Posted 11:18 AM by Robert

Diese Weise Nach Argentinien

Germany's ongoing search for the door marked "This Way To Argentina" continues apace. In the 1930's Argentina was wealthier, per capita, than the United States. And now the Economist reports that Chancellor Gerhard Schröder in his new year message to the German people said: “WE ARE a rich country and we want to stay one”. No doubt the Argentines wanted the same thing - and then they went right ahead with market- strangling policies and practices that impoverished them.

But the Economist observes that it's not just some Argentines, without means, who do it:

[N]either Mr Schröder nor many Germans seem to have fully grasped the extent of the changes the country must make if the prosperity of the post-war years is to be preserved. Not long after Mr Schröder’s message, data showed a further decline in German manufacturing, with output and order books contracting. Even export prospects appear to have weakened, partly in response to the rise in the value of the euro, which has made German products less competitive on world markets.

The chancellor has warned of the need for reform—in his message, he talked about the need for fundamental change—but after more than four years in power, his newly re-elected government has shown little appetite for pushing through unpopular policies. Ironically, the government’s dithering has itself delivered unpopularity on an almost unprecedented scale. Within weeks of the start of his government’s new term, Mr Schröder had seen his popularity fall further and faster than any other chancellor in modern times.

It isn’t just employers who lack confidence in the government. Support from the unions, traditionally strong backers of Mr Schröder’s Social Democrats, appears to be fading as well. On January 2nd, talks restarted to avert a possible strike by millions of public-sector workers. They want a pay rise of over 3% against the 0.9% they have been offered.

But this is a government chosen by the voters largely on the basis of its performance in dealing with a flood and its willingness to stick its tongue out at the correct policies of its most important ally towards Iraq. Too few cared or care about the economy and reform - they're having a party.

Hamelin is in Germany - so the Germans shouldn't be surprised that they have to pay up. Curiously, many consequences of post-war German social and economic policy seem to lead to the loss of the next generation, just like the fairy tale: low birth rates, high youth unemployment, downward intergenerational mobility, bad social security incentives, lots more.

Maybe the Germans haven't learned a thing.

Posted 9:27 PM by Robert

UPDATE: Have A Happy New Year, Some Say It Was Probably A Good Retail Season

More thoughtful people, such as Bill Hobbs and astute reader HV, who suspect that retail sales were actually pretty good, seem to be gaining evidence.

The money line from High Frequency Economics through Bill Hobbs: Accordingly, we have moved up our working assumption - it is too soon to call it a forecast - for fourth quarter GDP growth to about 1 from zero.

Posted 3:33 PM by Robert

The Pragmatic Sanction

Bertrand Russell famously said that pragmatism is like a warm bath; it warms up so imperceptibly you don't know when to scream. One's willingness to defend even unjustified assaults on a total loser is like that. Pragmatically, for more and more people, it just isn't worth the effort - no matter how peculiar the charges become. Al Gore is one such loser - his claims and the claims of his supporters that he was actually a winner made his real loser status all the worse, perhaps even created it. Could Marlon Brando's plea, "I could have been a contender," have made his character seem any more bathetic and delusional? It could have been written "I was a winner," but the effect would have been too obvious and crude for a melodrama like On the Waterfront.

Enron is another such loser. Never easy, pragmatically it just isn't worth the effort for almost anyone to try to fend off even merely colorable charges of direct or indirect Enron-related culpability - with the exceptions occurring where the stakes are truly huge. How bad is the resulting distortion?

Well, this is a country where Senator John Edwards announces his bid for the Presidency with the ringing populist cry that as a trial lawyer he had faced off against some of the country's biggest insurance companies and made them pay up. But the current Enron effect is enough to make the successful refusal of a bunch of big insurance companies to pay up on an Enron-related claim by JP Morgan Chase seem itself a populist triumph, even earning grudging, partial respect from the Wall Street Journal.

And this despite the fact that big insurance companies are among the world's most sophisticated players in the structured finance markets. Nevertheless, the companies' assertions that they were "misled" by Enron and JP Morgan Chase were enough to lead to a settlement that cut the insurance companies' exposure about in half.

The Journal construes the settlement as a quasi-recognition by the bank that it did wrong. But some of the insurance companies had offered to pay even before the bank sued them, and now they're paying hundreds of millions in settlement despite a litigation climate that could scarcely be more favorable to claims of Enron-related facilitation and fraud. The Man Without Qualities is no fan of Enron's lenders and investment banks - as indicated by many prior posts. But since when do insurance companies pay off hundreds of millions of dollars - half of a claim, and vastly more than their attorneys fees and costs of litigation - when they really think they were defrauded? In fact, the circumstances of this settlement are much more consistent with both sides knowing the insurance companies had not been defrauded, but the sides both also realizing that the current litigation climate is highly hostile to Morgan Chase.

Ask Senator Edwards.

Failure on the scale of Enron offends the gods. In the movie version of the classic myth Jason and the Argonauts, Phineas rebels against his torture by Harpies, flying bird-women who punish him for his sins against the gods by stealing his food every day. He cries out that he admits he was a sinner: "But I did not sin every day - so why must you punish me every day." But they do, anyway. And Enron has no Jason coming.

Posted 12:20 PM by Robert

That Nasty California Electricity Price Spike

A considerable number of people continue to prejudge and misjudge the causes of the California electricity price spike. Fraud, market power and manipulation and other nefarious conspiratorial and near-conspiratorial causes are routinely assigned or suggested or insinuated by some politicians and media - especially the mainstream liberal media.

However, the most recent assessments still seem to point to quite different causes, as noted by a recent highly cogent updating paper by Susan Pope, which can be found on the web site of the Harvard Electricity Policy Group.

From Dr. Pope's paper:

December 9, 2002

When prices for a product like electricity spike to previously unknown levels, people want to know why. However, in the rush to find a reason it is easy to make mistakes and jump to conclusions before all of the facts are known. A balanced understanding of the causes of high electricity prices in California and the West1 starting in the summer of 2000, and continuing until the beginning of the summer of 2001 requires a systematic look at the facts. This requires time, and the information that is now available contradicts many early conclusions regarding the causes of the high prices.

When electricity prices rose in California and the West during the period from May 2000 to June 2001, some analysts blamed the rise on the exercise of market power. For example, Robert McCullough concluded in an article that appeared in Public Utilities Fortnightly that the high prices in the summer of 2000 could not be explained by changes in the fundamental factors that affect electricity prices, such as load levels, the availability of hydroelectric generation, fuel prices, or the demand/supply balance. McCullough argued that certain non-utility generating plants in California were not producing their full output during the crisis, seemingly providing support for his contention that it was the exercise of market power, and not market fundamentals, that was largely responsible for the high prices. A more complete examination of the data challenges these conclusions, providing a picture more like that of a perfect storm, in which a number of unfavorable demand/supply events improbably coincided, leading to increases in electricity prices that are understandable in hindsight.

- Electricity prices were high in the West during 2000 and 2001 at least in part because of a shift in the demand/supply balance, leading to a supply shortage more extreme than in any year in recent history, including the drought year of 1994.

- In all but two months between January 2000 and June 2001 electricity consumption was higher than in the same month of any prior year (1993-1999).

- Decreased hydroelectric generation was a significant factor in the supply shortage. The data clearly show that this decline began in June 2000, when hydro generation was almost 20 percent lower than in prior years (1995-1999).

- There was a large decline in the output of nuclear plants, particularly in the period from January 2001 through May 2001 when the 1,080 MW San Onofre Nuclear Generating Station Unit 3 was out of service.

- The overall supply shortage was dramatic and sustained. From May 2000 to June 2001, the electricity demand that had to be met month after month by generating resources other than hydro, coal and nuclear plants was typically 3,000 GWh more than in prior years (1993-1999) and rose to a high of 8,784 GWh (60 percent) in May 2001. This sustained shortfall in hydro, coal and nuclear electricity supply was predominantly met by running existing gas-fired generators at much higher levels than in the past. In May 2001 alone, the 8,784 GWh shortfall in hydro, nuclear and coal output amounted to a need to operate the equivalent of 48 more 250 MW gas-fired units (at full capacity) than would have been required to meet electricity demand in previous years.

- The data confirm that the electricity output and hours on-line of gas and oil-fired generators, including those owned by non-utility generators, were significantly higher from May 2000 to June 2001 than they had been in any previous year (1994-1999). From January 2001 through May 2001, for example, the output of non-utility generating units was 57 percent higher than during January-May of the drought year of 1994.

- As the supply shortage led to dramatically increased demand for gas-fired generation, electricity prices rose through a combination of dramatically higher gas prices, higher prices for NOx emission allowances (required for some gasfired generation) and the inevitable use of less efficient gas-fired generating plants.

...

Dr. Pope is with the firm LECG, LLC located in Cambridge, MA, where she is a member of a team of consultants that specializes in the economic and public policy analysis of electricity market design. Dr. Pope has a Ph.D. in Business Economics from Harvard University.

Posted 11:27 AM by Robert

"Nobody seems to have thought ..."

Lynne Kiesling raises even more profoundly the basic question "just who the heck is 'nobody' supposed to be, anyway?"

Among other things, Lynne says: "So Krugman's hyperbole seems unfounded; market participants are certainly paying attention (and I would bet that administration members are too) to the possible disruption of world oil markets."

So very true. And the clearly astute and reportedly babelicious Dr. Kiesling won't lose money on that bet, because OPEC exporters have publicly sought to tame soaring prices by pledging to fill any supply gap left by the strike in Venezuela or a possible war on Iraq, with Saudi Oil Minister Ali al-Naimi specifically telling reporters at a meeting of Arab oil ministers in Cairo: "Shortages, when determined, will be made up. We want to have no imbalances in the market."

In this case, one doesn't have to have been in attendance at administration meetings that may have addressed this issue in order to refute Professor Krugman's preposterous claim that "nobody seems to have thought about the state of oil markets if there is simultaneous turmoil in the Persian Gulf and Venezuela."

On the contrary, the commercial oil markets are obviously obsessed with this possibility, and if the Administration is not aware of - and working in overdrive on - this very issue, then the reality is contrary to all appearances, especially since - according to the New York Times itself - a lot of people have been harping at the Administration to release oil from the united States Strategic Petroleum Reserve for exactly this reason:

Increasingly, industry analysts and oil traders have called on the Bush administration to release oil from the strategic petroleum reserve to ease the supply shortage. But they also concede that the administration may be waiting to gauge what the full impact of a war in Iraq could be on the oil market, and to release crude oil from the reserve only then.

Posted 9:13 PM by Robert

Välkommen!

Eric Lindholm, the man and the Swede behind Smarter Harpers, now has his own Blog - Viking Pundit.

Looks like a corker!

"The justified anger of the only Conservative in Western Massachusetts?"

Nah, Eric.

Don't get mad, stay incisive!

At least you get to live in beautiful Western Massachusetts! I particularly like hiking the Taconic Crest in a windy ice storm, when the trees sway wildly and their wet, frozen roots make them look like they're about to pull themselves from the earth for a walkabout!

I still remember so well the lovely Natasha saying to Anders and me as we set off from Cambridge with all of our camping gear:

"I can't believe you guys are going to drive for hours somewhere to sleep in bags!"

Posted 4:51 PM by Robert

Wise Guy Does Good

David Letterman, professional wise guy and TV boy, does some impressive, under reported good Christmas deeds.

From Mike Daley

Posted 3:38 PM by Robert

Qualities

In case you wanted to know, but never clicked on the link to the left:

Robert Musil was not very pleasant company. Adolf Frise indexed ... the qualities that were associated with Robert Musil by those who knew him.

Cool, proud, uncommunicative, cold, harsh in his judgement, sharp, a military tone of speaking, vain, elegant, polite, well dressed, distant, official, impeccable, an impressive personality though not a sympathetic or congenial one, proud of his time as officer during the First World War, inaccessible, felt unrecognized, kept people far from him and hence fell into isolation, made slighting rather than positive remarks.

These qualities are usually, in his biographies, associated with two other aspects. The poverty he had to deal with for the bigger part of his life, and his attitude towards other authors of his time. Both come, biographers often state, from his earnestly felt lack of recognition as an important figure in German Literature.

Robert Musil was always in dire need of money: always wondering how he and his wife Martha could live through the next day. In his diary there are regularly complaints that they only have little money left to live on. In a diary-fragment he notes: I am (spiritually and moral) exhausted.

This poverty was not new to Musil and his wife. Ever since he decided to dedicate his life to writing, instead of a promising career at the University, he spent his days in poverty. In Berlin and Vienna admirers founded Musil Societies in order to make his work publicly known and thus enabling him to work on, and perhaps even complete, his one great masterpiece The Man Without Qualities. In his later years in Geneva father Robert Lejeune was the one who, through what Musil described as 'begging', found him the financial means to continue writing. The people who donated money were invariably admiring authors, or philanthropists.

In 1930 Robert Musil is desperate: he is going to be 50 years old, and the first parts of The Man Without Qualities are being published. What is bothering him the most is the discrepancy between his immense efforts and the public attention and recognition. He has been working on The Man without Qualities for ten years now; other author publish four or five books in this time, and do not mind writing for the public. In an interview with Oskar Maurus Fontana he states he wishes to give a "Beitrage zur geistigen Bew䬴igung der Welt".

The most important reproach to other authors concerns their shallowness. They are not capable, or prepared to be reflexive, that intellectually the time in which they live and about which they should write is far beyond their grasp. Hence their success. This success, in turn, is responsible for the lack of profundity that he reproaches them.

A particularly fine head on a man usually means that he is stupid; particularly deep philosophers are usually shallow thinkers; in literature, talents not much above the average are usually regarded by their contemporaries as geniuses. [Man Without Qualities III, Chapter 14, p. 851]

Thomas Mann is one of those authors. As far as Musil is concerned Mann owes his success to the fact that he is the spokesman of the biased liberal intelligentsia, be it a bit more refined. The person of an intellectual average can relate to the thoughts and words of Mann. When Musil is told that Thomas Mann is, along with others, one of the founders of the Musil Societies, and what these societies do for him he admits he is moved by the gesture of the man whom he has been so unjust to. But the distrust towards successful author remains.

This distrust could be dealt with as envy, were it not that it reflects Musils poetics. To Musil the writer/poet is a representative for his country. In works of literature, and art in general, what is thought and lived in a country is reflected. German language literature in his time is not equipped for this task. She remains shallow, deals too often with political, esthetical or ethical fashions, writes only about itself, and thus caters to an irrelevant need.

The disappointment with the lack of recognition and his poverty make Musil a bitter and lonely person. He dies in obscurity in Switzerland, where only a namestone on the cemetery remains of him.

Daß du nicht berühmt bist, ist natürlich; daß du aber nicht genug Leser zum Leben hast, ist schändlich. That one is not famous is only natural: that one has not enough readers to live is a shame!

And that brings us to why we have InstaPundit now.

A LOT MORE

Posted 10:25 AM by Robert

FURTHER UPDATE: The Two Ivory Towers

Insightful reader AA points out that when Paul Krugman noted that "yes, the tax cut also made a marginal contribution" in the list of reasons for 2002's resumption of growth in the column discussed here, he was not conceding error:

You might have pointed out (as Krugman should have as the statement is too compressed for folks like you and Mickey) that the marginal effect of the "Bush tax cut" on the economy was due to its front loading of cuts to the regular folks. That part of the cut was a Democratic idea.

Maybe. I'm not sure what Professor Krugman was referring to when he wrote "yes, the tax cut also made a marginal contribution" - and I think the reader's not being able to know is often just the point with Professor Krugman. I don't think this represents compression - it's more like evasion.

What Professor Krugman wrote reads (at least to me, and, I think, Mickey) more like a concession that at least some aspects of Professor Krugman's prior positions on the tax cut were wrong than would, say, "and, yes, the part of the tax cut to ordinary folks which was championed by Democrats also made a marginal contribution - as hoped and expected here." That would have been just as easy to write and packs a lot more information than what actually appears in the column. But it's also easier to check against past and future facts - which Professor Krugman increasingly seems to want to avoid, in my opinion.

Even what at first seem to be his simple predictions on closer inspection often appear crafted to avoid subsequent identification as bad predictions if they go wrong, but to allow Professor Krugman to claim them as good predictions, if things go his way. For example, consider his statement in the same column that "Taxes, mainly taxes that fall most heavily on the poor and the middle class, will go up" - discussed by Jane Galt and here. At first this seems eminently verifiable against future facts: if states don't mostly use regressive taxes to fund their deficits, then his prediction is wrong.

But not so fast. The elegiac style and context of the assertion can also be read as expressing mere concern and anxiety on Professor Krugman's part that regressive taxes will go up. If regressive taxes don't rise, Professor Krugman can claim that his hopes were fulfilled - but his concern and the threat were both nevertheless very real.

All of which leaves open whether it is a bad thing that "regressive" taxes go up. For example, the BTU tax advocated by many Democrats would likely have been highly regressive - as is the federal gasoline tax. Is it a bad thing if such taxes cause energy users to internalize the costs they would otherwise impose on others through the environment? Many sensible and knowledgeable people also believe that there is a clear need for congestion pricing (i.e. tolls) on freeways - which would probably be regressive, but might benefit everyone and the environment overall. Is it clear that such tolls would be a bad thing? Does Professor Krugman think they would be bad things? He doesn't say - but he implies that a rise in regressive taxation would be bad regardless of its nature – a position most better economists would consider not to be thoughtful economics.

That's all fine for a partisan columnist, but the serious economist inside has quite clearly expired, if he really had a lot of life to begin with.

Posted 8:47 AM by Robert

Have A Happy New Year, Some Say It Was Probably A Good Retail Season

Astute reader HV from West Hollywood, California, writes to say that, contrary to the doomy-gloomy Paul Krugman and much of the media, retails sales have actually been good:

The big item really is that it is the RISE in retail sales that is the smallest in 30 years, not retail sales. Retail sales set a record. The so-called reporting by the usual suspects was the usual "Bush stinks and the economy is in trouble" variety. Only if you factor in an inflation indicator, something that is missing from all past data, do you see a very small shrinkage. If you then factor in the quite remarkable online sales ($2 billion plus) sales were great.

The WaPo ran a snide article a week or so ago about online sellers and their rotten stuff for rotten people. When I checked some sites listed I found that many were sold out, couldn't fill orders til well into next year, and had merchandise that retailers would not take. One woman has made a killing selling duct tape purses and wallets, another seller is a specialty seller who sells the most unique merchandise ever who would only succeed if he could hit a mass market of millions on the cheap, which he has done since 30% of what he has is sold out.

The days of buyers on the take in large retail chains, exacting bribes, advertising for the stores, and exploiting small start ups in general are over. This Christmas may mark a major change in how retailers conduct their businesses.

Various statistics have been passed around concerning this holiday season's retail results. My understanding has been that some of them inlude at least some on-line sales results. But is it possible that reports of a bad bad retail season have more to do with reporters and some economists just not keeping up with the American consumer - or just not doing their homework?

We should know by February!

UPDATE: Reports of tentative big increases in on-line retail sales: here and here.

Reference from astute reader HV.

Posted 5:01 PM by Robert

UPDATE: The Two Ivory Towers

Jane Galt makes the excellent point that the Paul Krugman column discussed here claims that states are going to have to raise regressive tax rates in order to meet the latest crisis. Jane quite correctly points out that no evidence or argument is provided in the column to support the assertion.

And there is probably a good reason for that lack of support: The assertion probably isn't correct, if the following observations are correct:

Every state maintains a mixture of regressive and progressive taxes. Every interest group (including the wealthy and those of modest means) vie with each other in the legislature to impose costs somewhere other than themselves. An actual tax structure is a kind of topographical map of the relative political power of the various interest groups.

Why does that matter?

Because, as Jane and others point out, the current state deficits mostly come from increased spending - which were based on prior "assumptions" that then momentarily -enlarged capital gains tax streams would continue to flow indefinitely. Capital gains taxes on income from securities sales are paid disproportionately by the relatively wealthy. There is good reason to believe that those (wealthier) people who lost the last round in the legislative taxation game when it came to paying for the last round of state spending hikes will for the most part lose again if the legislature chooses to fund whatever programs are not cut through tax increases.

I cannot guaranty that the above analysis is correct. But I do guaranty that the question addressed is one for that area of economics known as "public choice theory" - a field which is mentioned in Paul Krugman's columns only rarely and normally only to be misused.

In contrast to empty and/or wrong Krugmanian non-predictions, one may find in the works of James M. Buchanan, probably the world's most important economist working in this field, a willingness to apply the principles of public choice theory to specific tax reforms. For example, Professor Buchanan was willing to go on the record to predict how Congress would behave after the 1986 federal income tax overhaul. - and most of what he predicted turned out to be correct.

Posted 2:38 PM by Robert

Continuing Patty Murray Whitewash

Best of the Web continues the chronicle of the ongoing liberal media whitewash of Patty Murray's witless paeans to Osama bin Laden:

The Newark Star-Ledger weighs in with an astonishingly lame defense of Washington state's Sen. Patty Murray, whom the paper styles "a patriot in the proudest tradition" for her recent comments about Osama bin Laden's purported humanitarian works. The Star-Ledger pats Patty on the back for having "the integrity to tell uncomfortable truths." But at the same time, the paper acknowledges that Murray wasn't telling the truth: "Murray was wrong to suggest that Osama bin Laden's appeal is based on decades of charity work. ... In the division of terrorist labor, bin Laden provides more muscle than munificence."

...

Murray's remarks, incidentally, probably reflect stupidity more than a genuine animus toward America. In the Washingtonian magazine's annual survey of Capitol Hill staffers, conducted several months ago, Murray placed first among senators in the "No Rocket Scientist" category ...

Ah! The invaluable stupidity defense. Yes, it saves Senator Murray from being cast as unpatriotic.

But does a senator easily persuade voters who would otherwise turn her out of office that she made such remarks because she is stupid? Or does she just count on the voters to know that she is stupid - and love her for it?

And note the tension here: As with so many in the liberal media, this editorial writer knows that he or she basically agrees with Senator Murray - even though the editorial acknowledges that what Senator Murray said was wrong. As noted in an earlier post about a different liberal media editorial:

The agreement is with her larger premises and with her willingness to distort whatever facts it takes and can be gotten away with to support and advance those premises. They agree with her "deeper" belief that it was a failure on the part of the United States .... that should be the focus of our concern, that the military should not be a component of the measures taken to address terrorism, and, most importantly, that there is some low budget magical thinking that will allow the United States to have all the Pell Grants and other federally paid public programs it wants - while simultaneously inducing the the world's terrorists to love us on the cheap.

Posted 12:10 PM by Robert

Good Property Rights And Regulation Make Good Neighbors

Lighthouses and Wall Street are next door to each other, if you get the economics down like Jane does.

Posted 9:17 AM by Robert

Wither Affirmative Action

As the Supreme Court gears up to reconsider its Bakke decision and address the University of Michigan's racial preferences, Stuart Taylor reports on one new poll:

As to public opinion, consider the responses to a question on the Washington Post/Kaiser Family Foundation/Harvard University racial attitudes survey in spring 2001: "In order to give minorities more opportunity, do you believe race or ethnicity should be a factor when deciding who is hired, promoted, or admitted to college, or that hiring, promotions, and college admissions should be based strictly on merit and qualifications other than race or ethnicity?"

Of the 1,709 adults surveyed, 5 percent said "race or ethnicity should be a factor," 3 percent said "don't know," and 92 percent said "should be based strictly on merit and qualifications other than race/ethnicity."

More surprising, of the 323 African-American respondents, 12 percent said "race or ethnicity should be a factor," 2 percent said "don't know," and 86 percent said "should be based strictly on merit and qualifications other than race/ethnicity."

That's right: By a ratio of 7-to-1, black respondents in this poll rejected racial preferences.

There's lots more.

In the experience of the Man Without Qualities, the response one receives from an "affirmative action" question depends very much on rather minute details of how the question is formulated, the context in which it is asked and often hard to determine personal factors. And this is, after all, just one poll.

But also in my personal experience, a lot more African-Americans professionals seem comfortable in themselves and their personal capabilities today than even a few years ago, and the pace of adjustment seems to be accelerating. They also seem perfectly aware of continuing - often hidden - racial bias. But they also usually know how to deal with it constructively when it arises, and do. In sum: From my personal experience, there seems to be a declining interest in and attachment to the more aggressive forms of affirmative action among African-American professionals, who increasingly seem to regard the whole subject as a distraction.