)

Global welfare will then be described by the equation:

W_world = P_aW_a + P_lW_l +P_iW_i + P_gW_g + P_fW_f

Right now, for our purposes, P_g = 0. Kerry would like to see it increased to much greater than 0. I would like it to stay 0.

Glenn is right, I think, that for both of us the first preference is a scenario in which legal immigration is increased, so that in twenty years, our population and culture have been enriched by hordes of assimilated foreigners merrily remitting financial and human capital back to their home countries:

But since this is politically infeasible, Kerry turns to a guest-worker program as second-best. Here, I think, is Kerry's mental model of what happens with a guest worker program:

This, obviously, represents an unambiguous Pareto improvement, especially since we both anticipate that current American immigration policy will make P_i fall no matter what we do about guest workers; indeed, I think Kerry views guest worker programs as a possible way to alleviate anti-illegal sentiment.

My mental model, however, extends over multiple time periods. In time period one, you import a large number of guest workers who impose adjustment costs on their neighbors, including other immigrants with whom they compete for resources. In time period two, those guest workers go home and are supposed to be replaced by new guest workers. However, the frictional costs of those guest workers has increased opposition to both legal immigration, and the guest worker program. So in time period 1, things look like this:

In period two, one of two things happens (possibly both): there are significant changes in the law and our institutions in order to better contain guest workers; or the guest worker program and the legal immigration program are curtailed in order to appease rising anti-immigration sentiment. I fear an outcome like this:

In other words, I'm not holding out for some awesome future that both Kerry and I would probably agree is first best, but would probably also agree is not currently politically feasible. I'm against guest worker programs because I think it is possible to do much worse than the status quo, and that guest worker programs will probably reduce American welfare, immigrant welfare, and the total number of foreigners represented by (P_l + P_g + P_i).

Obviously, I don't think that P=1 for my scenario. But it doesn't have to be all that close to one for guest worker programs to start looking a lot less attractive.

New Year's Resolutions

Rather than grimly commit to self-improvement, a friend and I had a glass of wine on Saturday night and considered the things we actually want to do in the New Year. The list so far:

• Write a book
• Reconnect with at least five people I haven't seen in years
• Concede that my rock-climbing days are over
• More house parties, fewer mediocre restaurants
• Wear nothing that doesn't make me feel wonderful--even if I have to wear the same damn outfit every day
• Visit at least one country I've never been to before
• Take singing lessons

With Lent coming up fast, I'm also toying with the idea of going vegan this year. What are y'all planning for 2008?

Your Ron Paul moment of the day

Guitarist John Meyer argues with the guy from the Apple commercial about Ron Paul

And while I'm building my wish list . . .

In general, I try to assume that when someone does something professionally, they have some passing familiarity with the subject. This prevents me from looking like an utter fool when I triumphantly catch, say, a science journalist in some "error" that turns out to be my own misunderstanding.

In fact, I have caught professional economists and journalists in errors, sometimes embarassing ones; and in turn, I have been caught in a few bloopers of my own. But the flood of silliness in my comments from people who do not know what they are talking about, and do not know that they do not know, has to stop.

For the record, I have read the Austrian works to which I am being referred. The thing is, I have also read some other books about economics. This is clearly not true of the commenters who make basic errors such as calling me a Keynesian, thereby demonstrating that they have no idea who John Maynard Keynes was, or what he said. Approximately the only thing that Baron Keynes and I agree upon is that in the long run, we will all be dead. And not very long, if I keep having to respond to such silliness.

I wish . . .

That Ron Paul supporters would stop informing me, in ALL CAPS, that various current policies are UNCONSTITUTIONAL, when in fact those very things were WRITTEN INTO THE CONSTITUTION via the AMENDMENT PROCESS. The FOUNDING FATHERS deliberately gave future legislators the ability to AMEND the constitution, because they wisely assumed that in the FUTURE there might be circumstances they were unable to FORESEE in 1787. Whatever you may think of the income tax, it is not only constitutional, but actually in the constitution, via this very clear amendment:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

The complaints that I don't know what I'm talking about would be more convincing if the people making them gave evidence of having actually read the document that they claim validates their most dearly held beliefs.

Ron Paul's Economic Policy, Part Two: Alternative Currencies

I agree that the Treasury's crusade against the Liberty Dollar is stupid and should be halted. I don't agree that you have a right to hold commodities without paying capital gains taxes, nor that the US government should accept taxes in multiple currencies. The exigencies of the law mean that the government is always going to specify tax rates in one currency, which means that anyone who wants to use an alternative currency is going to accept currency risk. And given that taxes are 20% of GDP, most people are not going to be willing to accept that currency risk.

Which is why, while I agree that the government should leave the damn Liberty Dollar people alone, I don't agree that this matters. The gold standard is an idea whose time has gone.

Ron Paul on taxes

A number of readers want me to really dive into Ron Paul's economic policies and explain why I don't like them. Okay, here goes. First up: one of the main areas in which I am supposed to agree with Dr. Paul. That is to say, taxes.

Most of Dr. Paul's supporters like the fact that he wants to cut taxes. I like the fact that he wants to cut taxes. But how he plans to cut taxes is not so good. In fact, it's pretty bad.

His website is full of talk about eliminating the income tax, which is not going to happen. His more realistic plans consist mostly of about eighty zillion tax credits, either to replace existing government spending, or to make a warm gesture towards interest groups Dr. Paul thinks are swell, like senior citizens and people serving in the active duty military.

Item one: there is no good reason to replace spending with tax credits. Economically, they are indistinguishable from spending, except that they add all sorts of ugly behavioral inefficiencies.

Item two: they are regressive. Dr. Paul has several plans to replace spending programs with tax credits, which would represent a massive fiscal redistribution away from people who can't do much with a $15,000 tax credit because they do not have $15,000 worth of taxable income.

Item three: tax credits are economically inefficient, for reasons that I once laid out at great length here.

Item four: tax credits are economically distortionary; they either pay people to do things that they were going to do anyway, or they encourage people to do things that won't pay for themselves.

Item five: tax credits are much beloved of politicians because they sound magically different from spending, which allows them to distribute goodies to their supporters. If nothing else, this should make any libertarian shudder at the thought of tax credits.

And how will he pay for this tax cuttery? Megan's First Fiscal Law: spending is taxation. Economically, it doesn't seem to make much difference whether you finance that spending with taxation or debt; both exert some economic drag, though the mechanisms are different. If you want to cut taxes, you have to cut spending.

Actually, Dr Paul says he agrees with this. So how come his website and collected "issues" writing reveal no major cuts to any programs except his scheme to eliminate the department of education? I mean, I'm all for getting rid of the School Nannies. But observe, please, this graph which I am shamelessly ripping off of Marginal Revolution:

Note, please the category "everything else" which comprises under 17% of the budget. The Department of Education disappears into there, along with transportation, farm subsidies, and everything that is not entitlement spending, defense, and interest on the national debt.

Perhaps he is planning to slash military spending? But then who is going to perform all this border enforcement? And I don't actually see where he's planning to make the military smaller; he's just planning to keep them home. Iraq is expensive, but it's not expensive enough to pay for the kind of tax cuttery he's proposing. You'd have to cut the defense budget by a third to produce a 5% reduction in the overall budget.

Entitlements are by far the largest part of our budget; if you're serious about cutting spending, you need to get serious about attacking entitlements. But Dr. Paul makes no mention of slashing Social Security, Medicare, or Medicaid, and for good reason: the senior lobby would slaughter him. In fact, he's not only going to leave Social Security benefits intact, but also, he's planning to eliminate taxation of Social Security benefits. His plan for dealing with the entitlement problem seems to consist of saying that we should keep the federal government from spending the "trust funds". Okay, Dr.; into what financial assets should the government invest this trust funds, and what taxes will you raise, or spending will you cut, in order to plug the several-hundred-billion-dollar hole this will open in the general fund?

Nor are seniors the only ones he plans to cut taxes on. His ideas include no taxes for active duty military, tax credits for health care, tax credits for paying property taxes . . . apparently, the only people Dr. Paul thinks should pay taxes are, well, me, a young urban worker who doesn't own a home.

He promises to veto new spending. But new discretionary spending is simply not the major driver of our budget. The major driver of our budget is entitlements, which will grow unchecked even if he, and Congress, adjourn to play golf for the next eight years. This is not economically serious, fiscally responsible policy; in fact, it's just another variant on what everyone else is doing, which is ignoring the entitlement programs that are about to turn into the sucking chest wound of the US budget.

Finally, he sells his fiscal policy with completely unnecessary, not to mention factually deceptive, immigrant-and-trade bashing. His brief on the Import-Export Bank, an FDR-era boondoggle of trivial significance to anything, including the US taxpayer, is positioned as a complaint that we are massively subsidizing China. In fact, the subsidy is tiny, and it's not aimed at foreigners. We lend poor credit risks in other countries money to buy US goods; it's an export subsidy, and a particularly stupid one that should be eliminated--without gratuitous fearmongering about China.

Similarly, he attacks the Social Security Administration's plan for a "totalization" agreement with Mexico, claiming that it will result in the American taxpayer, suddenly and for no apparent reason, sending a ton of money to Mexicans who work here for a little while and then go back to Mexico in order to loll around in the sun collecting their Social Security checks.

This sounds ludicrous because it's a gross distortion. Totalization agreements are standard practice between countries with social security systems; they prevent people who are working abroad, but planning to retire in their own country, from having to make contributions to two systems. We have totalization agreements with any number of countries, and the actuaries at the SSA expect that the agreement with Mexico will have little impact either way on the trust funds. Indeed, the agreement with Mexico will cost us much less than our agreement with that nation of mooching scabs, the Canadians.

In short, I do not look at this list of proposals and see a bold iconoclast who finally dares to transcend politics, fearlessly doing what needs to be done and speaking truth to power. I see a politician telling his supporters what they want to hear, which is that they deserve to pay lower taxes, but not to have any program that is important to them slashed. I see him scoring cheap campaign points off of American hostility to foreigners, particularly poor foreigners who compete with them economically. And I see him, like everyone else, dodging the major fiscal challenge of our time: the problem of paying for the health care and pensions of the retiring baby boomers.

Ron Paul waffles on one thing, at least

Evolution.

Why <i>shouldn't</i> we punish rich people who renounce their citizenship?

We're not the Soviet Union, that's why. A society should offer a good enough deal to all of its members, even the rich ones, that they do not want to leave. If it cannot do that, it should let them pursue happiness somewhere else.

If someone wants to renounce their citizenship for any reason, good riddance to them and don't let the doorknob hit them in the ass on the way out. You don't have a right to their property to fund your government, a right of which they are "depriving" you by leaving. Taxes are the bill one pays for membership in the society. If one declines membership, one doesn't owe the taxes. The princes of Saudi Arabia are very rich, and much of their money was earned selling products to Americans. Do they owe us taxes too?

That kind of punitive taxation is, like the draft, an attempt to compel a civic emotion which cannot be manufactured by any external power. Like the draft, it increases quantity at incalculable cost to quality. The American idea is that you are not an American because you were born here; you're an American because you want to be. If people do not want to be Americans, then we are better off without them.

Taxation and the right of exit

The Economist's Free Exchange writes that many higher-earning Danes are voting on its tax regime . . . with their feet:

None of this is to say that the strains of commitment in Denmark have imperiled its stability in the near term. But as the low-tax, high-growth EU entrants from the east close in on the west, competition for both human and financial capital will intensify, drawing away ever more well-educated, cosmopolitan Danes-- unless they are given sufficient incentive to stay put. In effect, free migration within Europe allows wealthier Danes to bargain to keep a greater portion of their earnings. The interesting question is how hard they will bargain.

The numbers don't seem that large, but they come out of Denmark's most valuable human capital; the immigrants flowing the other way tend to be much lower skilled.

It is hard for high levels of taxation to survive a right of exit; Europe has mostly been protected (so far) by its many languages, which make it harder to move. But as the EU increases labor mobility, expect to hear more about harmful tax competition. Or more American-style efforts to keep the citizenry from moving abroad to work¹.

¹ In case you didn't know, America, alone among developed countries, taxes the foriegn earnings of its expatriates. Also alone among developed countries, it holds you liable for taxes ten years after you renounce your citizenship, and confiscates your property if it determines that you have renounced your citizenship for the purposes of tax avoidance.

Filibusted

Kriston asks:

Why on earth don't majority Democrats hand minority Republicans telephone books and tell them to start actually filibustering? It is only a gentleman's agreement that invests the threat of a filibuster with the full weight of an actual filibuster. So long as Republicans choose to turn every vote into a 60-vote cloture issue, Democrats might as well require them to own up to the mechanism that makes this obstructionism possible. At zero cost the Republicans can currently threaten filibuster on any legislation that comes down the pike; at the cost of reading from the encyclopedia all night long, some of these threats will surely be proven to be bluffs. Better yet, an intractable press will have to take notice when Republicans are forced to make a circus display of torpedoing popular legislation. Also, what the Democrats are doing now isn't working: Popular legislation is not passing and Democrats are being tagged "ineffective."

Many Republicans asked this very question when the Democrats were the ones doing the filibustering. The answer, as I understand it, is that if you make the opposition stay and actually talk, you (or a fraction of your majority) have to stay and actually listen. The spectacle is entertaining, but everyone would rather be home in bed, so they "let's not and say we did" became the order of the day."

Incidentally, is anyone else amused by the lightening speed with which filibustering has gone from [undemocratic obstructionism/a vital institution for protecting minority interests] to [an important tool for preserving Federalism/an obscene mechanism for thwarting the clear Will of the People]? No one's even bothered to come up with a better fig leaf than "but it's different when my guys are in charge!

Passage of the day

From Doing our Own Thing, by John McWhorter:

Language is exactly like singing and dancing. Printing and the spread of literacy happen to have created a First World in which the written version of language infuses our very souls, in a way that musical transcription only does for a few, and dance transcription for even fewer. But properly speaking, that is a historical accident. The capacity for language that we are, most likely, genetically specified for is an oral one. Just as we have no genetic endowment for driving, although many of us do it daily, we have no genetic endowment for reading (which in fact damages our eyes) or writing (which is hard on the hands and, on keyboards, now gives millions carpal-tunnel problems).

In fact, most of the 6,000 languages in the world remain, for all intents and purposes, exclusively oral in their usage. Of course by now most of them have been transcribed onto paper in some way--brief word lists in some cases, longer word lists and short grammatical descriptions in many others. For hundreds of languages there are these plus, say, Bible translations and some transcriptions of folktales. But even in these cases, the very sight of the language on the printed page is something of a novelty for its speakers, commonly evoking a certain marvel and gratitude. For them, the language remains fundamentally oral, used causally at home or with friends. They rarely read it, especially since there is so little to be read--no newspapers, magazines, or novels. How deeply can a word list permeate daily life? Few of even us speakers of written languages are given to curling up with a dictionary and a cup of hot cocoa on a blustery night. Speakers of oral languages commonly use one of the world's "big" languages for reading and writing.

But these "Berlitz" languages are very much the exception among the 6,000 Only about two hundred languages are regularly taught in writing to children, and only about half of them are represented by piles of works on a wide range of subjects to the extent that we could say that they have a literature. For most of the languages in the world, if you learn it, it'd better be in order to talk to its speakers, a lot--because there's barely anything to read. Language is talked. If it's written, that's just an accident.

Is it really true that we've no genetic facility for reading? How come some kids learn to read so much faster than others, then?

Anyway, the book is fascinating so far. Highly recommended.

Who cheated whom?

Nobel-prizewinning economist Gary Becker writes this week about the subprime bubble. He ably punctures the notion that the bankers were all a bunch of evil cheaters:

Many economists and members of Congress have claimed that the housing crisis was greatly magnified because unqualified home buyers with limited incomes and assets were not fully aware of the terms of their mortgage loans, such as that the low initial (teaser) interest rates were only temporary. This belief in the beneficial effects of greater knowledge about mortgage terms is inconsistent with the evidence that the most sophisticated banks and investment companies, including Merrill Lynch, Citibank, and Morgan Stanley, have written down their housing investments by billions of dollars. No one can reasonably claim that these banks lacked the skills and knowledge to evaluate all the terms of, or the likelihood of repayment, on the subprime and other mortgages that they originated or held as assets. The losses to investors have been so large, and have so eroded their capital base, that some of the major investment companies have needed large infusions of capital from Middle Eastern and Asian Sovereign Funds (see our discussion of these funds on December 10th).

Although there was some fraud by mortgage lenders and by borrowers, fraud was not the main reason why so many subprime mortgages were issued. Otherwise savvy investors greatly undervalued the risks associated with many of the mortgage-backed securities that they held. They and borrowers alike did not fully appreciate that interest rates were likely to increase from their unusually low levels, and that many borrowers lacked the financial means to meet their mortgage repayment obligations at higher rates, and sometimes even at the low initial rates they had received.

Given the low interest rate lending atmosphere of the past few years, it is highly unlikely that borrowers would have turned down the mortgages they received if they had much better information about terms, or that lenders would have been more reluctant to originate or hold these mortgage assets if they had better information about the credit and other circumstances of borrowers. This is why I doubt that the rules proposed this week by the Federal Reserve to require lenders to get more information about borrowers, and to provide more information to borrowers about the terms of mortgage loans, would have been effective in warding off this crisis, or will be effective in preventing future crises.

He goes on to point out that the same people criticizing banks for issuing loans to people in marginal neighborhoods with inadequate credit were, several years ago, some of the loudest voices raised against "redlining"--that is to say, the practice of refusing to issue loans to people living in marginal neighborhoods with inadequate credit¹. But I want to focus on this point.

The housing bubble was a great national folie-a-deux. Buyers and lenders alike were deluded by long years of easy credit into thinking that risks were lower than they actually were. It is not plausible to argue that the banks knew the loans would go bad . . . and nonetheless jammed billions of them into their portfolios.

To many people, of course, this cries out for regulations to keep the bankers from being stupid: force them to up their loan quality. This is likely to just replace one kind of error with another. Most people who got subprime loans are not in default, and I will be very, very surprised if the number of defaulters even gets near the 50% mark. Why would we want to cut off credit to the sensible majority who can meet their payments, in order to protect those who take out loans they can't afford? There is no way to tell Class A from Class B--or believe me, the banks would already have weeded the latter group out.

It is characteristic of major economic problems that whatever problem you're having now seems like the only problem worth solving, no matter what the cost. But the cost of denying credit to millions of people is very high--and tellingly, it will not be borne by any of the people who are advocating it.

¹ But why does the quality of the neighborhood matter, I hear you cry? Because when housing booms end, the marginal neighborhoods experience the fastest and deepest declines in home values. That means that a lot more people in those neighborhoods end up "upside down" on their mortgages: the value of the loan exceeds the value of the home. That means that they can't get out of a tight spot by refinancing, or selling; even if they sell, they owe the bank money, meaning they have to declare bankruptcy.

Seriously, though

The New York Times' willingness to believe that Ron Paul is a Nazi-lover seems like a symptom of a general willingness to believe that people with extreme political views that you disagree with all hang out together in some big club, where they exchange tips on stamping out liberty, and recipes for Molotov cocktails . Memo to the right: the greens do not hang out with the Maoists¹. Memo to the left: the Nazis and the anarcho-capitalists hate each other with a passion seldom found outside a faculty compensation committee meeting. It should be rather obvious from listening to Dr. Paul that he's no crypto-fascist. Now if you'll excuse me, I have to go research Dennis Kucinich's links to the Shining Path.

¹ Though to be fair, this is partly because no one wants to go to dinner with vegans except other vegans.

Ooops

Ron Paul: not a Nazi. I'm slightly bemused by the fact that the Nazis are so eager to claim Ron Paul as one of their own. I mean, not that Ron Paul isn't a perfectly nice guy, and so forth, but isn't claiming that you're friends with famous people who've never met you something you're supposed to grow out of in high school?

On second thought, I suppose a Nazi is definitionally someone who never grew out of anything in high schoool.

Why are citizenship and working bundled?

In re guest workers, Kerry responds:

Citizenships are club memberships you happen to be born with. Some clubs, like the Norway club, have truly awesome benefits. Others, like the Malawi club, offer next to none. Membership in each club is kept limited by club members, who understandably worry about the drain on resources that new members might represent. Wishing the U.S. would extend more memberships in 2008 isn’t going to get you very far.

Conceptually, for whatever reason, most of us are in a place where we think labor market access and citizenships ought to be bundled. A Malawian can’t come work here, we think, without the promise of a club membership, which is nearly impossible to get. This is an incredibly damaging assumption for two reasons: (1) memberships are essentially fixed in wealthy democratic societies (2) uneven labor market access is a major cause of global inequality. Decoupling the two leads to massive gains, as we see in Singapore, without the need to up memberships.

Question: what's the difference between outsourcing and immigration? To an economist, perhaps not much; they both cause relative adjustments in some wages while producing gains from trade. To the rest of us, however, there are large and noticeable differences. Immigrants produce substantial externalities, positive and negative, in the communities they inhabit. Citizenship doesn't come bundled with the right to work for American companies; it comes bundled with the right to work for American companies here. And it does so for the very good reason that one's neighbors have a very large impact on one's life. We may some day transcend geography, but right now we're all very much locked to a small patch of earth, and the people who happen to be inhabiting the patches next to us.

I am of the opinion that the positive externalities outweigh the negative ones, particularly when we consider, as I believe we should, the benefits to the migrants. But there are ways to amplify the negative externalities, and setting up a program that explicitly prevents assimilation seems like a big one. So does setting up a program which, in order to actually make it work as promised, would require massive changes to American institutions such as gender discrimination laws.

I don't think that most supporters of guest worker programs actually envision them working as promised; I think they anticipate substantial leakage from the program, rather than anticipating that we will, say, suddenly start discriminating against female immigrants. Probably they're right. But I get hopping mad every time I see a politician lowballing the cost of his latest healthcare boondoggle, so I don't feel entitled to work similar tricks on people I disagree with. And in the long run, I don't think it will work. Programs sold on exaggerated promises, like the Medicare subscription drug benefit, survive because they create their own constituency against changing them back. But if this program works as advertised, its major beneficiaries won't ever be able to vote.

The un-dorsement

I'm digging the undorsement trend, at least when it's as well done as it has been by Daniel Drezner:

On the other hand, Matthew Yglesias and the Concord Monitor are onto something with the "undorsement" idea. So, my two undorsements of candidates that could ostensibly win are.... John Edwards and Rudy Giuliani.

My reasons for the Giuliani undorsement have been made clear.

As for Edwards -- I can't take seriously anyone who thinks that a free trade agreement with Peru -- Peru!! -- is somehow going to devastate workers and communities. Proposing to "make top prosecutors at the Department of Justice responsible for enforcing trade agreements"? I love how Edwards wants to re-engage with the world and simultaneously bully these governments into accepting American terms. Hillary Clinton's trade positions are problematic, but Edwards is Hillary on steroids.

I second that emotion.

Ron Paul: Why ask why?

Why harp on Ron Paul? ask my interlocutors. Do I hate liberty? Do I not realize that he's the closest thing there is to a libertarian candidate?

Well, for one thing, there's not much point in my arguing with a John Edwards supporter.

"But he's a demagoguing populist who wants to gut trade, jam taxes sky high, and spend the money on a ludicrous state-run health care program!" I cry.

"I know! Isn't it marvelous?" they reply, and that's the end of the discussion.

In fact, I will, in the run-up to Iowa, be digging into the economic policies of all of the major candidates, and presenting my thoughts for your delectation. Ron Paul is up first for two reasons: first, because so many people seem convinced that he ought to make my heart go pitter-pat; and second, because the nuttiness extremity of his policies makes for interesting discussion.

There's really very little variation between most of the candidates this election; we're mostly arguing about dry bureaucratic tweaks to the same fundamentally wrong-headed policies advocated by everyone. Ron Paul, on the other hand, has an entirely different set of fundamentally wrong-headed policies, which makes him slightly more amusing to talk about. Ron Paul is the master of high-concept politics: he's full of simple prescriptions that can be stated in a sentence or less. Thus we waste little time getting tangled up in subtleties.

Anyway, why not just bite the bullet and support him, imperfect as he is? I did as much for the execrable George Bush in 2004, after all. Well, actually, you just answered your own question; I've overlooked disturbing tendencies in a candidate before, with less than salutory results. George Bush supported low taxes, a semi-decent entitlement reform, etc., etc. It's just that little of that stuff happened, and a lot of bad stuff did.

The fact that Ron Paul doesn't want to do those bad things, but instead advocates an entirely different group of bad ideas, like abolishing the Federal Reserve and pulling every American solider back behind our borders, doesn't comfort me. Nor does the fact that Congress will stop him, since Congress will stop him from doing nearly all the things I like, such as reforming Social Security--just as they stopped George Bush from doing the things I liked. They won't stop him from refusing to negotiate new trade deals, and doing his best to scupper the ones we've got, for example. Nor will they likely block him on immigration. And I'm pretty sure they can't keep us from whisking all of our troops home from everywhere tomorrow, which sounds fun in a bold, sweeping sort of way--but I am inherently suspicious of bold, sweeping changes to our foreign policy.

All of which is irrelevant because if Ron Paul somehow did garner the Republican nomination, the only tangible result would be a Goldwater-style landslide.

Department of irrelevent but interesting questions

There are interesting side-speculations about what might have happened to America had we not fought the Civil War which do not concern themselves with slavery and race. They don't get much air play, because they're pretty much totally irrelevant to the question of whether we should have fought; but they're still kind of fascinating. For example, what would trade policy have looked like if the Confederacy had left us?

One of the big issues between North and South, after all, was the level of the tariff. The north wanted high tariffs, to protect its industries from competition; the south wanted low tariffs so that its farmers could buy cheap manufactures. Had we not reconstructed them into the Union, we would have lost the major constituency for free trade in Congress.

Good, fast, cheap: pick two

Texan Kriston Capps has a few interesting observations about the death penalty in Texas:

A study performed by Cornell University in 2004 found that Texas assigns the death penalty at a rate lower than the national average (2 percent versus 2.5 percent). The most death penalty-prone states were not Texas or Florida, but rather Oklahoma (6 percent) and Nevada (5.1 percent). In part this rate disparity owes to Texas's sentencing standards. In order for the death penalty to be assigned, a crime must meet certain objective criteria (scroll down). For example, when a police officer or firefighter is murdered, when a child under age 6 is murdered, or in the case of multiple murders. Subjective criteria—the "heinousness" of a crime, for example—are not considered. Texas's sentencing standards are those that tend to find sympathy among even moderate opponents of the death penalty.

The speed with which the state carries out capital punishment, however, finds no quarter among sensible observers. Both the Texas Court of Criminal Appeals and the Texas Fifth Circuit are prosecutorially oriented; a state prosecutor explained to me today that there are no defense lawyers serving on the Court of Criminal Appeals at all. The speed of the system is aggressive, as critics point out, and is certainly out of step with the current national mood. (Indicators of which include the so-called national moratorium—although it is no such thing. The Supreme Court has merely stayed every execution by way of lethal injection that has come across its desk. A formal SCOTUS moratorium would have delayed the hasty execution of Michael Richard; the "de facto" moratorium did not.)

The Times: "The death penalty developments that have dominated the news in recent months are unlikely to have anything like the enduring consequences of Texas' vigorous commitment to capital punishment." True for the convicts put to death, of course; true for the families of their victims, I would imagine. In other respects, this is a dramatic statement. The state's execution of executions is impressive and awful, the product of a pervasive political problem that inflects the justice system. Its devotion to the death penalty, however, is truly average.

The prosecutorial bias is much more disturbing than the fact that Texas has the death penalty, even though I'm against the death penalty. Spending your entire life behind bars isn't so much better than dying; we should be focused less on the small number of executions, and more on the biases in the system that lead to wrongful convictions of all kinds. And sadly, Texas isn't really unique in this regard, either.

Benazir Bhutto killed in a bomb blast

Benazir Bhutto has been assassinated at a political rally, along with at least 15 others. I have nothing interesting or original to say on the topic, so I won't strain for something. However, I'm surprised at how harsh BBC World News has been. For now, BBC America has suspended regular programming for the news broadcast, and the interviewee they just had on isn't waiting for the body to get cold.

If you're looking for some background on Pakistan, you can't do better than our October article, and the follow-up web-only interview. The Economist also has a short backgrounder with links to articles.

Alas, poor Card

I just got back from Western New York, driving back to DC with my sister. She's a science fiction buff, and we listened to Orson Scott Card's Empire all the way down. Since I'd just read Peter Suderman's review of the book in the New Atlantis, I was interested to see what I'd think.

I'm afraid I agree with Mr Suderman: the book is dreadful. I'm an enormous fan of Card's, but there are some things no love can survive, and this book is one of those things. The book's premise of a plot to start a new American civil war is stupid. Card is phoning it in--apparently from somewhere with a very poor signal--and does nothing to make the story more believable. Characters this thin cannot be described with the traditional "paper" or "tissue"; they seem to be composed of some sort of special alloy fabricated to be exactly one molecule thick. Worse, they're not even entertaining. Stock fictional characters, well done, can provide hours of fluffy entertainment; these mostly bore one with ill-conceived sermons on politics and family life.

What if?

The other question about the Confederacy, of course, is what would have happened if they had managed to abolish slavery fairly early on. I suppose one could construct some sort of "blowback" argument whereby American intervention hardened racial attitudes and made white Southerners act nastier to blacks than they otherwise would have been . . . . but such an argument would be hilariously unconvincing.

It is hard to imagine a Confederacy with a Civil Rights Act. School segregation probably have been less of a problem; I doubt there would have been too many schools for black kids. Legal discrimination would be buttressed with the sort of social and economic discrimination that America (read, the North) legally prosecuted for decades. Confederate apartheid, unlike the the African version, commanded the support of actual majorities of the population in most places, so even if you gave blacks the vote, it's not clear to me how it would have ended.

Isn't there another way?

I periodically flirt with isolationism, or if you prefer, "non-intervention". Like most libertarians, I'm attracted to "high concept" political philosophy: simple rules that can be stated in a sentence or less. No arguments about causus belli, blowback, or ultimately unknowable political ramifications; just a simple "yes or no" test. Did a foreign army invade the United States? For "Yes", press one; for "No", press two, and go back to arguing about what should replace child welfare laws in the coming anarcho-capitalist society.

Besides, all the foreigners hate having us there. Why not leave, and see if absence makes the heart grow fonder? (I suspect that many nations which have come, over long decades, to regard regional peace as some sort of natural law, will get a rather nasty surprise. This might make our influence look, in retrospect, rather appealing.)

But anyone who thinks at all seriously about libertarianism will, fairly early on, be faced with a very high hurdle. There are a handful of wars in which American intervention unambiguously halted gross abuses of human liberty. World War II is one, though many end up going around, rather than over . . . arguing that the Nazis were the direct result of American intervention in World War I; or that it was justified because Japan attacked us¹; or that Russia and Britain would have defeated Hitler anyway². The American Civil War, however, is by far the highest leap; and the hardest to dodge.

In theory, every state has the right to secede, and the stated Federal rationale for the Civil War--preserving the union--was the vilest tyranny. In practice, chattel slavery was a barbarism even viler.

And so we killed 20-30% of the Confederate Army, not a few of our own, and uncounted numbers of civilians. That's not counting the wounded, who probably outnumbered the dead. All we managed to achieve, at this horrendous cost, was a corrupt and brutal occupation, followed by the "freedom" of Jim Crow, sharecropping, and "separate but equal". And it was worth it. The good guys won. We didn't do everything we wanted to, or even everything we could have, or should have. Jim Crow was putrid. But it was nonetheless so much better than slavery that it was worth the horrendous cost--in my opinion, and that of almost everyone in the world.

Hard-core non-interventionist policy doesn't have a very good model for this--at least not one that I've seen. Either the states didn't have a right to secede; or we had right to invade a sovereign nation and occupy them in order to end slavery; or you have to leap the hurdle and say "Yup, we should have left the South alone". Some libertarians do say this, and not because they're racists; the price of intellectual consistency is embracing occasional bad results. I think this is wrong, for all sorts of reasons, but I do understand the allure of consistency. Because if you don't take their position, then suddenly you no longer have a high concept policy, full of hard-and-fast rules that could be applied by any literate twelve-year old. Suddenly you're mired in arguments about which practices merit intervention, and which are merely offensive, and how much of our own national interest we are obliged to sacrifice in these sorts of humanitarian efforts.

Thus non-interventionists fairly often end up in debates over what would have happened if we'd just let the Confederacy go. Jim Henley's post on the topic is interesting and very thoughtful, but like most of these arguments, it seems to me too willing to embrace the comfortable belief that intervention never achieves any substantial positive effect. I am very suspicious of any model which validates someone's policy preferences by proving that there are absolutely no tradeoffs. This is what drives me crazy about the supply-siders: rather than facing the implications of what they advocate, they resort to fairy-tale scenarios in which all the problems magically disappear. One occasionally stumbles across Pareto improvements in the policy world, but they are rarer than hens' teeth.

It is true that slavery was on decline in the developed west in the late 19th century, but that story, at least as I understand it, is rather complicated. Britain and Spain abolished slavery in far-off colonies; it was not economically important to most voters. The numbers involved were comparatively small, relative to the British Empire's population; something less than a million, compared to 4 million slaves in the American South. In Britain, slavery's economic importance was declining as industrial production replaced agricultural commodity trade as the economy's main engine of growth. In Brazil, too, it was a relatively weak institution, declining due to competition from foreign labor. In Russia, the serfs were not quite equivalent to chattel slaves, and in any case, there too, they were freed under the aegis of an absolute monarch who wanted to modernize the economy.

But in the American South, slavery was still a vital and thriving economic institution at the time of the Civil War, as economic historian Robert Fogel has shown in his brilliant Time on the Cross. Would it have been eliminated quickly? Even if it had declined economically, would the Confederacy have gotten rid of an institution that was central to its foundation?

I think it's rather more plausible to believe that a breaking away would have strengthened the institution. For one thing, an independent Confederacy could have relegalized the slave trade, outlawed since 1808. (This might well have had the side effect of extending slavery elsewhere, as Confederate-supported slave trade brought new sources of cheap supply to areas where immigrants were making slavery uncompetitive.) For another, I think Jim is massively overestimating the number of slaves who escaped; estimates I've seen put the number of runaways at about 1,200 a year, out of a population of 4 million. That's even with the basically non-existent enforcement of the Fugitive Slave Act. Escaping turns out to be very difficult when you need a travel permit to be anywhere more than a few miles from your house, as any Russian defector can attest.

It's hard to imagine any scenario in which more than a handful of blacks ended up in the north; the slaves mostly didn't escape, and if they'd been free, it seems doubtful that we would have allowed them to immigrate in massive numbers. The best case scenario seems to be 4 million blacks nominally free but subject to a more vicious version of Jim Crow, unmoderated by the safety valve of northern migration.

That slavery would have ended, eventually, is probably true. But how "eventually"? Obviously, if slavery would have ended in 1862, then our invasion was counterproductive; on the other hand, if they had just managed to get rid of it last year, I imagine that most people, probably even Mr Henley, would vote in favor of a retrospective invasion. But how about 1900--would it have been better to leave another two generations of blacks under the lash? What about 1920? 1950? How many generations of suffering are enough to justify intervention? No evil lasts forever, after all; if nothing else, eventually the sun will go nova and incinerate us all with magnificent even-handedness. How long before that happens are we entitled, or even obligated, to say "enough!"--and make it stick?

¹ Er, yes, in response to naval activity in their sphere of influence, thousands of miles from the continental US

² Really? Without our meddling, decidedly interventionist Lend-Lease and merchant shipping programs? More to the point, would they have liberated the camps before Hitler finished his Final Solution?

³ Much harder to escape your owner than to legally board a train.

That's a good . . . no it's not

Remember how our teachers told us there was so such thing as a dumb question? I think they may have misled us.

Be our guest!

Libertarian Kerry Howley and Matt Yglesias are having an interesting back-and-forth on her excellent article about guest workers, which ran in the latest issue of Reason. Kerry's article is a broad brief in favor of the programs, based on looking at how it works in Singapore. To which Matt responds:

I’d definitely recommend that you give Kerry Howley’s Reason article on guest workers in Singapore a read. It’s a very thorough and balanced discussion of the way it works. That said, given that the crux of the opposition to such programs for the United States is “it’s repugnant and un-American, violating everything this country stands for” to say in reply but look at how well it works in a small, regimented, highly inegalitarian Asian dictatorship doesn’t seem very persuasive.

The experience of a more similar society, Germany, is not something that many Americans look at and would desire to replicate. Meanwhile, I have no desire to see the United States become more like Singapore. We are, however, in the midst of a burgeoning libertarians against democracy moment (a return to classical liberalism’s traditional anti-democratic sentiments) of sorts, so maybe we’ll start seeing more and more aspects of Singapore and Hong Kong recommended to us as models.

Kerry replies:

No, we don’t want to be more like Singapore overall. We want to be more like Singapore in the ways that Singapore is more liberal than we are. I think we can reasonably expect a U.S. guest worker program to be more compassionate and less disturbingly efficient than a Singaporean one. If the system is bettering lives over there, it would surely do so in a country less excited about, say, executing people for marijuana possession.

I don't think we're particularly like Germany, which like most European countries, is still dominated by an ethnic view of what constitutes "German-ness". But I do think this rather short shrifts the question of how American society would have to change to accomodate large numbers of people who have no vested interest in our country.

I'm in favor of much more open immigration, but I'm not in favor of unlimited immigration, because I think that without limits, immigration could easily exceed our ability to assimilate immigrants. Cultures have some right to preserve themselves; America does not have a duty to suddenly double its population with people who don't speak English, have no experience with functioning liberal democracy, and low economic productivity--even if it would, as is undoubtedly true, make all those people better off.

Not that Kerry is advocating any such thing; I'm just illustrating that there are limits to our obligation to make poor people in other countries better off by allowing them to migrate here. I think that obligation is substantial. Almost no one reading this would be here if America hadn't thrown open her doors to their ancestors, and so we have something close to a sacred duty to extend that welcome to as many more people as possible. But we don't have an obligation to radically alter our society in order to make it more friendly to guest workers.

So how radically would we have to change in order to accomodate the transient population? Kerry's article offers a hint:

And yet Manalac is very much a guest in this country. He says he’ll remain for as long as they’ll have him, though he doesn’t presume to have any right to stay. If he were fired or became unable to work, he’d have to leave within seven days. He is subject to regular medical examinations to ensure that he is HIV-negative. He can’t bring his children here. He can’t bring his wife here. Were his marriage to fail, it would be illegal for him to marry a Singaporean. Were he female, a pregnancy would mean repatriation or abortion. The Singaporean government has made itself very clear: Foreign workers are here to build a nest egg, not to build a nest.

What will we do with pregnant guest workers? For three to six months, at least, they won't be working. They'll need health care; who will provide it? Will we force companies to provide their guest workers health care, which will make them uneconomical compared to other low-skilled labor, or will the taxpayer foot the bill? Do we ship them home? Do we rewrite our constitution to exclude their babies from citizenship?

We could simply discriminate against female guest workers, as many countries do; or we could allow employers to do so, as they do in most places where such things are allowed: firing the ones who get pregnant, or locking them in at night so that they can't get into trouble in the first place. It's not really surprising that the female guest workers she interviews for the articles are maids, closely supervised by the families they work for.

That's one troubling question. Here's another: do we let the guest workers date and marry American citizens, as they will? Because if we do, we'll find a lot of our guests have become permanent members of the household.

Then there's the question of social services; even if we force employers to cover health care costs, what do we do for guest workers who are between jobs? Send them back to Mexico? If we let women in, we will end up with a largish number of new citizens: are we obligated to educate them? Can they sign up for S-Chip?

But mostly, I worry about having a large number of people in the country who are, definitionally, not planning to stay here. There's something corrosive about transience: witness the way college students treat their neighborhoods. (And don't tell me they're young; they're prime guest-worker age.) Civic bonds can withstand culture clash, but I'm not sure they can withstand pockets of people who are just there for the job.

And though Kerry says that this is probably the only way we'll get to expand legal immigration, I'm not exactly sure what a guest worker program buys you--unless we really do exert Singapore-style controls to keep the workers herded in ghettos, unable to date or marry American citizens and watched like hawks by cops with a rather casual attitude about civil rights. The main objections of Americans to illegal immigration has nothing to do with the brown people staying too long. Rather, it is that the brown people introduce change to your community (all the signs are in Spanish!), commit crimes, use social services, live in slumlike conditions that reduce local property values, have babies that automatically (and at great taxpayer expense) become citizens, and refuse to assimilate. How will forcing them to leave after five years, while immediately replacing them with a new crop of non-English speaking, social service consuming, child-having extremely poor people living eight to a room actually relieve any of these tensions? Ultimately, I suspect that a guest-worker program would end up doing more harm than service to the cause of freer immigration.

Update Given that a couple of people I respect have misunderstood me, let me clarify: I'm not against immigration. I'm for expanding legal residency programs a lot. I don't particularly care about legal immigration. I am specifically against creating a guest worker program. It might, in the short run, seem like a cute way to do an end-run around anti-immigration sentiment. In the long run, it brings in workers who are less committed to the country and the community, and probably makes tensions between immigrants and natives worse, since as soon as they start to assimilate a little, we'll ship them home and import a new crop that don't speak English. Nor will the people who currently don't like immigration somehow fail to notice the ones who get married or pregnant and stay. But it is not the fact that guest workers will come here, get pregnant, and suddenly present us with new baby Americans that bothers me; it's what damage we might do to our own civic institutions in trying to keep this from happening.

Peace on earth, goodwill to men

I have a big slab of my family's Christmas bread in one hand, and a huge mug of coffee in the other, and I am about to sit down and open presents.

Hope everyone out there is having as lovely a time. Thanks for reading all year.

Department of mathematical illusion

Matt explores the phenomenon of decreasing returns to scale:

Via Andrew Sullivan, Eric dePlace notes that "You save more fuel switching from a 15 to 18 mpg car than switching from a 50 to 100 mpg car." And so you do. A 15 MPG car would require 1,000 gallons of gas to drive 15,000 miles while an 18MPG car could get it done in just 833 gallons. That saves 167 gallons of gasoline. By contrast, since a 50 MPG only uses 300 gallons to go 15,000 miles, upgrading to 100 MPG can't save that much gas -- the super-efficient car uses 150 gallons.

One moral of the story is that the MPG statistic is probably misleading a lot of people who aren't quantitatively sophisticated. In policy terms, meanwhile, the upshot is simply that it makes more sense to focus on raising the efficiency of the least-efficient vehicles than creating new super-cars. Of course, the genius of pricing carbon through a tax or through auctioned emissions permits is, once again, that is spares people the burden of trying to do all the math in our heads and just lets price signals automatically find the most economical way of reaching the targets.

This is a common mistake in assessing ratios. I've just finished a piece on the impending retirement of the Baby Boomers, and one of the things that's hard to explain is the accelerating nature of the problem. Since 1945, the year the Baby Boomers were born, the number of workers per retiree has fallen from 40 to about 3. The drop from 40 workers per retiree to, say, 10 workers sounds very large. But for the workers, it's a smaller change than the decline from 3 to 2. Just keeping retiree income steady (as a percentage of GDP) over the next 20 years will require every worker to increase their contributions to same by 50%.

Senior moments

We're going to be seeing a lot more stories like this as the Baby Boomers age:

Mr. Pyle’s suit contends that mortgage brokers and banks defrauded him by helping him take out loans they knew he could not afford, and that the person who bought his house deceived him by paying far less than its market value.

Such theories have yet to be fully tested in court. And because many cases settle before they go to trial, in part because companies often assume juries will side with older victims, there is little precedent for how the laws should be interpreted.

As growing numbers of elderly consumers begin citing such legislation to undo contracts or get refunds, some companies and executives are warning of possible repercussions.

“Either someone has the mental capacity to make a decision, and therefore live with the consequences, or they don’t, in which case they shouldn’t be managing their own finances,” said Terry J. Dyer, president of Jett Financial Services, a defendant in Mr. Pyle’s suit. Mr. Dyer said his company, which helped Mr. Pyle refinance his home, did nothing wrong.

“There is no business on earth that can function if its customers can say, ‘I’m tired of abiding by this contract, so I want out because I’m old,’” he added.

For his part, Mr. Pyle wants to have it both ways — protection when he makes mistakes, and the right to make all his own decisions.

“It would be complete overkill to take away my independence,” Mr. Pyle said. “So I made a few mistakes. Twenty-five-year-olds make mistakes all the time, but they don’t lose their right to make decisions. I helped build this country. I deserve more dignity that that.”

Seniors are extremely vulnerable: they are often lonely, their mental facilities may be slipping somewhat, and they have large stocks of cash for con artists to loot. Mr Pyle was taken advantage of by a woman who sounds like a vile, vile human being; she played on his loneliness to get him to give her huge sums of money. Ultimately, he lost his house. To a greater or lesser extent, this is played out all over America every day.

But as the article makes clear, his problem wasn't that creditors improperly disclosed the terms of the loans; it was that he borrowed too much money. In effect, his lawsuit argues that he is not capable of making good decisions about his finances, and says the lenders should have done so for him.

If this sort of lawsuit is upheld, seniors will find it much more difficult to get credit, or indeed to enter into any sort of financial transaction. Businesses will not do business with people who can shed their contracts simply by declaring that they were, in retrospect, too old to make an informed decision. As the article notes, Mr Pyle wants to have it both ways: he wants the court to declare him too dimwitted to be responsible for his financial choices--but to leave him in charge of his own finances.

Ron Paul=protest vote?

Andrew Sullivan views a vote for Ron Paul as a protest against everything the Republican Party has become. Bryan Caplan says that even if he were elected, he couldn't enact the crazier parts of his agenda.

That's fair, but if I'm going to cast a protest vote, I need to know: what elements of Ron Paul's agenda am I going to empower? The problem with expressive voting is that politicians may not actually get the message you're trying to send.

If I vote for Ron Paul, am I ratifying his views on foreign policy, only a small part of which I agree with? Or am I telling Republicans that they should tack to the right on immigration and abortion? And if, in some alternate universe, Dr. Paul got elected, it is true that he would not be able to put the country on the gold standard--but what parts of his agenda might he enact? And who would he appoint to key jobs? One doesn't like to imagine who his nominee for the position of Chairman of the Federal Reserve might be.

Your morning retail report

I'm up in my mother's hometown for the holidays, a sleepy country village in western New York. Due to a sudden surplus of holiday iPods, we went to the outlet mall yesterday to pick out something else for my sister.

The place was eerily abandoned. Even Harry and David, which is normally crammed with shoppers stocking up for holiday parties, had more staff than shoppers.

The housewares stores seemed the most deserted, which makes sense: it's easier to make one's plates go another year than the ratty old sweater with a hole in it. I secured some fantastic bargains at the Mikasa store closing sale--four champagne flutes for $4, that sort of thing. I suspect anyone who retails china or pots is having a very grim Christmas indeed.

Western New York is already economically depressed of course, so your results may vary . . . but a friend found the same phenomenon in the Ohio malls, right down to the underemployed store clerks stalking her through the aisles. And nationally, it's been clear for a while that this Christmas season was bringing in some aggressive pricing policies; even Bose, which makes it a point of corporate policy to never discount, is "discounting" by offering freebies with its products.

I've been waiting for a recession to hit for over a year now, so perhaps I'm just suffering from confirmation bias, but I think it's pretty clear that consumers are massively retrenching. Since many retailers don't swing into profit until the fourth quarter, that sector, at least, probably qualifies for the r-word. As for the rest of us, I guess we'll have to see. But I'd say that P(Democrats win 2008 election) is solidly in the 95%+ range.

Quote of the day

Offered without comment:

There’s something cool about the thought of being totally off the power grid. It’s a psychological thing. I could rationalize being off the grid by saying it would come in handy if the rest of the world runs out of energy. But realistically, the big worry in that case wouldn’t be powering my iPod so much as not getting eaten by cannibals.

From Scott Adams.

Lost in translation

I've been rereading Italo Calvino's If On a Winter's Night a Traveler, and regretting that I don't speak Italian. There's always something vaguely unsatisfying about reading in translation; I always feel the author straining against the flattening effect of someone else's words.

But perhaps I'm just projecting. Are there translations which are better than the originals, or just as good? Borges doesn't count.

It's beginning to look a lot like Christmas

Tony Woodlief offers you an ironclad excuse for not sending out your Christmas cards on time.

High politics

On board the Ron Paul blimp.

Navel gazing

This article is so obviously written by a man.

The Better Borrowing Bureau

The gold standard, it seems, is a sort of economic ginseng: a broad-spectrum financial snake oil that purports to cure almost any ill one can imagine. One of the interesting things emerging from the argument about the gold standard is that many of its proponents seem to believe that it will somehow force the government to spend less money, or balance its budget.

I have no idea why they believe this. Is the gold standard going to prevent the US government from issuing bonds? Will Congress have to lower tax rates in order to protect IRS agents from lower back strain? Seignorage, aka the "inflation tax" is not an important source of revenue for the federal government; it's not even a particularly important source of revenue for private banks, which collect most of it. The gold standard will not prevent the government from doing anything--except respond to changes in the demand for money.

But gas costs so much at the pump! Another in my series on Ron Paul and the Gold Standard

How much of the higher price of gasoline is the Fed's fault?

To a first approximation, zero. Oil is priced in dollars in the international market. The falling dollar has no effect on the price of oil. And inflation is a tiny contributor to the huge increase in gasoline prices. The huge increase is due to the fact that a lot of people want to consume oil, but producers have been slow to supply additional quantities. When demand goes up and supply doesn't, prices rise.

More Ron Paul monetary wisdom

Ron Paul blames inflation on the Iraq War:

Indirectly, it might have created some small effect because of the disruption of oil from Iraq, and security worries (though it has lately become much less fashionable to blame high prices on speculation). But spending on Iraq is, compared to our economy, very small.

Putting the "mega" in "mega-rich"

Q&O links my CEO pay post, noting:

As is the case in professional sports, more overall wealth and greater competition for that wealth produces a sort of salary/talent attenuation - the top-tier talents attract disproportionately more income, because the competition for that last little marginal edge in talent is so fierce. Michael Jordan wasn't 20 times better than a playing making $1.5m per year, but that marginal advantage he did have made him far more valuable than the rank and file NBA player.

But even the salaries of ordinary professional athletes have increased dramatically since the 1950's. Somehow, though, no one resorts to conspiracy theories about "captive owners", lax government regulation, or a grand cultural shift in the way we view those greedy bastards on the bball court. No, people are willing to pay a lot more to see professional sports than they used to, and so owners have more money with which to bit up the price of top talent.

Note that the lion's share of income inequality seems to be driven not by CEOs, but by compensation in the technology and financial services industry. Hedge fund managers may not, in some platonic sense, "deserve" what they get, but I guarantee you that none of the investors are giving them 2-and-20 because they're such good friends. Nor because they're brutal class warriors who throw largesse to financiers largely as a way to keep that cash out of the hands of the deserving poor.

It has gotten vastly more lucrative to be in certain kinds of professions, for reasons we don't entirely understand. But if your story involves a sudden increase in Net National Greed, I'm pretty skeptical.

My commenters is smarter than I

A heartbreaking work of staggering genius.

Women, know your limits

Birth control, control

All year I've been seeing these stories about dastardly pharma companies, who have inexplicably and meanly jacked up prices for college students. This seemed odd, though it was hard to work up too much sympathy, since $50 a month is less than what your average college student spends on bad beer. But I should have known that there was a government regulation behind the sudden change.

Okay, so why not competing commodity currencies?

I dunno, why not? You can have one right now. You will be required to use one (1) US dollar in the transaction in order to qualify for protection from the courts, but given the predations of the Federal reserve, this seems a minimal expense. Otherwise, go ahead and denominate your deals in anything you like: ounces of gold, bushels of wheat, ingots of tin, barrels of oil, or anything else you can dream up. You will have to convert back to US currency in order to pay your taxes, but I doubt Ron Paul's system would let you pay your taxes in dried codfish either.

Nor are you limited to barter. You can simplify things by obtaining a certificate which entitles you to some quantity of gold or other commodity--right down there at your local metals exchange. One can buy a bunch of gold and melt it down to coins of a fixed weight of gold. They won't be legal for paying your taxes, so you'd bear some currency risk when tax time rolled around. But you would under any system with multiple commodity-backed currencies, because their relative supplies and demands would fluctuate.

So why haven't you done this? If you say, because no one would spend it, you've hit on the reason for government money; it massively reduces transaction costs to have a single accepted currency.

One common response is that "bad" government money is driving "good" private money out of the market. But that assumes what you want to prove. If government money were so bad, people would turn to substitutes; if you go to any country where the government massively inflates the currency, you'll notice that people turn to dollars or gold in preference. Note that people who could choose any money they want turn to the dollar as their store of value. This is less true than it used to be, for reasons that have very little to do with our central bank's policy, and much to do with global capital flows. But it is still very true. Which is why I say that the gold standard is a solution in search of a problem.

The good old days weren't always good, and tomorrow ain't as bad as it seems

As I believe Will Rogers once said, it ain't what we don't know that kills us; it's what we do know that ain't so. One of the reasons behind affection for the gold standard is the erroneous belief that during the era of the gold standard, the economy grew much faster than it does now.

Well, sometimes it did. It also shrank much faster than it does now. Under private or semi-private money, the economy tends to be much more volatile.

But on average, if you compare the two centuries, as I did using what primitive growth data we have for the 19th century, you'll see that there were spectacular years of China-style growth, but even more spectacular years of contraction. Recessions tended to be much longer, deeper, and more frequent than they are now.

But on average, the 20th century, with its Federal reserve and its fiat currency, grew not only more smoothly, but on average faster than the 19th. In 1800, real per-capita GDP was $1200 or thereabouts; at the turn of the 20th century, it was a little less than $5,000, a roughly fourfold increase. By comparison, between 1900 and 2000 real per-capita GDP went from $4,921 to $34,775, a sevenfold increase. Even if we chop off the first half of the 19th century, to put us squarely in the industrial revolution, 20th century growth still looks better. If fiat money is killing us economically, it's sure a slow-acting poison.

Why is the gold standard crazy?

I wrote a long post on this a couple of months ago. Here's the highlight reel:

In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg). Meanwhile, the limitations on the government's ability to respond to fiscal crises, the necessity of defending against speculative attacks in times of crises, and the possibility of independent changes in the relative price of gold, make your economy more unstable. It's a terrible idea, which is why there are so few economists willing to raise their voices in support of it.

No Ron Paul supporter (or other gold standard advocate) has managed to articulate to me what problem the gold standard solves. Inflation is low, and even better, relatively predictable, so the expectation is built into asset prices. Moreover, most people on fixed incomes are retirees, and most retirees get almost half their income from Social Security, which is indexed for inflation.

This Ron Paul speech lists a number of reasons, all of them wrong:

1. The Federal Reserve destabilizes the economy with its "boom and bust" monetary policy. This is hard to square with the fact that the longer the Federal Reserve has been in existance, the more stable the economy has been. Dr. Paul's words strongly imply that he believes that there was no business cycle in the 19th century, which is untrue; as best we can tell, recessions were much longer and deeper before America had a central bank.

2. Americans don't save because they're afraid inflation will erode their savings. This is daft. Moderate inflationary expectations are built into the interest rates that banks offer. After thirty years of stable monetary policy, a good portion of the population doesn't even remember high inflation, and the ones that do are mostly retired and spending down their savings. Americans don't save because . . . well, have you tried the Wii? It's awesome.

3. American exporters are whipsawed by our fluctuating currency. Unless Dr. Paul has plans to put the entire world back on the gold standard--which I mote would require the kind of powerful international organization he's so suspicious of, or invasion--our currency will still fluctuate relative to others if we're on the gold standard. Every time the price of gold changes in another country, American exporters will either be helped or hurt by a change in the relative prices of their goods. The gold standard will shelter exporters from currency fluctuations only in their trade with other countries on the gold standard. There are no other countries on the gold standard.

4. Fiat money inflation benefits those shadowy figures who receive access to artificially inflated money before the inflationary effects kick in. Those shadowy figures being the bankers who loaned it to you so that you could buy your house. At any rate, this would only be true if we were talking about unexpected inflation. Expected inflation is already built into asset prices. The US economy does not have significant unexpected inflation.

5. Fiat money inflation "also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state". This is an extraordinarily primitive view of the money supply. The Federal government is not Caesar cutting his denarii with lead. The revenues from seignorage on 2% inflation are trivial. The Federal government gets the money for the "welfare-warfare" state just where it says it does: by taxing the bejeesus out of your wages.

6. Congress does not have constitutional authority to delegate its power "the authority to coin money and regulate the value of the currency". Hmm. Okay, but I'm pretty sure none of our legislators are qualified to operate a printing press, much less the annealing ovens and upsetting mills needed to mint coins.

7. Congress "should only permit currency backed by stable commodities such as silver and gold". Commodities, almost by definition, are not stable. The price of gold looks as if it used to be stable, because the dollar was fixed relative to an ounce of gold. This does not mean that its value relative to other economic goods was unchanged. You could fix your currency to the price of a bushel of wheat, and suddenly "wheat bugs" would be claiming that wheat is the only reliable, stable commodity in the world whose price never changes. That wouldn't stop fluctuating wheat supplies from whipsawing your economy back and forth. To be sure, the supply of gold changes more slowly than the supply of wheat. But demand for it is not so fixed.

Did Ron Paul "school" Ben Bernanke?

It has been suggested to me that Ben Bernanke has been overpowered by the power of Ron Paul's incredible arguments about money supply during his congressional testimony. Here is one such clip:

Ron Paul's supporters see the might of his common sense slashing through the doubletalk of the financial solons. I see a really, really smart economist responding to Ron Paul the same way you react to Cousin Mildred when she corners you after Christmas dinner to complain about the flouridation of the water supply. What Congressman Dr. Paul is saying doesn't make any particular sense; American consumers are not particularly suffering because of the decline of the dollar, the dollar is not declining because of Fed policy, and the Federal Reserve has nothing to do with a relative scarcity of oil and food, which is what is driving the CPI increases he complains about. If we were on the gold standard, oil and food would still be getting more expensive, and people on fixed incomes would still be feeling the pinch.

Rah, rah, Ron Paul?

I am being urged, in comments and email, to ignore the fact that Ron Paul is a no-hoper because after all, he's an honest man who stands by his beliefs.

The same, of course, could be said of the lunatic who sincerely and with great conviction declares himself emperor of France and uses all the asylum's plastic sporks to map out his conquest of Russia.

Ron Paul has some beliefs that I like, such as his opposition to eminent domain abuse. But he also has a number of beliefs that are, not to put too fine a point on it, utterly insane. The gold standard is one; the belief that NAFTA is a trojan horse for the North American Union is another. Much of his persona, sincere or not, seems to boil down to "Foreigners are scary, and people who like foreigners are plotting to take away all your stuff."

More gift recommendations

Recommendations from Christmas past are at the Amazon store I set up last year. You still have five days!

Whither the blogosphere?

David Frum has an article in the new National Interest about the blogs and the foreign policy community.

Michael O’Hanlon, as readers of The National Interest will know, is the editor of the Iraq Index, a source relied upon by people of almost all points of view. He served in the Congressional Budget Office during the last Democratic majority and has strongly criticized the Bush Administration almost from Inauguration Day. What makes him such a detested target?

To find the answer, revert for a minute to a key point in Gideon Rose’s above-quoted paragraphs: The bloggers’ attacks are generally aimed at the think-tank world. Which is to say: at members of the FPC who are currently out of power. Which is to say: at Democrats. Especially at moderate Democrats, internationalist-minded Democrats, Democrats who in 2002–2003 expressed support for the Iraq War. The bloggers hurling the invective are Democrats too, usually more liberal Democrats.

The blogosphere of 2007 is a predominantly liberal and Democratic place. This was not always the case: As recently as 2005, former Vice President Al Gore castigated “digital brownshirts” who bullied and intimidated critics of George Bush. He would have no such complaint today. Today, it is the critics of George Bush who do the brown-shirting.

This has some bearing on a question that I have been discussing a lot recently: what will happen to the blog world after the election?

Assume, for the nonce, that come January 2009, there will be a Democrat taking the oath of office. What will the blogosphere look like?

Compared to the netroots, right now, the rest of the political blogosphere is a demoralized and listless place. Libertarians are abandoning their mild preference in favor of Republicans, not for the Democrats, but for despair. On the conservative side, even ardent supporters of the president have tired of him. Everyone is out of plausible policy proposals. What is there to be in favor of? More tax cuts? An even more aggressive foreign policy?

Meanwhile, the netroots is ascendant. They feel their hands closing around the reins of power, and they like the way it feels. The war in Iraq may be a bad idea, but they're preparing to kick some ass in the political battles to come.

But what happens when power shifts over? The netroots is fundamentally an opposition movement. They argue among themselves, to be sure, but they have solidarity built on their common hatred of George Bush. The move from never-never policy proposals to actually having to talk about things that might get done will be somewhat disconcerting. And as executing policy starts to require compromise and not a little hypocrisy, the pure ideological fervor that animates the netroots will start to dissipate, as it has among the disillusioned conservative blogs.

Meanwhile, I expect the handover will actually be good for the rest of the blog world. We may not agree on much, but we can probably unite around hatred of our new presiden'ts policies. I would wager a fair amount that the libertarian flirtation with the Democratic party doesn't last much beyond March 1st, 2009. As libertarians know too well, being in the opposition can be fun. Having full range of motion on one's opinion muscles feels surprisingly good, especially if you've spent years assuming contorted positions in order to support the last administration.

Ron Paul: the patron saint of lost causes

Ross ponders what Ron Paul should do with all the money he's raising. His answer: pour the money into New Hampshire, hoping to break 7%. My answer: why not pour the money into something useful, like raising awareness about eminent domain abuses?

Ron Paul is not going to win. Ron Paul is the ultimate refutation of the notion that money is what determines races. Like fellow Texan Ross Perot, Paul appeals to people who are fed up with the political process, including a lot of libertarians. But many of his positions are deeply unpopular, and he can't triangulate because his precise appeal to his supporters is the image of standing rock-steady in the face of politics-as-usual. Nor has he, as far as I can tell, injected his own politics into the race by forcing other candidates to kowtow to him. Since he can't win, and isn't forcing other candidates to react, why not use the platform he has to push a single issue? Not the Iraq war, upon which no one seems open to much persuasion, but something where he might conceivably actually change America a little? Wasting it on actually trying to get elected seems extravagent.

Crime doesn't pay

Last night I met Daniel Drezner for dinner at an Ethiopian place near my house. As he had fifteen minutes or so after dinner before he had to go to the airport, he walked over to inspect my new digs.

As we neared the gas station kitty-corner to my house, a very large man started following us along the street. He was walking way too close to us, but not so close that two compulsively well-mannered blue-staters were going to ask him to step back. He tailed us through two intersections, just a few feet behind us. Because Dan doesn't actually know where my house is, we turned off U Street later than I normally would, and the guy very obviously changed direction to stay behind us.

Unfortunately for him, I live only two doors off U Street, which is, for those who do not have the benefits of living in Washington DC, a very busy street. My house is set far enough back that the doorway is not visible from the street, so I just stopped and dropped my bag on the ground at the bottom of the stairs to hunt for my keys. Dan stopped. The guy stopped. Then he seemed to realize that there was no way to linger behind us without obviously communicating the fact that he intended to follow us into my apartment building and either mug us, or rob my house; nor, with the busy street in full view, was there any very good way to force us up to the door. Whereupon he very visibly stomped his foot in frustration and walked away shaking his head. I waited until he was around the corner before I "found" my keys.

I've lived in cities all my life, but aside from having bicycles stolen (four, at last count), I've only been the victim of three attempts at serious crime. And each time, I've been amazed at how inept the criminals were.

The first time was in Philadelphia by two young kids who ran away when I pretended to know karate. No, seriously.

The second time was a fifteen year old kid who spent half an hour wandering back and forth in front of the camera that my super (for reasons I have never fathomed) was using to video tape our garbage, while intermittently reaching through my jimmied window to grab things off my dresser. In case the videotape wasn't enough, he didn't wear any gloves, even though it was mid-November. He left fingerprints everywhere, and was caught a month later.

The third time was this guy, who couldn't have broadcast his intentions more clearly without hiring a skywriter and a marching band.

Are all criminals this stupid?

The Federal Reserve makes a move on mortgage lenders

The Federal Reserve just announced new proposed mortgage rules aimed at cutting down on shady lending practices.

As far as I can tell, this is one of the most absurdly cosmetic measures ever undertaken, and I include the bizarre decision to split banking and underwriting in the wake of the 1929 stock market crash. The rules seem to be mostly aimed at curtailing abuses such as excessive prepayment penalties, which to a first approximation is a problem for exactly no one in the current mortgage market. Even the mighty reporters in the the Wall Street Journal's newsroom couldn't really find anyone to say that this was going to, y'know, actually affect anything.

I can't really find much to object to in the new rules (though, of course, I am not a mortgage banker.) But the proposal was greeted with much fanfar, simply because the headline has the words "mortgage" and "Federal Reserve" in it. Presumably this is what the Fed was aiming for: a bid to calm the markets without actually enacting any regulations that could have nasty side effects. And at that, as a strategy it sure beats "time to get in there and change everything!"

Department of infinite recursion department

A friend just shared the bit I wrote about the Google Reader friend sharing.

Music Thursday

A friend's brother is a member of the Cave Singers, which inspired me to download them from eMusic. They got a 6.8 from Pitchfork, but I have to say, I'm rather charmed by them.

Public nuisance

Of course, I neglected to mention earlier the most hideous cost of leaving drug users to share needles: they form a solid reservoir of nasty diseases that they pretty regularly pass out into the non-drug-using population. This is one of those public health measures that actually does help protect the general public from other people.

Three cheers for retail

If the preliminary buzz is correct, this season y'all are supporting your local retailers with somewhat less enthusiasm than you have in prior years. However, even if you can't see your way clear to lavishing outrageous sums on his extensive array of silvery consumer geegaws, you might take a moment to say thank you for everything he's done for the American economy.

As Nick Schulz reports:

Within countries, the McKinsey researchers observed startling variety in productivity rates across industries. For example, some countries might have high productivity in automobiles, but low productivity in construction. Others might be tops in electronics but laggards in transportation. The study’s most striking conclusions were about the economic importance of the retail sector. William Lewis, the founding director of the institute, tells this tale in his book The Power of Productivity: Wealth, Poverty and the Threat to Global Stability. Productivity in the retail sector is critical for understanding the relative success rates of national economies. For example, India’s antiquated retail sector has yielded bizarre market distortions. “In India, the price of ready-made shirts from domestic manufacturers is about 35% higher than the price of a tailor-made shirt,” Lewis says. “The manufacturing cost of the shirt is about the same as the tailor-made price. However, the manufactured shirt has to get to the consumer. In India, that’s a huge problem because of the undeveloped retail sector.”

Lewis points out that productivity gains in retailing have dynamic effects throughout a nation’s economy. For example, when most Americans and others think of the drivers of the US economic performance, they immediately think of successful tech firms such as Microsoft and Intel, or innovative financial services players such as Goldman Sachs. However, it is efficiency gains in the retailing sector that powered much of America’s economic performance in recent years.

Assessing the health of the economy, we tend to get obsessed with stuff: how much are we making? This is why lost manufacturing jobs so obsess trade foes. But manufacturing isn't where the economic beef is, and hasn't been for some time. Distribution is the dominant force of change in our lives now, whether the distribution vehicle is Wal-Mart, and iPod, or the internet.

Retailers: God rest ye merry, gentlemen. Hopefully not atop your piles of unsold merchandise.

Barack Obama: naive health-care surrender-monkey

Paul Krugman accuses Barack Obama of being a tad bit wet behind the ears:

Over the last few days Mr. Obama and Mr. Edwards have been conducting a long-range argument over health care that gets right to this issue. And I have to say that Mr. Obama comes off looking, well, naïve.

The argument began during the Democratic debate, when the moderator — Carolyn Washburn, the editor of The Des Moines Register — suggested that Mr. Edwards shouldn’t be so harsh on the wealthy and special interests, because “the same groups are often responsible for getting things done in Washington.”

Mr. Edwards replied, “Some people argue that we’re going to sit at a table with these people and they’re going to voluntarily give their power away. I think it is a complete fantasy; it will never happen.”

This was pretty clearly a swipe at Mr. Obama, who has repeatedly said that health reform should be negotiated at a “big table” that would include insurance companies and drug companies.

On Saturday Mr. Obama responded, this time criticizing Mr. Edwards by name. He declared that “We want to reduce the power of drug companies and insurance companies and so forth, but the notion that they will have no say-so at all in anything is just not realistic.”

Hmm. Do Obama supporters who celebrate his hoped-for ability to bring us together realize that “us” includes the insurance and drug lobbies?

O.K., more seriously, it’s actually Mr. Obama who’s being unrealistic here, believing that the insurance and drug industries — which are, in large part, the cause of our health care problems — will be willing to play a constructive role in health reform. The fact is that there’s no way to reduce the gross wastefulness of our health system without also reducing the profits of the industries that generate the waste.

As a result, drug and insurance companies — backed by the conservative movement as a whole — will be implacably opposed to any significant reforms. And what would Mr. Obama do then? “I’ll get on television and say Harry and Louise are lying,” he says. I’m sure the lobbyists are terrified.

As health care goes, so goes the rest of the progressive agenda. Anyone who thinks that the next president can achieve real change without bitter confrontation is living in a fantasy world.

To me, Paul Krugman is the one who comes off sounding, well, like a guy who has a rather spotty grasp of how actual politics works. It's the old joke about economists:

Castaway: We are stranded on a desert island with a bunch of cans and no equipment with which to open them. Whatever shall we do?

Second Castaway, who happens to be an economist: That's easy! First, we assume a can opener . . .

When designing a policy program, you cannot just assume away the interest groups--nor, except in Paul Krugman's imagination, can you simply overcome them through your steely-eyed willingness to engage in "bitter confrontation". Drug companies make lifesaving drugs that people need, which of course tends to breed resentment when they charge what the market will bear, but also gives them a rather powerful weapon to deploy in the PR war. Similarly, most people are quite content with their current insurance; if you attempt to destroy the insurance companies outright, they will do their best to get all those people worried about what will happen under your new program. These industries are also very important to several highly populous states with powerful senators and congressmen; threaten them and you threaten your coalition.

I mean, these tactics are fine by me; I don't want national healthcare. But is Paul Krugman interested in making policy, or just making an expressive statement about his youthful ideals?

Should the government hand out needles to drug addicts?

Needle exchange is one of those weird areas where bourgeois morality is actually very expensive for the state to enforce.

Probably, needle exchange does lead to more drug use by lowering the cost of doing drugs. But most of us (all of us, I hope) recognize that no matter how screwed up you are, no one deserves to die of AIDS or hep C.

Okay, a conservative or libertarian might argue, but drug users bring this trouble on themselves; why should I a) pay for clean syringes and b) implicitly sanction their irresponsible and self-destructive behavior? Well, okay, leave aside the morality of forcing people to use dirty syringes (really forcing, since as I pointed out in the last post, junkies use dirty works partly because the government won't let them buy clean ones legally). The problem is, needles are cheap, and treating AIDS isn't. Given that we're not going to let them die, it makes much more fiscal sense just to give them the needles.

The libertarian answer is to eliminate both the restrictions on needle purchase, and the government program to distribute them, and I'd support that. But given that we are clearly not going to eliminate the syringe restrictions any time soon, we might as well save money by giving junkies some clean needles.

DC gets needle exchange

It seems the District is finally going to get a needle exchange program.

You have to love needle exchange. First, the government makes it nearly impossible to buy syringes legally unless you have a doctor's okay. Then, having noticed that this causes junkies to share needles and give each other horrid infections, it starts a program to give them needles. It's like the proverbial gas station attendant who runs around town siphoning gas out of peoples' tanks and then sells it back to them the next day.

Desktop Tower Defense: Because you have several days you want to lose to a Flash-enhanced fog of clicking

This flash game is one of the most addictive video games I've ever played; it rivals Solitaire and heroin for sheer mindless pleasure. I don't recommend that you try it, exactly, but if you're looking for something that's hella fun to suck up a weekend, you might give it a go.

Google reader: sharing means caring

Google Reader now lets you flag things to "share". That means that anyone who's part of your Google Talk network can see the items you've shared, and you can see yours.

Thoughts:

1) Social networking software is rapidly approaching the point where we really don't have to go out. So why am I sitting in a coffee shop with five bloggers?

2) Google's engineering approach--continuous incremental improvement--really is a powerful model for innovation. If I weren't such a fierce advocate of passive investment, I would consider buying a share. Hell, I may consider buying one for the sheer pleasure of owning a single share of stock valued at $600.

3) I predict that this will be used heavily for about a week by everyone I know, and within two weeks will have fallen back to about the same frequency that people post notes on Facebook. Which is to say, almost never.

4) This is a very good way to find out which of my friends are heavy users of Google reader.

Ali G and Noam Chomsky

A friend emails to say that he is glad that I finally like Ali G. But I have liked Ali G., ever since his Noam Chomsky interview:

Why so high?

This Eugene Fama interview is a must-read if you think you've got the goods on EMH. Leaving aside our recent contretemps, however, I'll zero in on his comments on CEO pay:

Region: Another issue those papers touched on was compensation of CEOs, a controversial question in recent years. How do you view the suggestion that some CEOs are overcompensated?

Fama: If the [compensation] process gets captured by the CEO, then it can get corrupted. But if what you’re seeing is a market wage, then I don’t know why you would say it’s too high. If it’s a market wage, it’s a market wage. I don’t know of any solid evidence that the process was corrupted. So my premise would be that you’re just looking at market wages. They may be big numbers; that’s not saying they’re too high. It’s easy to say that people are paid too much, but when you’re on the other side of the fence trying to hire high-level corporate managers, it turns out not to be so easy.

The liberal rejoinder to this would be that even if it is true, this is a positional thing; if all CEO salaries were lower, you wouldn't have to pay so much to attract a good one. Of course, this doesn't mean that there is any good way to lower them; measures aimed at doing so, such as capping the amount of a CEO's salary that was tax deductible to the company, have mostly backfired, pushing compensation into things like stock options. And even if we could cap salaries, of course, that wouldn't mean that we should.

But what advocates of the idea that these salaries are necessary to attract good CEOs must contend with is the question of why CEO salaries have increased so much over time. Contrary to popular belief, CEO's are not driving inequality trends; there are too few of them, and they aren't paid that well. Nonetheless, they are much better paid than they used to be, and one wants to know why. Have the returns to having a good CEO gotten so much bigger? Is the supply of CEO's being outstripped by the demand? That latter case is pretty hard to make; there are actually slightly fewer public companies listed on the various exchanges than there used to be, and the population has grown rather rapidly.

I find Paul Krugman's argument that CEO's have simply gotten greedier, while the rest of us have become more greed-tolerant, less than compelling. Explanations I do find compelling:

1) Falling tax rates have increased the bang one gets from one's CEO salary buck

2) The size of public companies is bigger; CEO's are essentially taking a fixed piece of a larger pot

3) Being a CEO is riskier than it used to be; executives are more likely to be forced out

4) Stock options have disguised the true cost of compensation, boards spend them with the casual disregard of a tourist using a strange currency

5) Deregulation and globalization have made the economy more competitive, which means that CEOs matter more. Thus, it is more important to actually have a talented CEO, which results in a bidding war for a limited supply of human capital.

6) Advances in financial markets offer an alternative way to get really, really rich; CEO pay is bidding against Wall Street salaries for talent.

7) Deregulation means that boards are no longer afraid of attracting unfavorable government attention with lavish executive salaries.

The ghost of Christmas past

The other day I found this passage in one of my favorite anthologies of all time: Drinking, Smoking and Screwing. (Also not to be missed is the companion volume: Lying, Cheating and Stealing.) It is the opening to "The Office Party" by Corey Ford:

There are several methods of getting through the Christmas holidays. One is to board a ship in San Francisco and sail for the Orient, arranging to cross the International Dateline at midnight on Christmas Eve. As a result, the next day on teh calendar, will be December 26th, and our Christmas will have been a total blank.

Another way to make your Christmas a total blank is to attend an Office Party the day before . . .

The annual Office Party statrs along about noon on December 24 and ends two or three months later, depending how long it takes the boss to find out who set fire to his wastebasket, threw the water cooler out of the window, and betrayed Miss O'Malley in the men's washroom. By the time the entire Accounting Department has been dismissed and the painters have finished doing over the two lower floors which were ruined when somebody turned on the sprinkler system at the festivities' height, the moment has arrived to start planning next year's party, which everyone vows will be even more hilarious than the last one. Next year all the guests will be supplied with shin guards and hockey sticks.

There's something very revealing about the tropes that drop out of the popular literary imagination. Last night, I was talking to a friend about American Inventor, and it occurred to me that the crazy fellow who tinkers in his basement with inventions that never quite work has pretty much entirely fallen out of fashion in literature and movies--even though the show illustrates that the phenomenon is still very much alive.

Similarly, the wild, drunken office Christmas party used to be a staple of television, books, and movies. Now I feel as if it's dropped pretty thoroughly out of the popular imagination; the only example I can think of recently is a fleeting scene in Bridget Jones' Diary. Were office holiday parties really that much wilder in the past? Or have we just stopped noticing, literarily?

This is your brain on drugs

In reference to my conversation with Mark Kleiman about the most dangerous drugs, Stuart Buck reminds me of this classic Ali G segment:

'Tis the season

This Christmas season, don't just mindlessly blow your hard-earned cash on consumer gimcrackery in a futile effort to produce a physical manifestation of the love you bear your family. Take some time for yourself, to sit down in a quiet spot and think about the important things . . . like tax arbitrage:

It's not a good idea to spend your hard-earned money for the privilege of paying taxes on someone else's earnings. That means you should be careful if you buy mutual funds in December.

The tax law requires mutual funds to distribute capital gains on their stock sales annually, and most distribute the whole amount in December. If you buy into a mutual fund the day before the distribution, you buy a share of the whole year's liability.

Many funds put the amounts and dates expected capital gain distributions on their web site. It's worth a few minutes on the web to avoid buying a year's worth of mutual fund tax liability.

Note that this is rarely a problem with index funds . . . yet another point in favor of passive investment strategies.

Life's like a movie, write your own ending . . .

Two prisoners escaped from a New Jersey jail by tunneling through the wall of one cell and using pinup pictures to hide the holes. The stunned jail operators say that inmates will no longer be allowed such posters.

I realize that The Shawshank Redemption probably isn't terribly popular among prison guards, but TNT plays the thing on a near-continuous loop. How could this not have occurred to them before?

This is your head on blogs

Mark Kleiman and I talk about drugs, gambling, and crime on Bloggingheads.tv

Friday recipeblogging: Hangover Cure Pasta

This recipe was created by yours truly early one New Years morning, after a houseful of people had staggered back from an evening of revelry. It was christened by a friend who believes that its alchohol-absorbing qualities are a sovereign cure for excessive imbibement. I make no warranties about its curative properties, but it is terrifically easy to whip up after an evening out, and it fills the hole cheaper and more tastily than DC pizza.

1 pound pasta (any kind will do, but I think cavatappi is perfect)
1/2-2/3 c. grated swiss cheese
1/4 cup parmesan cheese
3-4 tbl heavy cream or half-and-half
Salt
Pepper
(optional) arugula or bacon bits

Bring a gallon or so of water to a boil on the stove. (You CANNOT cook pasta properly in a tiny little pan. Stop that!)

Add a tablespoon of salt to the water, then add the pasta. Boil according to the instructions on the box.

Meanwhile, combine the cream and cheeses in a microwave proof bowl big enough to hold all your pasta. Microwave on high 1-2 minutes. You're not trying to melt the cheese; just heat it up a little. Once the cream is piping hot, but before the cheese is melted, remove the bowl from the microwave. Add a very large amount of freshly ground pepper. The pepper should be the dominant flavor of the dish when it's all mixed together.

When the pasta is ready, drain it and dump it atop the cream/cheese mixture. Stir. Add arugula or bacon if desired, and more pepper. (Trust me: you didn't add enough to the cream.) Stir and cover the bowl with a lid, or in a pinch, some saran wrap for five minutes. This will melt the cheese. Stir again. The result is a not-terribly-cheesy light sauce, just enough to coat the noodles with a little flavor, and a nice peppery tang. Serve with vitamin C, aspirin, and large quantities of water.

Time to panic?

The market has not reacted well to the news that consumer price inflation increased at the fastest pace in decades last month.

This is normally where I drag out the tired notation that core inflation, which excludes food and energy prices, ticked up much more slowly. Then one of my commenters points out that ordinary people don't get to exclude food and energy from their budget. Then I respond that, yes, this is true, but from the Federal Reserve's point of view, the fact that certain staple commodities have become relatively scarce does not tell them much about managing the money supply.

Consider that we've had that debate. What does this news mean?

For individuals, it is bad; it means they are paying more for the same basket of commodities they consumed a month ago.

For money supply managers, it is much less bad, but still bad: the rise in core inflation indicates that monetary policy may be too loose.

That's normally not something you want to hear when you're trying to avert a credit crunch and an increasingly likely-looking recession. This news much reduces the Fed's scope for policy response to the subprime problems.

Still, I wouldn't panic just yet. Inflation has been low enough, for long enough, that the Fed has a couple of months worth of random expansion in it, if it's really needed. And I'm not sure that it's really needed.

The market is upset, because the market likes to borrow cheap money. But you shouldn't pin your assessment of the economy, or the future, on the Dow.

No credit? No sale.

I find this commercial fascinating:

Fascinating, I mean, in the same way that I find it fascinating to contemplate obscenely large rare tumors preserved in formaldehyde. You know, I care about good credit and all, but I am not under the illusion that if my credit suffers, I will have to move into my parents' basement; presumably I will still have income. And I'm pretty repulsed by the notion that the proper response to finding out that your betrothed has bad credit is obviously to break up with them. "I was preparing to go with that richer/poorer, better/worse thing, but I didn't realize that meant paying higher interest rates on my auto loan!"

I mean, yes, you should be very wary of getting into a relationship with someone who is financially irresponsible. But those sorts of things usually manifest themselves in ways other than a shoddy credit report. The first time you go over to their place and notice that they have no electricity in the middle of a fine, sunny day--that is probably the time to start asking questions, not three weeks before the wedding.

Family planning

Julian Sanchez muses on what would happen if we could change our sexual preference:

Hetracil, a drug that supposedly "cured" homosexuality, was an elaborate, clever joke. But apparently, researchers at the University of Illinois have discovered the real thing... at least for fruit flies. As John Tierney wryly notes, it will be interesting to see whether the Leon Kass types denounce such technology as "meddling with nature" or "playing God."

Of course, the reaction of the gay community will be interesting to watch as well. For perhaps understandable reasons, gay activists have staked a lot on the notion that sexual orientation is—whether by genes or early environment—biologically hardwired, not the result of any conscious choice. But of course, this meant that someone might one day come up with a biological means to artificially produce either orientation. If something like this ever reaches the market—still, to be sure, a far-off hypothetical—I'm guessing we'll watch X-Men III play out, though (alas) with fewer mutant powers.

With respect to adults, this seems all to the good. If I were single, it might be interesting to try being gay for a few months. But children will present a difficult case. Doubtless there will be parents who—whether from homophobia, because they're eager for grandchildren, or because they fear the discrimination gay kids and teens face—decide to ensure their kids are straight. If their numbers are substantial, that obviously creates a series of both personal and political problems for the gay community.

We already have a test case: deaf children and cochlear implants. We've never spent any time quibbling about whether deafness is innate or chosen; the answer is obvious. Or, it was. Because now congenitally deaf children can be given a device that will transform them into hearing children. While they may never hear as well as I do, the cochlear implants pull them out of the deaf community: they acquire spoken language, go to hearing schools, and usually don't learn to sign. This is a choice that unfortunately must be excercised not by the children, but by the parents; unless kids get them early, their oral language acquisition will always be stunted.

Deaf activists are very, very against cochlear implants. For one thing, they imply that deafness is a disease that needs to be cured, which is a pretty unbearable way to view something as central to your identity as the language you speak. I sympathize though I ultimately disagree: if sign language can only be maintained through forcibly denying people oral language acquisition, I am against it, just as I would be against preserving the French language by forbidding anyone born in France to ever leave.

But another animating passion in the fight against cochlear implants is very relevant here: there are network effects in deviation from the norm. That's certainly apparent to me when I go shopping with female friends who are tall, but not that tall; while I can try on perhaps 5% of the clothing currently sold in American retail stores, they can try on nearly all of it.

If we can turn most deaf kids into hearing kids, the quality of life of the remaining deaf people will suffer dramatically. There will be fewer services available for deaf people, less research into products that can improve their lives. They will have a smaller pool of people from whom to choose friends and spouses. Less deaf culture will be produced--and it's fairly hard for them to consume most non-visual arts, particularly those who are illiterate. It's not crazy to worry that deaf culture and institutions would be crippled, leaving the few remaining deaf people stranded in an island of silence.

What's even more worrying is that this could lead a general drive to reduce variance even in areas where there is nothing inherently dangerous, restricting, or wrong with the underlying condition. Recently, someone who is himself average height, but who has a very tall daughter who is going through the particularly awful adolescence common to most women taller than six feet, asked me if it got better. "But in the end, you're glad you're tall, right?" he said, in the tone of someone who clearly wanted reassurance that his beloved daughter will be fine. "If you had to choose, you'd be this tall?"

Well, no. I like being tall because I like being me. But if I were responsible for my own development--if I was a parent who could choose their child's height--then no, I would not make my daughter 6'2. I would make her 5'8. Being that different from everyone else is mostly an enormous pain in the ass only partly mitigated by being able to see over crowds and fetch things off high shelves without a footstool.

There is nothing wrong with being gay. But having a minority sexual preference by definition has costs: a lot fewer potential partners to choose from, for starters. It also makes having children with a partner much more complicated, at least until technology enables us to fuse the DNA from two eggs or two sperm. A loving, non-homophobic parent could choose to turn the gay genes off simply in order to ease their child's life for reasons that have nothing to do with social stigma.

But of course, even aside from reinforcing (however implicitly) the idea that gayness is a problem, this is bad for other gay people. They suddenly have even fewer partners to choose from, even less political clout. Moreover, the more parents, or adults, who make that choice, the less attractive gayness becomes, which will tend to push marginal choosers into the "straight" camp. And the charge probably will be led by parents who make their children straight, not to avail them of the network benefits of a majority preference, but by parents who are simply repulsed by homosexuality. One imagines that the gay community will be somewhat resistant to letting those parents in effect make choices for them.

Moreover, reducing variance is bad genetic strategy. The less genetic variety you have, the more vulnerable you are to unforeseen circumstances; genetic variance is a reservoir of potential adaptations. Similarly, even if they were not worthwhile in themselves, the subcultures we now have the medical possibility of destroying are sources of dynamism in our society. We will all be poorer without them.

Better living through chemistry

Now is the time of year when, as mental health professionals like to inform us, a lot of people sink into depression. Like most people, I've watched a couple of people I loved swirled away on a tide of despair, so I'm happy to pass along this stirring reminder from Dooce that this is not actually necessary, and toughing it out when you're sad or suicidal is silly puritanism. I don't try to buck up and bluster my way through a thyroid hormone deficiency, so why would I try to ride out a debilitating chemical imbalance in my brain? If you're feeling despondent, support your local pharmacist. That little voice in your head telling you not to talk to anyone is a lying bastard with a strong instinct for self-preservation.

Why I eat meat

If you've been reading the site awhile, you'll know that I only eat humanely raised meat and eggs. This is a good way to be unpopular with everyone. People who eat meat dislike you because of the uncomfortable implication that they, too, should care about the suffering of the animals they eat. And vegetarians are apalled by what they regard as half-measures. Don't I realize that an innocent, adorable little animal died to provide my dinner?

I do. I take that seriously. But for animals (not for humans), I'm essentially an aggregate utilitarian: I think that as long as their lives are worth living, it is a positive good to eat them.

It is hard, to be sure, to determine what a chicken considers "the good life". However, I'm pretty sure that industrial farming conditions do not constitute a life worth living; if those chickens had the cognitive and mechanical capacity to commit suicide, they would. Likewise veal calves, pigs, and any other animal that lives its entire life confined in a darkened space too small to move, marinating in its own feces, and more than occasionally, those of the animals around them.

But if a bird or mammal has a decent amount of space in which to move, the company of its own kind, and the ingredients of such recreation (mostly hunting for food) as they are capable of enjoying, I consider that it is better for them to be born, live, and be killed for food, then never to have lived at all. Eating certified humane meat is not a compromise; it's a positive good.

I've had more than one vegan friend tell me that it's better for a cow never to be born, then to live its life as a slave. This strikes me as the comment of someone who has never spent any time near a cow. Cows Bovine Americans do not have the same kinds of aspirations to liberty and self-actualization as the other residents of our great nation. They mostly want to chew. This routine is broken by short bouts of walking, the very occasional trot, and some lying down to enjoy the grass externally as well as internally. If they have access to the opposite sex, occasionally they will mate, a process that is nasty, brutish, and short. But even if you leave them the large print version of On Liberty and broadcast the Teaching Company's philosophy lectures into the pasture every afternoon, their political consciousness tends to remain very low.

By a similar logic I used to be a lacto-ova vegetarian. But milk cows and laying hens are treated worse than the members of their species who are raised for meat. And they're eventually slaughtered anyway; they just suffer longer before they die. Plus, you know what farmers have to produce a lot of, in order to keep their cows in milk? Veal calves.

The Mind: Boggle divide

Today's extraordinary quote of the day comes via Alex Massie. I give you: Robert Mugabe's acceptance of his party's endorsement in Zimbabwe's elections.

"Every one of them matters to me. Can I let them down?" AP news agency quotes Mr Mugabe as saying during his keynote address to delegates before his endorsement.

"No. Their welfare is my welfare. Their suffering is my suffering. I dare not abandon them," he said.

Incidentally

I wanted to slap up a Youtube of the Saturday Night Live "Steroid Olympics" piece, but it's not online. You'll have to content yourselves with the transcript, which gives the sense of the thing.

Update Thanks to reader Dave Ragsdale who found it:

What's the steroid equilibrium?

The typical libertarian opinion on steroids is "Who cares? It's your body." Tyler Cowen offers an interesting take:

I don't usually recycle posts but this one is from the early days of MR, and my view on steroids hasn't changed much. Excerpt:

Note that the Olympics probably prosper more from competitive balance than from a single dominant country. Was it really so much fun for the rest of the world to watch the Soviets win all those medals? This would predict that the Olympics should take special care to ban performance-enhancing drugs, which is indeed the case.

Baseball is again thrown under a cloud, and one obvious question is how much we have close substitutes for our increasingly damaged pride in the sport. The likely eventual outcome is a long-run equilibrium where all performance enhancements are allowed, thereby placing an inefficient tax on amateurs and performers who don't need to be the very best.

A running friend pointed out ten or fifteen years ago that 100 yard dash world records are only set in the latter part of the lull between the introduction of tests for new steroids. There's something upsetting about the fact that athletic contests are less and less a measurement of your willingness to train, and more and more a measure of your body's responsiveness to arcane chemical cocktails. On the other hand, I don't see how to stop it, given that athletes at that level are pretty much insane. Asked whether they'd give up five years or ten of their life in order to be the world champion in your sport, most of them just kind of blink at you and try to figure out what the trick in the question is. Then they ask if Satan has empowered you to cut that kind of sweetheart deal. So the lesser risks posed by steroids are probably not going to deter very many of them.

Yes, to some extent, we're selecting for athletes who are willing to do extreme and dangerous things to their body in order to win--but then, most olympic and pro athletes, except perhaps swimmers, are destroying their bodies anyway and we find that laudable. Athletes from runners to pro football players will all mostly end their lives crippled by joint problems and old injuries; boxers will end their lives ten or so IQ points lower than they started. But no one worries that we're selecting our athletes for a willingness to trade a healthy old age for victory now. And if you're willing to do to your shoulders what pitchers do to theirs, I'm not sure how big a step it is to inject testosterone analogs.

Given that, what's the healthy equilibrium? As Tyler suggests, I think it's probably allowing the drugs. That way athletes aren't benefiting from asymmetrical information; everyone has the same opportunity to trade health and sanity for wealth and fame.

Fear of flying

Over on Free Exchange, one of the anonymous bloggers discusses carbon taxes on airlines:

In response, Mr Hall does an excellent job examining price elasticities in arguing that airlines would probably not suffer "massive dislocations" if faced with carbon pricing. To this I would add that so politicised an industry as air travel need not fear dislocations in any case; governments would react incredibly quickly to pull back on any part of an agreed-upon energy bill that appeared to cause significant damage to airlines or aeroplane manufacturers. This, in fact, is one of the arguments made by carbon pricing sceptics--that governments will not allow the necessary pain to be felt.

I'm with the sceptics on this one: flying is, all in all, the most wasteful consumer of carbon on the planet. Anything that doesn't touch airlines will do a poor job of addressing carbon consumption. And I also agree with the Economist blogger: governments will not allow anything to harm the airline industry.

What I don't quite understand is why this is so. Why is everyone obsessed with having protected domestic airlines, and indeed, airplane manufacturing capacity? The minimum efficient scale of airframe manufacture is so large that the efficient number of airframe manufacturers for the current global market seems to be one; nonetheless, Europe has plowed fantastic sums of money into Airbus. I believe the original rationale was quasi-military, but it's hard to take this seriously from a group of nations who have ratcheted down their military spending to the point that not one of them could project enough force to storm the World Cricket Cup without an American airlift. Now China, too, wants its own airframe manufacturer. And everyone wants to protect their national airlines.

Why is flying so emotional? And so heavily, heavily protected by the heavy hand of the state?

Tall tales

Robin Hanson wants someone to come out in favor of Mankiw's proposed "tall tax", which aims to redistribute the unearned windfall that tall people receive just because nature has decreed that they will tower over their peers. Peter Diamond has dismissed this argument because it relies on the premise that models which produce ridiculous conclusions should be thrown out. Mankiw's reasonable response is that if we don't throw out models which produce ridiculous conclusions, then we're just cherry picking in order to validate our priors. This would tend to vitiate any claims economics might make to being a science.

However, I am tall. Therefore, I know this is a stupid tax. Let's think about why:

1) It confuses income with utility. Yes, I get to be tall. On the other hand, I can't find any clothes that fit. I spend ridiculous amounts of time trying to contort my body to fit standard automobiles, airplanes, busses, and so forth. I also suffer from many physical ailments associated with being tall: poor circulation in my hands and feet, foot cramps (my feet are too small for my height), back trouble, and a nasty case of bursitis which I acquired because no one told me that very tall women with long legs for their height should never, ever take up cross country running.

Also, my height completely crushed my childhood dreams of becoming a jockey.

2) The income is not distributed evenly among the tall: it goes almost entirely to men who got their full height very early. Why should I pay more in taxes just because my cousin can afford a Lexus?

3) Height can be associated with deadly conditions. You've got Marfans or a pituitary tumor. You're going to die young. Hello, here's a special tax on your condition, just in case your life was not already difficult enough.

4) We already have a very good proxy for earning extra income, which is . . . the extra income. Presumably, the progressive income tax is already taxing the tall for being tall, while possibly also giving them discounts for other conditions that have lowered their earnings potential.

5) I already pay quite enough in taxes, thank you very much.

6) I have noticed that the kind of economists who spend a lot of time proving that tall people are smarter, earn more, and are also probably better conversationalists and fantastic in the sack, tend to also be the kind of economists who spend a lot of time shopping at Rochester Big and Tall. This qualifies my faith in their results, and therefore, my willingnes to alter tax policy accordingly.

7) I really pay a lot in taxes.

The case of the fake Gaugin

The art market produces some mind bending meditations on what, exactly, prices represent. These are not, mind you, original meditations, so I will not overtax your patience with a lengthy post. I merely point you to this article, which comes via the Cranky Professor, on a forged Gaugin sculpture at the Art Institute of Chicago. He highlights this passage:

So why was it that no one seems to have questioned the Gauguin? The sculpture appeared to be based on a tiny drawing of a faun sculpture in a sketchbook which the artist used in Martinique in 1887. A work entitled “Faun” was also listed in a Gauguin exhibition held at the Nunès and Fiquet gallery in Paris in 1917. These references are noted in Christopher Gray’s Gauguin sculpture catalogue (1963) and Merete Bodelsen’s authoritative study of Gauguin’s ceramics (1964).

It seems that the Greenhalghs set out to recreate this missing sculpture. What is astonishing is that they were able to design and fire such a successful stoneware forgery, which had no obvious features to reveal it as a modern fake. Ms Howie, an experienced dealer, was originally captivated by the work: “We lived with it, and I cannot tell you what pleasure it gave us. It was a wonderful object.”

The object itself has in no way changed; it is still just as amazing, or not, as it always was. But their pleasure in it is radically altered. My intuitions tend to all run the other way. Of course, I spent a great deal of time studying finance and the associated dark arts, where the value of an asset is supposed to be the expected value of its future cash flows; and the value of a non-financial asset is supposed to be at least largely determined by its inherent usefulness.

But even before that, I was a lit major, where your enjoyment of a work is supposed to be focused on the work's attributes, not its provenance. A first edition of Bleak House may sell for 100 times what you would pay for a knock-off at Barnes and Noble. But you are not supposed to get 100 times the enjoyment out of reading Bleak House in first edition that you get out of the Modern Library version. Perhaps the right comparison is authorship, but even that doesn't really work; "undiscovered" works by famous authors almost always sell very poorly, because there is usually a very good reason that the artist didn't submit them to the public.

I acknowlege that people pay an enormous amount of money simply for the pleasure of imagining that Gaugin's hands once touched the sculpture they so love. But I'm afraid I don't quite understand why.

Proof positive

I am being assailed by people pointing out that Berkshire Hathaway has done spectacularly, and therefore this EMH stuff is a bunch of hooey. I could point out that if you'd had a million guys flipping coins repeatedly for a year, at least one of them would have come up with a massive streak of heads. Even if you paid him $1mm for each heads flip, this would not actually be attributable to his awesome coin-flipping skill. Indeed, you'd have at least one cluster of guys who'd done well . . . perhaps fellows who'd gone to Harvard together, or people who'd all studied "Value Coin Flipping" under a master. There would be other outliers, and other groups of people who'd studied "Fundamentalist Coin Flipping" or "The Vincenzi Flipping Technique" who would not have done well. But no one would be looking to them for advice, so you would never have heard of them, and it would seem like a minor miracle that this guy, this technique had just produced such amazingly outsized returns.

As even hedge-fund managers will tell you, most of the strategies they explore look terrific in back-testing, and flunk a real time run. And many of the things that pass the real-time runs turn out to be a pretty good way to lose money as soon as the market changes.

The market always changes.

But say you're right. Say Warren Buffett is every bit as good as you say he is. I beg you to consider two questions:

1) What will happen to the price of your Berkshire Hathaway stock when Warren Buffett dies?

2) Do you have any way of predicting when he is going to die?

Why do people buy mutual funds or individual stocks?

This puzzles many people. The evidence is fairly incontrovertible that stock-picking and fund-picking are very, very expensive hobbies. So why do people do it? A fellow alum of the Chicago GSB once pointed out how many of our classmates, having spent $100K to learn that they can't beat the market, are now in the money management business. "I'm not sure," he said meditatively, "but I think maybe they should be in jail."

Why do people do this to themselves? My tenative answer is that you can't hit a home run with an index fund. You may get rich, eventually; but you will never get richer than everybody else. People investing in the stock market are buying the fantasy of the quick score. And like everyone else looking for a painless way to get rich, they're easy marks for the unscrupulous.

How can markets be efficient if people are such morons?

There is, of course, a bit of a puzzle in finance. To wit: how can markets be so efficient that even very smart people with PhDs in finance cannot (on average) outperform a diversified index, when so many of the people buying and selling the stocks are so stupid that they think they can beat the market?

For the same reason that you can't beat the football spreads. Even if people are stupid, as long as their error is random, the errors will, on average, cancel out.

Of course, the argument of those who think that they can beat the market is that the error isn't random, and that they can therefore make money.

There are several problems with this. The first is, of course, that a lot of people have thought they discovered non-random error in the market's thinking, only to find that they were the ones who had made a big mistake.

The second is that when there are errors or information asymmetries, they tend to attract a lot of people trying to make money off of them. They rapidly bid down the arbitrage opportunity to zero.

The third is that even if you have identified a price anomaly, you may not be able to act on that information. I am acquainted with someone who shorted the stock market in 2000 and made a killing. Unfortunately, he also shorted it in 1997, 1998, and 1999, and was very close to being totally bankrupt before the market went south. As traders like to put it, "the market can stay irrational longer than you can stay solvent".

It is a common fallacy among quasi-financially-literate laymen to believe that "efficient markets theory" means that there is some platonic ideal of a price, which markets inevitably find. That is indeed a silly theory, and one easily refutable by any of dozens of kinds of evidence. But that is not EMH. EMH only says that, whatever that platonic ideal of a price is, trading on your estimate of that ideal price is unlikely to make you more money than you would by purchasing a broad market index.

Yes, Virginia, markets are efficient

There are a lot of students who walk through the doors of the University of Chicago's Graduate School of Business ready to contest the validity of the Efficient Markets Hypothesis. Few, however, manage to walk out without having "drunk the Kool-aid". It turns out to be very, very hard to maintain the belief that you can foretell the future against the pointed questioning of some of the world's smartest economists.

I was one of the Kool-Aid drinkers. I then went and spent some time living with a money manager who was an acolyte of Warren Buffett. I greeted more than one sunrise during our heated games of "dueling regressions". (This story is dedicated to Matt Zeitlin, who previously held the title for nerdiest blog confession.)

Now ever since Michael Lewis' article on index fund management came out, I have been experiencing something perilously close to PTSD. Some would disagree, but I think it's a pretty good article. It is, to be sure, grossly simplistic. But as any financial journalist will tell you, it is very hard to get a 15,000 word treatise on the EMH, with math, past an editor. And if you do, no one will read it.

Lewis completely glosses over distinctions between various forms of the efficient markets hypothesis, bizarrely simplifies arguments about the various premia on asset classes (those looking for a solution to this riddle might start with the word "liquidity"), and tells a suspiciously pat morality tale about a stock-jammer-turned-sainted-investment-advisor. But he gets the big thing right. The world would be a better place if we all took home the point of his sermon:

You can't beat the market. YOU can't beat the market. YOU CAN'T BEAT THE MARKET.

It doesn't matter which version of the EMH is correct. It doesn't matter if the behavioral finance guys are correct. You--adorable, clever, hardworking little you--are mathematically just as likely to underperform the market as outperform it. You would do better to go to Vegas and sit down at the $25 blackjack table with a firm resolve to walk away as soon as probability has varied a few hundred dollars in your favor.

And the guy you're paying to manage your money? Same deal. Statistically, in fact, he will give you a lower return than a broad market index, because of his salary and trading fees.

Hedge fund managers may make money. But it's a pretty safe bet that they do it in one of two ways: they develop systems that let them trade on information faster than everyone else, so that they can make money in the fraction of a second before the price changes; or their longer lock-ups allow them to trade in asset classes where markets are less efficient than large-cap stocks. But the experience of mutual funds over long periods of time indicates that everyone who thought they were a genius turned out to be lucky, not smart; the current spate of meltdowns seems to be sending the same message about hedge funds. And when there are detectable algorithms that let you make excess returns, they tend to get detected, whereupon they no longer work.

The stupidest thing you can possibly do with your money is what most Americans do: either buy and sell individual stocks, or carefully analyze the list of mutual funds to see what the "best" (i.e. highest return) ones are, and plow all your money into them. You see the fine print at the bottom that says "past returns no guarantee of future results"? They mean it. In fact, those guys are not only not particularly likely to end up in the top funds next year; they may actually be destined to underperform. That's because the manager has a "strategy" and whatever that strategy was worked well last year. Since it is no longer last year, that strategy is likely to be counterproductive.

You can't beat the market, and neither can the jerk on the phone trying to sell you stocks. Put your money in the broadest possible index fund (being young and having no children, I'm all equity with a 70/30 split between domestic and international; your mileage may vary). Then leave it there. Don't even peek. Throw the statements away unopened. Rebalance once a year to keep your money at your target allocation, and otherwise don't think about it. If you want the thrill of gambling, go to Vegas. At least they'll give you free drinks.

What does Barack Obama really believe?

Apparently, someone leaked an Obama political questionnaire from 1996 to the Politico:

The questionnaire, which was provided to Politico with assistance from political sources opposed to Obama’s presidential campaign, raises questions of whether Obama can be painted as too liberal and whether he is insufficiently consistent.

A week after Politico provided the questionnaire to the Obama campaign for comment, an aide called Monday night to say that Obama had said he did not fill out the form, and provided a contact for his campaign manager at the time, who said she filled it out. It includes first-person comments such as: “I have not previously been a candidate.”

The campaign said his views have been consistent, and points out that his positions have always been more nuanced than can be conveyed in yes-or-no answers.

Ezra Klein retorts:

According to The Politico, these "liberal views could haunt Obama." Yes, particularly if major media outlets bring them up as documents worth taking seriously, rather than dismissing them as a pandering document published in the year of the Macarena. Say what you will about Obama, but with two books to his name and a speaking style that trends towards the endless, the guy hasn't given us an insufficient quantity of contemporary guidance as to his opinions, judgments, and qualms about public policy issues. It's true that, if the media wants to haunt him with old documents simplifying policy positions from a decade ago, they can. But don't use the passive voice. Let's not pretend someone wearing a sheet is a real live ghost.

The "too liberal" views in the questionnaire are support for a gun ban, support for a universal health care system, and opposition to the death penalty. For my part, I'd always assumed that these were Obama's views on the subject. Now I am pondering: are there really people out there who believe that a candidate's policy papers are what they would actually hammer out if they weren't running for office, and had simply been given the task of designing the system they thought would be best for the country?

I'm not even sure how much it matters what a candidate's real views are. Barak Obama probably believes, in his heart of hearts, that the death penalty should be abolished, and I agree with him. But the president doesn't really have any authority over the death penalty, and even if he did, strong public support for executions would almost certainly keep him from doing anything about it. Likewise, while I'm sure he wants to ban guns, Democrats have learned their lesson from Al Gore too well to consider doing much about it.

Health care is a different story, and there his views worry me--but they worried me before I knew he'd advocated a single-payer system back in 1996. His current healthcare plan is a pretty clear signal of the direction he wants to take the country's medical system in. Because whatever his true beliefs, if he campaigns on his current health care plan, and wins on his current health care plan, he's probably going to try to stick pretty close to his current health care plan. In politics, above all else, you go with what brung you to the dance.

Mostly, the reaction to this seems pretty tribal: we're not judging what he'll do, but "is he like me?" To be sure, that might be useful in assessing what he's like to do about all the policy problems we don't even know about yet--but not that useful, because who would have predicted Clintonian welfare reform or Bush's Medicare prescription drug benefit? Anyway, I really can't spend a lot of time wondering whether politicians share, deep down, my core values. The number of politicians who agree with me on any major policy question can be counted on the toes of one hand.

Your daily subprime commentary

From Arnold Kling:

Tyler also points to Mark Thoma who in turn points to a column by Sean Olender.

But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

A lot of these mortgages are defaulting within the first twelve months, and I've said before that back when I was at Freddie Mac (this was the stone age, when home owners actually had to put money down to buy homes) we presumed that anything that defaulted that early was fraud. It was up to the institution that sold us the loan to prove otherwise.

The difference between Freddie Mac and the typical private packager of mortgages is that Freddie Mac guaranteed investors against loan defaults, regardless of cause. If the loan was originated fraudulently, then that was an issue between Freddie Mac and the originator who sold us the loan. We tried to make lenders repurchase loans if we found fraud. Our loan sellers were representing to us that they had underwritten the loans properly. They were giving us a warranty that the documentation of the loan was accurate. These "reps and warrants" provided our legal basis for forcing repurchase.

Private packagers work differently. But somewhere in the process between loan origination and the owner of the mortgage-backed security, there probably are "reps and warrants" that have been violated. They could be small, technical violations, such as an inappropriate document used to verify income. Or they could be more egregious violations, such as falsifying the name on the loan application. A lot of those violations are from the loan seller to the loan packager, neither of whom currently bears the risk of the loan default.

Further up the food chain, there could be "reps and warrants" about the mortgage pools making up the securities that might provide a basis for legal action. That is, the packagers presumably have to make some "reps and warrants" to investors.

If you are an investor, I assume that the people you want to sue are the packagers, i.e., the companies that bought from the brokers and sold securities. But the problem there is that you are suing them on the basis of what they represented about their entire mortgage pool. It's not worth going through loan by loan. What you want to do is force them to repurchase the whole pool on the grounds that the violations of reps and warrants were systematic, so that the packager was deceiving investors. I have no idea how easy or hard this would be to prove. I have never looked at the offering circular of a private mortgage pool, so I don't know what the reps and warrants look like.

I just sat in on a conference call with the Treasury, whereupon I learned several interesting things:

1) The Treasury Department has its own conference call system

2) That system doesn't work very well

3) This is clearly an attempt to facilitate an orderly reorganization of the market; no one was able to offer high hopes that it would actually change much of anything.

The fundamental problem is that rising house prices have long eased the financial problems of Americans by allowing them to lever up when times got tough. But leverage has a nasty way of working in reverse: now housing is less a piggybank for those in temporary financial difficulty, and more of a millstone around their neck. The easy leverage that pushed up prices in the early part of the decade is now dragging them down, leaving a lot of people stuck in homes that they can't afford, and also, can't sell.

The Treasury plan will give many of those people breathing room. But it will not reverse the decline in housing markets. That means that there will still be a lot of people out there with negative home equity, and all the problems that implies. They are one move, one job loss, one setback away from disaster.

The question remains whether the Treasury should bail those people out more completely; and if a bigger bailout is needed, whether hte time for it is now. On one theory, a big, bold move has the greatest chance of success; on another, the earlier and the bigger your move, the greater the chance that you will do something spectacularly wrong. I'm tenatively of the Treasury's "wait and see" school.

Give us your huddled masses . . .

Harvard University is upping its financial aid for working and middle class students*. They are, as the Wall Street Journal puts it, "responding to criticism that elite colleges have become unaffordable for ordinary Americans."

Here are the bones of the plan:

The Ivy League school said undergraduates whose families earn up to $180,000 would be asked to pay 10% or less of their incomes annually for the cost of Harvard, which this year totals $45,456. The university said the initiative would reduce the cost of attending the college by one-third to one-half, making the price comparable to in-state tuition and fees at top public universities.

For example, the university said a family making $120,000 will be asked to pay about $12,000 for a child to attend Harvard College, compared with more than $19,000 under current student-aid policies. A family making $180,000 would pay $18,000, down from $30,000.

At lower income levels, families would pay a smaller percentage of income, declining to zero at $60,000 a year. Harvard said it would eliminate loans from all financial-aid packages and no longer consider home equity in calculating eligibility. (Read the text of the Harvard statement.)

"We want all students who might dream of a Harvard education to know that it is a realistic and affordable option," said Harvard President Drew Faust.

I find this fascinating for several reasons. First, it implies that the children whose parents only make $175,000 a year in joint income are among Harvard's underprivileged. And second, this seems grossly unlikely to make any actual difference in Harvard's enrollment, or indeed its costs. The actual discrimination comes from the fact that it is very hard to attend Harvard unless your parents have a great deal of money and social capital to pour into the task of turning you into "Harvard material".

When I was at Penn, a friend who actually qualified as a proletarian, and whose proletarian consciousness would have been rated "Exceeds expectations" by the Comintern Membership Committee, indignantly informed me that almost half our class was the product of private schools.

"So?" I asked innocently.

"So those schools are less than 2% of the total American school system," he said. As far as I can tell, that disparity has only grown in the intervening years; thanks to unfavorable demographics, getting into college now is much more competitive than it was in my day. As long as you're drawing half your student body from schools that charge tens of thousands of dollars a year in tuition, playing with your financial aid package is the poverty-fighting equivalent of sending a complementary fruit basket to the local orphanage at Christmas.

* Actual middle class students, not the children of corporate lawyers living in Manhattan who consider that an income of $500,000 a year puts them smack in the middle of the proletariat.

Live or recorded?

I'm with Ogged:

People go to concerts to feel the vibrations in their bones, to feel the energy of the interaction of the band and the crowd, to watch the performers play, and, ultimately, to feed their will to power get laid achieve zen. But the music sounds worse. It's too loud, or you can't hear it, or it's garbled, or mixed improperly, or the performer is having an off night, or...always something. If I want an "experience," I might go to a concert, but if I want to actually hear music, I'll put on a CD.

I'm always torn. On the one hand, I have a perforated eardrum, which makes it physically painful to get too close to the speakers; also, I have a lot of friends who like to stand very close to the speakers.

On the other hand, I like watching people perform. And my living room is not big enough to hold a mosh pit, as we discovered at my housewarming.

Sovereign rules

Today UBS becomes the second high-profile bank to be forced to tap sovereign wealth funds in order to shore up the holes in its balance sheet. A number of commentators have attacked this from various angles: should we be worried that ARABS ARE BUYING CITIBANK!!! or "Is sovereign wealth the new hedge fund management?"

To me, it highlights just how much of this crisis is a liquidity problem. Defaults are obviously a big problem. But if we knew exactly how big a problem it was going to be, we could deal with it: banks would take the write down, some investors and companies would go under, more would be forced to merge in order to shore up their capital base, and the economy would weather the storm. Instead, you have a situation where deals can't be done because people aren't even willing to take a guess at the value of the securities in the balance sheet. Banks appear to be taking write-downs that are more aggressive than they have to, both so that they can reassure the markets of their credibility, and (presumably) so that they can hand stock owners a happy upside earnings surprise at some point in the future when they "discover" their CDO problems were not as bad as they'd initially believed.

The sovereign wealth funds are stepping in, not because they're The Future of Finance, but because right now, they're the only investors who are liquid; they have a guaranteed source of revenue (oil, taxes) that doesn't depend on the financial markets. They're getting some terrific bargains at fire sale prices right now, which will probably pump up their balance sheets for years to come. But I doubt they'll ever be the colossus that stands astride the world. Global capital markets have just gotten too big for one player, or one type of player, to dominate for very long.

Festina lente

There's apparently a pretty standard procedure for applying for Social Security disability: you apply. They reject you. You appeal. Some unspecified period of time later, your appeals win, and you get to go on disability. This New York Times article has a pretty harrowing explanation of the process:

Of the roughly 2.5 million disability applicants each year now, about two-thirds are turned down initially by state agencies, which make decisions with federal oversight based on paper records but no face-to-face interview. Most of those who are refused give up at that point or after a failed request for local reconsideration.

But of the more than 575,000 who go on to file appeals — putting them in the vast line for a hearing before a special federal judge — two-thirds eventually win a reversal.

Mr. Astrue and other officials attribute the high number of reversals to several causes. Those who file appeals tend to be those with stronger cases and lawyers who help them gather persuasive medical data. During the extended waiting period, a person’s condition may worsen, strengthening the case. The judges see applicants in person and have more discretion to grant benefits in borderline cases.

Requiring face-to-face interviews at the initial stage could reduce the number of appeals, Mr. Astrue said, “but given the huge volume of cases coming through, it would be incredibly costly, and the Congress is not willing to fund that.”

The growing delays in the appeal process over the last decade resulted in part from litigation and financing shortages that prevented the hiring of new administrative law judges. In addition, the number of applications is rising as baby boomers reach their 50s and 60s.

This is not quite as psychotic as it sounds. Disability is made deliberately difficult to apply for because the free rider problems in disability systems can be quite immense; by one estimate, from McKinsey, the actual Swedish unemployment figure is not 5% but 15%, after you take into account the working-age population who are on disability or in early retirement. Unless Sweden's much-vaunted kribbe-to-grav welfare state is somehow producing massive numbers of extra physical and emotional cripples, it's hard to escape the conclusion that some of these are people who could, if they wanted, hold down jobs.

Disability systems were originally designed to deal with conditions that were easy to evaluate--do you have two legs, or not? But they've been expanded to cover conditions such as depression and back pain that are literally in the minds of the patients: there is no way to detect malingering. In the 1970s, this gave rise to a number of well-publicised cases of able-bodied adults collecting disability. To prevent that, we've designed an application system that is preferable to working only if you really can't hold a job.

Despite what the article says, the boomers aren't a very good explanation for the rising caseload. Boomers are healthier than any previous generation, so much so that active life expectancy (ALE) is actually increasing faster than average life expectancy. Which is why, if you look at the data, you'll see that changes seem to be driven not by creaky knees, but by changes in awards for hard-to-verify categories like mental disorders. Just like in Sweden (although to a smaller extent), disability seems to be an increasingly popular substitute for unemployment insurance or welfare.

Of course, if you think the government should support more people, this is a feature, not a bug. But even if you don't, it's hard to see what should be done about this. Discouraging malingerers this way also entails immense suffering for the truly needy, who lose houses and hope while waiting for the government to relent.

Iraq's improving. Deal with it.

I am, as readers know, generally of the opinion that the Iraq War has been a clusterbomb of badly made decisions leading to even worse outcomes. And those who opposed the war had every right to become frustrated and angry when the war's more gung-ho supporters refused to acknowlege evidence that things were going very, very badly.

Lately, however, the anti-war side is beginning to sound a lot like the boosters they were so angry at. This is the particular example that caught my eye, but there is an increasingly rich body of blog posts and other writing that are the collective equivalent of sticking your fingers in your ears and chanting "La la la la la la la I can't HEAR you!"

Look, data from Iraq are bad. Bad, bad, bad. We don't know to any reasonable degree of certainty how many civilians have been killed, how many are displaced, how many are now living abroad; how the material condition of Iraq's many millions has changed since the war; or how many have lived or died because of the secondary effects of our invasion. We will never know those things well, but right now we don't even really know them badly, because it's very hard to gather data.

So one has to be cautious in making any statement about conditions in Iraq, and whether they are getting better or worse. But the best collection of data we have is Brookings' Iraq Index. To be sure I find a lot of their data kind of sketchy--David Petraeus may be a swell chap, but I'm not sure I want to rely on a powerpoint presentation he gave to Congress as my sole source of information about Iraqi civilian casualties. However, in the cases where the data is sketchy, they're nonetheless the best we have.

So while I wouldn't make any definitive statement about many of these data individually, collectively, they present a pretty powerful case that things in Iraq are imrpoving rapidly. All the indicators are going in the same direction. Yes, there could be some explanation for reverse refugee flows other than the obvious, which is that people love their country, and want to live there if it is not too dangerous. Any of the improvements could be explained away. But taken as a group, the various quibbles are easily sliced by Ockham's Razor.

The improvement may not last. And even if it does, there's still a fine argument to be made that the suffering which preceded it made the invasion a terrible, terrible idea. But the current strategy of ignoring the news from Iraq, or quibbling with it, doesn't lay a sound foundation for making that argument.

Intelligentsia

Incidentally, the fact that it got linked from Arts and Letters Daily reminds me to point out that my former employer is now running a rather smart quarterly magazine called Intelligent Life. It's a sort of lifestyle magazine for the thinking set--less how to comparison shop for Patek Phillipes, and more an attempted operating manual for the well-lived life. It is not, alas, available in the United States in print. But its website is rather brilliant, and features some of my favorite former colleagues, all of them writing under their very own names. Highly recommend you add it to your RSS feed.

Meet the new boss, same as the old boss

Ezra Klein has transferred his blog to his employer's website. Same great Ezra taste, now with 25% more red type. Bookmark early and often.

How high is high?

The Washington Post has a follow-up on Dean Baker's complaint about its Mexican GDP calculations (I blogged the story here). The Editorial Board's defense: it took the figures from a presentation by a Mexican economist. This is not much of a defense, about like "I was sooooooooooooo drunk!" The first rule of economics journalism is Always Adjust for Currency Changes, and a real quadrupling of GDP in 20 years implies a growth rate of over 7% a year, which is just obviously not the case in Mexico. But they also point out that Dean Baker made some sizeable errors, as well as cherry picking a not-terrifically-appropriate statistic in order to give the lowest possible figure to contrast with the WaPo's ridiculously high one. All in all, no one's really covered in glory.

Things that make you go hmmmmmmm . . . .

On a strange side note, I was also struck, when looking at the boyfriend-inscribed flyleaf, by the fact that his handwriting bears a surprising resemblance to the handwriting of many of the other men I've dated. They are not of the same region, ethnic group, age, or schooling system. How could they all have handwriting that looks so much alike? A miracle?

I was about to start believing in fate, and then I thought of a more prosaic explanation: most of the guys I've dated, and all of the ones with whom I have entered more-or-less serious relationships, have been left-handed.

That in itself, is, of course, more than passing strange.

Save me from myself

So I fell down the stairs last night. It was a fairly spectacular wipeout--they were wet, and I lost my balance--and caused a muscle spasm so bad that I had to call a nearby friend because I was afraid I couldn't walk.

Now I'm on my couch with a brand new heating pad. I call it a "heating pad" only because this is the appellation the manufacturer has chosen; it doesn't actually produce much in the way of heat.

My first instinct is to blame this on the safety nazis. But this seems ignoble; perhaps the damn thing just doesn't work.

Except that, having a bad back, I have noticed a similar trend in other heating apparati. I usually buy ThermaCare patches for travel; the heat keeps my back from spasming. Lately, however, I have noticed that the heat patches no longer produce much in the way of heat. They used to produce a comforting glow that kept my back relaxed for eight hours or more. These days, I could get a better heat level by dipping my napkin in the lukewarm airline tea and slapping it on my back.

This makes me suspect that they have lowered the amount of heat that heating appliances produce, presumably because people with very poor circulation, such as diabetics, were burning themselves. Apparently, it is much better for them, and everyone else, to have something labeled a "heating pad" that doesn't produce any heat. I'm all for exploiting the placebo effect, but it's hard to generate a willing suspension of disbelief while lounging on a stone-cold chunk of plastic.

Travel talk

Since I mentioned The Long Dark Tea-Time of the Soul's opening, I might as well reproduce it. It has a particular resonance now, when I've been travelling so much:

It can hardly be a coincidence that no language on earth has ever produced the expression "As pretty as an airport."

Airports are ugly. Some are very ugly. Some attain a degree of ugliness that can only be the result of a special effort. This ugliness arises because airports are full of people who are tired, cross, and have just discovered that their luggage has landed in Murmansk (Murmansk airport is the only known exception to this otherwise infallible rule), and architects have on the whole tried to reflect this in their designs.

They have sought to highlight the tiredness and crossness motif with brutal shapes and nerve-jangling colors, to make effortless the business of separating the traveler forever from his or her luggage or loved ones, to confuse the traveler with arrows that appear to point at the windows, distant tie racks, or the current position of Ursa Minor in the night sky, and wherever possible to expose the plumbing on the grounds that it is functional, and conceal the exit gates, presumably on the grounds that they are not.

Caught int he middle of a sea of hazy light and a sea of hazy noise, Kate Schechter stood and doubted.

The follies of youth

Embarassingly, I am still unpacking things from my move. I just opened my last carton of books, in which I discovered The Long Dark Tea-Time of the Soul. Funnily enough, I had just been discussing that very book on Tuesday, because it has one of the best opening sequences in the history of the universe. So I flipped it open, only to discover that my college boyfriend had left a note on the flyleaf.

Memory is a funny thing; although we haven't seen each other in more than ten years, I immediately recognized the handwriting. Even before I looked at the date on the inscription, I was cast back to the cavernous apartment on 44th and Walnut where the miles of ancient hardwood flooring were practically innocent of furniture, but the walls were fully occupied storing vinyl, polycarbonate, and reconstituted tree pulp. There we sat for countless hours, wiling away a happy youth producing overflowing ashtrays and impassioned marginalia*. As the inscription itself bears the full charm of youthful book annotation, I herewith reproduce it:

Remember, every time you do something stupid, it will leave a memory with which you will have to live for fifty years. This is the great advantage of drinking to excess: memory loss.

But the real charm is the accompanying note:

[reword to snappy epigram]

* You see, back then, we were immortal. Also, cigarettes only cost $1.50 a pack.

Seriously?

Did I just read this? Or am I imagining it?

. . . public atheist Pullman says he isn’t perturbed at all by the complete excision of theocratic corruption in the film because all forms of totalitarianism are the same.

Except they’re not. Life in a theocracy means everyone – not just members of the Communist party or the military junta – must live out the philosophy of the rulers every day of their lives. There is a peculiarity to a complete absence of the separation of church and state that doesn’t prevail in a communist or a fascist state. When there is no distinction between religious and secular power, it’s not enough to obey the rules, you have to believe in them, too. Theocracies are obsessed with sexuality in a way that common or garden totalitarianism is not. Women get a spectacularly raw deal in a theocratic state, which is what makes Mrs. Coulter such a notable character; she plays the religious hierarchy at their own game and wins, albeit at a terrible cost.

I'm sure the victims of the Khmer Rouge, the Great Leap Forward, the Stalinist purges, and the Holocaust would be surprised to hear that they didn't have to live out the regime's ideology in their everyday lives.

Gains from trade

I'll try to do a books post by mid-next week, to wrap up the Christmas recommendations. But of course, you already know that you should own Discover Your Inner Economist, Tyler Cowen's brilliant opus on applying economic principles to everyday life.

There are so many areas in which one's life could be made infinitely better by the application of basic economic principles. For example, everyone has been in the position of awaiting a much-desired, but highly uncertain, outcome: finding out whether you got a coveted job, perhaps, or waiting to see if the person from that awesome first date calls you back. Why not hedge your net psychic wealth a little? Find an amenable friend, and bet against the outcome you desire. That's what friends and I did in graduate school with permanent offers from our summer internships: anyone who got an offer had to kick in $75 for those who didn't.

This did not, of course, erase the pain of those who didn't get permanent offers. But it did soothe it a little; the disappointment of "they hate me" was replaced with the sudden realization that you had a few hundred dollars to blow on something frivolous. Meanwhile, those who got a job had multi-thousand dollar signing bonuses, against which the pain of the lost $75 was invisible.

Recently, I have also been experimenting with bacon offsets. As longtime readers know, I only eat certified humane meat. This creates certain problems when I am invited to brunch or a weekend at someone's house, and they have thoughtfully provided me a meal laden with juicy, delicious, inhumanely raised and slaughtered bacon.

Luckily, the first time this happened, my friend Matt swooped to the rescue. Matt buys a lot of bacon, but has so far resisted my blandishments to purchase the certified humane kind. However, if I eat bacon out, Matt has agreed that the next time he buys bacon, he will buy the certified humane kind, and let me pay him the difference between its cost, and the cost of the regular bacon. This way I get to be a good guest, and the net amount of animal suffering in the world doesn't rise . . . indeed, it falls slightly, because the going rate is one pack per outing, and I don't eat a whole pack of bacon. Even nicer, the last time I went to brunch at someone's house, they bought "hippie bacon" rather than force me to excercise my offset option.

Nooooooooooooooo

The New York Post's review of Atonement calls it

the most achingly romantic movie since "Titanic"

Now I'm afraid to see it without a blood glucose monitor and Wilfred Brimley.

Cui bono?

There's a mildly interesting tiff taking place on the web right now. On one side are those who are confused, and more than a little outraged, to see people complaining about the bailout on the grounds that people who bought too much house shouldn't be rewarded for their folly. I estimate that none of these people, plus or minus five percent, are homeowners with fixed mortgages on sensible, boring properties.

On the other hand, there are those who are outraged that their neighbors who bought too much house are being rewarded for their folly.

On a moral level, I'm with the latter group: people who qualify for the bailout are mostly people who really should have known better; they will now be bailed out mostly by people who did know better.

On a macroeconomic level, placing blame is somewhat counterproductive. Those who have sensible, fixed mortgages will not really be made happier if the credit crunch turns into a liquidity crisis, the economy plunges into a deep recession, and they lose their jobs, forcing them to default on their sensible, fixed mortgages.

In my opinion, a willingness to tolerate high levels of moral hazard--to give people second, and third, and eighth chances without inquiring too closely about how they got into so much trouble--is one of the great strengths of the American system. It makes us happier as people, and it lets our society make use of human capital that is too often left moldering in (metaphorical) debtor's prison under the more punitive and moralistic regimes that prevail in the rest of the world.

Facebook friends

New York Times technology blog The Lede discovers that as products gather more users, they also tend to attract more criticism. I myself am working on a post I shall title Special Report: The Hot New Club in Tribeca is Very Crowded.

Feature, or bug?

Apparently, the California Nurse's Association is preparing to run an ad in papers on Monday arguing that with average health care, Cheney would be dead:

Washington, DC –Print ads demanding health care reform will blanket Iowa newspapers on Monday Dec. 11. The California Nurses Association (CNA) / National Nurses Organizing Committee (NNOC) are running the ads as part of a national campaign pushing for guaranteed health care coverage for all Americans through a Medicare-based system.

The ad uses recent headlines about Vice-President Dick Cheney’s heart procedure to point out the difference between the government-funded health care that the nation’s leading politicians enjoy and the precarious health care situation in which most Americans find themselves.

A news article about Cheney’s recent treatment for heartbeat irregularities provides the context with the headline: “If he were anyone else, he’d probably be dead by now.” The text highlights that factors such as the patient’s history and prognosis would likely lead to a denial of private insurance claims for most Americans, assuming that they had coverage in the first place.

Is this supposed to sell their plan to progressives?

Bleg II

Given what I do with a bike, I'm thinking I might want a Trek Lime Shopping or a Gary Fisher Simple City model. But I don't know when they'll be out; obviously, I can't wait that long. Anyone have any scoop?

OIl, oil toil and trouble

Incidentally, this chart from the Wall Street Journal is a very useful little history of oil prices. You can see what happened in the eighties, as demand sagged, and also the amazing run-up we've had over the last few years.

One of the things that I was struggling to get across at a dinner a few weeks ago is how discontinuous prices on inelastic goods can be. That is, a few percentage points increase in demand against a relatively fixed supply doesn't produce a few percentage points increase in price: it can produce huge spikes. That's not intuitive; we feel as if prices and demand should grow at approximately the same rate. But people in the world have a lot of spare income they can use to bid up the price of oil; the speed with which its price is increasing is a measure of just how useful the stuff is.

Mixed metaphor

It is common to hear opponents of single-payer health reform point out that if we bought health insurance the way we bought car insurance, we'd all be broke. Ezra Klein says this is a stupid analogy:

1) You Can Drive Without Swiping Your Auto Insurance: This is the most obvious, and most important, difference. If your car required proof of insurance to start, more people would be insured. But it doesn't. Cops don't even ask for insurance when they pull you over. The only time insurance is relevant is when you're in an accident.

Health insurance mandates, by contrast, make proof of insurance a prerequisite to using the system. To see a doctor, you do have to swipe your insurance card. To enter a hospital, you do need to show proof of insurance. In the Edwards plan, you'll need to enter your policy number on your tax form. If you can't, you'll be enrolled in the basic plan. This alone will reduce noncompliance dramatically, because compliance will be necessary to use the health system. Auto insurance, by contrast, is not necessary to use a car.

2) Car accidents are less likely than flus: Everybody reading this has been to the doctor. Most reading this have never been in a car accident. People are not unaware of the relative rarity of those events. It's easy to skip car insurance under the theory that you will not need it. It will be harder to skip health insurance under the theory that you will not need it. (This is Obama's argument. The danger is that people will skip it until they do need it, as explained here.)

3) We do not subsidize auto insurance: At least so far as I know. By contrast, all of the major Democrats, including Obama, subsidize health insurance to 300 percent or 400 percent of the poverty line. If lower income folks were given help on auto insurance, more would purchase it. As it is, they will be given help on health insurance,and so more will purchase it. This isn't rocket science. It's also one of the useful things about a mandate: The very fact of its universality means a hue and a cry will go up if the government doesn't ensure affordability. Thus, the government has to ensure affordability, or publicly dismantle its mandate. My hunch is it will do the former.

This seems very muddy to me; Ezra is flipping back and forth between talking about using the car, and using insurance. If you restrict the comparison to the use of insurance, most of his objections are moot. Sure, you don't have to show your insurance card to get your car repaired, but they won't let you drive it out of the garage again unless someone has paid; and similarly, they will treat you without insurance, it's just that you'll get an ugly, monster bill.

And while car accidents are less likely than flus, most people should be doing routine maintenance on their cars at least as often as they go to the doctor, which is precisely why free-market types like the analogy: it clarifies the distinction between other types of insurance that are used to cushion against catastrophic events, and the weird way that Americans use health insurance to essentially prepay for largely predictible expenses.

The real reason to distinguish between car and health insurances to my mind is that one of them allows you to do something we think of as optional (drive), and one of them allows you to do something we think of as a right (live).

Nonetheless, I think it's very useful to compare the markets, and policy responses to failure therein. Do mandates work to ensure universality, or something close enough thereto? In the market for car insurance, they do. Most people get insurance because it's illegal to drive without the stuff, even if they're reasonably sure they'll never be in an accident. Yes, some small segment of the population is uninsured. But they're mostly poor or irresponsible people who wouldn't have contributed much money to the system anyway.

That's why, even assuming that the market failures such as adverse selection are actually serious problems, there's no reason to think that we need every single person in the country to be insured in order to fix them. The adverse selection problem will disappear before the uninsured do; markets can tolerate some level of non-compliance.

Remember that almost all of the people you're worried about not complying will almost never show up in a hospital; anyone who's actually sick and uninsured will presumably jump on community rating. So this isn't a problem about system access; few of them will try to swipe that card. It's a finance problem: what we're really worrying about here is that we can't take money from those young, healthy, uninsured people in order to subsidize the older, sicker people who buy insurance. But as I pointed out above, the people who will fail to buy health insurance under the new system are almost certainly the kind of people who have very little ready cash to contribute to the system. So it seems unlikely that the overall effect of their absence would be large.

Musical notes

Upon Terry Teachout's recommendation, I bought Relaxin' with the Miles Davis Quintet off Amazon's MP3 service. And what valuable lesson have we learned from this? That we should follow more of Terry Teachout's recommendations.

Meanwhile, I am once again taking eMusic nominations. If you've made the same nomination more than twice, though keep in mind that either I bought it, I didn't like it, or (most likely) it isn't carried on eMusic. You'd be surprised at how much isn't, even indie music . . . though of course, enough is that I keep going back to the well.

Unsurprisingly . . .

Kanye West gets eight Grammy nominations for his latest album. Surprisingly, I preferred College Dropout.

It's electric!

Following up on my kitchen posts and cookbook posts, I now inundate you with my favorite electronic gear of the year:

1. The iPod and its minions: I made the mistake of getting a 30GB, which is already too small, and I'm not even a music buff. I continue to maintain that the screen is too small for watching serious video, so I recommend the 80GB.

Yes, it's expensive and in two or three years the battery will die, leaving you with a pretty rock. But network effects have basically made the iPod into the new Windows. You buy it not because other players are inadequate, but because its ubiquity has created by far the richest market in secondary products. Also, someone will always have a cable or a charger to lend you.

I own both Composite AV cables, for hooking it up to my clock radio (the cables also charge it), and a Bose SoundDock, about which I cannot rave enough. The new version is sleeker, but the old version is plenty good looking, and apparently on sale for $100 less. It's easily portable, and if you're like me, and have a kind of inadequate music collection, it lets you prey on the better offerings on your friends' iPods during parties. I'm also a fan of this Belkin case for keeping your expensive system unharmed. Also, an eMusic subscription to keep it well stocked; I get 100 songs a month for $25. The selection is limited, but they're use-anywhere MP3s rather than Apple's DRM-crippled items. If you do want to buy off iTunes (and often you have to), I recommend buying iTunes gift cards from Costco, which gives you a 10% discount on your songs.

2. Laptops: I am the proud owner of a Sony Vaio and a Mac Powerbook Pro (well, technically, The Atlantic owns it). Partisans will be shocked to hear that I like 'em both. The Sony is a perfect size (13.3 inches), which is hard to find from other manufacturers. It is also very, very, very light, which makes it terrific for travelling or taking to a coffee shop. And it is much more powerful than a Mac, has a huge hard drive, and tons of connectivity. On the down side, I had a lot of trouble with their customer service, though that's hardly unusual among computer manufacturers.

The Mac is lovely and easy to use, and for web stuff, the suite of software is very good. Because Apple builds all the helper apps natively, they work together much better than those on the Vaio. Its built-in camera turns out to be, surprisingly, extremely useful--too useful, as it tempted me to stay up late Skyping from Vietnam. And it's super-easy to use, so if you have far-flung relatives or significant others, this alone is enough that you should be thinking hard about getting one. On the downside, it runs critical apps on emulation, is slower than my PC, and has a tiny hard drive, which is now becoming a problem with my music and photos. Its battery life is also bad, and rapidly getting worse. And the perennial problem of Macs is the limited software selection, although frankly, it hasn't bothered me much.

3. Tivo Series Three: After a downsizing parent gave me a small HD (sorta) television, I realized my Tivo wouldn't work with it. I lumped it with the cable company DVR for a while, but it's really hard to overstate how much better a Tivo is. Its guide is better, its software is better designed, it supports add on features such as music and photos, it lets you subscribe to podcasts, its season passes work better, its suggestions are actually useful, it lets you download your stored programs to a computer over the network, it supports remote programming from the road through Tivo's website . . . in every way you can imagine, it's better. Did I mention it's not supported by the sluggards at your cable company? The Series 3 takes two cable cards, which means you can record and watch two different shows, thus destroying the Comcast DVR's sole advantage. And you can hook an external hard drive up to it via USB to store extra shows.

Speaking of which, I am a big fan of my new Western Digital 1TB drive, which is currently acting as a sort of St. Joseph's Baby NAS via an Airport router scored from a home merging friend. Airport routers are overpriced, thanks mainly to their looks. But the ability to hook up a printer or a hard drive via USB turns out to be pretty sweet; the backup is slow, but works fine for my needs. If you need a network backup, it's worth thinking about, but not otherwise.

4. Camera: my work camera is this Sony Cybershot, which takes great pictures, and is the next-best thing to an SLR. Better for me, actually, since I am not talented enough to fiddle with my fstop and focus every time I take a photo. The best thing about it is the 10X optical zoom, which makes a huge difference if you're taking anything besides snapshots of your friends at bars. The soft-touch flash is also nice, and there's both a manual feature for full control, and an intermediate mode that lets you program most of the settings, such as color saturation and ISO. The only problem I've detected is that I sometimes accidentally activate the delay timer.

5. Nintendo DS Lite: It's kind of silly, and I'd never have bought one outright. But Comcast sent me one in exchange for signing up for its voice package. And it turns out, they're kind of useful for travelling. The battery life is great, and it really helps keep the airport rage down to a manageable level. You can even do crosswords on them, which I did all across Asia.

6. Headphones: for earbuds, I like the Shure E3C noise-cancelling model with the triple-flange sleeves. They take a little getting used to, but once you do, they're not only cheaper than the Bose models, but better. The Bose uses white noise to cancel out common frequencies, particularly those found on planes. The E3C actually blocks the noise from entering your canal. That means that they block noise in a wider range of environments, and even on a plane, the screaming baby disappears along with the wing rattle. Plus, they're a lot easier to carry and sleep in than the big over-ear models once you get used to them. And in my opinion, the sound quality is also better. I prefer the E3C to the cheaper E2C because the E2C doesn't take the flange sleeves (which, btw, you have to order separately for $10). I found the triple-flange both more comfortable and more effective at blocking noise.

For the computer, I am a huge fan of this Logitech headset, which can actually also be used as a pair of regular headphones. The sound quality is very good, and the microphone folds neatly back when you're not using it so that it looks like a normal set of headphones. Most other headsets make you look as if you're trying to land WWII cargo planes through the power of the internet. That's the headset I use for Skype and Bloggingheads.

For a bluetooth cell phone headset, I like the Aliph Jawbone, which gets great sound, looks good, and offers really very superior noise cancellation. It also comes in colors, but I'm not that stylish.

7. Printer: I bought a Brother MFC-7820N multifunction laser printer when my last printer died. It's great. Really great. Almost too great; I am besieged with requests to borrow my fax/printer. It has built-in network support, which is rare in a multi-function, and installing the drivers is easy, so guests can easily log on. So far, every feature I've tried has worked great, and if you have an answering machine and only one phone line, the fax will decide where to route unanswered calls. And I prefer laser to the more common inkjet.

Save early and often

Sorry about the light posting; a Firefox crash just ate a monster post on tax policy just seconds before it was finished. Talk amongst yourselves while I gather my strength for a second attack. Also, save your work.

Student life

College bloggers should enter their blogs in AFF's new contest, which offers a large cash prize, and of course, the prestige of winning. The deadline for entering your blog is December 31st, after which a panel of judges, including me, will be judging your output.

Lessons learned

Two quotes on the subprime problem:

From commenter David Nieropont:

There are many nuances related to mortgages. For instance, if you default, what are your rights in foreclosure? How can you redeem, and when? But it wasn't any nuances that tripped people up. "The monthly payment is more than I can afford" is not a "nuance."

Ryan Avent on the new plan to freeze mortgage teasers:

. . . the lesson here appears to be that if you see everyone else borrowing well beyond their means, you should too, since the government cannot credibly allow large numbers of homeowners to go into foreclosure.

This plan is by no means going to end the crisis; for one thing, many of the subprime borrowers who are in trouble seemingly can't make the payments with the teaser rates. But the market is currently in the grips of terror: how bad will it get when rates reset? This may allay those fears enough to ease the credit crunch.

But there are downside costs--we live in an imperfect world. One will be distortion of the housing markets; people with those artificially cheap subprime mortgages won't be able to move, and by stalling the decline of house prices, this may drag it out to ill effect. Another will be the moral hazard. Bankers and consumers just learned that no matter how stupid they are, the government will bail them out.

Overall, I'm pretty sure the cost is worth it. But I worry that if this works, and things settle down, we'll see the financial industry's appetite for risk grow even more voracious, and along with its tendency to mistake beta for alpha.

Thank God for telecommuting

No bike, no bus, no service. The metro is hosed too.

You've never seen anything like the DC reaction to snow. Yesterday, as I walked through the snowy streets, I looked at the drivers inching along and thought "they've never seen snow before". After a while, though, I began to think "they've never seen cars before". It's as if each of those little white flakes was composed of some sort of powerful explosive activated by contact with car tires or shoe leather.

The future and its enemies

A stirring defense of science fiction.

The security that passeth all understanding

If you don't understand what a CDO is, here's a good illustration from Portfolio. Lengthier explanation here. Wiki here.

Bleg

So now that my bike has been stolen, I'm going to need a new bike. Unfortunately, the theft indicates that the bike needs to be lightweight enough to carry up two flights of stairs, one of them steep. It does not need to power me to victory in a triathlon, or withstand long rides down a rocky mountainside. Thoughts?

Upmarket

Dan Gross is now blogging the same journalism tour I took to Vietnam:

In our travels, we heard repeated stories of how Vietnamese brands and consumers had fought off cheap Chinese imports by improving quality and focusing on brands. In urban clothing stores, consumers are far more likely to find domestically made clothes than Chinese ones. "Now the time for cheap products has gone by," said Nguyen Thi Thanh Hu, general director of apparel maker Garco 10, which derives about 20 percent of its sales from the Vietnamese consumer market. Last summer, a Vietnamese company, Viet Tien, signed a deal with Perry Ellis to license its Manhattan line of clothes for the domestic market.

In the 1990s, said a senior trade official, cheap Chinese beer flooded the market. "Ten years ago, eight of every 10 bottles of beer in the market were Chinese-made, and everybody was afraid," he said. But Vietnamese brands like 333, Saigon, and Tiger Beer (foreign-owned but brewed domestically) took marketing cues from Western beer companies and began advertising on television. As they did so, better-off consumers grew more sophisticated. "In the past, we just drank any beer we had," said the trade official. But today, "there is no Chinese [brand] in the market to compare."

The arrival of cheap Chinese motorbikes a few years ago forced Japanese firms to cut prices significantly. But Vietnamese consumers with disposable income now look beyond price. The trade official said he bought a Chinese-made motorbike for his daughter, but she sold it after a year and purchased a Japanese-made one instead. At Le Quy Don High School, a magnet public school in Ho Chi Minh City, we chatted with students. (Most disconcerting flat-Earth moment: the unanimous roar of approval that arose when we asked if they liked Hannah Montana.) "The goods imported to Vietnam from China are not really good," Bang Thanh, a 16-year-old wearing stylish sunglasses, told me. "The Honda motorbikes they make there and bring in are no good."

Of course, national pride—and not simply a rising sense of consumer sophistication—filters into the resentment of all things Chinese.

Over and over again, the journalists asked the same question about China: how are you planning to compete with China's massive economies of scale? Over and over again, we heard the same answer: quality. We'll find an upmarket niche, said officials, entrepreneurs, and development officials.

What Mr Gross is slightly too nice to say is that this makes no sense. Vietnam still lags China on value-added goods production; its main export is low-end textiles. No one managed to elucidate any very good reason that Vietnam would, suddenly and for no apparent reason, get better at making stuff than the Chinese are. Currently, China has a productivity advantage combined with massive economies of scale, which is a pretty hard combo for Vietnam to beat.

Domestically, Vietnamese-made products are upmarket from Chinese imports, but that's because the imports in the Vietnamese market are the absolute rock-bottom Chinese products, the local equivalent of that beer they used to sell in white cans marked "beer". In developed country export markets, however, which is where all the money is, China has an edge in both quality and quantity.

But as I said earlier, Vietnam has one advantage that no one we interviewed mentioned: we kinda like them. China's billion+ masses scare workers in the developed world, inviting protectionist legislation from politicians. To be sure, Vietnam is also currently laboring under textile quotas, but its currency and wages are not an emotional issue for voters from Milan to Monterrey. That's one reason that multinationals who don't want all their eggs in any one national basket are enthusiastically diversifying into Vietnam. This might--emphasis might--give the country enough breathing room to climb above China on the value-added production ladder.

The battle of the sexes, special automotive edition

In response to my question about combat integration, commenter Will says:

even if strength weren't an issue, soldiers would still have to read maps.

Yes, but don't they also have to be able to figure out when they're hopelessly lost?

RHIP

Many of us get bad service in cafes. Some of us are even forced to choke down some gnarly grilled cheese sandwich when we clearly and specifically asked to have it toasted. But how many of us can get the miscreant behind the sandwich counter fired? Congressmen, that's who.

Second favorite headline of the day

Obama wants Craigslist-like volunteering database.

A Craigslist for volunteers! Why didn't someone think of that before?

Update A commenter points out that he wants a "Craigslist-like" database, not a Craigslist database. This implies that Craigslist is insufficiently like Craigslist. Or perhaps it is too much like Craigslist. So we want something that is like Craigslist, but not like Craigslist. Have I got that straight?

The war to end all wars

Favorite headline of the day: "GOP claims Democrats are waging 'war' on the economy."

So many questions about this . . . is it a preemptive, preventative, or defensive war? If the economy loses, can Democrats build military bases in its territory? Will economists greet the Democrats with flowers?

Vive la difference

I was looking for a blog post on the DC gun ban--specifically, one I vaguely recall having argued that gun-control activists should have pressured DC to repeal its ban rather than let the case go to the Supreme Court, because DC sidesteps the incorporation question, and is therefore likely to produce a more sweeping ruling than a state case would.

But I got sidetracked onto Volokh, where Kingsley Browne is guest-blogging about whether women are simply too physically weak to be in combat.

This strikes me as an argument deserving serious consideration. But this segment of it seems weird:

Advocates of integration of women into combat forces often downplay the sex difference in physical capacity, correctly pointing out that some women are stronger than some men. In fact, however, there is little overlap between the sexes in terms of strength.

Women, on average, have only one-half to two-thirds the upper-body strength of men. The probability that a randomly selected man will have greater upper-body strength than a randomly selected woman is generally between 95 and 99 percent, depending upon the measure and the sample. Most of this difference is due to differences in the quantity of muscle tissue, a difference attributable primarily to sex hormones.

Although most discussion of physical sex differences focuses on strength, the sexes also differ on a host of other performance measures, such as running speed, aerobic and anaerobic capacity, endurance, and throwing speed and accuracy. These abilities are all potentially important in combat.

Some assert that these large physical differences can be overcome through training. In fact, however, training often increases the sex difference. Both sexes benefit from strength training, and in samples of out-of-shape individuals, women may initially gain more from training than men. Nonetheless, the overlap between the sexes decreases, because training not only increases the strength of both groups, it also decreases the variability within the groups. When males and females both start out in good physical condition, women gain less from further conditioning than men do, so the gap between the sexes actually increases.

Is this actually an argument made by large numbers of people? Because it's completely, obviously insane. Being on the tail end of the size distribution, this realization was perhaps delayed slightly for me--but not past the age of sixteen, when I playfully snatched a hat from the head of a male companion who was a year younger and five inches shorter than I was, only to have him calmly and without visible effort use one hand to pin my arms behind my back while with the other he retrieved his chapeau. I'm both (very) large and strong for my gender, and yet I'm not sure I've ever met a (healthy) man who wasn't stronger than me; even the 130 pound scarecrows I've dated were clearly my superiors in physical strength.

My understanding, though, is that most advocates of fully integrating the military simply argue that strength doesn't matter that much, or that the rare superwomen who can meet the basic male requirements should be allowed the chance to serve in combat. I've never heard anyone deny that men are, on average, stronger than women.

Leave it to the states

The Wall Street Journal's tax report points out that states are expecting slow revenue growth this year.

This is a particular worry for New York State, where tax revenues are disproportionately driven by Wall Street bonuses. I recently interviewed the business manager for an upstate school district as part of a story I was working on, and he's really worried about what's going to happen to the district's finances, which are heavily dependent on state aid. Eliot Spitzer had used some of the state's recent Wall Street windfall to try to put some stability into the level of state school aid, but with the subprime problems, he said he'd be thrilled if next year's aid doesn't fall.

This is part of a broader story about how volatile state earnings are becoming. New York State's finances are basically tied to the health of a single industry, while California's are hostage to the fortunes of two. Two of the three biggest states in the country are turning a slightly larger version of the Company Town.

One would argue for federalism, except that our federal tax receipts seem increasingly to be driven by the same few engines. Finance, entertainment, and technology throw off such massively disproportionate profits, and salaries, that problems in those sectors can easily engulf success in a hundred other less volatile industries.

Skeptical inquirer

A reader in a previous thread asks if I'm a climate change skeptic. Nope. Not being a meteorologist, physicist, geologist, chemist, etc, myself, I go with the scientific consensus on the matter, much as I assume that the biologists are right about evolution and the physicists aren't pulling my leg about this gravity stuff. I do not have the time, expertise, or inclination to investigate every single scientific claim about the world, and so I trust in the scientific method, the peer review process, and the wisdom of crowds to deliver me a reasonably reliable answer.

I'm still working out how much I think we should be prepared to do about this, but I believe it's happening.

A for effort

I've long believed that all the hyperbright procrastinators I know, many of them underachievers, are the product of a particular mindset about intelligence. They are people who long ago internalized the notion that performance is largely based on innate talent--and are therefore putting off work because they know it won't be perfect. Procrastination delays the moment at which you find out that you aren't as talented as you hoped and believed you were.

This is approximately Carol Dweck's argument here. I agree with the diagnosis, but I'm a little more sceptical about the cure:

How do we transmit a growth mind-set to our children? One way is by telling stories about achievements that result from hard work. For instance, talking about math geniuses who were more or less born that way puts students in a fixed mind-set, but descriptions of great mathematicians who fell in love with math and developed amazing skills engenders a growth mind-set, our studies have shown. People also communicate mind-sets through praise. Although many, if not most, parents believe that they should build up a child by telling him or her how brilliant and talented he or she is, our research suggests that this is misguided.

In studies involving several hundred fifth graders published in 1998, for example, Columbia psychologist Claudia M. Mueller and I gave children questions from a nonverbal IQ test. After the first 10 problems, on which most children did fairly well, we praised them. We praised some of them for their intelligence: “Wow … that’s a really good score. You must be smart at this.” We commended others for their effort: “Wow … that’s a really good score. You must have worked really hard.”

We found that intelligence praise encouraged a fixed mind-set more often than did pats on the back for effort. Those congratulated for their intelligence, for example, shied away from a challenging assignment—they wanted an easy one instead—far more often than the kids applauded for their effort. (Most of those lauded for their hard work wanted the difficult problem set from which they would learn.) When we gave everyone hard problems anyway, those praised for being smart became discouraged, doubting their ability. And their scores, even on an easier problem set we gave them afterward, declined as compared with their previous results on equivalent problems. In contrast, students praised for their effort did not lose confidence when faced with the harder questions, and their performance improved markedly on the easier problems that followed.

My parents, who had both themselves found school excruciatingly easy, certainly never told me I was smart; they believed the important thing was effort, not talent. I nonetheless internalized the notion that talent mattered more than effort, because in my case, it was obviously true. I learned my lessons far faster than the kids around me with absolutely no effort at all; I mastered long division in about ten minutes, then sat through three excruciating weeks while all the other kids in my class caught up. Telling me that this was the result of my effort, rather than native ability, wouldn't have made me believe in effort; it would have made me believe in the idiocy of adults.

Needless to say, this belief was incredibly harmful when I got into harder academic environments where effort was required; it took me a long time to catch up when I switched from public to private school, because the work was harder than that in my old school, and I didn't know how to tackle it. But before you can reward smart kids for putting out a lot of effort, you have to put them in an environment where some effort is required, and for most really bright kids in America, that isn't the case.

Who's your daddy?

In re yesterday's posts about the proper federal role in school lunch policy, Mr Yglesias replies:

Julian Sanchez concedes the point regarding "nanny state" activity being perfectly reasonable when the people being nannied are children. Instead, he's upset on federalist grounds about the idea of congress making snack regulations for public schools.

To which I say . . . eh.

In practice, arguments about federalism are almost universally made opportunistically. People favor devolving power to the states when they think doing so will produce policies they approve of, and people favor concentrating power in Washington when they think doing so will produce policies they approve of. Everyone knows this. And while one might condemn the hypocrisy of it all, this always strikes me as a good thing to be hypocritical about.

I think there's a kernel of truth to this, though there seem to me to be a lot of people out there who simply think that more federal control of everything would make the world an infinitely better place. But this example is the worst possible illustration of the principle. I know Julian well enough that I would stake a fair amount of money on the proposition that there is no "policy he approves of" on school lunches, because it is not a subject that he, or I, or Matt, or almost any other single person without children, wastes valuable time developing an opinion on. I am acquainted with Dan Mitchell, and I'm pretty sure that he, too, has no secret school lunch agenda that he is trying to sneak through the back door of states' rights. Actually, this is possibly the strongest argument for federalism on the issue: the people most likely to have a handle on the best policy are the people who actually care about it: i.e., the parents and the school board officials they elect.

This is why, contra earlier commenters, the word "paternalism" strikes me as entirely a propos. The argument for federalising the nation's school cafeterias rests on an argument that most of the people in America are such total morons that they cannot feed their children an adequate diet, or vote for a school board that will do same, without Matt's assistance in the way of a little coercive regulation.

Quote of the week

Climate change skeptic Arnold Kling on The Great Global Warming Swindle:

It comes across as very persuasive, but I take the view that you can make a persuasive propaganda film for just about any position on any subject.

Craziest idea I have ever heard

Cactus offers a reader's new tax system:

In a nutshell, here is my idea:

1. All taxes are removed - income tax, sales tax, company tax... everything.
2. The government creates the money it needs via seigniorage (printing money).
3. The Central bank then controls inflation by increasing the Reserve requirement of bank deposits (on M2 and maybe M3).

Cactus muses:

1. Government spending in 2006 was over 20% of GDP. Can that be funded simply by printing money? And if not, can government spending could be shrunk enough for it to be funded entirely this way?
2. Fiddling with the money multiplier does affect the money supply (and hence, inflation), but its small potatoes relative to open market operations (the Fed buying and selling bonds). Will it be enough?
3. Banks make their money by loaning out money. One Salient Oversight's plan wouldn't necessarily create funds out of thin air - some of those funds would come from reduced profits that the current system creates (out of thin air) for the banks. Will the banks agree to it? And if not, can they be forced into it? After all, banks are powerful enough, politically, to get bail outs when they do incredibly stupid things?
4. As much as they say they're for tax simplification, I just don't see the big accounting and tax law firms agreeing to something like this, and they're pretty powerful entities too.

Let's say money supply needs to grow an average of 3% a year, and we can tolerate inflation of 3% a year. That implies, I think, a limit to economically tolerable seignorage of 6% a year. Above that, the Fed will have to start raising reserve requirements to tamp down credit creation. The problem is, reserve requirements have a hard upper limit of 100%, since you will probably find few banks willing to get into the business of holding more money than people will deposit with them. The practical limit on reserve requirement increases is, of course, well below this; long before you hit 100%, the credit system would basically shut down. Need I point out that capital accumulation and distribution to investments in future productivity is one of the main reasons that we have this awesome modern economy?

OPEC gets greedy

OPEC has declined to raise its quotas, causing the price of oil to jump back towards $100. A few years ago, OPEC ministers were worried that prices were heading towards $50; they feared that this would lead to the kind of demand collapse that ravaged OPEC finances in the mid-eighties. Now the FT says price hawks, led by Venezuela, were arguing that "a price of $100 a barrel was fair." Undoubtedly, if the price crosses $100, $125 will start to look more than just.

To be sure, the other members are less aggressive; the FT reports that Abdullah al-Badri, Opec’s secretary general, said: “There is no reason whatsoever for prices to go up to $100.” Nonetheless, they caved to the hawks, apparently because last week's price drop, which was based on expectations of a quota increase, scared the more moderate producers.

As in the late seventies and early eighties, these producers have become extremely dependent on expensive oil to support their budgets. Hawkish member Venezuela is hawkish in part because Chavez's diversion of investment funds to social spending, and his creative nationalization of oil fields, have caused Venezuelan crude production to fall. Should the price of oil fall back towards historical level, the Venezuelan boom will not only bust, but leave the Venezolanos worse off than they were before. Most of the other members are in similar, if less dire, straits; they are spending their windfall, not saving it, and when (if) the price falls so will the government's income and popularity.

Too, the lengthy price run-up has not just made them more dependent on high oil prices; it is also making high prices seem less scary. After all, demand remains robust, and world economic growth is still okay(ish). But this may be a false sense of security. Human beings are programmed to continually reevaluate the probability of an event based on recent events. Emotionally, we become more comfortable with situations the longer they persist, even if there is no rational reason to believe that the underlying risks have changed--indeed even during events such as stock market bubbles, where the risks get worse the longer the situation endures.

OIl prices are highly inelastic over the short run; people have to drive to work and heat their homes even when the price of oil rises, so they buy the oil and gasoline, and cut other spending from their budget. Over periods of years, however, conservation becomes a priority in making all sorts of purchase decisions: they opt for smaller, better insulated houses, more efficient cars and appliances, shorter commutes. Importantly, these changes are extremely persistent. The durable goods may last a decade or more, cutting into the demand for your product. And the memory of high prices is also persistent, affecting purchasing decisions even after the price starts to come down. The result, in the mid-eighties, was that prices did not decline gracefully; after years of run-up, they simply imploded, taking the OPEC members' budgets with them. There's evidence that Americans are starting to get serious about conservation--my aunt, located deep in the heart of red state America, just traded her SUV for a Prius. Abdullah Al-Badri may be more right than he knows

Of course, there's another explanation for OPEC's behavior, one that is increasingly worrying energy experts: that they aren't increasing production because they can't. High prices like this are usually accompanied by rampant cheating, but the overall level of leakage seems to be pretty modest. If that's the case, a few years from now, we may think that $100 a barrel sounds pretty fair ourselves.

Paternalism: it's what's for lunch!

Julian Sanchez makes a sensible observation about the school vending machine debate currently occupying several left wing blogs, such as that of colleague Matthew Yglesias:

I also think they're misunderstanding Dan Mitchell's objection—which, in fairness, may be because the headline reference to the "nanny state" in the headline is a bit of a red herring. I think the point is that the content of school lunch menus, while both important and fit for government determination, is not really a federal issue. The momentous question of whether the cafeteria at PS 23 serves Coke or Twinkies can probably be left to the bright lights of the state legislatures—maybe even the local school board.

But hey, since this apparently is a federal question, we may as well elevate the rhetoric to match. Scale disagreements of this kind (at least, assuming Matt or Ezra really do want to insist that the decision take place at the federal level) say something about how seriously you take value pluralism. If you think it's obvious that there's an Objectively Correct Answer to any question, and that we know it—should little Bobby be allowed candy, or kept to a strict wheat germ regimen?—then allowing local variation just means giving the rubes a chance to fuck it up. If you think there are genuinely different and valid value weightings yielding different tradeoffs, or opportunities to learn from variety and experimentation, you're more sanguine about decentralization.

Of course, sometimes the values are large enough and the lessons of experience clear enough that I, too, opt against letting the rubes fuck it up: free expression, equality under the law, due process. But I'm thinking school lunches aren't quite up there.

Matt Zeitlin responds:

While I think that some decisions should be more local, the question of what’s in school lunches requires looking at the status quo situation. And in the status quo, schools are selling crappy food through vending machines, snack bars and “a la carte food lines.” And they aren’t doing anything to change it. Moreover, the federal government is already heavily involved in school food , because cafeteria food programs already need to meet Department of Agriculture nutrition requirements. So there’s a trade-off, either we can continue with certain health standards being applied in a piecemeal manner across the country, depending on the attitudes of local school boards and states, or we can just make the standards stricter now, for everyone. I guess one of the things that makes me a liberal as opposed to a libertarian is that I prefer the latter and don’t really see what’s so offensive about a centralized dictate — especially as opposed to the alternative.

For some reason, this puts me in mind of the discussions one hears about birth control and child labor in the developing world: to wit, there seems to be an assumption that people in far off places, particularly ones with funny religions and/or skin colors, do not have children for the same reasons that the right-thinking folks around here do. Because they seem to regard their children as some sort of undifferentiated herd animals, rather than loving the heck out of those adorable little tykes, we need to step in and make some decisions about how they should go about this reproduction business.

The libertarian approach is to assume that those people probably feel the same way about their kids that you do about yours, and that seemingly inexplicable behavior, such as sending a child to knot rugs in a rundown factory building, probably has some deeper motivation than "Why the hell not?" And indeed, it turns out that child labor is almost invariably a result of severe familial economic distress, and that the first thing that families "purchase" as soon as they get a smidgen of economic security is their childrens' retirement from the labor force. That's why laws outlawing child labor, in areas where child labor is actually common, seem to result in a lot of dead children, or children shifted to worse labor than knotting rugs, such as the unregulated sex trade.

So I assume, too, that the people on school boards throughout the country are probably mostly people who have a more than passing interest in producing a fine, healthy crop of future Americans. I therefore ask myself, "Why are all these people installing vending machines in schools?" My admittedly sketchy research indicates that the answer is not "Because they love PepsiCo and obesity, and hate kids!" Rather, they seem to be afraid that the kids will just go off the school grounds and stuff themselves with even crappier food at fast food restaurants--or in the case of schools that are providing a lot of free breakfasts and lunches, that the kids will reject healthier options and become malnourished. Nor is this an insane fear, since schools that ban vending and unhealthy lunch options seem to often end up with widespread civil disobedience. And of course, if the kids are going to eat crap anyway, the schools figure they might as well sell them the crap at more reasonable prices while taking a small cut.

As far as I know, there is no actual evidence that the meals served on school grounds have any impact on child obesity or other health problems. In addition, I note that the federalism we currently have--the Department of Agriculture's various interventions--are one of the reasons that school lunches are such crap, since of course the Department of Agriculture's nutrition guidelines and other programs often sacrifice dietary soundness in favor of appeasing the various farm lobbies. Like Julian, I see no reason to federalize the nation's cafeterias.

It looks so natural!

This is neat: Puerto Rico as a natural experiment in immigration economics.

A moment of thanks for the modern minutemen

Last month, I blogged about this odd Naomi Wolf moment:

Few young Americans understand that the Second Amendment keeps their homes safe from the kind of government intrusion that other citizens suffer around the world; few realize that "due process" means that they can't be locked up in a dungeon by the state and left to languish indefinitely.

Now she's posted a defense:

Many writers have asked whether I intended to refer to the Second Amendment when I mentioned that we have been free of intimidation by the government that other citizens experience around the world. I did indeed intend to refer to the Second Amendment, though not in the sense that most of the email about this assumed. I was referring to militias -- "a well regulated Militia" --not to private gun ownsership.

Often today, the Second Amendment is associated in our minds with the private right to bear arms, which is the subject of a case--District of Columbia v. Heller--at the US Supreme Court this year. Rather, I was referring to the historical origin of the Second Amendment, as the protector of local militias that would be more closely accountable to the people than a federal army. Many in the founding period were distrustful of a large standing army: they - and their wives and children - had experienced abuse at the hands of unaccountable soldiers in their midst.

They wanted to make sure that local governments retained their own protection against foreign invaders and ALSO against the potential for domestic tyranny. An abusive military, secret police force, or network of paramilitary militias,directed to intimidate or oppress citizens to whom they are not accountable, are one of the ten key tools of those who seek a crackdown against democracies or democratic movements -- see Italy in the 1910s, Germany in the 1930's, East Germany in the 1950's or Russia, Egypt, Myanmar, Pakistan, or pretty much any closing or closed society today. The Second Amendment protects U.S. citizens by protecting local militias that are closely accountable to the people. The states are still allowed to have their own militias, which are referred to as State Guards or State Defense Forces (as opposed to the National Guard, which is part of the federal army). Twenty-five states have such guards, which are under the direction and control of the governor of the state.

I could have done better than this on a freshman composition, spotting Ms. Wolf three beers and an entire day wasted on Law & Order marathons. The most charitable interpretation was that Ms Wolf was a stealth second-amendment absolutist coming out of the closet to announce, in an ill-phrased and opaque way, that she thought that our third and fourth amendment rights were ultimately protected by the right of the public to keep and bear arms, and to rise up against a government that did not abide by the constitution. The second most charitable interpretation was that Ms. Wolf was a closet second-amendment supporter of a slightly hysterical bent, kept awake nights by the worry that without the second amendment, the United States government would long ago have instituted house-to-house searches to seize our guns. The third most charitable explanation, and the one that struck me as the most likely, is that Ms Wolf had made a typo. Since op-eds are generally given more leeway than straight articles, no one caught it.

But rather than offer any of these explanations, Ms. Wolf has tried to argue that the approximately 12,000 members of the state defense forces are the main thing standing between you and the 1.5 million members of the active duty military, 1.3 million members of the active reserve, and the million or so police officers and federal agents in the United States. Without those brave 12,000 souls, you see, the Federal Government would even now be roaming freely through your living room, rustling through the Precious Moments collectibles, raiding the fridge and probably hogging the remote. The next time you get up to fetch another beer, and return to your couch without tripping over a DEA agent, or the long dark night of fascism gripping our nation's soul, how about taking a moment to give silent thanks to those brave militiamen? And of course, the founding fathers who had the foresight to write their courageous service right there into our constitution, instead of doing something stupid, like giving you your own gun to shoot the federales when they showed up at your door demanding a place to sleep and a few warrantless searches to keep them entertained while you cook.

Help me help you

I think we're going to be hearing a lot more of this over the next few months:

Treasury Secretary Henry Paulson, at a housing conference yesterday, said he is "aggressively pursuing" an agreement with lenders and investor groups to freeze rates on subprime adjustable-rate mortgages at their original levels. The proposal, aimed at helping homeowners who would fall behind in their payments at higher rates, is designed to prevent a surge in foreclosures next year. About 1.5 million subprime adjustable-rate mortgages are scheduled to reset to higher rates in 2008.

But as outlines of the plan become known, some homeowners are complaining that the effort isn't fair to borrowers who didn't overextend themselves. Others argue that the government shouldn't be involved in perpetuating a housing bubble that needs to deflate. A key question: How far should you go to help borrowers who can't pay their bills?

"People have to be responsible for their own actions," says Harry Lancz, a small-business owner in Traverse City, Mich. He holds a pair of fixed-rate mortgages, one for his primary residence, which has been for sale for six months, and one for a second home in Louisiana. "What are you going to do when their credit cards get due and they can't pay? Are you going to bail them out on that, too?"

I said in my previous post that I'm not sure it matters who's at fault, but of course, politically it does matter. Borrowers may have had help getting in over their heads, but at the end of the day, "variable interest rates vary" is not in the realm of things it is unreasonable to expect them to have understood when they signed on for a gigantic mortgage. Indeed, many of the defaulters seem not to be able to afford their teaser rates, which is certainly something they should have been able to figure out on their own. One of the reasons that I do not currently own a home is that I cannot afford one. Now I get to pitch in my tax dollars to bail out people who also could not afford a home, but went ahead and bought one anyway.

I can't say that this thought is keeping me awake nights; keeping people from losing their homes, however stupidly acquired, strikes me as a better use of my tax money than much of what the government does, especially if this has the side effect of forestalling a financial crisis. And the cost of it is likely to be small compared to, say, invading Iraq or buying prescription drugs for affluent seniors. On the other hand, I am a contented renter, not a family crammed into a small home they could afford on a fixed rate, watching neighbours in bigger houses get a helping hand from Uncle Sam.

Primed for a fix

Ezra Klein and Ryan Avent are having a throw-down over the subprime mortgage market. Did borrowers borrow more than they could afford, or were they rooked by unscrupulous mortgage brokers?

Neither Ryan nor I have any data on how these conversations actually went. But whether it was the loan officer pushing the borrower off the variable-rate cliff or the borrower begging for a bit more rope with which to hang herself or, most likely, a bit of both, doesn't much matter. It is perfectly well understood that borrowers, by and large, know nothing of loans. It's a market that operates with a huge asymmetry of information. And though we know that loan officers are, in fact, loan salesmen, they are not presented that way -- instead, they're offered up as helpful experts waiting to guide you to a safe and secure financial solution. They're presented, in other words, like loan doctors.

What's supposed to govern their behavior isn't merely basic morals and business ethics, but a sense of concern for their company. If too many individuals enter into loans they can't afford, defaults will rise and the bank will suffer. Which is exactly what's happened. The loan officers, and above them, the banks, and above them, the regulators, were the ones with the knowledge, power, and authority to head off this mess. This market works, it exists, because we trust them to run it in such a way that does not massively exploit the ignorance of individuals, and does not put the entire economy at risk. They failed. But, unlike with the individual borrowers, they failed when their whole mission in life was to not fail, when they were paid to have the tools and information to not fail, and now, in reconstructing this market, we need to figure out what regulations will keep them from failing again.

To which Ryan responds:

Somewhere between the idea that consumers are wholly responsible for their own actions and the idea that the state must be an attentive and omnipresent nanny, there has to be some middle ground. I thought, and I thought that others generally thought, that businesses were generally out there to turn a profit, and while this might often encourage them to engage in helpful, service-oriented behavior, I should not assume that any business has my well-being as its first and highest concern. That’s my job. I cannot fathom the notion that customers ought to be able to walk into a lender’s office with no idea what they can afford and expect that they’ll get a product that’s best for them. I can’t imagine excusing customers who “know nothing of loans” and yet borrow five times what they earn in a year.

There is absolutely a limit on the due-diligence that we can expect consumers to undertake. Having to outthink devious loan sharks is one thing. Understanding that it might not be a good idea to borrow massive amounts of money under terms one doesn’t entirely understand is quite another. If we approach the economy from the point of view that consumers are essentially idiots who can be easily played by anyone, anytime, then the entire economy falls apart. Democracy falls apart. We have to begin from the point of view that people will try to look out for themselves, and when they don’t, there should be consequences.

Technically, Ezra's analysis strikes me as simply incorrect: whatever asymmetries of information exist run towards the borrowers, not the lenders. The terms of the mortgage you sign may be disguised in fine print, but the lender has to put them in print in order to get you to sign them. The lender, on the other hand, has only limited means at his disposal to determine your likelihood of paying.

That does not excuse mortgage brokers who deceived confused borrowers about the terms. But realistically, lenders did not lend to massive number of people who couldn't repay them because they wanted to be mean, and damn well didn't care what it cost them as long as they could thrust massive numbers of people into bankruptcy. We've just participated in a national folie-a-deux, where overoptimistic lenders gave too much money to slap-happy borrowers counting on a miracle to bail them out of a mortgage they couldn't really afford.

But I'm not sure that it really matters who's at fault, because whoever started it, everyone's hurting about equally. Ezra's argument, naturally, is that this means the government should step in to prevent this sort of thing. But the government is a very blunt instrument. As of this writing, the vast majority of subprime borrowers are making their payments on time. Defaults are expected to rise sharply, but even if the number doubles, or more, that would still mean that a majority of subprime borrowers are able to make their payments. Should the government have "protected" them from owning their home?

The government used to protect poor people, and young people, and people with bad credit histories, from getting loans, by making it illegal to charge the high interest rates that would make those loans profitable. Were they better off? They didn't have credit card debt, to be sure, or huge mortgages. Instead they had pawnshops, or time payments, or convictions for kiting checks, all of which used to be popular ways of handling things like emergency car repairs.

Which is to say, maybe there aren't regulations that can keep them from failing again, at least not at acceptable cost. I think it's safe to say that the fallout from this credit crunch is that subprime borrowers, including people with fine credit but low incomes, will be finding it harder to get any sort of loan; to that extent, Ezra's wish has already come true. Pushing to further restrict their credit access might well hurt more people than you help.

The people have spoken, the bastards

Daniel Drezner offers up the optimistic take on the Venezuelan referendum:

[J]ust as important [as the referendum's defeat] was Chavez's concession. The opposition "won this victory for themselves," he admitted in a voice whose subdued calm was in contrast to his frequently aggressive political speeches. "My sincere recommendation is that they learn how to handle it." Despite his authoritarian bent, Chavez (whose current and apparently last term ends in 2012) had always insisted he was a democrat — that he was, in fact, forging "a more genuine democracy" in a nation that had in many ways been a sham democracy typical of a number of Latin American countries. His presidential election victories — in 1998, 2000 and 2006, as well as his victory over an attempt to recall him in a 2004 referendum — were all recognized by credible international observers; and that conferred on him a democratic legitimacy that helped blunt accusations by his enemies, especially the U.S., that he was a would-be dictator in the mold of Fidel Castro.

In the end it was a cachet that, fortunately, he knew he couldn't forfeit. As a result, the referendum result will resonate far beyond Venezuela.

That is indeed reason for optimism, but it strikes me as a little too soon to declare victory. After all, Robert Mugabe conceded graceful defeat after a similar referendum in 2000:

Zimbabwe's President Robert Mugabe has accepted defeat in a referendum on a new constitution.

"The government accepts the result and accepts the will of the people," the president said in a televised address to the nation.

He added that the result was "unfortunately a 'no' vote".

The next move was, of course, his attempt to consolidate power through the disastrous land reform and associated economic policies that have driven Zimbabwe's economy into the ground.

The situations aren't entirely parallel, of course; situations rarely are. But Chavez's crony populism and hamfisted mismanagement of the country's main economic resource, combined with his obvious belief that the world would be a vastly better place if he had a great deal more power, does not exactly make me sing with joy for his nation's prospects.

Trust in me

I agree with Ryan Avent: this is lunatic.

There are interesting economic questions to be asked about Los Angeles’ plan to switch from an “honor system” to turnstiles on public transit. For which system is the expected revenue take larger? (This depends on the extent to which random checks act as a deterrent to would-be free riders). Also, for a system struggling to establish itself as a principle part of the transportation network, are there other advantages to the honor system? It may act as a means of price discrimination (if the expected value of fare-dodging is lower than fare-paying) under which expected revenue is maximized. Or a lengthy initial honor system period (or free period) could encourage riders to build their commutes around transit, such that when a more rigorous turnstile system is adopted, their transit demand is fairly inelastic and they keep riding.

Of course, the New York Times largely downplays these questions, instead going to Joel Kotkin, who can always be counted upon to deliver a baseless anti-urban assertion:

Some saw the move as another sign of the shifting ecology of Los Angeles.

“Unfortunately, as L.A. gets to be more urban, it has these breakdowns of trust that happen in big cities,” said Joel Kotkin, a Los Angeles resident and author of “The City: A Global History.” “It’s the flip side of all the good things.”

It's not that Joel Kotkin is wrong--anyone who's lived in any two places of varying size knows that as urban aggregations get larger, politeness and trust go down. But LA was already well above the size where the trust problems kick in; the honor system was presumably a reaction to some other factor--perhaps the cost of turnstile maintenance was too high, or perhaps LA simply wanted to get people off the streets by any means necessary. It seems silly to speculate that the switch has anything to do with some change in LA's underlying trust supply.

SOS

Blogger Gary Farber is in trouble again and could use some help.

Department of Awful Statistics

Chris Hayes points to Dean Baker catching the Washington Post in a rather sizeable error:

T]he Post tells us that "Mexico's gross domestic product, now more than $875 billion, has more than quadrupled since 1987." That's not exactly right. If we pay a trick to the IMF website, we find that Mexico's real GDP in 1987 was $1,130 billion. The IMF projects 2007 GDP as $1,895 billion, an increase of 67.7 percent. That is considerably short of quadrupling.

How on earth does the Post get that Mexico’s GDP quadrupled when it actually only grew by 67.6 percent? Well, they may have taken the growth in nominal GDP. If we don’t adjust for inflation then we can conclude that Mexico’s GDP quadrupled over the last twenty years. Of course, no reasonable person would ever assess growth without first adjusting for inflation since it has no meaning. If we don’t adjust for inflation, Zimbabwe’s economy, wracked by hyperinflation of several thousand percent annually, is the fastest growing economy on the planet. If the Post editorial writers use a consistent measure, we can expect to see warm praise for Zimbabwe’s extraordinary growth on the editorial pages in the near future.

My best guess is that the Washington Post used PPP figures in current international dollars, which give roughly a tripling of GDP since 1987. This is not totally out of line; using constant dollar figures from the Economist Intelligence Unit, I get roughly a doubling since 1987. But quadrupling is just in error according to any data set I can find. And I'm not sure what to do with a current dollar PPP figure.

Unfortunately, Mr Baker has made a few errors too. First of all, the constant-price GDP figures he gives are in pesos, not dollars. While it is true that in Mexico the dollar sign is used to denominate peso prices, the international standard for economics journalism--and certainly, the domestic American standard for same--is to write out "pesos" or abbreviate it (MXP) and then offer the exchange rate equivalent in a common currency, almost always dollars but in a growing number of cases, euros.

I'd also argue that to eliminate this sort of exchange rate confusion, Baker should have used PPP in constant dollars. That figure yields a much more favorable assessment of NAFTA--although still one that makes the Washington Post look wildly off.