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Tuesday, March 30, 2004

Richard Clarke

In his recent book, Against All Enemies, Richard Clarke "slammed the Bush administration for paying insufficient attention to the terrorist threat in the summer of 2001." Clarke also praises the Clinton administration during the March 24, 2004 9/11 Commission Hearings for it's efforts fighting terrorism:
CLARKE: My impression was that fighting terrorism, in general, and fighting Al Qaida, in particular, were an extraordinarily high priority in the Clinton administration -- certainly no higher priority. There were priorities probably of equal importance such as the Middle East peace process, but I certainly don't know of one that was any higher in the priority of that administration.
However, this description of the world by Clarke is absolutely and completely the opposite of how he described the world in August, 2002:
RICHARD CLARKE: Actually, I've got about seven points, let me just go through them quickly. Um, the first point, I think the overall point is, there was no plan on Al Qaeda that was passed from the Clinton administration to the Bush administration.

Second point is that the Clinton administration had a strategy in place, effectively dating from 1998. And there were a number of issues on the table since 1998. And they remained on the table when that administration went out of office -- issues like aiding the Northern Alliance in Afghanistan, changing our Pakistan policy -- uh, changing our policy toward Uzbekistan. And in January 2001, the incoming Bush administration was briefed on the existing strategy. They were also briefed on these series of issues that had not been decided on in a couple of years.

And the third point is the Bush administration decided then, you know, in late January, to do two things. One, vigorously pursue the existing policy, including all of the lethal covert action findings, which we've now made public to some extent.

And the point is, while this big review was going on, there were still in effect, the lethal findings were still in effect. The second thing the administration decided to do is to initiate a process to look at those issues which had been on the table for a couple of years and get them decided.

So, point five, that process which was initiated in the first week in February, uh, decided in principle, uh in the spring to add to the existing Clinton strategy and to increase CIA resources, for example, for covert action, five-fold, to go after Al Qaeda.

The sixth point, the newly-appointed deputies -- and you had to remember, the deputies didn't get into office until late March, early April. The deputies then tasked the development of the implementation details, uh, of these new decisions that they were endorsing, and sending out to the principals.

Over the course of the summer -- last point -- they developed implementation details, the principals met at the end of the summer, approved them in their first meeting, changed the strategy by authorizing the increase in funding five-fold, changing the policy on Pakistan, changing the policy on Uzbekistan, changing the policy on the Northern Alliance assistance.

And then changed the strategy from one of rollback with Al Qaeda over the course of five years, which it had been, to a new strategy that called for the rapid elimination of Al Qaeda. That is in fact the timeline. [...]

JIM ANGLE: You're saying that the Bush administration did not stop anything that the Clinton administration was doing while it was making these decisions, and by the end of the summer had increased money for covert action five-fold. Is that correct?

CLARKE: All of that's correct.
Clarke now claims he was lying during the August 2002 interview, but he is now telling the truth. Not surprisingly, a quick scan shows that left leaning websites believe this and right leaning sites think that Clarke is lying now and was telling the truth in August 2002. My personal belief is that once someone has been shown (and admits to) lying for personal gain in the past (he was making his employer look good), anything they say that could possibly be for personal gain in the future (e.g., it might sell more books) should be heavily discounted.

In a presidential election, about 40% of Americans vote Democrat no matter what and about 35% vote Republican no matter what. The keys to winning the election are to get out the vote from your party and to get the swing voters to vote for you. It doesn't look to me like Clarke's "revelations" will significantly affect the turnout of the party faithful for either party. The more interesting question is what effect, if any, it will have on swing voters. My guess is that this debate has occurred too early to have much of an effect (very few will remember this when they vote in November). I also guess that the Democrats will choose not to keep it in the forefront since there has been some negative mainstream press and Senator Bill Frist has threatened to prosecute Clarke for lying under oath to Congress:
Third, Mr. Clarke has told two entirely different stories under oath. In July 2002, in front of the Congressional joint inquiry on the Sept. 11 attacks, Mr. Clarke testified under oath that the administration actively sought to address the threat posed by Al Qaeda during its first seven months in office.

It is one thing for Mr. Clarke to dissemble in front of the media. But if he lied under oath to the United States Congress, it is a far more serious matter. As I mentioned, the intelligence committee is seeking to have Mr. Clarke's previous testimony declassified so as to permit an examination of Mr. Clarke's two different accounts. Loyalty to any administration will be no defense if it is found that he has lied before Congress.

Fourth, notwithstanding Mr. Clarke's efforts to use his book first and foremost to shift blame and attention from himself, it is also clear that Mr. Clarke and his publishers adjusted the release date of his book in order to make maximum gain from the publicity around the 9/11 hearings. Assuming the controversy around this series of events does in fact drive the sales of his book, Mr. Clarke will make quite a bit of money for his efforts.

I find this to be an appalling act of profiteering, trading on his insider access to highly classified information and capitalizing upon the tragedy that befell this nation on Sept. 11, 2001.
If the Democrats do keep this in the forefront of the media's attention, I'm still not sure what effect it will have with swing voters. I have a hunch that Karl Rove, with all that Republican money and his talent, will be able to more than counteract Clarke's charges. The problem is that each time the Democrats attack Bush in this manner only to have Rove and company mitigate the effect by casting doubt on the perpetrators, the swing voters may become even more skeptical about new information. Unfortunately, that may further diminish Kerry's ability to make headway against Bush.

GG IV an Unqualified Success

Fantastic time this weekend! Thanks again to Bret who was host and guide extraordinaire.

Now, back to the battle! I enjoyed our political discussions in the desert. Sometimes talking through things opens up new doors. With regard to the impossibility of the government snuffing out terrorism, I was pleased to log on to the von Mises Institute site and find this article. Here's one excerpt:

"There can be no question about this administration's Iraq fixation. The Bush regime had it in for Iraq for a whole range of reasons, from personal vendettas to oil to regional political issues and probably a few others we are not privy to. It certainly cries out for explanation why this poor country, ruled by a man the US had long backed, suffering under sanctions for a decade after an unjustified war, should be invaded and occupied even though it represented no threat to the US."

The author, Llewellyn H. Rockwell, Jr., concludes: "...the only real way to prevent terrorism is to do less in the way of government policy and more in the way of private provision and trade, which would be far easier to do if the warfare state would stop fomenting trouble all around the world."

Although I don't agree with every nuance, the article resonated with me, and, as usual, was more eloquent than I was in trying to make the case against militarism.

Before I close, I'll note one other article on the von Mises site about Republicanism. It's a pretty strong indictment of our current administration's big government policies. The author rightly notes that the Democrats are bad actors in this regard as well. But, as Bret noted, at least if we have a Democratic President we're less likely to accumulate corrupting power at the federal level. The bottom line is, the current administration is not even remotely close to the principles of libertarianism. It's hard for me to understand, Howie, how you can hang your hat on this premise.

Here's my abbreviated case against the Bushies:
- A strong preference for attempting to solve problems with military and policing solutions
- Poor trade policies: steel tariffs; ag and energy subsidies; lack of leadership in multilateral trade agreements (Doha round)
- Patriarchal positions on "morality" (desire to roll back abortion rights, Constitutional amendments against gays)
- Deliberately suppressing Medicare bill cost estimates (see Richard Foster)
- Deliberately suppressing/ignoring information contrary to preconceived goals (see Richard Clarke)
- Lack of leadership on environmental issues. By the way, I'm not way to the left on this issue; as this NOAA report - which strikes me as reasonably balanced and broadly participative - suggests, there is little doubt that human activity is raising the concentrations of greenhouse gases, and that this in turn is causing temperatures to rise (notwithstanding Howie's earlier post from 30 years ago about an upcoming ice age).
- Usurping issues that should be left to the states (e.g., school testing)
- Alienating allies and people around the world
- Allowing deficits to escalate to a point at which our economic options have, at best, become severely limited

Indeed, I find it difficult to identify one thing the administration has done well.

Wednesday, March 24, 2004

Europe Will Show Us the Way

Niall Ferguson of AEI argues that Europe will have even worse problems with unfunded liabilities and that these problems will occur sooner:
The German population is projected to decline absolutely from 82 to 67 million between now and 2050. Falling populations will be a characteristic feature of the once globally dominant societies of Western Europe. An increase in retirement ages would help only slightly, but it is not an adequate answer to the problems that already beset the social security systems of Western Europe. The implicit liabilities of the German social security system at the moment are currently around about 270 percent of German GDP. There are problems with the social security and Medicare systems in this country--very serious problems indeed. But the problems in Europe are much worse, and they will bite politically much sooner.
I've seen this same argument by a number of other economists and virtually no opposing views. Thus, we will have the opportunity to watch Europe try various solutions to their problems and can implement the ones that work the best ourselves. No reason to try to fix it now without the benefit of that extra information.

Tuesday, March 16, 2004

U.S. Economic Present

Here's an interesting perspective from our favorite magazine, the Economist:
Waiting for the job recovery might be a good time to take a broader measure of the material well-being of Americans. Their condition is widely held to be perilous. The economy, it is said, is being "hollowed out" by international competition and the connivance of business and political elites, creating "two Americas", one rich, one poor. Median income of American households, commentators often say, has been stagnant, though census figures give a rise of one-fifth since 1980. Lou Dobbs, on CNN's "Lou Dobbs Tonight", is just one media fabulist who makes his living by claiming that, as America is being "exported", so the well-being of middle Americans is in a parlous state.

It is a good story, but false on many levels. For a start, this slow growth in median income overlaps with a scale of immigration into America outpacing all immigration in the rest of the world put together. Many immigrants have come precisely to take up the lowest-paid jobs. As a result, in the 20 years to 1999 some 5m immigrant households were added to those defined as below the poverty level. Yet among native-born Americans, poverty rates have declined steadily since the 1960s. In the case of black families, median incomes have recently been rising at twice the pace for the country as a whole.

Strip out immigrants, and the picture of stagnant median incomes vanishes. Indeed, for the nine-tenths of the population that is native-born, middle-income trends continue their improvement of the 1950s and 1960s. For these people, inequality is not rising, but falling. Gregg Easterbrook cheekily points out in his excellent recent book, "The Progress Paradox" (Random House), that if left-leaning Americans seriously want better statistics about middle-income gains, then they should simply close their borders.

Mr Easterbrook points to something else about the figures for median household income. A quarter-century ago a typical household had three members. Today, it has just 2.6 members. Simply by this effect, median households have seen their real incomes rise by a half.

Another measure of improved well-being is increased access to jobs. Between 1980 and 2002 Americans in work rose by over 40%, a far brisker pace than the 26% growth in the population. Some three-quarters of the adult population are now in work, close to a record and some ten percentage points higher than in Europe.

One reason is more teenagers in work: over the same period, teenage employment grew by nearly two-thirds. As Andrew Hacker points out in the New York Review of Books, teenagers are a significant source of low-paid labour in supermarkets, shopping malls and fast-food franchises. Exploitative? Hardly, since it helps them buy cars and independence.

Yet the chief reason for higher participation is more women in work, notably married women. Very roughly, in the past half-century the average weekly hours worked by married women have tripled, while hours worked by men and single women have stayed about constant. The usual reason given is that married women have had to work so that families can make ends meet. A recent study* by three economists, Larry Jones, Rodolfo Manuelli and Ellen McGrattan, published by the Federal Reserve Bank of Minneapolis, punctures that notion. They find that the tripling of married women's hours can be explained entirely by a gender wage-gap that has narrowed. That is, a smaller pay differential between men and women gives married women sufficient incentive to invest in education and careers.

Of course, many American households struggle to survive on minimum-wage jobs with employers who do them few favours. We will look at low-paid work in a future week. What this piece attempts to argue is that the middle is far from being hollowed out. As Mr Easterbrook emphasises, most Americans have at least two cars and their own house, and they send their children to college. Certainly a bigger share of household income is being spent on things that did not feature 50 years ago, such as high-tech health care. But it has brought the benefit of a longer and better life, and not just for the old: since 1980, infant mortality has fallen by 45%.

At the end of last year, America's household wealth, at $44 trillion, passed the previous peak set in early 2000...
Compare this last household wealth number with the "staggering $45 trillion" of "American government's future obligations" that another Economist article that Jim links to worries about. Including the assets, the balance sheet doesn't look so bad, does it? Especially since the vast majority of those liabilities are Social Security and Medicare entitlements which can become un-entitled if we so choose (or if not un-entitled because of morality qualms, then particularly heavily taxed, or, in other words, means tested).

Tuesday, March 09, 2004

U.S. Economic Future

I've started reading articles on health care from sources with differing viewpoints. Needless to say, it's a complicated issue. Bret, if Lory has come across any studies that she thinks are insightful, I'd appreciate the references.

But, I keep getting distracted by the issue -- which Howie and I have disagreed about -- concerning the health of the U.S. economy. As I don't want to be accused of reading only the Economist, I've been perusing other sources. You can judge their credibility. The first is an article from Fortune. My guess is that you won't be able to see the entire article unless you already subscribe. So, if you're interested, use my address to sign in. I like this article because it does a fairly good job of sorting out where the trends are heading in the next 10+ years if we don't make any signficant changes in the management of our federal finances.

The second article is from the Ludwig von Mises Institute. I think the author makes a good point that deficits are not bad per se (a position I believe the Economist would agree with), but deficits with the characteristics of ours spell trouble.

Both of these articles criticize our current economic policy. To be fair, there's another article in Fortune by David Malpass that suggests we (citizens/consumers) shouldn't be so worried. However, the article seems to have a fairly narrow perspective in terms of the relatively near future and the potential impact of higher interest rates. By and large, though, I'm finding few articles with a sanguine outlook.

Howie, I'm anxiously awaiting your rationale for why the U.S. economy will be fine. I'd like to believe you are right, but, for now, I remain dubious.

Populism and Presidential Candidates

I've often wondered why presidential candidates running on a populist message have fared so poorly in the past. Surely, if the majority of the national income accrues to the top 20% of income earners, there must be some appeal to a populist message. Recently, via a convoluted path, I stumbled across some data that might shed some light on why the populist message has been unsuccessful. The convoluted path is interesting, so I'll start there.

Not only do I complain about errors in liberal articles, I am also often dismayed by conservative articles as well. I just don't trust the media - any of it. I occasionally email authors who publish ridiculous statements. They usually don't respond. For example, I've emailed Krugman in the past but got no response.

In a recent article by Thomas Sowell, a conservative economist, I saw a statement that seemed absurd to me:
Not only is the average real income per person rising in the bottom 20 percent of the income distribution, people seldom stay in the bottom brackets for more than a few years. Over the course of their lifetimes, most of those same people are in the top 20 percent at one time or other.
Most of the bottom 20 percent end up in the 20 percent? Seemed rather far fetched to me. So I emailed the author asking for some supporting data and got the following response:
The information you quoted is from a larger discussion of income differences in chapter 9 of my "Basic Economics." The sources are listed in the back of the book. I happen to have extra copies of the galleys and will send you one if you give me a mailing address.
I sent him my mailing address. I wasn't exactly sure what a galley was. I thought it was the where you cook on a boat or a ship that was powered by rowing (I was wondering if it would come complete with ancient Roman slaves to do the rowing). So I was quite curious to see what was going to come in the mail.

Turns out a galley seems to be a copy of the book before they've filled in the page numbers in the table of contents. In other words, some sort of early printed draft of a book. Oh well, not nearly as interesting as I had hoped, but probably more useful for the task at hand.

Sure enough, in chapter nine, Sowell writes something similar:
An absolute majority of those Americans who were in the bottom 20 percent in income in 1975 were also in the top 20 percent at some point over the next 16 years.
Also, as promised, the sources were listed in the back of the book.

The primary source is the 1995 Annual Report of the Federal Reserve Bank of Dallas. The following table appears in the report:
Income quintile in 1975 Percent in each 1975 quintile in 1991 In 5th 1975 quintile sometime in 1976-91
1st 2nd 3rd 4th 5th
5th (highest) .3 2.5 7.7 20.1 69.4 98.4
4th 1.0 6.6 16.0 30.0 46.4 78.6
3rd (middle) 2.2 15.6 24.1 32.0 26.1 48.2
2nd 2.1 19.9 19.9 25.2 32.9 52.6
1st (lowest) 2.3 14.0 17.6 26.9 39.2 57.0

In the report, the table has the following caption:
Judging by a constant measure of living standards -- income quintiles of 1975 -- 39.2 percent of those individuals in the lowest income quintile in 1975 managed, by 1991, to achieve a real income comparable to that of the highest income group in 1975. Only 2.3 percent of this group remained at a living standard equal to the lowest of 1975. Of those individuals who were at the highest living standard in 1975, 69.4 percent were able to at least maintain that standard.
From this table, Sowell's second quote is technically correct. However, to be clearer, I think it probably should have been written:
An absolute majority of those Americans who were in the bottom 20 percent in income in 1975 were also in the top 20 percent of 1975 incomes at some point over the next 16 years.
However, this change doesn't have a whole lot of impact on the meaning.
Sowell's first quote isn't quite right. I'm guessing its creation was mostly sloppiness. He based it on his other quote which wasn't tightly worded and based on other data. So my guess was right that the first quote was incorrect.

However, the quote isn't nearly as far fetched as I had anticipated. The FRB report does show incredible income mobility. If the data is correct and the FRB's interpretation of the data is reasonable, it would easily explain why class warfare doesn't work very well. Most of the "poor" will soon not be, and they probably know it. No reason to increase taxes on higher brackets since they will be there soon.

Is the data correct? I don't know. The data is taken from the Panel Study of Income Dynamics, a large "nationally representative longitudinal study of nearly 8,000 U.S. families. Following the same families and individuals since 1968, the PSID collects data on economic, health, and social behavior." Hundreds of studies which have influenced policy have utilized this data so I hope it's good. The study design looks reasonable, but studying people is hugely difficult, so you never really know.

Is the interpretation reasonable? I don't know. However, the data is available on line and I've added it to my list of things to do to see if I can derive similar results.

The results are so stunning that if the data and analysis are any good at all, it shows the people in the U.S. have surprising income mobility. There aren't really any stable classes, so class warfare and populist messages are going to have limited appeal.

Senator Kerry might want to consider that as he hones his political rhetoric over the next few months.

Saturday, March 06, 2004

No Apology Necessary

The verbal jousting is what I come for.

Thanks for laying out your policy preferences. I'll ask you a few questions and raise a few issues, later.

Friday, March 05, 2004

Whoops! An Apology

Jim, if there was a tone of condescension in my last post, please accept my apologies. I think it was more of a reflection of my exasperation over certain lines of reasoning appearing in this blog. This is obviously a reflection of my limitations and not yours. As for angst over personal circumstances, that is very understandable. Hopefully, in future posts, I can give you a convincing set of arguements as to why the country's economic future is likely to work out better than you think.

Neo-mercantilism I would describe as a modern version of mercantilism: trade surplus -good, trade deficit - bad, and the assumption that a trade deficit must invariably cause a currency to decline. There is no gold standard nor must there be blatant protectionism as in classic mercantilism. The Economist advocates free trade and I know that, but they have the modern equivalent (neo) of mercantilism stamped on some of their assumptions. In the modern world capital flows are many times larger than trade flows. A country that creates a favorable investment environment can sustain trade deficits for quite some time without sufferring a currency crisis.

I think Paul Zane Pilzer?? wrote a book called Infinite Wealth which emphasized the role of knowledge in wealth generation as Bret mentioned. The tone was less arrogant than Wanniski - I'll try to find my copy and let you know if this is a better presentation...


My preferred policy slate

flat tax
phase out tariffs
phase out corporate welfare
tort reform
more active public debate over costs versus benefits of regulations
school choice and vouchers to empower parents and children...
reform of medicare/medicaid along the lines of the Breaux Commission as a first step to dealing with health care

this would be a good start but the tough question is how to win the political battle??

Angst?

Bret, I liked your critique of the Economist article. I thought you made a couple good points, especially about the unique economic environment we're in.

Howie, I found your last post to be filled with unattractive condescension and inaccurate characterizations. (Do you even know what mercantilism is? The editorial slant of the Economist is in favor of free trade, market mechanisms (over government regulation), and unprotected industries. Does that sound like mercantilism to you? Maybe you'd better re-read those ten years of subscriptions since you don't seem to have understood the articles the first time.) Further, while I'm sure the books are good and I thank you for the reference, it would be nice for once to hear your opinions rather than simply receiving a litany of the masterworks you've read. So, what do you think should be done about anything related to governing our country? Or are you simply the appointed apologist for the Republican party?

All joshing aside....

Have you hit on something, though, when you say I'm filled with angst? Let's look at this rationally (which I tend to do, unless caught up in the passion of the moment). Do I have any reasons to be filled with angst (which my Heritage Illustrated Dictionary simply defines as "feelings of anxiety")?

Here are a couple candidates for the source of creation of angst in me, and my thinking about them.

1. By a slim thread, I continue to hang onto a job at ChevronTexaco. No question about angst there. But, I don't link my situation to the economy per se, and most certainly not to Bush's policies. If anything, the stimulation Bush has provided through tax cuts and the $30 billion in energy subsidies given to the energy industry each year should be "helping" me at this time.

2. The country's economic future looks to me to be headed toward periods of recession, perhaps prolonged ones, as we cope with demographic shifts and less flexibility to finance transitions due to an already enormous structural debt. Surprisingly, my angst is not so high on this issue. Why? Because angst is a very personal thing, and I don't feel particularly threatened by the prospects of the long-term economy. Even if I don't get a job with ChevronTexaco, it's likely that I will be able to make enough money in the next 10-15 years to get by in reasonable comfort for the rest of my days. But, I do have a great deal of sympathy for all those people, perhaps including my kids, who may themselves have buckets full of angst if they can't get a job when those recessions roll around.

As for everything else, life is good. The really important thing -- a loving, healthful family -- is solid. Indeed, there's a GG Conference in 3 weeks! Let's not lose perspective.

Howie's Reading List for Jim

I haven't read any of the three books Howie is recommending for Jim's "tremendous angst." I've read several articles by both Wanniski and Gilder. I don't generally disagree with what they've said in those articles, but I personally find their tone overly confident and partisan and the data too sparse to give me much confidence in what they have to say. Perhaps their books are more objective than their articles. I'm skeptical, however, given that the title of Wanniski's book is "The Way the World Works." I find it hard to believe that anyone can describe the way the world works in a mere 300 pages or so. Nonetheless, I see they have pretty good reviews and the authors can tell a pretty good story (which I'm told is a powerful way to "leverage" ideas), so the books may well be a pretty good read.

A Phoney Recovery

Even though I just let my subscription to The Economist lapse (I'm trying to reduce living beyond my means :-), I've always thought and continue to think that, more than any other weekly magazine, they at least try to present both sides of the argument. And indeed, I think they made a good effort in A Phoney Recovery (which Jim linked to). It's always entertaining and sometimes enlightening reading articles that argue against themselves.

If I had to summarize the article's conclusion in a nutshell it would be this: people are irrationally increasing their debt load and investing in property (and the stock market to a lesser extent) and Greenspan is irrationally keeping interest rates too low which encourages that sort of irrational behavior. If they deleted the "irrational" and "too" (low) part of their description, I'd agree completely. I'd also agree that worldwide economic numbers are not combining in the familiar old patterns of 20 years ago, and this new, unfamiliar territory is discomforting (even to me).

I don't think investors are acting irrationally at all. If Asian countries (notably China) want to buy bonds at absurdly low interest rates (high prices), why is it possibly irrational to sell those bonds, whether to buy a more expensive home or invest in the stock market? It's a classic opportunity to "sell high, buy low." In arguing against the rationality of the approach, the author puts forth a statement I find bizarre:
More serious is that the price of homes or shares can fall, while debts are fixed in value.
If debts are fixed in value, then why, pray tell, are there bond markets? If you sell a bond at an interest rate of 5% and interest rates go up to 10%, the value of that bond drops. If you used that money to buy a home, your monthly payment remains the same. As long as you continue to live in that house, it remains at least as affordable as long as you make at least as much money as when you bought. If you make more money over time, the mortgage payments get more affordable, not less.

Am I saying this is a good thing? No, not necessarily. I don't know. But to call it irrational like drug addiction is way off base in my opinion.

Here is another statement I found incoherent:
In the long run, the only way to create genuine wealth is to consume less than income, and to invest in real income creating assets.
Ummm, well, yes and no. First of all, in the long run we are all dead. Or, more to the point, in the long run everything we invest in real income creating assets today is dead (i.e., it will completely depreciate). It is true that some amount of time before we get to the long run, we will need to invest in income creating assets to create more "genuine" wealth in the long run (by the way, how does "genuine" wealth differ from other kinds of wealth, can you buy more with it?). Anyway, the point is that it doesn't necessarily follow that we should increase our investment in such assets today.

Also, in the long run, the most important thing is knowledge and information, not capital equipment. I'll have a post on this line of reasoning in the next few days.

Finally, we get to the core of the problem:
The current dilemma for the Fed is that inflation is presently too low for comfort, which argues for holding interest rates down.
Well, yeah! No kidding! Sounds like a good argument to me. I think Greenspan is worried that we were actually in a bit of a deflation and that scares him (possibly for good reason). A rational economist could reasonably disagree with Greenspan's position (seems he's taking some heat from economists at the moment for being partisan), but I don't think Greenspan's analysis can be dismissed out of hand as being irrational.

What it comes down to is that there doesn't seem to be a comparable example of low inflation/deflation, rapidly falling dollar, low savings rates, low interest rates, low employment growth, robust GDP growth, rapidly rising property prices, and an increasingly robust stock market. Greenspan certainly does have a dilemma on his hands. His chosen to err on the side of growth and hope for the best. That would be my choice as well. I hope he's right. Only time will tell (and even then, only the barest glimpse of the truth will be told).

Wednesday, March 03, 2004

Prescription for Economic Angst

Jim, in your Way Out.. post I sense tremendous angst. They have medication for problems like that. As an alternative I would prescribe that you read these 3 books and call me in the morning. (see books below) If you do this, you'll be right as rain.

Nothing is cast in stone! There is a lot of uncertainty, especially about the future. Sometimes in trying to avoid that which we fear, we cause it to happen. I'm afraid that some of your policy prescriptions would fit this category. Your own strategy has the seeds of the solution.

...accumulate enough wealth in the short-term to mitigate the impact of any future calamity.

The recommended books will give you new insights into the wealth accumulation process on a societal scale.
They will also make it easier for you to seperate the relevant from the largely irrelevant when trying to formulate an economic judgement.

note on The Economist: I read it for more than 15 years. The first 10 years they probably new more economics than I did, after that I pulled ahead. They simply refused to learn from their mistaken notions - no learning or adjustments in their thinking. The mercantilist beliefs they hold were probably reasonable 100 years ago, today they are nonsense.

The Way the World Works by Jude Wanniski
Wealth and Poverty by George Gilder
Innovation and Entrepreneurship by Peter Drucker

Tuesday, March 02, 2004

Way Out on one Data Branch

Bret, I think you've missed the point. In my opinion, the main issue is not whether lower tax rates spur growth -- in the short term, they probably do. (A difference in time horizons for statistical analysis seems to be one reason you and the author to the article I cited come to different conclusions. By the way, I did read the article, although I did not take the time to validate the statistical analysis.) The main issue is the health of the overall economic system. It's certainly nice to get short-term growth, but at what long-term cost?

My basic theory is that problems tend to play out in one of three ways. Either they go away because of changes in the environment (e.g., technological advance, new social trends), they get solved, or they build up until a crisis happens. National financial problems may go away due to technological changes or social trends, but it's hard for me to imagine how. I'm also not optimistic about the problems being solved because of two incompatible conditions: (a) the U.S. economy is complex and trends in it are exhibited over decades (not a few years), and (b) there is no accountability -- in government or elsewhere -- for long-term economic performance. Whoever happens to be president when the debt-exploding policies of this administration come to roost (perhaps in 8-10 years from now) will pay a political price.

In fact, the incentives for politicians are all in favor of short-term fixes. Why? Because those who benefit the most from short-term gains in tax policy (i.e., the wealthy) can accumulate enough wealth in the short-term to mitigate the impact of any future calamity. (This, by the way, is my strategy.) And because those who benefit the most from "social" spending by the government (i.e., the poor, the middle class, and special interests) will fight like hell to keep the spigots open. So, what we get is an administration who cuts taxes and spends like a drunken sailor. "We have met the enemy, and he is us."

Meanwhile, the soundness of our economy is deteriorating, which eventually will lead to an extended period of lousy growth, regardless of tax rates. This article from the Economist explains the situation reasonably well. Here, also, is a quote from another article in the Economist:

"In fact, according to a forthcoming book by Laurence Kotlikoff, an economist, the present value of the American government's future obligations, taking into account promised pensions and health-care benefits, is a staggering $45 trillion."

Anyway, focusing only on tax rates, Bret, reminds me of the old quip: "The treatment was successful, but the patient died." The long-term scenario for the U.S. economy is not, in my opinion, pleasant. Of course, only the future will prove whether I am a Cassandra or you are a Pollyanna. In the meantime, I recommend that all of those folks in their mid-40s stock up on their resources and hedge their risks. If I'm wrong, and there is plenty of growth and prosperity to go around for the next 50 years or so (the relevant timeframe for us), then we'll be just that much more comfortable entering our retirement years.

Monday, March 01, 2004

Data Rebuttal Rebuttal

Jim's rebuttal to Where's the Data? is in italics, my comments are in normal typeface.
Bret, here's a different perspective on the statistics (which I came across in 2 minutes of searching on the Internet).
Unfortunately, it looks like you only spent two minutes and didn't bother reading the article.
 I have no idea who the author is, but his numbers seem just as good as yours.
His numbers are the same as mine, too bad he completely ignores his own numbers when he writes the text.  I'll lead you through it if you need me to, but if you take a closer look you'll see that his numbers don't provide much support for his text, and his numbers don't in anyway refute my assertion that tax rate cuts increase growth and those numbers actually support my assertion that "the vast majority of times a country raises taxes, its economic growth slows from the baseline rate." The one thing I will concede is that I meant to say "tax rates" where I said "taxes" in my post.
 He concludes:
"Nobel laureate Robert Lucas, one of the world's most famous conservative economists, has spent over a decade looking for the secret to economic growth, and has not found it.
I don't think Robert Lucas spends a lot of time looking for "secrets" to economic growth.  Like most of the University of Chicago economists, he's very data driven. Lucas also professes to know a lot about economic growth. Here is an excerpt from a Business Week article regarding Lucas:
Considering the economy's parlous state, the timing seems strange for a Nobel laureate in economics to proclaim the triumph of macroeconomic policymaking in managing the business cycle. Yet that's exactly what University of Chicago economist Robert Lucas did in an address ("Macroeconomic Priorities") at the annual meeting of the American Economics Assn. in Washington, D.C. in early January. And Lucas, a pioneering theorist and intellectual leader of the classic school of economic thought, is always worth paying close attention to, especially when he concludes that the future of economic policymaking lies in focusing on the supply side of the economy.
That would be growth that Lucas is trying to increase with those policies.
Nobel-bound Paul Krugman, one of the world's most famous liberal economists, admits that the mystery of growth is "deep and poorly understood."
Krugman may well be clueless, no argument from me here.
People who claim that tax rates affect growth are not serious economists; more often they are journalists, radio-talk show hosts, politicians and other types of snake oil salesmen with easy solutions to complex problems. You can dismiss their bumper sticker slogans with perfect confidence."
Hmmm. If tax rates don't affect growth, why not just raise them to 100% and go back to communism?  I'd be quite surprised if even 1% of economists believed that there is no relationship whatsoever between tax rates and growth.  I find the ad hominem is usually a good clue that I can safely ignore the author.
My point is not to argue about the data. In fact, I suspect a good statistician can pretty much prove anything by drawing selectively from the huge pool of existing economic data (with the possible exception that communism worked out well).
No, only bad statisticians prove things that aren't supported by the data.  Good statisticians are able to find meaningful correlations that further understanding of the world.
I was reading a presentation this morning about how good ideas get transmitted in a corporation. In fact, presentation of charts and data have very little impact in driving improvements. Story-telling is where the real leverage comes from. This may be good news for Harvard grads, and not so good news for MIT grads. It also may explain why people from MIT are often considered nerds who are so attuned to the data that they are out of touch with the stories of "real" life. I certainly can acknowledge that this has been an occasional fault of mine.
Are you saying that we would do better by living in a fantasy world of stories rather than trying to understand real causation and correlation?  I'm not saying that story-telling isn't an effective way to leverage an idea.  But wouldn't it be better if the idea that's being leveraged at least had some foundation in reality?   Perhaps a team of Harvard and MIT would be best?

In conclusion, I don't consider Jim's post a very convincing rebuttal.

Data Rebuttal

Bret, here's a different perspective on the statistics (which I came across in 2 minutes of searching on the Internet). I have no idea who the author is, but his numbers seem just as good as yours. He concludes:

"Nobel laureate Robert Lucas, one of the world's most famous conservative economists, has spent over a decade looking for the secret to economic growth, and has not found it. Nobel-bound Paul Krugman, one of the world's most famous liberal economists, admits that the mystery of growth is "deep and poorly understood." People who claim that tax rates affect growth are not serious economists; more often they are journalists, radio-talk show hosts, politicians and other types of snake oil salesmen with easy solutions to complex problems. You can dismiss their bumper sticker slogans with perfect confidence."

My point is not to argue about the data. In fact, I suspect a good statistician can pretty much prove anything by drawing selectively from the huge pool of existing economic data (with the possible exception that communism worked out well).

I was reading a presentation this morning about how good ideas get transmitted in a corporation. In fact, presentation of charts and data have very little impact in driving improvements. Story-telling is where the real leverage comes from. This may be good news for Harvard grads, and not so good news for MIT grads. It also may explain why people from MIT are often considered nerds who are so attuned to the data that they are out of touch with the stories of "real" life. I certainly can acknowledge that this has been an occasional fault of mine.

Where's the Data?

Jim writes:
This suggests to me that nobody really knows what they're talking about when it comes to economics.
I couldn't agree more. That's why I generally insist on seeing supporting data before I buy into an economic or social policy.

For example, communism was tried by many countries, and in every case it ended up as a totalitarian disaster. The data is pretty clear on that one.

Similarly, tax policy and its relationship to economic growth seems fairly clear. Virtually every time a country cuts taxes significantly, economic growth increases from its baseline (sometimes with a lag). In fact, I challenge anyone to find a single case where a country that's at least somewhat developed cut taxes and had an economic slowdown that started shortly thereafter. The converse is true as well. The vast majority of times a country raises taxes, its economic growth slows from the baseline rate.

So there is little doubt in my mind that cutting taxes is positively correlated with increased GDP growth. What's still debatable is whether or not a majority of the people benefit from that growth. Many people believe that GDP growth only benefits the rich (who've just had their taxes cut), and most others lose out.

However, the data doesn't support the belief that except for the rich, most others lose out. For example, consider the following table:

===================================================================
Median and Average Family Income by Family Size, U.S., 1947-2000
Source: U.S. Census Bureau, U.S. Department of Commerce,
Housing & Household Economic Statistics Division,
Income Surveys Branch

Ave. Median Income
Size & Number Current 2000 Family Growth
Year (1000's) $ $ Size 2000 dollars
2000 72,388 50,890 50,890 3.17 0.59%
1999 72,031 48,950 50,594 3.17 2.59%
1998 71,551 46,737 49,317 3.18 3.42%
1997 70,884 44,568 47,687 3.18 3.13%
1996 70,241 42,300 46,240 3.19 1.41%
1995 69,597 40,611 45,599 3.2 2.15%
1994 69,313 38,782 44,638 3.19 2.68%
1993 68,506 36,959 43,472 3.2 -1.49%
1992 68,216 36,573 44,129 3.19 -0.86%
1991 67,173 35,939 44,514 3.17 -1.93%
1990 66,322 35,353 45,392 3.18 -1.61%
1989 66,090 34,213 46,135 3.17 1.85%
1988 65,837 32,191 45,297 3.16 0.29%
1987 65,204 30,970 45,166 3.17 1.67%
1986 64,491 29,458 44,425 3.19 4.37%
1985 63,558 27,735 42,564 3.21 1.48%
1984 62,706 26,433 41,944 3.23 3.41%
1983 61,997 24,580 40,559 3.24 0.71%
1982 61,393 23,433 40,273 3.26 -1.11%
1981 61,019 22,388 40,725 3.25 -2.64%
1980 60,309 21,023 41,830 3.27 -3.42%
1979 59,550 19,587 43,311 3.29 1.50%
1978 57,804 17,640 42,671 3.31 5.64%
1977 57,215 16,009 40,391 3.33 0.61%
1976 56,710 14,958 40,148 3.37 3.12%
1975 56,245 13,719 38,935 3.39 -1.80%
1974 55,698 12,902 39,649 3.42 -2.59%
1973 55,053 12,051 40,702 3.44 2.03%
1972 54,373 11,116 39,894 3.48 4.85%
1971 53,296 10,285 38,048 3.53 -0.20%
1970 52,227 9,867 38,123 3.57 -0.20%
1969 51,586 9,433 38,201 3.58 4.72%
1968 50,823 8,632 36,480 3.6 4.62%
1967 50,111 7,933 34,869 3.63 2.20%
1966 49,214 7,532 34,117 3.67 5.15%
1965 48,509 6,957 32,445 3.69 4.34%
1964 47,956 6,569 31,095 3.7 3.74%
1963 47,540 6,249 29,974 3.7 3.52%
1962 47,059 5,956 28,954 3.68 2.85%
1961 46,418 5,735 28,151 3.67 1.06%
1960 45,539 5,620 27,857 3.7 1.91%
1959 45,111 5,417 27,334 3.67 5.85%
1958 44,232 5,087 25,824 3.65 -0.45%
1957 43,696 4,966 25,940 3.64 0.45%
1956 43,497 4,780 25,824 3.6 6.80%
1955 42,889 4,418 24,179 3.58 6.25%
1954 41,951 4,167 22,756 3.59 -2.41%
1953 41,202 4,242 23,317 3.59 8.10%
1952 40,832 3,890 21,570 3.53 3.03%
1951 40,578 3,709 20,935 3.54 3.50%
1950 39,929 3,319 20,227 3.54 5.54%
1949 39,303 3,107 19,166 3.54 -1.32%
1948 38,624 3,187 19,422 3.58 -2.73%
1947 37,237 3,031 19,967 3.64

(Families as of March of the following year. Income
in current and 2000 CPI-U-RS adjusted dollars/)
=======================================================================

Two significant tax cuts occurred during this table: Kennedy's tax cuts in 1963 and Reagan's tax cuts in 1982. Now consider the growth rate of the median household income (in constant 2000 dollars) in the years before and after these tax rate changes. Since the median household income rate of growth fluctuates some, it's necessary to average a few years (I've picked five but anything between two and six gives similar results) before (the baseline rate) and after (the resultant rate). The following table shows the effects of the tax changes:

Baseline Resultant Change in
Year Change Rate Rate Rate
------------------------------------------------------------------------
1982 Reagan Tax Cut 0.34% 2.33% +1.99%
1963 Kennedy Tax Cut 2.24% 4.01% +1.77%

Both sets of tax cuts increased the rate of growth of the median household income by nearly 2%. That's nearly double the average rate of growth for the duration of the table.

Of course, a sample size of two is not statistically significant. Nor will a sample size of three be statistically significant after we see what happens with the latest round of tax cuts. However, my point is that there isn't any data at all that gives any support to the assertion that except for the rich, most people lose out when there are tax cuts. If anything, what little data there is indicates that a majority of people benefit when taxes are cut and also that when GDP grows, so does income for most people.