Russia and Libya

From the FT:

Libyan leader Muammar Gaddafi, starting his first visit to post-Soviet Russia on Friday, will discuss opening a Russian naval base in Libya to counterbalance US interests in the region, a newspaper reported.

Colonel Gaddafi, who last visited then Soviet Russia in 1985, is expected to discuss purchases of Russian arms and energy co-operation during his three-day trip. . .

After a decade of strong economic growth, Russia is keen to project its power. Russian warships led by a nuclear-powered missile cruiser docked in Libya this month on their way to Venezuela to take part in joint naval exercises.

For more PP on Russia's resurgence:
- Russia and oil
- Russian arms sales to Iran
- Russian ambitions in the Middle East
- Russia and Venezuela
- General Russia brief
- South Ossetian conflict
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There is no Bradley Effect -- so long McCain

As awful as it sounds, McCain’s only hope is in winning Pennsylvania--which is in turn key in winning the election--is a significant Bradley effect.

The Bradley effect is the observed disparity between voter opinion polls and electoral outcomes in those election in which a white candidate runs against a non-white candidate. There is supposed tendency for some voters to tell pollsters they are either undecided or will likely vote for the non-white candidate—its called social desirability bias; people want to be seen as possessing desirable qualities such as racial tolerance—only to vote for the white candidate due to racial affiliation or worse.

McCain’s problem is the Bradley effect may be dead. The five most recent cases in which a non-white candidate ran against a white candidate indicate that the Bradley effect is no longer significant (statistically at least).

The baseball statisticians turned electoral scientists over at fivethirtyeight.com report that of the last five elections in which a black candidate ran against a white candidate, on average the black candidate outperformed his polling numbers by 1.5 percent.

The most directly applicable case is of course the 2006 gubernational race in Pennsylvania in which Lynn Swann (black republican) ran against Ed Rendell (white Democrat). Lynn Swan RCP average was 36%. He finished with 39.6% of the vote—a 3.6% increase. According to the numbers then, if there is a Bradley Effect at work, it’s in no way significant enough to make up the 9.3% difference between McCain and Obama.
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Why are deficits bad?

Because deficits reduce income over the long run. Essentially, by spending money now, we're taking money from future generations (or ourselves at a later date). So the Democrats' tax lots and spend more policies, and the Republicans' tax less and spend more policies, are irresponsible in every sense of the word (financial crises are probably an exception, though we should still seek to minimize damage even in emergencies). Economists Gale and Orszag:

Each percent-of-GDP in current deficits reduces national saving by 0.5 to 0.8 percent of GDP, and that each percent-of-GDP in anticipated future permanent unified deficits raises forward long-term interest rates by 25 to 35 basis points. . . .

Assuming a marginal product of capital of 6 percent, those missing assets will reduce national income by 1 to 2 percent in 2015—or about $1,500 to $3,000 per household, on average. The budget deficits will also raise interest rates by 80 to 120 basis points—or about $1,000 per year on a 30-year, $150,000 mortgage.

Deficits (a) reduce income and (b) raise interest rates (so that house you want to buy will cost a lot more). Current projections of deficits (click on images for larger version):



Entitlements will be the largest driver of deficits in the next few decades:



As Spikers reminded us, Social Security is less of a problem than health care.

Lesson: there's (still) no such thing as a free lunch. Turns out your parents were right.

Source

The Budget Outlook: Projections and Implications by William Gale and Peter Orszag
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Deutsch Bank on Oil

Adam Zieminski, chief energy economist at Deutsch Bank, on Bloomberg Surveillance with Tom Keene (and that other guy) podcast:

- "It certainly seems to me that we could get down to 50 dollars per barrel." This is the level he calls the "cash operating cost" of oil.

- "The marginal cost of new supply is probably somewhere around 85 dollars a barrel. So when you're under $85 you're lowering your capital expenditures and you're not starting up some of the new projects."

- "Venezuela is going to have a big problem with prices at these levels. We calculate that they need probably 90 or 95 dollars to balance the budget with the social programs that have been instituted by President Chavez. Some of the other OPEC countries also have very high budget requirements so they're going to have to go on a campaign to cut their expenses."

- "The budget in Moscow is based on about 70 dollar a barrel oil, so below $70 even the Russians are going to be struggling to balance their budget."

This is why I've been saying that fixing our oil problem will go a long way towards fixing some of our biggest foreign policy problems. Cut oil revenues: reduce Chavez's hold on Venezuela, reduce Iran's funding of terrorism, reduce Russian expansionism.
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Election hinges on Penn, Ohio, Florida

According to Fivethirtyeight.com—an excellent website that analyzes electoral data—McCain and Obama’s electoral victory hinges on the ability to win Ohio, Florida, and Pennsylvania.

Under the scenario in which a candidate loses in Pennsylvania, Ohio, and Florida:

• Obama has a 3.5% chance of winning the election.

• McCain has a 0% chance of winning the election.

Obama can stand to lose in two of those three states (73.7% chance of winning), but losing in all three reduces his likelihood for electoral victory to 3.5%.

McCain cannot stand to lose in any of these states. For example, losing Ohio and Florida while proving victorious in Pennsylvania still leaves McCain with 0% chance of winning the election.

In other words, Obama need win only one of these three states to extinguish what little hope McCain's campaign still has. No wonder the candidate’s private jets are shuttling them between Pennsylvania, Ohio, and Florida.
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Stag-deflation - UPDATED

One of my favorite economists, Nouriel Roubini at NYU, saw the recession coming before most and has also been predicting deflation. Over-supply of housing and commodities and declining Treasury yields (but higher TIPS) indicate that he is, and has been, correct. From his Forbes opinion:

In conclusion, a sharp slack in goods, labor and commodity markets will lead to global deflationary trends over the next year. And the fiscal costs of bailing out borrowers and/or lenders/investors will not be inflationary, as central banks will not be willing to incur the costs of very high inflation as a way to reduce the real value of the debt burdens of governments and distressed borrowers. The costs of rising expected inflation will be much higher than the benefits of using the inflation tax to pay for the fiscal costs of cleaning up the mess that this most severe financial crisis has created.

UPDATE

UCSD economist James Hamilton argues that deflation is not a risk at all. Read his argument here.
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Belarus: A Silver Lining?

The financial crisis has led to deep concern among development economists that emerging markets - experiencing capital flight, declining commodities prices, and the rest - could be severely damaged, resulting in feedback effects on the developed world (see Dani Rodrik's plea).

The IMF has since announced efforts to stabilize some of these states. From the FT:

The International Monetary Fund yesterday unveiled a new emergency lending programme that will get money to well-run countries quickly and with almost no conditions attached if they are hit by financial volatility.

The new liquidity facility is the culmination of a decade of attempts at the IMF, after the Asian financial crisis of 1997-98, to come up with a way of protecting big emerging markets from financial contagion.

The IMF has been criticized in the past for the unintended consequences of its austerity conditions for lending (Stiglitz wrote an entire book about this - Globalization and Its Discontents).

In addition to this open invitation to borrow, the IMF is also talking specifics for lending to Ukraine ($16.5B), Hungary ($25B), and authoritarian Belarus (FT):

Belarus is promising to reform its economy and sell off some state assets as it holds talks with the International Monetary Fund on a possible $2bn loan as a “security cushion” in case of further turbulence from the global financial crisis.

Liberalization of Belarus would be a good thing - especially in contrast to the wave of economic nationalism we will likely see in the developing world.
...Keep reading

More free lunches...

Yet another big spender (aka change we can't believe in): "Mr. Obama, his Democratic rival, has vowed to reduce the deficit and put it on a path to balance" (NYT).

But...

“Neither one of them is being fiscally responsible,” said David M. Walker, a former head of the Government Accountability Office who has long warned about the perils of deficits. . . .

The deficit for the 2008 fiscal year, which ended Sept. 30, was $455 billion, or 3.2 percent of total economic output. Analysts say it could reach $1 trillion in 2009, or more than 7 percent of projected economic output, with the country in recession and fighting a two-front war. During the 1980s, the deficit peaked at about 6 percent of economic output; economists consider anything above about 3 percent to be a worrisome level for the deficit.

The fact that President Obama and his party will control both Congress and the White House indicates that he will break his promise to balance the budget. Republicans are in no position to complain given their doubling of the national debt under Bush.

"Fiscal responsibility" has no meaning - and never has. The hero Republicans look to, Reagan, dramatically increased the debt based on his contradictory - and ungrounded - economic mythology. It was Clinton who was the most responsible - and populist Obama has repudiated Clinton's economic policies (while hiring his advisers).

Both endless tax cuts (GOP) and endless entitlements (Obama) are based on the notion of a free lunch. In truth, we pay for these things in the long run, both as interest on debt and as reduced economic growth.
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A note on party systems

There has been some discussion of America's two-party system. Some people (who want a third-party candidate to win) blame the media. Others blame American culture. Still others think it is a "market outcome," meaning that if there were demand for more parties there would be more.

From a political science position, here are the basics:

1. America is a majoritarian, or first-past-the-post (FPP) electoral system (due to Constitutional rules). Whoever gets the most votes wins. Candidates in second place don't get positions. The alternative would be a proportional representation system, which gives power to second-place (and sometimes third, etc) finishers.

2. Majoritarian systems produce only two viable parties (there are a few exceptions). Rational voters must vote based on who matches their preferences and has a chance of winning. Proportional representation systems produce multiple parties. People can vote for smaller-party candidates without wasting their vote. So, in majoritarian systems third parties typically can't get positions in legislatures (especially if they are on the ideological fringes), while in PR systems they can.

3. In majoritarian systems, one party is a clear winner and will dominate the legislature (and executive, if they're the same branch). In PR systems, often the winning party doesn't have enough votes to form a government, and must therefore build coalitions with other parties (sometimes even losing parties can garner enough coalition votes to form a government).

4. The result is that in two-party systems, politics are very polarized (after elections). Multiparty systems can be more moderate (with exceptions) because centrist parties are often "king makers" - that is, they are needed for coalition formation. Moderate coalition partners demand moderate policies; more deal-making occurs. And, voters in the center of the political spectrum have a voice instead of being forced into one party or the other.

5. Pure PR systems can result in too many parties, with legislatures that are so fragmented they can get nothing done. Two solutions to this exist: thresholds, and mixed-member proportional (which often includes thresholds).

6. Thresholds require that parties must have a certain percentage of votes to get seats in the legislature. MMP systems have elections that are a combination of candidate selection and party selection. These systems guarantee that the legislature will have party seats proportional to voting percentages. Two main places come to mind: Germany and New Zealand, which have both been very successul with MMP electoral rules. New Zealand provides an excellent case study because they were FPP until 1997 when they chose to switch. Sure enough, new parties emerged.

My favorite is MMP. I would love to see the House of Representatives change to MMP, but it's not going to happen - (1) legally, our constitution is one of the hardest in the world to modify, and (2) culturally, our constitution is one of the hardest in the world to modify. Readers can draw their own normative conclusions from these stylized facts.
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A New Smoot-Hawley?

I've written before that the dissonance between President Obama's record, his rhetoric, and his advisers makes him a very unpredictable president. This certainly holds for trade.

Times of India (h/t Mankiw):

Pressures will mount for protectionist measures and beggar-thy-neighbour policies in the US. . . .

Obama has... avoided voting on many key issues. He has voted against trade barriers only 36% of the time. He supported export subsidies on the two occasions on which he voted, a 100% protectionist record in this regard. . . .

Obama favours extensive subsidies for US farmers, hitting Third World exporters like India. This has been one of the issues on which the Doha Round of WTO is gridlocked. . . .

Obama also favours subsidies for converting maize to ethanol. The massive diversion of maize from food to ethanol has sent global food and fertiliser prices skyrocketing, hitting countries like India.

As I said, only time will tell what Pres Obama's policies will be - the campaign tells us basically nothing. But his record and rhetoric (not advisers) agree that he is protectionist. Remind you of anything? Economic warfare is belligerent and will anger our allies.
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Here Comes Change!

Shall we guess how many of the promises below will be kept? Direct excerpts from a speech in Canton, Ohio:

In one week, you can put an end to the politics that would divide a nation just to win an election; that tries to pit region against region, city against town, Republican against Democrat.

So, Obama's shady NAFTA posturing and labeling rural Americans as bitter will never happen once the president is... Obama.

And I was convinced that when we come together, our voices are more powerful than the most entrenched lobbyists, or the most vicious political attacks, or the full force of a status quo in Washington that wants to keep things just the way they are.

Obama's connections to corn ethanol and Labor lobbyists; Obama has attacked McCain for such things as not being able to use a computer; Obama has voted with his party more than anyone else in his party. No more once the president is... Obama.

The last thing we can afford is four more years where no one in Washington is watching anyone on Wall Street because politicians and lobbyists killed common-sense regulations.

Obama "killed common-sense regulations" that might have prevented the collapse of Fannie and Freddie. That would never happen under president... Obama.

If you don't have a record to run on, then you paint your opponent as someone people should run away from. You make a big election about small things.

What record does the junior senator have? And who has painted his opponent as four more years of George Bush, a man Obama wants us to run away from? Such politics will never happen under president... Obama.

It's about whether you believe we should only reward wealth, or whether we should also reward the work and workers who create it.

More tax cuts for the least productive members of society will definitely reward work! Thanks, president... Obama.

And we call this change.
...Keep reading

Obama's Non-Marxist, European Domestic Policy

The accusations of marxism continue.

An article in the OCRegister argues that Obama's policies will be a shift to--not just towards--the socialist-democratic model. That means a significant increase in taxation to fund massive social welfare programs.

The article is right that Obama's policies will be a shift towards European domestic policy, but wrong in the extent of that shift.

Obama's tax plan, for example, is only a 4% increase in taxation for the wealthiest Americans, from 35% to 39%. Compared to the social welfare models in Europe--like Sweden where income taxes are over 60%--accusations of marxism is laughable.

America will remain a country that places a premium on independence and responsibility, despite claims to the contrary from right-wing demagogues.

Many of Obama's policies do, however, involve a hybrid more heavily influenced by European socialist ideology. Obama's health care policy, for example, is something directly based on Europe's welfare model.

But that's not a bad thing per say. European politics has been far more innovative with domestic policy than America--largely because Europe's multiparty systems create a more vibrant marketplace of political and economic ideas. Including Europe's successful, time-proven policy innovations--regardless of those policies philosophical underpinnings--is intrinsic to good governance.

With the potential for a filibuster proof democratic congress, Obama may have his pick of which Euro-policies to implement over the next 2 years. The question is whether he can choose the right ones.
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McCain behind by over 150 electoral votes

If McCain wins every toss-up state (a state in which the leader has less than a 5% lead), he would lose the election 306 to 232 (270 electoral votes are needed to secure a majority).

Check out the electoral estimates at:

(1) Fivethirtyeight.com
(2) New York Times
(3) Realclearpolitics.com
...Keep reading

Brooks on McCain

David Brooks:

McCain would be an outstanding president. In government, he has almost always had an instinct for the right cause. He has become an experienced legislative craftsman. He is stalwart against the country’s foes and cooperative with its friends. But he never escaped the straitjacket of a party that is ailing and a conservatism that is behind the times. And that’s what makes the final weeks of this campaign so unspeakably sad.

This guy started his career at the National Review.
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Politics of Iraq

Feisal Amin al- Istrabadi on Iraq (Project Syndicate, emphasis mine):

Iraq’s government is demanding a withdrawal timetable from the US, not because it believes that Iraqi forces will be ready to take over soon, but to burnish its nationalist credentials ahead of next year’s parliamentary elections. Thus, it hopes to divert public attention from still non-existent basic services, continuing sectarianism, weak oil production, scant infrastructure investment, and rampant corruption and cronyism. Whether this strategy will succeed in obscuring the government’s record of failure in the minds of voters remains to be seen.

The problem now for Iraqi and US politicians is that, to act rationally, they will need to face down elements within their own constituencies. They must recognize that a long-term presence by US troops is out of the question, but that US combat forces will be needed in Iraq – albeit with a diminishing role – for the next five years. Only such a presence can consolidate the palpable, but still reversible, gains made over the past year.

Such a force is needed to continue pursuing al-Qaeda, and to counteract pro-Iranian activities. Ending US involvement before the Iraqis can achieve these goals on their own would be disastrous for both US and Iraqi interests. In the meantime, US forces must support Iraqi efforts to strengthen the country’s own military and security forces, while simultaneously disbanding all militias.

Iraq’s militias will not go quietly, yet their dissolution is essential for long-term stability, itself a sine qua non for stability in the region. When these missions are accomplished – but not sooner – US forces should withdraw from Iraq.

Domestic politics in both countries influence public opinions and outcomes. One of the weaknesses of democracy is the way elections can prevent sound policy decisions. Extreme responses replace long-term solutions (applies to all types of policymaking).
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Unpredictable Obama

Like most presidents, Pres. Obama lacks the qualifications or experience to be ready for the office. Most of our recent presidents, including Clinton, Bush I, Reagan, Nixon, etc. - have been far more prepared for the office than him. But it doesn't matter. The Obama presidency will hinge on what kind of advisers he has, and whether he listens to them.

As for the quality of his advisers, Obama is in great shape. He has some great people helping him. No worries there.

The problem is, we have absolutely no indication of whether he will listen to them or not. What we do know is that his track record is not good.

Anthony Lake is on his FP team, and Lake certainly never endorsed an idea like presidential diplomacy with dictators without preconditions (of course, Obama learned and lesson and has drifted from that stance).

Most readers will remember the NAFTA debacle, in which we gained yet another insight into Obama's populism (and lack of integrity). He was spouting populist protectionist nonsense to get votes in the Midwest; Canada became concerned about his belligerent language re: NAFTA; his top economic adviser (Goolsbee) met with the Canadian consul and assured them that Obama's trade rhetoric was just political posturing. Obama first denied that the meeting ever happened (though he knew it did); then denied that Goolsbee never said that. Finally, a memo surfaced, and Obama admitted that it was all true. Then, the debacle in San Fransisco when Obama repudiated his own trade position, calling others who share that position "bitter". So much for Yes We Can rise above politics.

Now there are indications that Obama's adviser's don't really support his health care plan. From WSJ:

Mr. Obama's tactics are especially cynical because his own health-care advisers support plans much like Mr. McCain's. Or at least they did before joining up with Mr. Obama.

Put simply, the McCain plan seeks to remedy a distortion in the health-care market that economists have spent decades begging politicians to fix: The tax code subsidizes insurance only if it is provided through employers. Individuals can't take the same tax deduction for buying insurance that businesses can. So Mr. McCain wants to "spread the wealth" of these tax breaks to individuals of any income through a refundable tax credit, no matter where they get coverage.

"The fact that the tax subsidy, which supports the employer-sponsored system, is better than nothing is a feeble excuse for resisting any changes to the status quo." That's not John McCain's judgment. It's a quote from Jason Furman, who happens to be Mr. Obama's economic policy director. In a cri de coeur published in the journal Democracy in 2006, Mr. Furman implored fellow Democrats and other progressives to confront "a critical missing link" in their health ideology -- the same link his boss now spends most of his time demagoguing.

Mr. Furman used to portray the current system as regressive, inequitable and a subsidy for health plans that insulate consumers from the cost of their care, thus inflating health spending. When he was director of the Brooking Institution's Hamilton Project, Mr. Furman outlined a health reform -- again using tax credits -- that took the "sensible approach" of "exposing individuals to the price of health care through greater cost sharing."

Examples like this make the Obama presidency difficult to predict. Will he reflect the views of his advisers? Will he keep campaign promises? He has already fallen short on several promises: his relentless political posturing, along with his choice to go against his commitment to stick with public financing, prove that he is not the New Kind of Politician has has promised to be. This was a central theme of his campaign - and with it disproved, one wonders how he has made it this far (answer: lack of competition).

In addition to his track record of broken promises, it's obvious that no president can rise to the Hope Change Unity standard he has set for himself. If the Bush presidency was a joke because of it's unprecedented lack of intellectual underpinnings and moderation, the Obama presidency will be equally laughable since it will come farther from realizing the high ideals of its campaign than probably any other presidency in history. This is what SNL has failed to pick up on: amidst the ridiculous things Sarah Palin has done, Obama has done some equally ridiculous things that the satire media has missed.

So we can predict that he will fall short of his promises. But we can't predict if he will be a pragmatic leader. Will he follow his economic advisers? Will he follow his foreign policy advisers? His supporters assure me that they believe he listens to all sides. I agree. But there is no indication that such listening has ever affected his actions. He must have heard Goolsbee say that anti-trade rhetoric is irrational; that didn't affect him. And we hope he doesn't act on the counsel of some of his old friends like Wright and Ayers. In other words, who knows? We're voting this guy in for various reasons, but there is no way to tell if President Obama will remotely resemble Candidate Obama.
...Keep reading

'W'

I caught Oliver Stone’s most recent political biography this last Wednesday and was pleasantly surprised. I had my reservations on the fairness of the film given Stone’s political orientation as well as the films timing—filming a biography of Bush before the entirety of his presidency could be placed in context. Whether one has issues with Bush, the president certainly deserves the benefit—or damnation—of ten years to place his administration’s policies in context.

Nonetheless ‘W’ was as fair a piece one could expect from Oliver Stone. The film followed two storylines. Bush’s coming of age during his reckless, early adulthood years, and the buildup to the Iraqi war. The film could be best described by the rise and fall of George W. Bush.

From delinquent to campaign strategist to governor to president, Bush rose from slothful obsolescence to hard-earned significance and success. His rise is attributed to tough loving from papa Bush, serendipitously finding the right gal in Laura, spiritual transcendence, and, of course, Karl Rove.

This rise, however, was subsequently followed a sharp decline, his decision to invade Iraq. The war received the typical liberal characterization from Stone: motivated by Cheney’s imperial desires to monopolize the world’s oil resources. In Cheney’s own words—as attributed to him by Stone—“control the Middle East and you control the world.” Cheney and Rumsfeld were the major culprits, using Iraq’s alleged wmds and the potential benefits of democracy as selling points to Bush.

In the end, I enjoyed the film largely due to Brolin’s insatiably entertaining performance as Bush. And despite my reservations with some of Stone’s simplistic depictions, his ultimate assertion is one with which I can readily agree: Bush is a charming, well-intentioned leader who surrounded himself with the wrong people and sadly listened to them.
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Greenspan and Congressional Hypocrisy

It is impossible to tell how responsible Alan Greenspan is for the current crisis. Impossible. The economics are much too complicated, especially for the idiots that we vote into Congress - 90% of which have no formal training in economics.

What is possible, however, is to examine times when Greenspan, Bush, Snow, Mankiw, and many others warned Congress that Fannie and Freddie were dangerously overleveraged and needed better regulation.

Greenspan testified before Congress this week, in which hypocritical, disgustingly corrupt politicians blamed him for not seeing the future. They weren't complaining when he was making their constituents happy as the central banker for our longest boom in history.

From WSJ:

"You had the authority to prevent irresponsible lending practices that led to the subprime-mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price," said Rep. Henry Waxman (D., Calif.), chairman of the House committee.

This should make you sick to your stomach. The hypocrisy. Congress had that same authority - and Congress, specifically Democrats, were being corruptly paid by the GSEs to protect them. This mistake has cost taxpayers billions - maybe more than a trillion. Greenspan is not perfect, and here he admits it. Anyone who has read his book knows that he admits his mistakes.

When will politicians admit theirs?

Oh, and by the way, our new President, the Grand Deacon of Hope, Change, and Unity, was the #2 recipient of contributions from the GSEs. Yes - New Kind of Politics; Yes We Can!; Change You Can Believe In. I can think of another word for it; I've stepped in it on my Grandpa's farm.

The media hasn't held him accountable, the Republicans haven't held him accountable, and the American people won't hold him accountable. Think Bush could have gotten away with that?
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America's Hybrid Economy

Since Obama’s exchange with Joe the Plumber—in which Obama explains that he wishes to increase taxation of the rich in order to “spread the wealth”—McCain and the RNC have been labeling Obama a socialist.

So, is Obama a socialist? Let’s check the facts.

Obama tax plan proposes to suspend the Bush tax cuts for those making over $250k annually. That means that brackets income tax will rise from 35% to 39%. Additionally, Obama wants to increase the capital gains tax from 15% to 20%.

One can argue on the prudence of such tax schemes— given the economies desperate state, I’m concerned with the adverse affects an increase in the capital gains tax will have on job growth. But it’s irrational to argue that raising the income tax 4% and the capital gains tax 5% amounts to socialism.

McCain’s assertion that Obama is a socialist reeks of ignorance. Does he really believe that a measly 4% is the dividing between socialism and capitalism?!

----

What people have ignored—and specifically McCain—is that the US economy is a hybrid of both capitalistic and socialistic policies. Capitalism survived because it incorporated some socialistic aspects into its economic model.

Obama merely wants to add an additional hint of regulation and ownership to the American economic hybrid. But make no mistake, the hybrid is a capitalistic model, and Obama’s tax policy—prudent or not—fits neatly into it.
...Keep reading

A Word on Capitalism

McCain and the RNC are now calling Barack Obama a socialist. Most are attributing this label to Obama given his proposal to increase the progressiveness of the federal tax and use the increased revenue to fund tax credits for the poor. In his own words to Joe the Plumber, Barack Obama wants to “spread the wealth.”

McCain and his RNC cohorts have jumped on the bus with this one, using the quote to induce fear among voters of that Obama wishes to socialize America’s economy. This tactic fits directly into the RNC’s last ditch effort to scratch its way back into contention—creating a tangible fear of an Obamamian presidency. Its not just that McCain’s better, it’s that Obama’s bad. This is not a new tactic. RNC is perpetually pointing fingers at the DNC's creeping socialism.

Unfortunate for McCain the strategy isn’t working. Why? Because this tactic has been employed without substance. Obama is no socialist. The facts simply don’t check out. Obama wants to suspend the Bush tax cuts for those making over $250k annually. That means that brackets income tax will rise from 35% to 39%. Additionally, Obama wants to increase the capital gains tax from 15% to 20%.

While these policies do indeed invite more taxation, they cannot by any rational means be considered socialistic. Socialism is the middle ground between capitalism and communism, as Karl Marx saw it. It’s an economic system in which the state owns and administrates the means of production and distribution of goods.

Obama’s proposal to increase taxation by 4% is hardly grounds for labeling him a socialist. One can disagree with the prudence of such tax schemes—given the economies desperate state, I’m concerned with the adverse affects an increase in the capital gains tax will have on job growth. But Obama’s tax policy does not amount to socialism. He merely wants a little more tax revenue to fund a slight increase in government regulation. That doesn’t make him a socialist.

This talk of socialism reeks of ignorance. What people have forgotten is that the US economy is comprised of a mix of both capitalistic and socialistic policies. Free markets do not exist in vacuums. Neither are they the perfectly competitive markets we read about in textbooks. In theory, capitalism is the private ownership and administration of goods. In reality, however, capitalism is the private ownership with a hint of public ownership and administration. Obama merely wants a mix with a little more public ownership and regulation—an added hint of regulation if you will. But his economic policy still falls on capitalism's side of the economic paradigm.
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Young Voters and Obama: The Irrational Choice

An article by Robert Samuelson in the Washington Post argues that both candidates, but especially Obama, are ignoring the interests of the young. Makes you wonder why so many young people have been swooning over Obama for the past two years (the smart ones likely came into the camp during the last month or so, when it became obvious that mud on a stick is probably a better choice than McPalin).

Samuelson argues that, rather than representing the 64% of youth voters who support him, Obama gets his positions by pandering to the powerful AARP.

Click on the Obama video. You'll see some world-class pandering. There are three basic ways of reducing the costs of Social Security and Medicare: increase eligibility ages; trim benefits; and require recipients to pay more for their Medicare benefits (higher premiums, co-payments or deductibles). In his talk, Obama effectively rejected all three.

Or look at the September-October issue of AARP the Magazine, which has a "voters' guide." In it, Obama and McCain receive the opportunity to check boxes agreeing or disagreeing with AARP's positions on 11 issues. Obama checked agreement on 10. He's not an agent of change but a staunch defender of the status quo. Indeed, he would expand subsidies to the elderly by exempting from federal income taxes anyone 65 and over with $50,000 income or less.

Great line about Obama and the status quo (my emphasis). Intelligent voters have, for over a year, recognized that Obama's promises of big change are nothing more than shallow posturing. Uninformed idealists have bought his lies hook, line, sinker.

Later, Samuelson shoots Obama's moral arguments full of holes (those moral arguments that say the rich should take care of the poor):

What the debate has lacked so far is a moral dimension. Obama says it's okay to raise taxes on those with incomes exceeding $250,000. Well, why should Social Security and Medicare beneficiaries with incomes of $250,000 get subsidies from the young making less? How about $200,000 or $100,000? What are acceptable eligibility ages? People live longer; they can work longer. Baby boomers cannot be excluded, because they are the problem.

There can be no "rewriting of the social contract" without benefit cuts, because paying today's benefits inevitably involves much higher taxes, massive deficits or draconian cuts in other government programs. Even with sensible benefit cuts, taxes will have to rise and there will be pressure on other programs.

His advice:

What should you -- the young -- do? First, get angry -- at the media and think tanks for discussing this problem in misleading euphemisms (for instance, the problem is not an "entitlements crisis"; it's excessive benefits for the old); at the candidates for exploiting your innocence; and at yourself for your gullibility.

Our generation has fallen for it. Obama has promised the world, and many of us have just been too stupid to recognize that he is nothing more than another promise-but-don't-deliver politician. The spending and entitlement programs of the older generation - which will be supported, deepened, and widened by Obama - have only contributed to the debt and growth constraints that will be payed by our generation - debt which will doubtless be supported, deepened, and widened by big-spending Obama and his loyal Congress.

At this point, the election is over; we've chosen our fate. But what might have been? The youth have felt so empowered as Obama has hoodwinked them. But he was the irrational choice. If the youth vote weren't so gullible, it would have demanded a candidate that does more than serve as a teenage crush. But it's too late now: we get what we asked for, which will be a fat bill 30 years from now.
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Oil: The Solution to our Foreign Policy Problems

I've argued like a broken record that the best long-run thing the US can do for its economy and foreign policy is get off of oil - not by drilling and thus increasing dependence; not by direct government investment in projects like the corn ethanol disaster; but by creating incentives for the development of market-tested alternatives (with a Pigovian tax - for full discussion click here).

A great analysis article in the Times provides more evidence for my point, specifically regarding foreign policy. The US is completely powerless to reduce Russian aggression (see here and here), Venezuelan influence in Latin America, and Iranian proliferation. We can't use our military; sanctions don't work; and the international diplomatic process is hostage to autocracies like China and Russia. Ultimately, the best thing we can do is reduce oil prices (by reducing demand dramatically).

All emphasis mine -

Venezuela:

Mr. Chávez was emphatic last month when he announced that Venezuela would engage in naval exercises with the Russian Navy in the Caribbean. “Go ahead and squeal, Yanquis,” he said. “Russia’s naval fleet is welcome here.”

The moment, made possible in part by a flood of petrodollars used to buy Russian weaponry, must have been sweet for a man who has spent his presidency wagging his finger at the United States and railing against its capitalist model. Cozying up to Russia, whose leaders have been increasingly at odds with the United States, evoked cold war rivalries in the hemisphere.

Mr. Chávez has also used his oil money — in direct payments and through subsidized oil shipments — to win friends in the hemisphere and elsewhere, including President Evo Morales of Bolivia, who expelled the United States ambassador in La Paz last month, saying the envoy was involved in plotting a coup. . . .

“This country will be paralyzed because it is so dependent on petroleum,” said Oscar García Mendoza, president of Banco Venezolano de Credito, a private bank.

Iran:

When President Ahmadinejad presented his budget to Parliament in 2007, the United Nations Security Council had already imposed economic sanctions on Iran because of its nuclear program. The president said it did not matter.

“Even if they issue 10 more such resolutions,” he said, “it will not affect Iran’s economy and politics.”

He was partly right. It hardly affected Iran’s politics. There was another resolution two months later, and another a year later — and still, Iran augmented its nuclear program, even as its economy was squeezed.

One of the main reasons it was able to endure the economic punishment was the price of oil. Iran has the second largest known oil reserves in the world, and it has used them in the past four years as a political and economic weapon to defy and undermine the West while promoting its own agenda.

Oil money helped Iran spread its influence in Iraq. Oil money helped it challenge Arab political dominance in the Middle East. Oil money helped spread its influence in Lebanon, through Hezbollah, and in the Israeli-Palestinian conflict, through Hamas.

At home, oil money allowed Iran’s ideological hard-liners to preserve their monopoly on power, to buy political allegiances and to offset the fiscal damage of their economic policies. All that may now have to be recalibrated.

“The drop in oil prices will make the Iranian regime re-examine its calculations because its political immunity is less,” said Mustafa El-Labbad, director of the East Center for Regional and Strategic Studies, an independent research center in Cairo. “Their regional presence and role will shrink.” . . .

Still, if prices stay depressed for long, it could mean a greater willingness in Tehran to find a compromise on the nuclear issue and, perhaps, a political shift that left Mr. Ahmadinejad vulnerable in June’s presidential election, analysts said.

“The government has distributed money and has encouraged spending,” said Saeed Leylaz, an economist and political analyst in Tehran. “It has given high salaries to its own supporters. They have increased their expectations, and there is no way they can give them less now without making them unhappy. If the government fails to respond to their expectations, it might lead to a crisis.”

Russia:

Two months ago, the muted reaction of some European nations to Russia’s invasion of Georgia seemed to indicate that Mr. Putin’s policy was working, some foreign policy analysts said. Europe had become dependent on Russia’s gas and could not afford to mount a strong challenge, they said.

Now, however, with gas prices tumbling, this strategy has been thrown into question. Europeans may no longer be as intimidated, knowing that Russia is less able to pressure its customers.

“The more other countries are nervous about their energy security, the better Russia is geopolitically,” said Peter Halloran, chief executive of Pharos Financial Group, an investment fund based in Moscow.

Russia has been the most far-sighted, and would therefore weather low prices better than the others. But the point remains. Three of the largest foreign policy problems the US faces can be significantly reduced by structurally lower oil demand and prices. Structurally lower demand can only be achieved through a Pigovian tax, because:

(1) The tax forces people and companies to adopt technologies and habits that naturally decrease demand permanently; ie. GM's back-on-track work on electric cars or the significant decline in miles driven by Americans due to high prices.

(2) The tax keeps demand low, even in high points like summer.

(3) Unlike direct investment, which has resulted in the corn ethanol political/starvation debacle, the Pigovian tax creates incentives so that the private sector develops solutions that actually work.

(4) Unlike "drill, baby, drill," the tax permanently lowers prices, instead of slightly increasing supply like drilling. Drilling is a temporary solution (one that doesn't even start working for a decade!), while the Pigovian tax is a permanent solution.

Permanent reduction in oil demand would severely constrain Russia, Iran, and Venezuela in their ability to make things difficult for us. The world would be safer if we would cut off the main lifeline of these rogue states. Drilling won't do it (sorry Republicans), direct government selection and investment won't do it (sorry Democrats); understanding and harnessing the power of market incentives will.
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Why McCain's losing

Sunday morning Colin Powell, Bush’s former secretary of state, endorsed Barack Obama for president. This comes as a shock to many given Powell’s long-held Republican affiliation, friendship with John McCain, and stance on the war in Iraq. Any yet Powell finds himself endorsing Barack Obama rather than John McCain. Why?

In his interview with Tom Brokaw on Meet the Press, Powell noted two major reasons he chose not to endorse John McCain: the poor form in which John McCain chose to run his campaign and his choice in his running partner, Sarah Palin.

Powell’s reasoning is reflective of the opinion of this author—it’s not the war in Iraq or the Republican Party’s lack of popularity among mainstream America that explains McCain’s dismal spot in the polls. Rather its McCain’s lack of executive ability and poor judgment as indicated by how he’s run his campaign and in his choice in Sarah Palin. From providing absolutely no leadership during the credit crisis—instead turning it into a political stunt (read more here)—to choosing Palin as his running partner—essentially diluting the strength of his argument that experience in foreign policy is the deciding factor in this election—McCain’s campaign has been horrifically run. Making Ayers limited relationship with Obama the focal point of his campaign over the last two weeks is just the latest link along McCain’s chain of poor campaign decisions.

Perhaps more than anything, McCain’s decision to run as a center-right candidate during the primary only to drastically swing to the right upon winning the RNCs nomination has left pendulum politics truly flummoxed (read more here). If how McCain runs his campaign is any indication of how he would run an administration, we sympathize with Powell’s confusion.
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Powell on McCain

Powell Endorses Obama

On Sunday morning during an interview of Colin Powell by Tom Brokaw on Meet the Press, Powell endorsed Barack Obama for president. Interestingly, his reasons were grounded more in why he couldn’t support John McCain rather than why he supported Barack Obama. During the course of the interview, Powell’s disenchantment with McCain’s campaign and the Republican Party was tangible. His disenchantment was three-fold: Sarah Palin, McCain’s poor campaign choices, and the Republican Party’s bigoted mudslinging. Below are related excerpts from the interview:

Powell on McCain’s campaign focus on William Ayers:

"This Bill Ayers situation that's been going on for weeks became something of a central point of the campaign. But Mr. McCain says that he's a washed-out terrorist. Well, then, why do we keep talking about him? And why do we have these robo-calls going on around the country trying to suggest that because of this very, very limited relationship that Senator Obama has had with Mr. Ayers, somehow Mr. Obama is tainted? What they're trying to connect him to is some kind of terrorist feelings."

Powell on the Republican Party’s accusations of Obama’s Muslim origins:

"Well, the correct answer is, he is not a Muslim, he's a Christian. He's always been a Christian. But the really right answer is, what if he is? Is there something wrong with being a Muslim in this country? The answer's no, that's not America. Is there something wrong with some 7-year-old Muslim-American kid believing that he or she could be president? Yet I have heard senior members of my own party drop the suggestion, 'He's a Muslim and might be associated with terrorists.' This is not the way we should be doing it in America."

Powell on McCain’s choice of Palin:

"I was also concerned at the selection of Governor Palin. She's a very distinguished woman, and she's to be admired; but at the same time, now that we have had a chance to watch her for some seven weeks, I don't believe she's ready to be president of the United States, which is the job of the vice president. And so that raised some question in my mind as to the judgment that Senator McCain made."

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Powell Endorses Obama!

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Nuclear Irony

Last month the EU expressed concerns that Iran’s nascent nuclear program is close to being able to arm a nuclear warhead. To add to the nuclear-mongering, North Korea barred IAEA officials from accessing its main nuclear reactor, raising suspicions that North Korea is planning on reactivating its program.

Meanwhile, the United States remains committed to restructuring the political landscape in Iraq. Successes have been won, but not without costs—resources have been concentrated on Iraq to the detriment of other strategic US interests. Progress in Afghanistan has stagnated, Pakistan’s political stability is tottering, and, as aforementioned, North Korea and Iran are developing the very weapons of mass destruction the US intended but failed to find in Iraq. Ironic, eh.
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Krugman and Conservative Jealousy

Krugman's Nobel has prompted a flurry of anger among conservatives. Predictably.

Economists generally applaud Krugman for his accomplishments in trade theory. Few informed commentators would argue that Krugman's work doesn't deserve Nobel recognition. Most of the criticism I have seen comes from people who probably would never had heard of Krugman if it weren't for his column (because they're just generally uninformed about the field of economics), so their immediate assumption that he got the prize for his column is understandable (but pathetic).

If you read some of the objections to the award, you will find that critics aren't addressing whether Krugman's economics work is worthy of the award. Instead they are just complaining about his column. Why? Because these are economics illiterates: they aren't familiar with his work, and they lack the tools to critique it. So they take the superficial route. To the critics: go read some of his work, and read the thousands of papers that cite it. Write a post explaining Krugman's findings and demonstrate that they haven't had a profound effect on the field. Instead of being intellectually lazy and going after the straw man - his columns - impress us by doing some real research.

The timing is indeed a bit sketchy. Politics no doubt influenced the timing of the award. But make no mistake: he would have received it at some point, even if he weren't an angry, raging, broken-record liberal. No matter when that would occur, conservatives would cry and moan and claim the prize doesn't mean anything.

What's really going on here is conservative denial. Conservatives still refuse to admit that the consensus of economists disagrees with their myopic, detached economic ideology. Things like supply side economics (proper) and markets as a cure for all ills just aren't confirmed by economic theory or empirics. As such, any economist who demonstrates the weakness of conservative mythology will draw a barrage of excuses from conservatives who just can't handle the fact that the economics ground they stand on is just as shaky as the liberals'.

Yes, Krugman's politics are annoying and inconsistent. But ultimately, he would not have been considered for the prize had he not made a major contribution to the field. His work changed the way we think about trade in a big way. And his work about the liquidity trap is highly relevant (because we're in one now).

My hunch is that these detractors haven't read a single Krugman paper. In fact, a good portion of them probably haven't read a single academic economics paper.
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Tax Credits versus Tax Cuts

Tax credits are not the same as tax cuts. A tax cut decrease the rate at which one is taxed. A tax credit is a benefit paid to an individual to increase one's net income.

Obama's claim that he'll cut taxes for 95% of Americans is misleading for this reason: he misconstrues tax credits to mean tax cuts.

So, when Obama says he'll cut taxes for 95% of America, what he really means to say is he's going to adjust the progressiveness of the tax rate in order to fund tax credits for the lowest tax bracket--the one that doesn't pay any taxes at all. That's not a tax cut, its a refundable credit, a redistribution of wealth. The merits of such a shift in tax policy is debatable. It isn't, however, a tax cut for 95% of America.

Obama's may convincingly articulate his tax policy, but he doesn't do it honestly.
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President Obama: immune to criticism?

The McCain campaign has been dead in the water ever since his decision to bring Sarah Palin onto the ticket. The decline started far earlier, when the Republican Party chose to be irrelevant instead of developing a decent election strategy. As such, I see no point in further discussing the presidential campaign, since the campaign is over.

Now, we move on: to President Obama.

What sort of president is Obama going to be? Probably a fine one. But, I have four main problems with the Obama Administration.

The first is that Obama has suffered severe psychological and spiritual damage during this campaign. He has been worshiped, in every meaning of the word, for two years. That kind of treatment cannot leave any person unscarred, and Obama is no exception. In fact, Obama's preexisting arrogance (no person his age should have already written TWO autobios) and his lack of maturity indicate that he has likely handled the worship worse than many others. This incredible arrogance has led him to make ridiculous promises, and pretend that they will have no tradeoffs. He plans to reverse the rise of the oceans - something I thought only God was capable of. He plans to get us off foreign oil - while raising taxes on domestic oil companies. He plans to create a lot of jobs - while forcing businesses to increase healthcare benefits for employees. See the tradeoff?

A related issue is that he has made claims that are just false. When JFK campaigned for president, he based his national security plank on the idea of the "missile gap". This fed on American fears - we're behind the Soviets! Unfortunately for him, it was FALSE. He found this out in office and had a difficult time dealing with it. He had lied to instill fear in Americans - to win an election. Likewise, Obama uses fear tactics (though Dems think only McCain does this) to make things seem worse than they are. Yes, there is an economic crisis. But a country with less than 8% unemployment and 5% inflation is a strong economy! Those are the fundamentals, and the fundamentals are indeed strong. America will get over this - and Obama is not desperately needed for it.

President Obama must return to earth. Despite what many of his supporters think, he is not the Messiah. He cannot heal the oceans. He is not above the laws of economics (and physics). Someone mention this to him.

My second problem with Obama is that he refuses to ask anything of his supporters. Sure, he says he'll "ask" (read "force") higher-income Americans to contribute more to Social Security, etc. - but he doesn't do what needs to be done: tell all Americans that Social Security will be bankrupt, and that we must reduce benefits.

The founders of America believed that the government is responsible to provide certain rights. These were contained in the Constitution and the Bill of Rights. Obama has vastly expanded this list. He promises that all Americans deserve all sorts of things - but he doesn't explain how he can pay for all of them. When pressured, he resorts to the tried and true revenge line: we'll nail those rich people for the money.

This is a problem. I agree that we need to address inequality. But severe redistribution and revenge politics hurt growth in the long run. Moderation is needed. I think Peggy Noonan said it best:

[Democrats] express the most sympathy for the needy, the yearning, the marginalized and unwell. For those, in short, who need more help from the government, meaning from the government's treasury, meaning the money got from taxpayers.

Who happen, also, to be a generally beset-upon group.

Democrats show little expressed sympathy for those who work to make the money the government taxes to help the beset-upon mother and the soldier and the kids. They express little sympathy for the middle-aged woman who owns a small dry cleaner and employs six people and is, actually, day to day, stressed and depressed from the burden of state, local and federal taxes, and regulations, and lawsuits, and meetings with the accountant, and complaints as to insufficient or incorrect efforts to meet guidelines regarding various employee/employer rules and regulations.

President Obama must give up the class warfare. America needs rich people to pay the bills. The bottom half of America doesn't pay any taxes; let's not pretend they're getting completely screwed by the system. Obama, show some moderation.

My third problem with Obama is his populism. For example, consider these indications of consensus among economists, and consider whether Obama will do any of them:

* 87.5 percent agree that "the U.S. should eliminate remaining tariffs and other barriers to trade." (Obama has promised to unilaterally rewrite NAFTA and other trade agreements)
* 85.2 percent agree that "the U.S. should eliminate agricultural subsidies." (Obama has been part of the disgusting lobby for corn ethanol - a policy which has caused starvation - and nobody has questioned him on it)
* 85.3 percent agree that "the gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged."
* 77.2 percent agree that "the best way to deal with Social Security's long-term funding gap is to increase the normal retirement age." (Obama only wants to increase taxes on the owners of capital)
* 67.1 percent agree that "parents should be given educational vouchers which can be used at government-run or privately-run schools." (Obama doesn't support vouchers)
* 65.0 percent agree that "the U.S. should increase energy taxes." (Obama only plans to tax the big evil oil companies - but not the Saudis!)
* 90.1 percent disagree with the position that "the U.S. should restrict employers from outsourcing work to foreign countries." (You've heard his line on this one)

This list courtesy Greg Mankiw.

So Obama opposes every single economists' consensus item! Does this bother anyone else? That he has completely sold out to populism? Your first response will be, "Well, this is a campaign. This is politics. This is what he had to do." Such an excuse completely discredits the central tenet of the Obama revolution: he is a new kind of politician. Anybody who still believes this is completely impervious to facts and logic. Obama has proven time after time that he lies, panders, and triangulates just as well as - in fact, better than - any other politician. His career is a story of doing what it takes to save his own skin - whether that means letting born babies die, shooting down a bipartisan immigration bill, or breaking a promise about campaign financing. Politics first, integrity second.

Consider the NAFTA debacle. Obama gained considerable political capital with his irrational opposition to NAFTA. But his chief economist got caught telling the Canadian console that the rhetoric was just posturing. Then, Obama gets recorded in San Fransisco claiming that anti-trade sentiment is a result of bitterness! Can this guy be a bigger hypocrite?

President Obama, stop pandering. Be honest with the American people. Tell them that the solution to trade-induced job losses is education - not protectionism. Tell them that energy independence can only be achieved through a Pigovian tax. Tell them that Social Security is insolvent, and admit to the next generation that there will be no benefits. Tell Americans about our dire fiscal condition (economists estimate that Obama will increase the deficit by at least $300 billion next year). Tell Americans that we must pay for our big programs. Tell Americans that tax hikes on the "rich" won't be enough: we must also cut spending.

Finally, my fourth problem with Obama is that the public and the media believe he is above criticism. This man cannot be criticized! If a genuinely concerned person questions Obama's strange connection to white terrorist Bill Ayers, this is racism. If someone raises questions about anything else, well that's just "Karl Rove-style politics." Obama can attack McCain - dishonestly at times - but the attacks can't go the other way. This is a BIG PROBLEM.

Consider the way the media handled the Fannie/Freddie debacle. Obama was a top recipient of handouts from the GSEs. He is part of the reason they failed, costing taxpayers billions. The media gave him a pass. Nobody forced him to explain this. This is a sad commentary on the state of American media. The fact that Obama got away with such corruption is completely outrageous. But I suppose only a racist would make such a claim.

Presidents must be criticized. They are accountable to Americans. If we can't question Obama's actions and motives once in office, then we're no longer a Democracy.

President Obama, get over your ego trip. Your appeal is based on rock star euphoria, not your abilities or knowledge. You don't have the experience or toolset to be president - and that's ok. Few do. But recognize your weaknesses.

Most importantly, the media must stop giving Obama a free pass. He is not going to keep his promises. He cannot make the world love America while protecting our interests. He cannot create jobs without getting owners of capital on board. He cannot reverse the rise of the oceans. Are we going to hold him accountable, or not?


Obama represents an incredible opportunity for America. Our allies will see it as a fresh start. He has a crack economic team. He has the support of the majority of Americans. He can use that power to change the country for the better - make the painful economic reforms, be honest with Americans - or he can use it to further his own ambitions (which is what his life has been thus far). He has that choice.

More importantly, Americans can choose to sober up and recognize that Obama is human. We can make him accountable. I hope we do. But I doubt it.
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"Tax Cuts for the Rich"

Got this in my email...

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers,' he said, 'I'm going to reduce the cost of your daily beer by $20.'Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

'I only got a dollar out of the $20,'declared the sixth man. He pointed to the tenth man,' but he got $10!'

'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got ten times more than I!'

'That's true!!' shouted the seventh man. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't get anything at all. The system exploits the poor!'

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

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Jonah Goldberg on Chris Buckley

Last week I discussed Christopher Buckley's support for Obama. I said, "The more clear-thinking members of the party will continue to depart - not because Obama is good, but because the party is an embarrassment." So I emphasized the idea that the GOP, not Obama, is to blame for its loss of some intelligent members.

Courtesy OL&L, which labels Buckley's choice to follow his conscience as "betrayal," Jonah Goldberg responds to Buckley. Goldberg doesn't focus on my argument - that Buckley and others are leaving the GOP due to GOP weakness. Rather, he focuses on one of Buckley's arguments about Obama's character.

The story Christopher tells of McCain's great character has no real analogue in Obama. He may be in private a deeply honorable man, but his public record is one of accommodation, shortcuts, dishonest equivocations, serious leftwing sympathies and fellow-traveling with some awful people. Obama, let us recall, threw his own grandmother under the rhetorical bus in order to defend his relationship with Jeremiah Wright. That he sounded dignified doing it does not confer dignity on the act itself or the man behind it. That is surely not all there is to say about Obama, many of his friends and fans speak very well of him. But the scales Christopher uses to weigh one man against the other seem awfully rigged to me.

Agreed. All the more evidence for my claim that Obama is not destroying the GOP: the GOP is destroying the GOP. And, rather than examining whether concerns about the GOP's suicidal path may be valid, conservatives choose to label the dissent as "betrayal." This won't fix the problem.

If the GOP had spent the time since the primaries developing a cohesive strategy to attract desperately needed moderates to the party instead of labeling any conservative with a brain as liberal, McCain could have been effective at exposing the real Obama instead of wasting precious time (and VP appointments) on appeasing the "base."
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Scattered Thoughts

In this post: Paulson's new plan, declining spreads, Bill Ayers and Obama, Sarah Palin, and North Korea.

The news from Washington is mostly good. Paulson is finally doing what most economists have been advising for some time: equity injections in the form of preferred stocks. Despite the Right's cries of "nationalization!" and "communism!", this is pretty sensible policy. Preferred shares don't have any control over firms. They simply receive a dividend, and the companies will eventually buy them back from the government. Further, unlike the original toxic asset buyout plan, these shares have very low risk. The purchases are financed by selling treasuries, which have been selling for incredibly low interest rates. Yesterday I saw Glenn Beck argue that we will finance the move by printing money; but Beck is a moron. The markets are in desperate need of capital, and this is a pretty low-risk, low-political capture way to do it.

Ben Bernanke, one of the world's premier scholars of financial crises, give justification for intervention (WSJ):

History teaches us that government engagement in times of severe financial crisis often arrives very late, usually at a point at which most financial institutions are insolvent or nearly so. In these conditions, the consequences and costs of inertia and inaction can be staggering. Fortunately, that is not the situation we face today.

One of my favorite blogs, John Jansen's Across the Curve (recommended, but it's pretty technical and jargon-heavy - Glenn Beck doesn't have a chance), gives opening thoughts for the morning:

Prices of Treasury coupon securities have plummeted as the debt market responds to the actions of governments and regulators around the globe to refloat the banking system. The yield on the 2 year note has jumped 28 basis points to 1.86 percent. In like manner the yield on the 5 year note has climbed 27 basis points to 3.00 percent. The yield on the benchmark 10 year note has climbed a leisurely 14 basis points to 3.99 percent. The yield on the 30 year bond has also jumped 14 basis points to 4.27 percent.The 2 year/10 year spread has narrowed by 13 basis points and begin trading today at 213 basis points. . . .

Stock markets were certainly oversold following successive days of pessimism. So a significant relief rally is not unexpected. However, I would question the legs of the rally. The underlying economic fundamentals have not changed. The global economy is quite weak and will remain that way for a protracted period.

Certainly a profit-taking selloff is in order, but overall, falling spreads and rising equity markets are a good sign. The markets like the equity plan.


WSJ reports that John McCain is having a hard time raising money on Wall Street.

The Republican presidential candidate's "populist stuff sounds good on the campaign trail, but it's caused a lot of trepidation," says John Faso, onetime Republican candidate for New York governor and one of the event organizers. Sen. McCain's relationship with corporate America "has hit a bump in the road," says Mr. Faso, who is an attorney.

All of this revenge talk can be good politics, but there are consequences.


This Bill Ayers business is getting a little out of hand. Attacking Obama for his disturbing connections to WHITE terrorist Ayers is not racist. The most disturbing thing about the Obama campaign is that it is above attacks. Amidst the political mudslinging, there are some legitimate concerns about Obama's past, lack of experience, $120,000 connections to Fannie and Freddie, etc., but the media is too lovestruck to touch them and legitimate critics are labeled as racist. I just hope President Obama isn't equally immune to criticism. This is a dangerous double standard. Add to this the fact that no human being can survive worship without serious psychological consequences: such conditions have likely led Obama to actually believe he can do things like reverse the rise of the oceans.

Arrogant? Yes. Deluded? Probably. Full of %@$!? Definitely. Muslim? Not a chance. Give me a break, conservatives.


The completely irrational and inexplicable pander-to-the-base Sarah Palin selection just keeps getting better. Her pep rallies, mimicking the once-mocked-by-conservatives Obama rallies, get Republicans fired up but won't help win the election. From the Times,

But Ms. Palin’s partisan zeal could repel some independent voters in closely contested states like New Hampshire and Pennsylvania; Democratic polling in both states shows Ms. Palin with high negative ratings among independents. Palin advisers say many of these voters do not know enough about her; Ms. Palin is campaigning in Pennsylvania on Tuesday and New Hampshire on Wednesday.

Simply more evidence that the GOP just doesn't know how to win elections anymore. Pander to the base at the expense of moderates.


Finally, over at the North Korea quagmire, the US has agreed to remove the DPRK from the State Sponsors of Terrorism list (still on the list: Cuba, Iran, Syria, Sudan). In return, DPRK will dismantle nuclear reactors and allow inspections.

Memo to America: this won't work either. FT story.
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Krugman on Politicians

From Krugman's 1992 autobiographical essay (very interesting):

After a little while, however, I began to notice how policy decisions are really made. The fact is that most senior officials have no idea what they are talking about: discussion at high-level meetings is startlingly primitive. (For example, the distinction between nominal and real interest rates tends to be regarded as a complex and useless bit of academic nitpicking). Furthermore, many powerful people prefer to take advice from those who make them feel comfortable rather than from those who will force them to think hard. That is, those who really manage to influence policy are usually the best courtiers, not the best analysts.

No surprise here. The politicians would rather listen to political advisers than experts. The public mirrors this tendency: those on the right would rather hear Glenn Beck's economics than any reputable economist (I was watching Beck offer some incredibly ignorant economics earlier this evening). Those on the left would rather hear the Grand Deacon of Unity himself than any of his economic advisers (whom he happens to disagree with often).
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UPDATED: Krugman Wins Nobel

For a long time, people have predicted that Princeton economist Paul Krugman would eventually get a Nobel for his work on strategic trade theory. Many thought that now is too soon, but the Nobel committee has selected him for this year's economics award. View the full reasons here.

Krugman definitely deserves a Nobel, but the timing may be political. He has been a very outspoken, and polemic, critic of Bush, paradoxically assuming he is a complete idiot while simultaneously accusing him of brilliantly masterminding a conspiracy to destroy the world (oversimplified, but you get the idea). Most economists were probably expecting one of several others to be recognized this year.

Krugman essentially demonstrated that free trade is not always the best option for countries: by carefully selecting industries/firms to favor, governments can create substantial comparative advantages where they didn't exist naturally. In other words, even in theory, free trade is not necessarily optimal. He also, however, advised caution for governments choosing this direction: the problems of wrong choices can carry significant political capture and economic consequences.

His politics are predictably extreme and annoying, but Krugman is a brilliant economist. He deserves the award.

Commentary on the award:

1. Dani Rodrik
2. Brian Caplan
3. Greg Mankiw
4. Tyler Cowen

Update: More commentary
5. Menzie Chinn
6. Ed Gleaser
7. IBD
8. David Henderson
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Buckley on the bankrupt GOP

Christopher Buckley, son of the famous conservative thinker Bill Buckley, will be supporting Obama in '08. I gather three reasons from his article: John McCain has changed, Sarah Palin, and the party that forced him to change is ideologically and empirically bankrupt.

This campaign has changed John McCain. It has made him inauthentic. A once-first class temperament has become irascible and snarly; his positions change, and lack coherence; he makes unrealistic promises.

All this because the GOP chose to label him as a liberal. On Sarah Palin:

My colleague, the superb and very dishy Kathleen Parker, recently wrote in National Review Online a column stating what John Cleese as Basil Fawlty would call “the bleeding obvious”: namely, that Sarah Palin is an embarrassment, and a dangerous one at that. She’s not exactly alone. New York Times columnist David Brooks, who began his career at NR, just called Governor Palin “a cancer on the Republican Party.”

Reading Buckley's article puts the current GOP suicide path in perspective. What he has that the GOP lacks is consistency:

I am a small-government conservative who clings tenaciously and old-fashionedly to the idea that one ought to have balanced budgets. On abortion, gay marriage, et al, I’m libertarian. I believe with my sage and epigrammatic friend P.J. O’Rourke that a government big enough to give you everything you want is also big enough to take it all away.

Imagine that! Though conservatives have claimed to believe in small government, few of them really do. Reagan dramatically increased government spending - and the deficit. Bush II has been a fiscal embarrassment. "Fiscal conservatism" now simply means tax cuts and bigger deficits. So I can understand why someone with such deep familial attachments to the GOP now chooses to distance himself from its demise: I have the same thoughts exactly.

By allowing ideology to trump pragmatism; by ignoring science and social science; and by giving extremists control; the GOP has chosen to decline into irrelevance. The Sarah Palin selection is the embarrassing climax of the GOP's irrationality. The more clear-thinking members of the party will continue to depart - not because Obama is good, but because the party is an embarrassment.
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Oil Falls

By now most people are aware that oil is below $100 per barrel. From the FT:

The International Energy Agency, the energy watchdog, on Friday cut its forecasts for global oil demand this year.

Demand has declined - partly because of high prices, and partly due to economic conditions. Countries like Iran and Russia will have significantly lower than expected revenues, which means less ability to develop nuclear weapons and bother their neighbors.

The obvious lesson (obvious to all but the politicians/candidates) is that the government should be doing something to permanently reduce oil demand - a Pigovian tax (longtime readers of PP know what this is; for the rest, click here). The best foreign policy for belligerent, terrorism-funding rogue states is to stop using so much oil. Drilling won't do it. Taxing US oil companies won't do it. Alternative energy will.
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Homework for the weekend...

Some really top-notch economists have put together a 38-page "booklet" on What G7/8 Leaders Can Do To Solve the Global Credit Crisis. Some of the authors are Barry Eichengreen (this is one of my favorite economists), Charles Calomiris, and Brad DeLong. This will probably be worth your time - at least a cursory scan of the sections that sound interesting to you.

The arguments will reflect the "remarkable consensus" that has emerged among clear-thinking, non-ideological economists on what needs to be done. It will likely disagree with ideologues of Left and Right. I know it sounds long, but give it a look anyway.

(h/t P Krugman)
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"Can This Be Pro-Life?"

From Kristof's column:

The Bush administration this month is quietly cutting off birth control supplies to some of the world’s poorest women in Africa. . . .

There is something about reproductive health — maybe the sex part — that makes some Americans froth and go crazy. We see it in the opposition to condoms to curb AIDS in Africa and in the insistence on abstinence-only sex education in American classrooms (one reason American teenage pregnancy rates are more than double those in Canada).

This is disappointing, since I believe Bush's greatest accomplishments have been in addressing AIDS and poverty in Africa.

The issue of life and reproduction is difficult - so much more difficult than either side wants to believe. This reminds me of a post I wrote a long time ago about a WHO study of abortion, which found that the best way to decrease abortions is not law or abstinence: it's availability and education of contraceptives. What is the real goal of the pro-life/abstinence only crowd? Is it to achieve legislative accomplishments and spread religion, or to decrease the amount of unwanted pregnancies?

This is one of those times when ideology prevents a solution to a tragic problem.
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What we've been waiting for...

A possible solution for the crisis has emerged - not from He Who Brings Change We Have Been Waiting For, but from experts (people who actually do have the skills/experience needed to lead a country).

For a few weeks we've discussed the consensus among economists that a capital injection in the form of preferred stock purchases was the best way to address the crisis. On Tuesday I discussed Britain's decision to do just that.

Now this, from the NYT:

Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials. . . .

The proposal resembles one announced on Wednesday in Britain. . . .

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

Greg Mankiw's assessment:

(As an aside, one might ask, why did these firms make such bad bets? Essentially, it was a result of poor judgment among various private decisionmakers, encouraged by equally poor judgment of various public policymakers, many of whom were more interested in promoting homeownership among questionable borrowers than in the preserving the safety and soundness of the financial system. But this is not the time for recriminations. We have to face up to the problem sitting in our laps.)

Economists have suggested that the government inject capital itself. That raises several questions. First, which firms? The government does not want to put taxpayer money into “zombie” firms that are in fact deeply insolvent but have not yet recognized it. Second, at what price should the government buy in? Third, isn’t this, kind of, like socialism? That is, do we really want the government to start playing a large, continuing role running Wall Street and allocating capital resources? I certainly don't.

Here is an idea that might deal with these problems: The government can stand ready to be a silent partner to future Warren Buffetts.

It could work as follows. Whenever any financial institution attracts new private capital in an arms-length transaction, it can access an equal amount of public capital. The taxpayer would get the same terms as the private investor. The only difference is that government’s shares would be nonvoting until the government sold the shares at a later date.

This plan would solve the three problems. The private sector rather than the government would weed out the zombie firms. The private sector rather than the government would set the price. And the private sector rather than the government would exercise corporate control.

This is great stuff. It's good to hear the Treasury is finally listening to the consensus. But the likelihood of them following a good idea like Mankiw's is probably slim to none.
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Anti-aircraft for Iran

This should surprise nobody by now. NYT reports that Russia plans to sell anti-aircraft equipment to Iran. This would give Iran the upper hand in the event of a bombing raid on its nuclear facilities. Obviously, this concerns Israel:

Prime Minister Ehud Olmert of Israel apparently failed to win a firm pledge on Tuesday that Moscow would halt advanced weapons sales to Israel’s enemies.

Wrapping up a two-day visit here, Mr. Olmert said only that he had succeeded in getting President Dmitri A. Medvedev of Russia to understand his fears that Russian-made missiles and other technology could fall into the hands of anti-Israeli guerrillas in the Middle East.

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Good News

From CBS News:

The bailout exposed a fact most watchdogs already knew about Congress -- it ain't the London School of Economics.

So, the president of Andrew Jackson University, a small online school based in Birmingham, is jumping into this miasma of ignorance to offer a free online course in Econ 101 to members of Congress. This after a thumbnail survey found that eight of ten had no formal training in economics. . . .

So far nobody's signed up.

(h/t: Sh. Mattson)
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