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Thursday, August 24, 2006

AMUSING? AND PERFECT!   Reader Dudley Crawford responds to my observation that Paul Krugman aspired to be a "psychohistorian" from his childhood reading of Asimov's Foundation sci-fi trilogy.
I take it you've never read the trilogy he spoke of. If you had, you would know that psychohistory turned out to be a fake. It was all machinations of a 20,000 year old robot. (It is sci-fi, after all!) It's truly amusing that he wanted to be...a fake.
Update... Reader Fred Manzo remembers it a little differently:
I believe that was not mentioned in the original Foundation trilogy, but in its much later extensions.
Apparently Fred is right.Update [8/25/2006]... Reader Dudley Crawford adds:
I knew it was a later book but since the Robot series went to 20 books and I've read them all I didn't feel like exposing my extreme sci-fi geekiness. And that Wikipedia failed to mention that Asimov's short stories contained the first sketches of Daneel. The funny thing is that even in the first trilogy there are a lot of clues that [pscyhohistory founder] Hari Seldon is a fake.

Posted by Donald L. Luskin at 2:42 PM | link  

DO I GET ROYALTIES EVERY TIME IT'S USED?   Reader Robert Morley writes,
It seems you have contributed a verb to the English language - to be "Truth Squaded." But are you flattered?
Uh... I was until I followed the link Robert sent me.

Posted by Donald L. Luskin at 12:37 PM | link  

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LAFFER LAYS A ROTTEN EGG IN HIS DUFFLE BAG  
Arthur Laffer is a great American. But his op-ed on Fed policy in this morning's Wall Street Journal is a mish-mash of errors, misconceptions and loopy technical analysis. It starts from the very first line.

"You'd have to dig pretty far down in the duffle bag of economists to find one who actually believes in the Philips Curve -- the idea that rapid growth causes inflation."

Oh yeah? There's one duffle bag Art didn't look in, I guess: the Fed itself. Hasn't Art read Chairman Ben Bernanke's most recent testimony to Congress on inflation and the economy?

"...the growth in economic activity should moderate... Should that moderation occur as anticipated, it should help to limit inflation pressures..."

If Bernanke believes that slowing growth causes slowing inflation, then doesn't he believe that growth causes inflation? It's easy to find dozens of such constructs in Bernanke's speeches, and speeches and reports from other Fed officials (and just about any established monetary economist -- it's actually a pretty full duffle bag).

I could go on and on about Laffer's column, but my friend Bret Swanson at the Discovery Institute has already done a terrific job. Here's Bret:

Dr. Laffer is a national hero, who helped launch the U.S. to world economic leadership and, maybe more importantly, exported his low-tax ideas to a world in desperate need of capitalism. We are all benefiting from this global transformation that he and his mentor Robert Mundell envisioned. We continue to be somewhat flummoxed, however, over Dr. Laffer's views on monetary policy, which seem to contradict many of his earlier teachings.

Dr. Laffer's model appears to:

-- completely decouple commodity prices from Federal Reserve policy.

-- completely decouple the foreign exchange value of the dollar from Fed policy.

-- link the dollar's forex value exclusively to U.S. fiscal policy.

-- link commodity prices exclusively to economic growth and also fluctuations in the dollar "unrelated" to monetary policy.

In Dr. Laffer's model, the Fed appears to be a mostly impotent, almost meaningless entity.

-- Dr. Laffer says the dollar's strength between 1996 and 2002 resulted from the great economic policies of Presidents Clinton and Bush 43. But Bush 43's good economic policy didn't begin until the tax cut of 2003, which is when the dollar began its fall. Bush 43's great fiscal policy thus corresponds not with the strong dollar Laffer would predict but a weak dollar instead.

-- Dr. Laffer says the dollar weakening of 1985-1993 was due to the "end of the Reagan era and George Bush's and Bill Clinton's original tax increases." But the dollar weakening that began in late 1985 was a direct, concerted, and public effort of the Plaza Accord, and the weakening began before the tax reform of 1986, which was the most relevant fiscal event of that era.

-- Dr. Laffer grounds his benign inflation call almost entirely in what he sees as modest growth of the monetary base. But he does not appear to take into account rising velocity.

-- Dr. Laffer says expected inflation gleaned from TIPS bonds is the best predictor of inflation, but in fact TIPS have not been very good at all at predicting inflation.

-- IF...Growth = High Commodity Prices...AND...Growth = Strong Dollar...THEN...High Commodity Prices = Strong Dollar. But we all know this is almost never the case, and it's not the case now by a long shot.

-- For example, how do you explain the distinct periods of

> (1) the late 1990s when we had strong growth, a very strong dollar, and very low commodity prices; and

> (2) today when we have strong growth, a weak dollar, and very high commodity prices?

The difference, one can only conclude, is monetary policy. Likewise, in the early to mid-1980s, we had strong growth and a strengthening dollar. In the mid- to late 1980s, we had strong growth and a weakening dollar. The explicit difference was monetary policy.

-- Dr. Laffer then turns around and agrees with us that high commodity prices are determined partly -- or "exacerbated" in his term -- by a weak dollar. But he steadfastly denies that either has anything to do with the Fed. This after the Fed has just engaged in some four years of an explicitly "accomodative" monetary policy. Moreover, this accomodation was transmitted to China via the dollar-yuan currency link. So any extra commodity demand coming from China since 2003 has been in large part a result of a weak dollar supercharging an already fast-growing Chinese economy. And so we're right back where we started -- the Fed.

As former German banker Otmar Emminger said in 1985, the value of the dollar is "the most important price in the world economy." I don't see how we can ignore, let alone repudiate, this key theoretical tenet and practical guide.


Posted by Donald L. Luskin at 12:05 PM | link  


Wednesday, August 23, 2006

OH WHY, OH WHY -- OH WHY! -- CAN'T WE HAVE BETTER MORBIDLY OBESE BLOGGERS?   Can someone please answer that question for me? Krugman Truth Squad member Gene Epstein, author of Econospinning, sent me a note tonight about Brad DeLong's review of his book. Perhaps Epstein sent it to me because he knows that DeLong suppresses any critical views of himself on his blog.
When Brad DeLong makes a negative judgment of a book, he is quite capable of doing it fairly and honestly. As a case in point, read his sympathetic but highly critical judgment of New York Times reporter Louis Uchitelle's recent book on layoffs ("Americans Idle," New York Times Book Review, Apr 2, 2006, p. 20.).

But in his own sweeping dismissal of my book ("Tyler Cowen," he writes, "did a bad thing in recommending Econospinning"), he falls far short of his own standard. Just for starters, I needn't tell him that a reviewer of a book should always make due acknowledgment when he himself is mentioned critically in that book. Better still, he might explain why the criticisms made of his views—on which he is surely a uniquely qualified expert--are either correct or incorrect. Could DeLong really not have noticed that his own name is listed in the index of my book, with more than one page reference? His over-heated language alone ("Idiot. Fool") makes me doubt his claim that he opened "at random" to page 143; I get the impression he felt provoked. But if he did not notice, then I can only tell him he ought to read the series of chapters that include critical mention of him.

They are important chapters, principally on the way New York Times columnist Paul Krugman—and from a very different perspective, the Wall Street Journal editorial board—grossly misrepresented the labor data.

Instead, DeLong condemns my book as "bad" by dealing "at random" with just a single topic covered in three of its pages that is only loosely related to the central theme of the book. All the important topics to which Tyler Cowen alludes, are ignored. In fact, if DeLong only read my discussion more carefully, he would see that I did not commit the naïve error he attributes to me--which would indeed be an odd slip for a veteran of a market-oriented weekly like Barron's. For a full response to his criticism, I refer interested readers to my own blog—econospinning.com—dedicated to keeping a log on reactions to my book it should be up and running by this Friday, August 25th.

Since DeLong has proved himself quite capable of generating light rather than heat when even strong disagreements arise, I hope he adheres to that standard in any future exchanges between us.


Posted by Donald L. Luskin at 12:04 AM | link  


Tuesday, August 22, 2006

A COUNTERFACTUAL   Libertarian economist Tyler Cowen offers many answers to the question of why there is "a correlation between being a libertarian economist and being a die-hard sci-fi/fantasy geek." But what explains this from Paul Krugman, telling how science fiction drew him into very not libertarian economics.
Admittedly, there were those science fiction novels. Indeed, they may have been what made me go into economics. Those who read the stuff may be aware of the classic Foundation trilogy by Isaac Asimov. It is one of the few science fiction series that deals with social scientists -- the "psychohistorians", who use their understanding of the mathematics of society to save civilization as the Galactic Empire collapses. I loved Foundation, and in my early teens my secret fantasy was to become a psychohistorian. Unfortunately, there's no such thing (yet).
Krugman's idealized "psychohistorians" were just the kind of Leftist elite Krugman aspires to create and be part of -- a class of intellectuals who secretly control the destiny of everyone and everything.

Posted by Donald L. Luskin at 3:14 PM | link  

I JUST CAN'T GET ENOUGH SHELBY STEELE   Another fantastic Wall Street Journal op-ed, by the only conservative who writes with confidence on the basis of a psychological interpretation of history:
Hatred and murder are self-realization because they impart grandeur to Islamic extremists -- the sense of being God's chosen warrior in God's great cause. Hatred delivers the extremist to a greatness that compensates for the ineffectuality in his world. Jews and infidels are irrelevant except that they offer occasion to hate and, thus, to experience grandiosity. This is why Hezbollah -- Party of God -- can take no territory and still claim to have won. The grandiosity is in the hating and fighting, not the victory...

White guilt in the West -- especially in Europe and on the American left -- confuses all this by seeing Islamic extremism as a response to oppression. The West is so terrified of being charged with its old sins of racism, imperialism and colonialism that it makes oppression an automatic prism on the non-Western world, a politeness. But Islamic extremists don't hate the West because they are oppressed by it. They hate it precisely because the end of oppression and colonialism -- not their continuance -- forced the Muslim world to compete with the West. Less oppression, not more, opened this world to the sense of defeat that turned into extremism...

Over and over, white guilt turns the disparity in development between Israel and her neighbors into a case of Western bigotry. This despite the fact that Islamic extremism is the most explicit and dangerous expression of human bigotry since the Nazi era. Israel's historical contradiction, her torture, is to be a Western nation whose efforts to survive trap her in the moral mazes of white guilt. Its national defense will forever be white aggression.

But white guilt's most dangerous suppression is to keep from discussion the most conspicuous reality in the Middle East: that the Islamic world long ago fell out of history. Islamic extremism is the saber-rattling of an inferiority complex.


Posted by Donald L. Luskin at 9:02 AM | link  


Monday, August 21, 2006

ANOTHER CRIME WITH NO THERE THERE   From Eric Savitz's Tech Trader Daily blog:
Interesting op-ed piece in Sunday’s San Jose Mercury News asserts that in most instances, stock-options backdating resulted from paperwork issues, not intentional fraud. The piece, written by Jahan P. Raissi and Jason P. Lee, both former SEC enforcement attorneys now with the San Francisco law firm Shartsis Friese, is consistent with what Cowen’s Arnie Berman has been saying for weeks now: that in many cases, the punishment of individual stock prices has been worse than the crime. Hunting intelligently for bargains among the stocks slogging through stock-option backdating problems seems like a smart idea to me.

Posted by Donald L. Luskin at 7:31 PM | link  

BE PROUD OF THE MORALITY OF FREE TRADE   This says it all. What better way to be "charitable" to the developing world than to buy their trade goods?

This brilliant idea is brought to you by the brilliant folks at the Adam Smith Institute. Send them an email at wristband@adamsmith.org and they'll send you a wristband -- free! Thanks to Greg Mankiw for the link.

Posted by Donald L. Luskin at 7:08 PM | link  

TOM FRIEDMAN HAS A LITTLE CREDIBILITY ISSUE, TOO   It's bad enough that his book The World is Flat positions him as some kind of visionary, when in fact it's nothing but a rehash of stuff that economists and futurists have been spouting for decades ("this is a phenomenon that I call, 'outsourcing'"). What's worse is that he takes his unearned credibility from this and uses it to platform loopy ideas for saving the world that are based on lies. Hank Payne from National Review Online:
Earlier this summer, Friedman embarrassed himself badly in Detroit by making the sweeping, ignorant assertion that no company is “more dangerous to America’s future” than struggling General Motors because its marketing of sport-utility vehicles (SUVs) perpetuates America’s “addiction to oil.” By contrast, Friedman’s May 31 column maintained GM’s arch-rival Toyota is rolling in green because it has gone Green with its innovative hybrid vehicles...

As...every auto analyst — knows, Toyota is making billions in the U.S. market precisely because it has adapted remarkably well to the American consumer’s taste for well-made SUVs. And for Toyota, margins on trucks exceed those on cars by some seven times.


Posted by Donald L. Luskin at 9:01 AM | link  

KRUGMAN BECOMES INCREASINGLY ISOLATED   His professional peers in the economics community find him increasingly uncredible as he rants about income inequality being the result of deliberate political action to advantage the rich at the expense of the poor. Dartmouth's Andrew Samwick:
I'll forgive him the odd switches between real wages and real wages in manufacturing, as well as the comparisons of wages for one group with income for another group. I'll even agree with him about his (later) discussions of where Republican Eisenhower and Democrat Clinton fit in their respective eras. I'll even forgive him the seemingly obvious point that in the "New Gilded Age," the income gains do seem to be at the high end, refuting his critique of Paulson's first point (under the very reasonable assumption that the top 1 percent is on average "highly educated.")

What always puzzles me about Paul Krugman and his claims about inequality is why he doesn't seem to realize how silly he sounds when he refuses to acknowledge, and take some pride in the fact, that he is part of that top 1 percent. I find it hard to imagine that Paul Krugman's income in 2004 wasn't above $277,000, between his income from his university, his speaking engagements, his books, his columns, and his investments.

Now, does Paul Krugman think that he was just a tool of the "New Gilded Age" politicos? Does he owe his income gains to the people he despises, those nasty Republicans and that ridiculously centrist Clinton? I'd like to know. I suspect that if you asked him why his income grew to the point where he's in the top 1 percent, he would give some long answer, the shorter version of which is that he's "highly educated" and he's not lazy.

Harvard's Greg Mankiw:
Paul is correct when he says that income inequality has been rising over the past three decades (although he overstates the stagnation for the middle class by relying on numbers that exclude fringe benefits--see this previous post). But I agree with Andrew that Paul is on shaky ground when trying to explain rising income inequality by politics (as opposed to technology, demography, and so on). Policy choices such as tax rates and minimum wages have not been the main causes of increasing inequality. At least that is the consensus, as I understand it, of the professional labor economists who study the issue.
And even Berkeley's Brad DeLong:
The problem that I have with Paul Krugman's argument here is that the shifts in income inequality seem to me to be too big to be associated with anything the government does or did. Yes, Roosevelt and company were pushing in the right direction. Yes, Reagan, Gingrich, Bush, and company have been pushing in the wrong direction. But what they did and do affects (I think) after-tax income inequality much more than the before-tax income inequality numbers, and the before-tax numbers show the trends remarkably strongly. And I can't see the mechanism by which changes in government policies bring about such huge swings in pre-tax income distribution.
Update... George Mason's Tyler Cowen:
If we take the left-wing view that money doesn't make people much happier, and hard work is an oppressive rat race, the change in the distribution of utility is much much less than the change in the distribution of income. In fact it is easy to argue that the United States has become more egalitarian in terms of well-being. Most people get penicillin, and in utility terms a $20,000 stereo isn't much better than a $400 stereo.
Update 2... Editorial comment: For all this disagreement, Krugman must be gratified that the economics blogosphere at least acts like it gives a hoot about what he has to say anymore. It's been a long time.

Update 3 [8/22/206]... North Carolina's John Seater (via email):

I am at a disadvantage discussing Krugman's article because I haven't read it, nor will I do so because I am not about to shell out the subscription fee the Times requires. (That's how markets work. The price goes up, and the demand, especially for a generally lousy product, goes down.) However, there are some obvious things to say here, and I will stick my neck out and say them without the benefit of having read Krugman's article.

First, by far most income inequality is the result of two things: (1) choices people make and (2) the "life cycle." Some people choose not to have children until they are married, choose to finish school, choose to acquire skills, choose to work lots of hours. Other people make other choices. Any income inequality resulting from those different choices is *good*, not bad. Furthermore, even people with the same skills, willingness to work, etc. have different incomes at different stages of their lives. The lowest quintile of the income distribution disproportionately comprises young people and old people; the highest quintile is disproportionately middle-aged. The young on average will make average incomes later but haven't had time to do it yet. The old are retired, have low earned income by definition, but also may have accumlated quite a lot of wealth. The middle-aged are at the peak of their earnings. These people have very unequal current incomes, even though they may *identical* paths of income over their lifetimes. Why are such income differences of any concern to policy makers? That's a fundamental problem with the usual mindless yak about the *current* income distribution. To the extent the income distribution matters at all, what should matter about it is the "life-cycle" or "permanent" income distribution, which takes account of life-cycle differences. We know that the distribution of permanent income is *much* more equal than that of current income because the distribution of current consumption (a good proxy for permanent income) is much more equal. Economists such as Krugman know that. What I never understand is why so many of them ignore it.

Finally, if government programs are the reason for a "worsening" income distribution, isn't that one of the most powerful arguments a left-winger could come up with for *opposing* vast government programs?

Power tends to corrupt, you know. Why should we expect the power to manipulate the income distribution to be any different? Wouldn't we expect politicians to reward their friends, or at least their benefactors? Don't left-wingers believe that rich people have more ability to buy influence than poor people? Shouldn't left-wingers therefore want to stick with the ideas of the Founding Fathers and the US Constitution and keep the federal government out of places it doesn't belong, such as redistributing income for arbitrary reasons? Somehow, left-wingers, ever so eager to find market failures, never seem to see the overwhelmingly larger government failures, or to see that those government failures are the natural results of obvious incentives and not subject to any natural countervailing force, in contrast to the marketplace's competition, entry, and invention.

Why do we keep having these same arguments over such obvious points?


Posted by Donald L. Luskin at 8:50 AM | link