J. Bradford DeLong's Blog, page 1147

Across the Wide Mediterranean: Zalmay Khalilzad, Ex-Top US Diplomat, in Laundering Probe

I really hope that there is nothing here. Zalmay Khalilzad was the only member of the Bush Administration who struck me as likable, competent, realistic, and not-evil...

Associated Press: Khalilzad, ex-top US diplomat, in laundering probe: "Zalmay Khalilzad, who served as U.S. ambassador to Afghanistan, Iraq and the United Nations...

...under President George W. Bush, is being investigated by American authorities for suspected money laundering, Austrian officials said Monday. State prosecutor Thomas Vecsey confirmed a report in the Austrian weekly Profil about the investigation of Khalilzad, who played a key role in the political transition in Afghanistan after the 2001 U.S.-led invasion and the fall of the Taliban.

According to the magazine, the investigation centers on the alleged transfer of 1.15 million euros ($1.5 million) in May 2013 to an account in Vienna owned by Khalilzad's wife, Cheryl Benard. The money came from business activities in Iraq and the United Arab Emirates, it reported. Vecsey would not elaborate on the allegations, nor did the magazine's report. Benard's lawyer, Holger Bielesz, said that Austrian authorities ordered several bank accounts owned by Benard frozen in February, about 10 months after the U.S. Department of Justice asked for Austria's help. That ruling is now under appeal.

Bielesz said the vaguely worded U.S. request did not specify the grounds for the investigation but it appeared to be looking for evidence of money laundering. The lawyer argued Austrian authorities had over-reacted in ordering Benard's bank accounts frozen, considering that the Justice Department has yet to express "reasonable grounds for suspicions." Bielesz declined to go into details about the U.S. investigation, saying that at this point he was representing only Benard and her attempts to get full access to the funds on her accounts. The case became public after a blogger found documents while rummaging through a garbage container used by the state prosecutor's office in Vienna.

Khalilzad was born in Afghanistan and went to the United States as an exchange student. He later became a professor and a favorite of Republican presidents, especially Bush. He was the U.S. special presidential envoy to Afghanistan from 2001 to 2003, then U.S. ambassador there until 2005. He was the ambassador to Iraq from 2005 to 2007, and the U.S. permanent representative to the United Nations from 2007 to 2009. Many Afghan officials and foreign observers saw Khalilzad as the country's de-facto ruler in the initial months after the Taliban's collapse. He took center stage organizing the traditional grand councils, or loya jirgas, that would eventually approve Afghanistan's constitution.

In the private sector, Khalilzad is founder and president of Gryphon Partners, which advises companies and wealthy individuals on business opportunities in several industries and regions, including high-risk territories. He sits on the boards of the National Endowment for Democracy, America Abroad Media, the Mideast studies center at Rand Corp., the American University of Iraq and the American University of Afghanistan. He also is a counselor at the Center for Strategic and International Studies, and writes about foreign policy issues and frequently appears on U.S. news shows...

Monday Smackdown: The Stupidest Paragraph in Perhaps the Stupidest Article Ever Published

We are interrupting our DeLong Smackdown Watches (and other things to bring you news that International Economy is now in the running for the Washington Post for the title of publication that exercises the very least quality control--that takes the least care to make sure that the articles it publishes inform rather than mislead their readers.

Let's turn the mike over to Menzie Chinn:

Menzie Chinn: The Stupidest Paragraph in Perhaps the Stupidest Article Ever Published: Bruce Bartlett brought my attention to this article...

...which Mark Thoma mused was “The Stupidest Article Ever Published”. From "The Inflation Debt Scam", by Paul Craig Roberts, Dave Kranzler and John Williams[, in International Economy]:

To understand how risky the rise of debt is, nominal debt must be compared to real GDP. Spin masters might dismiss this computation as comparing apples to oranges, but such a charge constitutes denial that the ratio of nominal debt to nominal GDP understates the wealth dilution caused by the government’s ability to issue and repay debt in nominal dollars...

I’m not a spin master, and yet I cannot help but dismiss this calculation as exactly comparing apples to oranges. Nominal debt divided by nominal GDP is expressed in years--essentially years worth of GDP necessary to pay off the debt. I can understand what this calculation yields. In contrast, nominal debt is in $, real GDP is in chained 2009 dollars/year, so nominal debt divided by real GDP is a number expressed in years times dollars per chained 2009 dollars....

As far as I can tell, the article is merely an excuse for Williams to haul out the fully discredited “Shadowstats” one more time. By the way, according to Shadowstats, the US economy has been shrinking nonstop since 2004-05, on a year-on-year basis.... So, if this is not the stupidest article ever, it is in the running (along with Don Luskin’s 2008 gem [in the Washington Post]).

Lunchtime Must-Read: Heidi Moore et al.: Why is Thomas Piketty's 700-Page Book a Bestseller?

**Heidi Moore et al. Why is Thomas Piketty's 700-page book a bestseller?: "There’s been a bizarre phenomenon this year... it’s a bestseller.... Why this book? The themes that Piketty brings up have been enshrined in discussion about progressive economists for decades.... Now, over to the experts...

Stephanie Kelton: What explains the Piketty phenomenon?... The title,... doesn’t exactly carry the titillating allure of a bestseller like, say, Fifty Shades of Grey.... The Occupy movement laid the groundwork for a great debate. What was happening to America? Were we witnessing the rise of a plutocracy or the emergence of a meritocracy? Chris Hayes and Joe Stiglitz made the case on the left, while Tyler Cowen and David Brooks provided a counter-narrative for the right... but it was Piketty whose meticulous examination of the evidence, seemed to provide the impartial proof audiences were craving. The left was right....

Tyler Cowen: Thomas Piketty’s Capital in the Twenty-First Century has been a hit for several reasons, most notably the quality of the work. But I’d like to focus on a neglected reason why the book has found so much support, namely it appears to strengthen the case for redistribution.... As these issues get processed by the public there is a common attitude--whether justified or not--that many of the lower earners are partially or fully responsible for their own plight. The egalitarians don’t tend to win these policy debates.... If you are an activist who favors lots of redistribution, the Piketty story is a lot easier to tell yourself and to tell your audiences--and that is yet another reason for its popularity....

Emanuel Derman: Economists are the new nuclear physicists, turned to by governments for advice as though they are heirs to the power of the scientists who created Hiroshima.... Though I should, I can’t bring myself to read Thomas Piketty. I wish I could.... I am just spiritually weary of the ubiquitous cockiness of economists, though Piketty sounds as though he’s less guilty of this than most of the pundits in the daily papers.... My gripe with economists is not that their models don’t work well--they don’t, look at the role of central banks in the financial crisis--but that they seem so reluctant to acknowledge the riskiness of their advice. And yet, beware their fearsome unelected power...

Noted for Your Morning Procrastination for September 21, 2014

Over at Equitable Growth--The Equitablog

Why is Thomas Piketty's 700-Page Book a Bestseller?: (Early) Monday Focus for September 22, 2014 - Washington Center for Equitable Growth
Morning Must-Read: Steven J. Davis and John Haltiwanger: Labor Market Fluidity and Economic Performance - Washington Center for Equitable Growth
Morning Must-Read: Barry Ritholtz: After 30,000 Posts... - Washington Center for Equitable Growth
Morning Must-Read: Sam Wang: Senate Conditions Are Back To September 3 - Washington Center for Equitable Growth
Econometrics: One Thing That I Have Never, Ever Understood. Never. And Probably Never Will...: Very Late Thursday Focus for September 18, 2014 - Washington Center for Equitable Growth

Plus:

http://equitablegrowth.org/2014/09/21...

Must- and Shall-Reads:

Joshua Brown: iPhone 6: Adventures in Global Manufacturing

 

Sam Wang: Senate Conditions Are Back to September 3: "As of today, conditions in the battle for Senate control are just about back to where they were on the day after the shake-up in the Kansas Senate race. Using polls alone in a 2-3 week window (see right sidebar), current medians show the following key margins: Alaska D+5%, Colorado D+2%, Iowa D+0.5%, North Carolina D+4%, and Kansas I+5.5%. In an election based on today’s polled sample, the most likely outcome is 51 votes for Democrats and Independents. [Update: see comments. At the moment, significant drivers of the difference between PEC and other sites appear to be (1) we're using all polls, including partisan ones, which changes Alaska; and (2) we're using Kansas two-candidate matchups and don't have fundamentals to drag those polls in the GOP direction.]"

Barry Ritholtz: After 30,000 posts, Big Picture blogger has figured a few things out: "After more than a decade of getting up before the crack of dawn to write a daily journal about all things financial, here is what I’ve learned: (1) Writing is a good way to figure out what you think.... (2) Writing is a good way to become a better writer.... (3) Mainstream media ignored blogs, occasionally stole from, then adopted the format wholesale.... (4) Content: creativity, criticism and curation. Content is king. When you are asking people to read you several times a day, you better have some fine content. Mixing original content, intelligent criticism and curation (a.k.a. reading linkfests) has been a successful formula for me.... I would describe it [as]... 'First, here is something I CREATED which I think is worthwhile; second, THAT OVER THERE is wrong and not especially compelling and here’s why; and third, you should see ALL OF THESE. They are excellent.' I am oversimplifying, but that’s the basic three-part content structure of a good blog.... Reader comments have become useless.... This is a shame. At one time, commenters had tremendous value within given communities.... (5) Advertising is a terrible business model (unless you are Google).... (6) Authors vs. publishers. People read publications less than they do authors.... There is a caveat.... Any powerful platform will potentially expose a writer to a wider audience. That has been my experience here at The Washington Post as well as on Bloomberg View. (7) People lie to themselves.... For a data guy like me, this is both utterly fascinating and somewhat disturbing.... Whenever I encounter someone who refuses to accept reality, all I can do is shrug and remind myself that someone has to be on the losing side of the trade. It might as well be him. (8) It can be difficult for readers to distinguish between good information and distracting nonsense. Despite a tremendous amount of information online, readers are still mired in lots of bad thinking and disproven memes."

Steven J. Davis and John Haltiwanger: Labor Market Fluidity and Economic Performance: "U.S. labor markets became much less fluid in recent decades. Job reallocation rates fell more than a quarter after 1990, and worker reallocation rates fell more than a quarter after 2000. The declines cut across states, industries and demographic groups defined by age, gender and education. Younger and less educated workers had especially large declines, as did the retail sector. A shift to older businesses, an aging workforce, and policy developments that suppress reallocation all contributed to fluidity declines. Drawing on previous work, we argue that reduced fluidity has harmful consequences for productivity, real wages and employment. To quantify the effects of reallocation intensity on employment, we estimate regression models that exploit low frequency variation over time within states, using state-level changes in population composition and other variables as instruments. We find large positive effects of worker reallocation rates on employment, especially for men, young workers, and the less educated. Similar estimates obtain when dropping data from the Great Recession and its aftermath. These results suggest the U.S. economy faced serious impediments to high employment rates well before the Great Recession, and that sustained high employment is unlikely to return without restoring labor market fluidity."

Paul Krugman: Conservative Canadian Cockroach "Oh, my. Josh Barro tells us that conservatives are once again touting Canada as a role model, in particular using its experience in the 90s to claim that austerity is expansionary after all. I think this qualifies as a cockroach idea (zombies just keep shambling along, whereas sometimes you think you’ve gotten rid of cockroaches, but they keep coming back.) I thought we had disposed of all this four years ago. But nooooo. Barro hits the main points. Canadian austerity in the 1990s was offset by a huge positive movement in the trade balance, due to a falling Canadian dollar and raw material exports.... Also, the whole debate about austerity versus stimulus was driven by the problem that interest rates were at the zero lower bound, so that there wasn’t any easy way to offset the effects of austerity. Canada in the 1990s? Not so much.... However, Josh misses a trick. When dealing with right-wing claims about economic data, you should never forget Moore’s Law: not only shouldn’t you accept their assertions, you should assume that what they say is probably wrong.... So conservatives have fallen in love with an imaginary Canada, whose history and current reality is nothing like the real place. Are you surprised?"

Jason Millman: Millions have joined Medicaid under Obamacare. Here’s what they think of it: "All the study participants said they feel better off with free or low-cost Medicaid coverage... worry less about being able to afford bills or see a doctor.... The majority said they've already used their coverage and feel healthier.... Most said they didn't even know they were eligible for Medicaid.... There's some confusion about what the program actually covers, and researchers found some feared receiving low-quality or limited care. The enrollees' biggest problem has been finding a primary care doctor.... Some new enrollees in the focus groups said they had to call at least six practices to find a doctor.... Others said they weren't used to the process of finding a primary care physician, and others didn't try because they didn't see an urgent need to find one..."

And Over Here:

Why is Thomas Piketty's 700-Page Book a Bestseller?: (Early) Monday Focus for September 22, 2014 (Brad DeLong's Grasping Reality...)
Weekend Reading: Dean Baker: Influencing the Debate from Outside the Mainstream: Keep it Simple (Brad DeLong's Grasping Reality...)
Liveblogging the American Revolution: September 21, 1776: The Great Fire of New York (Brad DeLong's Grasping Reality...)
Over at Equitable Growth: Econometrics: One Thing That I Have Never, Ever Understood. Never. And Probably Never Will...: Very Late Thursday Focus for September 18, 2014 (Brad DeLong's Grasping Reality...)
For the Weekend: The Original Four Yorkshiremen (Brad DeLong's Grasping Reality...)
Liveblogging World War II: September 20, 1944: Eleanor Roosevelt (Brad DeLong's Grasping Reality...)

Should Be Aware of:

Federico Vittici: iOS 8 Changed How I Work on My iPhone and iPad
Scott Kaufman: 9 college freshmen dead in alcohol-related incidents in first weeks of new school year
Robert Hutchins (1951): The Freedom of the University

 

Benedict Carey: Implant bolsters memory in rats: "Scientists have designed a brain implant that restored lost memory function and strengthened recall of new information in laboratory rats.... In the new work, being published today, researchers at Wake Forest University and the University of Southern California... read neural activity... [and] translated those signals internally, to improve brain function rather than to activate outside appendages.... Scientists at Wake Forest led by Sam A. Deadwyler trained rats to remember which of two identical levers to press.... To test the effect of the implant, the researchers used a drug to shut down the activity of CA1. Without CA1 online, the rats could not remember which lever to push to get water.... The researchers, having recorded the appropriate signal from CA1, simply replayed it, and the animals remembered. The implant acted as if it were CA1, at least for this one task..."

Nick Cohen: Alex Salmond's tactic of making the rest of the UK the enemy was depressingly successful: "WHEN the great leader makes his last bow, there’s an awful temptation to play the hypocrite and mutter warm words.... For me the true measure of Alex Salmond’s worth came last weekend when a crowd of protestors surrounded BBC Scotland’s headquarters.... Nick Robinson had asked hard questions of the first minister at a rigged press conference packed with SNP stooges and said on air that Salmond had ducked them. The demonstrators found his lèse-majesté intolerable. They demanded the BBC fire their political editor for holding power to account. Think about it. A mob takes to the streets because the first minister does not like what an independent journalist has said about him.... By voting No and seeing Salmond resign, it looks to me as if Scotland has had a 'joyous' escape. A view confirmed when I read how he had tried to force the principal of St Andrews University to tone down her warning that independence would bring a 'catastrophic' loss of UK research funds. St Andrews is an ancient, revered and, above all else, independent Scottish institution. But Salmond couldn’t tolerate Professor Louise Richardson behaving as free women in free countries ought to behave and speaking her mind.... I hope there’ll be a reassessment of the guff he said about 'civic nationalism'. How soothing that phrase sounds. How cuddly and safe. On the one hand, we have the nasty nationalism that start wars and racial conflicts. On the other, civic nationalism, which wouldn’t hurt a fly.... It’s not true.... Even though he lost, Salmond’s tactics of making the rest of the UK the enemy were depressingly successful."

Leah Schnelbach: H.G. Wells Invented Everything You Love: "H.G. Wells is considered one of the fathers of science fiction, and if you look at a brief timeline you’ll see why he’s so extraordinary: 1895: The Time Machine. 1896: The Island of Doctor Moreau. 1897: The Invisible Man. 1898: The War of the Worlds. 1901: The First Men in the Moon. So basically for four consecutive years Wells got out of bed on New Year’s Day and said, 'What ho! I think I’ll invent a new subgenre of scientific fiction!' And then he took a year off, only to return with a story about a moon landing. If it wasn’t for that gap in 1900, he probably would have invented cyberpunk, too..."

Why is Thomas Piketty's 700-Page Book a Bestseller?: (Early) Monday Focus for September 22, 2014

Over at the Grauniad Guardian: Why is Thomas Piketty's 700-page book a bestseller? I like Thomas Piketty’s Capital in the Twenty-First Century a lot. It follows Larry Summers’s advice – which I have always thought wise--that the further ahead in time we want to forecast, the further back in time we should look. It deals with very big and important questions. It takes a broad moral-philosophical view, rather than a narrow technical-economist view. It combines history, quantitative estimation, social science theory, and a deep concern with societal welfare in a way that is too rare these days.

But I thought it would be a book for a narrow audience: me and a few others. I expected people who did not have the souls of accountants to start to snore at Piketty’s numbers, numbers, numbers and more numbers.

What we can think about is why the soil was fertile: why was there the potential for a mass-audience viral explosion of interest in Capital in the Twenty-First Century rather than our standard set of viral propagation memes – cat videos and Buzzfeed’s Twenty-Seven Things You Won’t Regret When You Are Older?

I confess that I do not know. I do have a guess. My guess is that the book-buying upper-middle class of America today is greatly distressed when it looks at the world around it, specifically at two things.

The first is that our society today is largely failing its non-migrant non-college-completing majority, in that for all of our cheap electronic toys, life is no easier than it was a generation ago in spite of an enormous explosion of technology and productivity.

The second is that they now know of a plutocracy that did not use to exist and makes us very uneasy. Last generation’s Michigan governor and American Motors president George Romney lived in a large-but-not-abnormal house and bossed a company that created lots of good jobs at good wages. This generation’s Massachusetts governor and Bain Capital CEO Mitt Romney has seven houses worth perhaps $25m in total, and bossed a company whose core business model appears to have been exploiting legal anomalies like the fact that pension funds have little control over their money after it’s invested.

And because the book-buying upper-middle class does not trust the entrenched positions of America’s ideologues, they are looking for fresh thinking – which a foreigner like Piketty, whose positions are not those of any large American political faction, provides.

Now Piketty’s grand argument may be wrong. It could be that in the future, capital will turn out to complement rather than substitute for labor, and the wealth accumulation of plutocrats will generate their self-euthanasia as a social class by pushing down the rate of profit.

It could turn out that growing fortunes will be a lot harder in the future than Piketty thinks it will. It could turn out that our plutocrats as a social class will decide to play the status game of spend-their-money-and-change-the-world rather than enrich great-grandchildren that they will never see.

My guess is that the grimmer elements of Piketty’s forecast have only a 50-50 chance of coming true even if plutocrats achieve and maintain a lock on politics for the next three generations. But that is much more than enough to worry about the scenario he paints, and figure out how to guard against it.

And a longer version:

I like Thomas Piketty's Capital in the 21st Century a lot. It follows Larry Summers's advice--which I have always thought wise--that the further ahead in time we want to forecast the further back in time we should look. It deals with a very big and important questions. It takes a broad moral-philosophical view, rather than a narrow technical-economist view. It combines history, quantitative estimation, social science theory, and a deep concern with societal welfare in a way that is too rare these days. I think it is a very good book.

But I thought it would be a book for a narrow audience: me, and a few others. I expected people focused on the present to be bored with Piketty's history. I expected (correctly!) my economist peers to be disgruntled at Piketty's refusal to fit his argument into the Procrustean bed of math-heavy theory. I expected (correctly!) the paid and professional right to be angry are at Piketty as they are angry at any work that does not pretend that the problems of controversy will solve themselves. I expected people who did not have the souls of accountants to start to snore at Piketty's numbers, numbers, numbers, and more numbers. I did not expect it to attract 10 times the audience of Carmen Reinhart and Ken Rogoff's truly excellent [This Time Is Different][2]--but then I did not expect This Time Is Different to attract one-tenth of the audience it did either.

That Piketty's book in particular would become the breakthrough mass-audience book for its topic is in large part arbitrary--the chaotic result of the particular butterfly-wing flaps that we cannot and should not see--just as why Reinhart and Rogoff became the breakthrough mass-audience book for its topic was similarly unknowable.

What we can think about is why the soil was fertile: why was there the potential for a mass-audience viral explosion of interest in Capital in the Twenty-First Century rather than our standard set of viral propagation memes--cat videos and Buzzfeed's "Twenty-Seven Things You Won't Regret When You Are Older"?

And here I confess that I do not know. I do have a guess. My guess is that the book-buying upper-middle class of America today is greatly distressed when it looks at the world around it at two things: (1) that our society today is largely failing its non-immigrant non-college-completing majority, in that for all of our cheap electronic toys life is no easier than it was a generation ago in spite of an enormous explosion of technology and productivity; and (2) that they now know and know of a plutocracy that did not use to exist and makes us very uneasy--last generation's Michigan governor and American Motors president George Romney lived in a large-but-not-unnormal house and bossed a company that created lots of good jobs at good wages, while this generation's Massachusetts governor and Bain Capital CEO has seven houses worth perhaps $25 million in total, and bossed a company whose core business model appears to have been exploiting legal anomalies like the fact that pension funds have cash-flow rights but not control rights.

And because the book-buying upper-middle class does not trust the entrenched positions of America's ideologues, they are looking for fresh thinking--which a foreigner like Piketty, whose positions are not those of any large American political faction, provides. It is a well-written book that meets a strong demand for advice from a fresh point of view on an urgent and important problem--and the chaotic butterfly-wing flap does the rest.

Now Piketty's grand argument may be wrong. It could be that in the future capital will turn out to complement rather than substitute for labor, and the wealth accumulation of plutocrats will generate their self-euthanasia as a social class by pushing down the rate of profit. (John Maynard Keynes back in the 1930s thought that was our destiny, and it was Marx's insistence that capital did not complement but substituted for labor that was his biggest mistake of all in analyzing the 1850s.) It could turn out that growing fortunes will be a lot harder in the future than Piketty thinks it will. It could turn out that our plutocrats as a social class will decide to play the status game of spend their money and change the world rather than enrich great-grandchildren that they will never see. My guess is that the grimmer elements of Piketty's forecast have only a 50-50 chance of coming true even if plutocrats achieve and maintain a lock on politics for the next three generations.

But that is much more than enough to worry about the scenario he paints, and figure out how to guard against it.

[2]: http://www.amazon.com/gp/product/0691... Reinhart and Rogoff Amazon link

Weekend Reading: Dean Baker: Influencing the Debate from Outside the Mainstream: Keep it Simple

Dean Baker: Influencing the Debate from Outside the Mainstream: Keep it Simple: "If people working outside of the mainstream of the profession are going to have any impact...

...on economic policy debates in the United States it is essential that they understand the forum in which the debate is taking place. This is not a contest of ideas where the best arguments and evidence win out. If we are talking about a debate within the economics profession, think of debating the morality of abortion with the pope in front of the College of Cardinals. That is pretty much what it is like to try to challenge any of the main precepts of economics within the economics profession.

The route for making progress is to get outside of the profession. For this it is necessary to appeal to people in policy positions, to reporters, to the general public, or to people who might follow economic debates, but don’t have extensive backgrounds in economics. And it is important to recognize what you are asking these people to do. You are asking these people to accept your claims over the claims of the most prominent economists in the profession.

This means that you better keep what you have to say simple. It is unlikely that many people are going to take the time to consider a complex argument even if it doesn’t require a PhD in economics to understand. To my mind the gold standard is a chart with two bars, where bar A is bigger than bar B. To make this point, I will briefly recount some of the economic debates in which I have been involved where the truth, justice, and non-mainstream economists won out over the forces of accepted wisdom coming from the elites of the profession.

The first, and perhaps best, example is the debate over the famous Reinhart-Rogoff 90 percent debt cliff that was kicked off by a paper by Thomas Herndon, Michael Ash, and Robert Pollin (HAP) which showed that cliff story depended on an Excel spreadsheet error.[1] When the error was corrected the sharp falloff in growth that Reinhart and Rogoff had found at debt-to-GDP ratios above 90 percent disappeared. Instead they found a negative relationship between debt-to-GDP ratios and growth at all levels, with the sharpest trade-off actually occurring at debt-to-GDP ratios around 25 percent.[2]

These revised results were radically at odds with the conclusions from the uncorrected paper which had been widely cited in policy debates in the United States and elsewhere. The fact that an Excel spreadsheet error was something that could be widely understood allowed for the media and the general public to appreciate the nature of the debate. Even Stephen Colbert got into the act, devoting a segment of his show to ridiculing Reinhart and Rogoff.

While correcting this error did not turn around the austerity debate, it certainly did open up space. The claim that there was some immediate need for sharp cuts in public debt in order to avert the cliff disappeared from the radar screen. We went back to the more traditional arguments about the virtues of balanced budgets.

The response of the economics profession to this error and its exposure was instructive. To a large extent there was a rallying around Reinhart and Rogoff, two prominent Harvard economists who established their reputations with a long track record of publications in top journals. It was as though HAP had been wrong to drag down the names of such well-regarded economists over a simple spreadsheet error.

Betsey Stevenson and Justin Wolfers gave us an example of this attitude in a piece in which they “refereed” the debate. They told readers:

It has been disappointing to watch those on the left seize on the embarrassing Excel errors but ignore this bigger picture.[3]

Of course we all make mistakes and no one would like to be publicly embarrassed over having once inaccurately copied numbers in an Excel spreadsheet. But perspective is desperately needed here. The Excel spreadsheet error was the reason the debate was taking place. Reinhart and Rogoff would not ordinarily be responding to criticisms from two University of Massachusetts professors and their grad student. If this had been a debate just over the correct aggregation method or econometric techniques, it would never have gotten far beyond the PERI website. Few people without advanced training in economics would follow that debate, but everyone can understand an Excel spreadsheet error.

The other point worth noting is that even if we take the most generous possible interpretation of Reinhart-Rogoff’s behavior in this matter, it is hard to see it in a positive light. They have said that the error resulted from the fact they were rushing to finish a draft for presentation. In a later version of the paper the erroneous calculation does not appear. But this later version does not have the 90 percent cliff.

Reinhart and Rogoff are both very intelligent people who surely knew how their work was being used in public debates. They had discussed their work with members of Congress, central bankers, and finance ministers. They knew that it was the 90 percent cliff threshold that was being held up in policy debates, not the finding of a general negative relationship between debt-to-GDP ratios and growth rates. Even if they had been rushed to finish the initial draft, it is difficult to believe that they could not have found the time to check their calculations or ask a graduate assistant to do so in the nearly three and half years between when the working paper was issued and when HAP was written.

Instead of being disappointed by the conduct of Reinhart and Rogoff, Stevenson and Wolfers are disappointed by the people on the left who were highlighting the error. I don’t mean to impugn Stevenson and Wolfers, both of whom are very good center-left economists. However, their attitude in this case shows the tribalism of the profession. If there is a question of seeking out the truth versus protecting leading lights in the profession, the bulk of the profession will opt for the latter. This is the reality that those outside the mainstream must recognize and overcome.

Fortunately the Reinhart-Rogoff spreadsheet error-type situations are not all that rare in economics. I will briefly go through a few with which I have some familiarity.

The Boskin Commission Tackles Social Security

Back in the mid-1990s we also had a serious bout of deficit hysteria comparable to the one we’re seeing today. The Very Serious People of that day (some of whom are still Very Serious People) all agreed that we had to move to balance the budget. Then as now, Social Security was one of the prime targets. Then Federal Reserve Board Chair Alan Greenspan came up with the innovative approach of reducing benefits by cutting the annual cost-of-living adjustment payment. His argument was that the consumer price index substantially overstated the true rate of inflation. He argued that the government could save a vast amount of money over the next decade by reducing the annual cost-of-living adjustment to something like one percentage point less than the rate of inflation shown by the CPI. There would also be large increases in revenues since the tax brackets are indexed to inflation also, as are a number of other government benefits.

Senator Daniel Patrick Moynihan, who was then head of the Senate Finance Committee, eagerly embraced this plan. He got the committee to appoint a commission of prominent economists, headed by Michael Boskin, the chief economist in President George H.W. Bush’s administration, to review the evidence and make recommendations to the committee.[4]

The Boskin commission issued its report in late 1996 just after President Clinton and the Republican Congress had both been re-elected. (The scene was more than a little comical, with technical discussions of items like hedonic price adjustments and geometric means versus arithmetic means drawing packed crowds of reporters, many of whom probably had not heard of the CPI six months earlier.) The commission’s assessment was that the CPI overstated the true increase in the cost of living by roughly 1.1 percentage point annually. They suggested that Congress appoint a group of experts to report the “true” rate of inflation each year, which would then be the basis for the indexation of benefits and taxes rather than the CPI calculated by the Bureau of Labor Statistics.

This general plan had a great deal of support in both parties in Washington, with the Very Serious People leading the charge. It also had substantial support in the economics profession. At the 1997 AEA convention Martin Feldstein moderated a panel on the report, which in addition to the commission members also included Yale University Professor William Nordhaus and M.I.T. Professor Jerry Hausman. The only person not pushing the commission report was Katherine Abraham, who was then Commissioner of the Bureau of Labor Statistics. In this capacity she could raise some questions about the specifics of the Boskin Commission report, but she could not be an open opponent of the commission’s plan.

While the evidence for the commission’s claim was weak (many of its claims of inadequate quality adjustments were based on introspection with much of the actual research being close to three decades old), it was difficult to challenge the assessment of many of the most prominent economists in the country. However, there was a very simple logical implication of the report that was hard for many people to accept. If inflation was in fact overstated by 1.1 percentage points annually, then it meant that real wages and real income had been rising by 1.1 percentage points more rapidly than the official data indicated.

This is just definitional. If nominal wages had risen 4.0 percent and the CPI showed a 3.0 percent inflation rate, then real wages would be reported as having increased by 1.0 percent. However, if the true rate of inflation was just 1.9 percent (1.1 percentage point less than the measure shown by the CPI), then real wages actually increased by 2.1 percent. When this difference in wage and income growth is carried back thirty or forty years it implies that people in the fifties and sixties were much poorer than the data indicate. In fact, it meant that most people who grew up in middle income families in the 1950s would have had a standard of living that was roughly at the poverty level in the mid-1990s. This didn’t strike many people as being right.[5]

Ultimately what killed the Boskin Commission report was the refusal of Richard Gephardt, the leader of the Democrats in the House to go along with the plan.[6] His opposition was key, because Gephardt was the most credible challenger at the time to then Vice-President Al Gore for the Democratic Presidential nomination in 2000. There was no better issue that Gephardt could have been given in the Democratic primaries than a cut in Social Security benefits. Gephardt could point to Gore as the person who cut your Social Security benefits, while he was the guy who tried to stop him.

Without Gephardt’s buy in, Clinton was not about to go forward. It also helped that the stock bubble and faster than projected growth led the deficit to fall much more than had been projected. It is worth noting that in spite of the near unanimity of the leading lights in the economics profession on the existence of a large bias in the CPI, the Bureau of Labor Statistics did not take steps to correct most of the bias identified by the Boskin Commission. The Government Accountability Office surveyed the four surviving members of the Boskin Commission in 2000. (Zvi Grilliches had died the prior year.) In their assessment, more than 0.8 percentage points of the bias they identified in the CPI remained even after BLS had made a series of changes in the index.[7] Yet few economists take account of this bias in their work or in discussions of economics policy.[8]

Stock Returns and Social Security: No Economist Left Behind

Shortly after he won the 2004 election, President Bush said that he had just gained some political capital and that he intended to now use it. The task at hand was privatizing Social Security. Bush’s team claimed that he could give workers a much better deal if they just put their money in private accounts rather than using Social Security’s old-fashioned one-size-fits-all model.

There were many good reasons to oppose going this route. The individual accounts would add a large element of risk in what is supposed to be workers’ core retirement income. They would also increase the administrative costs of the system by an order of magnitude. But the big potential attraction to many people who were not especially political was the promise of getting a much higher benefit on average from investing their money in the stock market. This promise of a higher return in the stock market in turn rested on the assumption that stocks would provide a 7.0 percent real return, their historic average.[9]

The problem with this assumption is the price to earnings ratios in the stock market were far above their historic average. This meant that, given the profit growth assumptions that are implicit in the Social Security trustees GDP and wage growth assumptions, it would be impossible for stocks to provide their historic rate of return going forward.

Arguing this point directly on its merits required more attention from reporters and people in policy positions than they were prepared to sacrifice; so we came up with a better way to make the point. We developed the “no economist left behind test.”[10] The test is very simple. Stock returns are the sum of capital gains and dividend payouts. That’s it; there is nothing else to enter into the mix. Based on this fact, the test asked economists to write down decade by decade averages for dividend yields and capital gains that would add up to give their 7.0 percent real return over Social Security’s 75-year forecasting horizon.

This was a simple way to show the 7.0 percent assumption was nonsense. Either price to earnings ratios would have to rise into the hundreds or it would be necessary to have stories of the whole corporate sector paying out more than their 100 percent of their after-tax profits in dividends. No self-respecting economist wanted to be associated with either of these positions.

We first posted this challenge on our website, however we were already in the early days of the blogosphere. Many progressive econ bloggers soon picked it up. This led to howls of anguish and outrage by conservatives. Some threw in the towel and acknowledged that it could not be done. Others wanted to change the assumptions so that we had more rapid GDP growth or a shift in income from wages to profits.

Finally Paul Krugman blasted the test into the national debate with a column in early February.[11] This exposed the fact that the privatizers were essentially just making up numbers. By showing there was no pot of gold in the private accounts, we were able to take the money out of it for typical workers. This drove home the point that there was no real potential for gain with privatization along the lines being proposed, just additional risk. This helped prevent the privatization plan from gaining any momentum. By the spring, most Republican members of Congress were running away from privatization as fast as they could.

Exploding Deficits and Health Care Costs

The deficit hysteria business is a major growth industry in Washington. Politicians have always been anxious to exploit public fears over borrowing; but the burgeoning industry of groups dedicated to highlighting the threat posed by deficits and debt largely owes its existence to Peter Peterson. Peterson made his fortune as the founder of the Blackstone, one of the country’s largest private equity companies. Over the last quarter century Peterson has started and/or funded a large set of organizations that focused on promoting concerns over deficits, including the Concord Coalition, the Committee for a Responsible Federal Budget, and Fix the Debt.

The basis for the hysteria stems largely from projections that show rapidly rising health care costs increasing government spending though programs like Medicare and Medicaid. The impact is hugely magnified with the assumption that revenues are never increased so that we get an exploding cycle of debt and deficits. To heighten anxieties these shortfalls are always expressed in the trillions of dollars rather than as a share of GDP. This only makes sense as a strategy to promote fear since virtually no one can make any sense of a deficit of $200 trillion over the infinite horizon. The deficit hawks also like to lump in Social Security with the health care programs to imply that the issue is one of an aging population rather than a broken health care system.

This is one of those great cases where a simple bar chart goes very far towards telling the basic story of why their deficit concerns should not be taken seriously. The projections from the Social Security and Medicare trustees give us an exact amount that we would have to raise taxes in order to keep both programs fully funded. Going three decades out to 2045 the projections show that we would have to raise the payroll tax by a total of 4.97 percentage points to keep both programs fully funded.[12] By comparison the Social Security trustees project that the average real wage will be more than 57 percent higher in 2045.[13] However, if we continue to see the same pattern of upward redistribution as we have seen in the years since 1980, then most workers will see little or none of the gains from this wage growth. All the benefits from growth will go to those in the top half of the wage distribution; with those at very top getting a grossly disproportionate share of the gains.

The point is that for most workers their prospective living standards are far more threatened by a continuing upward redistribution of income than by any plausible tax increases associated with the projected increase in the cost of Social Security and Medicare.

And of course the preferred policy in elite circles for preventing tax increases is cuts in benefits, which will leave these workers with lower living standards in their retirement years.[14] It would be difficult for anyone looking at this bar graph to explain why the prospect of an increase in payroll taxes of less than 5 percentage points over the next three decades should be of so much greater concern than an upward redistribution that costs workers an amount that exceeds 55 percent of their current wage.

There may not always be a simple story to describe every economic situation, but on many key issues the simple explanation does just fine. (We still need the simple story to explain why government debt is not a burden on our kids. The person who develops this story should get the people’s Nobel in economics.) Given that the only route for progress on economic policy issues depends on going outside the profession we have no choice but to find the simple explanation.

Economics may be too simple for economists to understand, but thankfully most of the rest of the world can pick it up with the right story. The job of non-mainstream economists is to tell that story.

[1] Herndon, Ash, and Pollin, 2013, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff, available at http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf

[2] Remarkably, Reinhardt and Rogoff had not tested for causality. When subsequent work did test for causality it found the direction of causation was overwhelmingly from slower growth to higher debt (e.g. Arin Dube 2013, “Reinhart/Rogoff and Growth in a Time Before Debt,” http://www.nextnewdeal.net/rortybomb/guest-post-reinhartrogoff-and-growth-time-debt

[3] “Refereeing the Reinhart-Rogoff Debate” http://www.bloombergview.com/articles/2013-04-28/refereeing-the-reinhart-rogoff-debate

[4] In the initial set of hearings held by the finance committee, Dale Jorgenson, who was then head of Harvard’s economics department, had the equivalent of an Excel spreadsheet error. He testified that due to a mistake in the construction of CPI in the 1970s, Social Security benefits were about 10 percent higher than had been intended by Congress. He suggested that the committee design legislation to phase down the level of benefits to the level that would be in effect had there not been this mistake in the CPI in the 1970s. Senator Moynihan and others on the committee were prepared to act on this suggestion.

In reality there was much less money to be gained by correcting this CPI error than Jorgenson claimed. Social Security benefits are only indexed to the CPI after people retire. This meant that the people who had gotten excessive benefits because of the mistake in the CPI in the 1970s were in their 80s and 90s by the middle of the 1990s.

While several people (including me) tried to point this out to Professor Jorgenson and the committee, it took a study by the Treasury Department to convince Moynihan that there was little to be gained by going this route. After the Treasury issued its study Jorgenson finally corrected his testimony to the committee.

[5]The flip side of wage growth being far more rapid than the official data show is that people in the future will be far wealthier than standard projections indicate. I was once on a radio show with then Senator Alan Simpson, who was a big proponent of the Boskin Commission report. He managed to get the story exactly backwards, ranting that the 1.1 percent estimate was on the low side and saying that he has economists who tell him the overstatement might be 1.5 percent or even 2.0 percent. He then concluded that our children our going to be living in chicken coops. Of course the implication his claim was that they would be living in penthouses, enjoying living standards that are vastly higher than those of their parents and grandparents.

[6] I knew Gephardt’s former chief of staff and was able to pass along my work on the issue. He may have never looked at it, but it gave him something to hold up when he talked about the issue.

[7] Government Accountability Office, 2000. “Update of the Boskin Commission’s Estimate of Bias in the Consumer Price index,” GGD-00-50 http://www.gao.gov/products/GGD-00-50

[8] Many economists do argue for using the personal consumption deflator rather than the CPI since it uses chain weighting rather than a fixed weight index. This would eliminate 0.25-0.3 percentage points of the bias identified by the Boskin Commision, still leaving the bulk of their 0.8 percentage points (0.5 to 0.55 percentage points) to bias our understanding of the economy.

[9] President Clinton had made the same assumption in his proposal to invest much of the trust fund in the stock market near the peak of the 1990s bubble. I first wrote about this issue in reference to the Clinton administration’s proposal, “Saving Social Security With Stock: The Promises Don’t Add Up.” Century Foundation, 1997 http://www.tcf.org/assets/downloads/tcf-savingSS97.pdf.

[10] This is available on the Center for Economic and Policy Research’s website at http://www.cepr.net/documents/publications/noeconleftbehind_2004_11.pdf

[11] “Many Unhappy Returns,” February 1, 2005 http://www.nytimes.com/2005/02/01/opinion/01krugman.html

[12] This is found in Table V1.G2 of the 2014 Social Security Trustees Report http://www.ssa.gov/OACT/tr/2014/VI_G1_OASDHI_payroll.html#170627. In fairness, this figure does not include tax increases that might be necessary to sustain Parts B and D of the Medicare program, which are financed largely from general revenue. It also doesn’t take account of any feedback effect whereby a higher tax rate may be associated with less income.

[13] This is calculated from the projected real wage differentials shown in Table V.BI http://www.ssa.gov/OACT/tr/2014/V_B_econ.html#292722

[14]An alternative route for saving on Medicare would be to bring health care costs in the United States in line with costs in other wealthy countries. This would primarily mean cutting payments to doctors, hospitals, and other providers.

Liveblogging the American Revolution: September 21, 1776: The Great Fire of New York

Great Fire of New York (1776) - Wikipedia:

The Great Fire of New York was a devastating fire that burned through the night of September 21, 1776, on the west side of what then constituted New York City at the southern end of the island of Manhattan. It broke out in the early days of the military occupation of the city by British forces during the American Revolutionary War. The fire destroyed 10 to 25 percent of the city and some unburned parts of the city were plundered. Many people believed or assumed that one or more people deliberately started the fire, for a variety of different reasons. British leaders accused revolutionaries acting within the city, and many residents assumed that one side or the other had started it. The fire had long-term effects on the British occupation of the city, which did not end until 1783....

When the American Revolutionary War broke out in April 1775, the city of New York... occupied only the lower portion of the island of Manhattan, and had a population of approximately 25,000... was politically divided, with active Patriot organizations and a colonial assembly that was strongly Loyalist. After Lexington and Concord, Patriots seized control of the city, and began arresting and expelling Loyalists....

British General William Howe... occupying Staten Island in July... launched a successful attack on Long Island in late August.... George Washington recognized the inevitability of the capture of New York City, and withdrew the bulk of his army about 10 miles (16 km) north to Harlem Heights.... General Nathanael Greene and New York's John Jay advocated burning the city down to deny its benefits to the British. Washington laid the question before the Second Continental Congress, which rejected the idea....

On September 15, 1776, British forces under General Howe landed on Manhattan. The next morning, some British troops marched toward Harlem, where the two armies clashed again, while others marched into the city.... The tables were turned, and the property of Patriots was confiscated for the British army's use....

In the early hours of September 21, 1776, fire broke out in the city. According to the eyewitness account of John Joseph Henry, an American prisoner aboard the HMS Pearl, it began in the Fighting Cocks Tavern, near Whitehall Slip. Abetted by dry weather and strong winds, the flames spread north and west, moving rapidly among tightly packed homes and businesses. Residents poured into the streets, clutching what possessions they could, and found refuge on the grassy town commons (today, City Hall Park). The fire crossed Broadway near Beaver Street, and then burned most of the city between Broadway and the Hudson River. It raged into the daylight hours, and was stopped as much by changes in the wind as by the actions of some of the citizenry and British marines sent, according to Henry, "in aid of the inhabitants." It may also have been stopped by the relatively undeveloped property of King's College, located at the northern end of the fire-damaged area.

The total number of buildings destroyed is not known with precision; estimates range from 400 to 1,000, between 10 and 25 percent of the 4,000 city buildings.....
General Howe's report to London implied that the fire was deliberately set: "a most horrid attempt was made by a number of wretches to burn the town". Royal Governor William Tryon suspected that Washington was responsible, writing that "Many circumstances lead to conjecture that Mr. Washington was privy to this villainous act" and that "some officers of his army were found concealed in the city". Many Americans also assumed that the fire was the work of Patriot arsonists. John Joseph Henry recorded accounts of marines returning to the Pearl after fighting the fire in which men were "caught in the act of firing the houses."... Some Americans accused the British of setting the fire so that the city might be plundered....

According to historian Barnet Schecter, no accusation of arson has withstood scrutiny. The strongest circumstantial evidence in favor of arson theories is the fact that the fire appeared to start in multiple places. However, contemporary accounts explain that burning flakes from wooden roof shingles spread the fire....

Major General James Robertson confiscated surviving uninhabited homes of known Patriots and assigned them to British officers. Churches, other than the state churches (Church of England) were converted into prisons, infirmaries, or barracks. Some of the common soldiers were billeted with civilian families. There was a great influx of Loyalists refugees into the city resulting in further overcrowding, and many of these returning Loyalists encamped in squalid tent cities on the charred ruins. The fire convinced the British to put the city under martial law rather than returning it to civilian authorities. Crime and poor sanitation were persistent problems during the British occupation, which did not end until the city was evacuated in November 1783.

Morning Must-Read: Steven J. Davis and John Haltiwanger: Labor Market Fluidity and Economic Performance

Steven J. Davis and John Haltiwanger: Labor Market Fluidity and Economic Performance: "U.S. labor markets became much less fluid in recent decades...

...Job reallocation rates fell more than a quarter after 1990, and worker reallocation rates fell more than a quarter after 2000. The declines cut across states, industries and demographic groups defined by age, gender and education. Younger and less educated workers had especially large declines, as did the retail sector. A shift to older businesses, an aging workforce, and policy developments that suppress reallocation all contributed to fluidity declines. Drawing on previous work, we argue that reduced fluidity has harmful consequences for productivity, real wages and employment. To quantify the effects of reallocation intensity on employment, we estimate regression models that exploit low frequency variation over time within states, using state-level changes in population composition and other variables as instruments. We find large positive effects of worker reallocation rates on employment, especially for men, young workers, and the less educated. Similar estimates obtain when dropping data from the Great Recession and its aftermath. These results suggest the U.S. economy faced serious impediments to high employment rates well before the Great Recession, and that sustained high employment is unlikely to return without restoring labor market fluidity.

Morning Must-Read: Barry Ritholtz: After 30,000 Posts...

Barry Ritholtz: After 30,000 posts, Big Picture blogger has figured a few things out: "After more than a decade of getting up before the crack of dawn...

...to write a daily journal about all things financial, here is what I’ve learned: (1) Writing is a good way to figure out what you think.... (2) Writing is a good way to become a better writer.... (3) Mainstream media ignored blogs, occasionally stole from, then adopted the format wholesale.... (4) Content: creativity, criticism and curation. Content is king. When you are asking people to read you several times a day, you better have some fine content. Mixing original content, intelligent criticism and curation (a.k.a. reading linkfests) has been a successful formula for me.... I would describe it [as]... 'First, here is something I CREATED which I think is worthwhile; second, THAT OVER THERE is wrong and not especially compelling and here’s why; and third, you should see ALL OF THESE. They are excellent.' I am oversimplifying, but that’s the basic three-part content structure of a good blog.... Reader comments have become useless.... This is a shame. At one time, commenters had tremendous value within given communities....

(5) Advertising is a terrible business model (unless you are Google).... (6) Authors vs. publishers. People read publications less than they do authors.... There is a caveat.... Any powerful platform will potentially expose a writer to a wider audience. That has been my experience here at The Washington Post as well as on Bloomberg View. (7) People lie to themselves.... For a data guy like me, this is both utterly fascinating and somewhat disturbing.... Whenever I encounter someone who refuses to accept reality, all I can do is shrug and remind myself that someone has to be on the losing side of the trade. It might as well be him. (8) It can be difficult for readers to distinguish between good information and distracting nonsense. Despite a tremendous amount of information online, readers are still mired in lots of bad thinking and disproven memes.

Morning Must-Read: Sam Wang: Senate Conditions Are Back To September 3

Sam Wang: Senate Conditions Are Back to September 3: "As of today, conditions in the battle for Senate control...

...are just about back to where they were on the day after the shake-up in the Kansas Senate race. Using polls alone in a 2-3 week window (see right sidebar), current medians show the following key margins: Alaska D+5%, Colorado D+2%, Iowa D+0.5%, North Carolina D+4%, and Kansas I+5.5%. In an election based on today’s polled sample, the most likely outcome is 51 votes for Democrats and Independents. [Update: see comments. At the moment, significant drivers of the difference between PEC and other sites appear to be (1) we're using all polls, including partisan ones, which changes Alaska; and (2) we're using Kansas two-candidate matchups and don't have fundamentals to drag those polls in the GOP direction.]