Man Without Qualities

Thursday, July 31, 2003

Speechless: Compare And Contrast

Man Without Qualities [July 25, 2003]:

Herr Doktorprofessor [Paul Krugman, July 25, 2003] also thinks: There is very little evidence in the data for a strong recovery ready to break out. As far as I can make out, Mr. Greenspan's optimism is entirely based on models predicting that tax cuts and low interest rates will get the economy moving. But where [Krugman] has often cited recent employment statistics as evidence of economic health, here there is no mention that the number of people lodging new jobless claims plunged unexpectedly last week to the lowest level since February, which some economists think means a lot. Nor does [Krugman] explain why those economists are wrong.

The fact is that there is plenty of evidence in the data for a strong recovery ready to break out. But there is also plenty of evidence in the data for concern.

New York Times [July 31, 2003]:

In its first estimate of how the economy performed during the second quarter, the Commerce Department said that gross domestic product, which measures the total value of goods and services produced in the United States, rose at a 2.4 percent annual rate in the April-June period. That rise was well above the 1.5 percent rate of increase that most Wall Street economists had been forecasting.

While the output numbers came as a pleasant surprise, analysts were equally encouraged by a report from the Labor Department, which showed that initial claims for unemployment benefits fell for a second straight week in the period ended July 26.

Jobless claims dropped to 388,000 for the week, down from 391,000 the previous week. More significant, analysts said, is the longer-term trend: initial claims have been trending steadily lower for the last seven weeks.

Man Without Qualities [July 16, 2003]:

My difficulties with Herr Doktorprofessor stem largely from his reliance on (1) a constant stream of bad economics, including incomplete economics, (2) false, misleading and materially incomplete statements of fact and economic theory, (3) evasive language often intended to allow him to claim credit for predictions where none were made, and (4) a boring parroting of the then-current liberal Democratic line that he attempts to tart up as original commentary.

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Wednesday, July 30, 2003

But Does It Matter That Much In Practice?

The most recent Harris Poll reports (through the Wall Street Journal) that 76% [of adults] disagreed with the Supreme Court's ruling that a university can use race as one of several factors when deciding whom to admit. That ruling stemmed from a challenge to the admissions policies at the law school of the University of Michigan. The high court struck down an undergraduate-admissions process at the school that weighted race more heavily.

With a 76% majority, it should be possible for anti-affirmative action forces to dismantle such programs through the elected branches of government, or through referendum. So, regardless of whether the Supreme Court's decision permitting limited affirmative action was right or wrong, the overall impact of the decision may be to terminate most affirmative action anyway.

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Kobe Rorschach

Here's yet another article, this one in Slate, going on for many inches exploring the possible stereotypes and biases that may be coming into play with respect to the Kobe Bryant rape case. But the biases and stereotypes discussed are all gender-based biases and stereotypes:

Long before the first juror is selected, the nation is making up its mind about Kobe Bryant. Web sites condemning his accuser as a whore are proliferating. ... Without a filament of evidence, journalists have split: Some call the young woman his "accuser"; others say "victim." Some complain that he's already been tried and convicted in the media; others complain that she has been raped again in the media. ... The legal rules for rape have been "reformed" to the point that defendants have few of the usual presumptions of innocence while victims are still humiliated and exposed at trial.

How did this happen?

An interesting question. Historical gender biases, such as those that would characterize as a "whore" a woman who visits a man in his hotel room, matter. But, obviously, inter-racial rape has a whole additional set of historical biases and horrors to worry about.

Inter-racial rape may have been the only common historical example of the application of that rallying cry of some modern feminists: "If she said so, it's true." As To Kill a Mockingbird shows, the historical application of that rallying cry in that context was not exactly a benefit to society. One might rephrase it in that context as: "If she says so, he dies - in a tree."

But the Slate article again doesn't even mention the inter-racial nature of the case at all, and therefore doesn't explore any of the special, and especially destructive, stereotypes and biases that may be coming into play here. The word "race" does not even occur in this article. Nor do the words "white" or "black." But they do matter. Some racial stereotypes and biases may hurt Mr. Bryant, and some may help him.

But they all undermine justice, although one couldn't know any of that from this article.

POSTSCRIPT:Many things are not what they seem, including the Rorschach link in the title of this post.
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Mania, Panic, Crash II

The Man Without Qualities has received an e-mail from a very astute reader essentially saying that my prior post on the dotcom "bubble" is a bunch of malarky, although my learned reader uses better form and language than that. Specifically, the e-mail notes:

Granting that the internet had (indeed, still has) the possibility of dramatically improving productivity through disintermediation, why do you think that the companies which are the disintermediators would earn more than a trivial share of the productivity gains? After all, very little of the gains of electrification went to electric companies (and wouldn't have, even if they were unregulated). None of the gains of facsimile transmissions went to the fax manufacturers (other than normal economic profits). Without barriers to entry either from superior skill or patents, why should the internet be anything different?

That said, I agree that someone needs to do the actual research on bubbles, not just blather on about theoretical models, but this time was one of the rare times you leave me unimpressed with the elegance of your insights.

I completely agree with my reader, as far as this analysis goes. In fact, where the internet has been effective to date, it generally provides generalized productivity increases which have been very hard for any one player to capture, just as suggest by this reader. But, as a preliminary matter, it is worth recalling that some dotcom investors had all those "stickiness" and "first off the boat" theories. I, personally never bought into those theories, which may be one reason why I, personally, never bought dotcom stocks at all. But I don't think it was clear that those theories were groundless or constituted "economic irrationality" at the time.

But there is a bigger gap in these observations. One dream of the boom-era dotcom investor was to purchase a portfolio of "new economy" stocks that represented a sector (that is, the dotcom sector or "new economy") that would grow without "old economy" restrictions like entrenched intermediaries, regulator and tax drag, etc. If that "new economy" grew at, say, 7% or 9%, the bet would have paid off.

Hence the possible significance of the Microsoft anti-trust suit developments, which helped to kill the optimism of the internet sector investors (as opposed to the "big kill" investors, who thought some company like Amazon would win big on "stickiness" theories and the like).

In any event, it is not easy to conclude that the thinking of the sector investors was "economically irrational." They certainly had a timing problem.

My reader's e-mail points that my prior post can be read as suggesting that the only way diversified-up-to-sector investors were expecting their returns was by hitting a few jackpots. That is not correct,and the post's suggestion was inadvertant . Generalized growth in the new economy at something like 7% to 9% would have been enough for that kind of play if the portfolio were a basket sufficient to capture the growth in a representative fashion. In this sense, diversified new economy sector investors essentially assumed that the new economy as a whole manifested "superior skill" or "claimed a niche" that would keep much of the new economy profits within the new economy. They may have been wrong, but they were expecting to get paid - a lot.
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Enron Game Called On Account of Reality IV: Learning To Take Life Easy

An interesting e-mail draws my attention to a blog posting by Charles Dodgson that includes this comment on my prior posts on the recent settlements between J. P. Morgan Chase and Citigroup and government regulators:

To most people, the $300 million payment would be a sign that the banks knew they were in hot water, and the lack of a formal guilty plea would be a technicality. To this guy, it's the reverse; the banks have, for some strange reason, agreed to pay $300 million to regulators who "have nothing, nothing at all, and know it" (his boldface), and their failure to extract a guilty plea is positive proof. Note particularly the rhetorical pirouette in which "the banks neither admitted nor denied any wrongdoing" somehow becomes a protest of innocence.

The e-mail I received also includes a copy of a message sent by the e-mailing reader to Charles regarding the above excerpt:

I'm not sure I understand. I haven't been following this matter nearly as much as you obviously have been, but aren't defendants presumed to be innocent unless they are convicted (or, I guess, found civilly liable) or admit they did wrong?

Maybe I'm letting my personal experiences get in the way of my understanding. I was once threatened with suit by the SEC without merit, and I know from that personal experience that defendants often pay to make a case go away even when they didn't do anything wrong - especially where the plaintiff is some powerful government regulator and they want to cut off bad publicity. Does this settlement look like one of those? What do you make of Columbia Professor Chaffee's quotes in the Times regarding the $300 million?

In my case, the SEC said I had traded on "inside information." I can assure you there was no inside information, but I had to settle (and pay!) without admitting or denying any wrong, because the SEC action would have been a disaster for my business. I had to "disgorge" my profits. Didn't Citibank make more than $100 Million off Enron? My lawyer - who works at a very good NY law firm - assured me that people do what I did all the time in these settlements and there is no "taint" because everyone knows that people have to settle with the SEC rather than spend their lives in humiliating and expensive litigation. Was he wrong? Should I sue my lawyer?

Well, gentle reader! Relax!

Presumption of innocence? Pshaw! Picky, picky, picky! Charles tells us that a "formal" guilty plea is a mere technicality!

Government lawyers admit that they couldn't find a mere preponderance of the evidence showing "intent to defraud?" Heck, what's that deficiency compared to having a settlement agreement with no admission of wrongdoing in it as a sign that the banks knew they were in hot water?

And if a prosecutor says something bad about you? Well, the prosecutor is a very busy man - he wouldn't say those things if they weren't true!

Anyway, who takes seriously that standard settlement agreement language "this agreement shall not be construed as an admission of any wrong or violation?" That language is a lawyer's in-joke! A settlement agreement is an admission of wrongdoing if you pay - just ask Charles.

A company wanting to terminate bad publicity and enforcement actions - regardless of their merit? Puleeze! Charles tells us that the banks entered into these settlements for some strange reason which most companies couldn't possibly understand. And that should be enough of an explanation for the likes of you! Why every defendant knows that to pay to make a meritless case go away (including every technology company in Silicon Valley that ever paid Mr. Lerach a settlement to get rid of a meritless class action of the type Congress had to eventually amend the securities laws to bar) is actually an admission of the charges.

Some Columbia securities law professor pointing out that new securities legislation makes the settlement a "no brainer" for the banks on economics grounds alone? Don't get so excited!

Fines imposed are much less than apparent profits from the alleged violations? Manana!

See, learn to take life easy. Sue that top New York lawyer of yours. Get another one to file the papers tomorrow. Don't you know? Litigating is fun! People who pay to make it stop are just big, uptight sillies who are admitting the charges against them, anyway!

Just ask Charles!

If you can find his rabbit hole.
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Davis Descending XIII: Mr. Taranto Dissents

Best of the Web thinks Gray Davis is toast even after bringing in the California budget:

The filing deadline for the replacement ballot is a week from Saturday, and it's possible that the Democrats will remain unified behind Davis, so that only Republicans and minor-party candidates will appear on the replacement ballot. This is probably Davis's best shot at holding onto his office; since Democrats hold a decided edge in California, the lack of options, combined with get-out-the-vote efforts aimed at interest groups loyal to the Dems, could push Davis over 50%.

We wouldn't bet the farm on it, though. Back in March, we noted that a poll had found "an unnamed Democrat would edge out President Bush." The problem, of course, is that in "an unnamed Democrat" can't actually run in a presidential race. Instead of their ideal or preferred choices, voters next November will have to choose between the incumbent and one of the actual guys now running--all of whom were losing to Bush in that same poll.

But the California recall actually does pit Davis against an unnamed candidate. And Davis is a lot more unpopular than Bush. Party loyalty may be enough to persuade most registered Democrats to vote for the governor--but that'll still leave him well below the 50% threshold. For this reason, we'd be very surprised to see Davis survive.

I wish it were true that Sweet Baby James were right - and I'm wrong - on this one. But, as I noted in the prior post on this topic, the worst the Governor has been doing in any poll that I know of is in that new internal poll by the California teachers union that reportedly shows him with a recall winning by a 57-43 margin. His ratings should be on the rise after the budget deal - and he doesn't have to go all that far to beat the 50% mark.

Worse, if there is only one major opposition candidate and its not a Democrat, then Mr. Davis is back on his home turf of demonizing his opponent. Best of the Web is right, in my opinion, that the California recall actually does pit Davis against an unnamed candidate - and that works against this incumbent. But if there is only one major opposition candidate, the Governor can probably recast the vote as de facto Davis against that candidate.

Unleash the demons of August and September!

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Don Does Paul ...

... and gets a perfect "10" for both style and substance.

But, no fair! Herr Doktorprofessor was probably all emotionally and intellectually discombobulated over hearing that The Federal Reserve sees signs the U.S. economy is improving, especially in the long-suffering manufacturing sector, a development which he has declared - and keeps declaring - to be all but impossible.

It was just a bad Herr day.

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Enron Game Called On Account of Reality III: Remembering Ms. Stewart

Remember Ms. Stewart? The alleged perpetrator of an "inside trade" of 4,000 shares of ImClone stock has been indicted for "obstruction of justice" by the Justice Department in an indictment that says all kinds of nasty things about her, but doesn't actually charge her with "insider trading." The SEC has also filed a civil complaint against her.

Martha Stewart gave an order to sell all of her ImClone stock, all 3,928 shares of it, and received an average price of $58.43. According to the SEC Complaint, in doing so, she avoided losses of $45,673.

Think about that: she avoided losses of $45,673. Wow. This is a case that the Justice Department and Securities and Exchange Commission really care about. I haven't seen the budget, but those two federal agencies must have spent many times that $45,673 already in taxpayer money coming after Ms. Stewart.

And they must have really stuck it to her in the settlement negotiations. Just imagine what would happen in the O-so-tastefully decorated Stewart household if the Justice Department and Securities and Exchange Commission were to offer her a settlement agreement along the lines of what they just signed up with J. P. Morgan Chase and Citigroup. That settlement offer would require that :

1. Ms. Stewart pay a fine in an amount much less than the $45,673 she saved from the suspect transaction (she could do this at the settlement signing from the change she keeps in her penny loafers).

2. Ms. Stewart neither admits nor denies the charges - but can put out a press release pointing out that she does not admit the charges.

3. Ms. Stewart agrees to put in tighter risk management controls for her future investing - and promises to submit to the agencies a revised set of standards within 60 days.

4. All potential civil and criminal charges that could be brought against Ms. Stewart are dropped and settled.

5. The regulators get to say things like: "This cases serves as yet another reminder that you can't turn a blind eye to the consequences of your actions," and "These settlements send the clear message that wealthy individual equities investors have an obligation to analyze and understand the consequences of their actions, and they will be held accountable for actions that obstruct justice."

Did I say just imagine what would happen in the O-so-tastefully decorated Stewart household? You don't have to, I'll tell you what would happen:


But, see, the regulators are really serious about the Martha Stewart case. They're not going to let her off with the kind of settlement agreement that banks that "know" they facilitated an alleged fraud worth, say, Seventy Billion Dollars to public investors get. No. The regulators want a settlement agreement from Ms. Stewart with bite. They want - they must have demanded - a settlement that makes Ms. Stewart admit she committed a crime! And the mere facts that (1) many people think that the regulators have probably got a pretty weak case against Ms. Stewart to take to the jury, and (2) Ms. Stewart has already lost her seat on the NYSE, her position as head of her own company, hundreds of millions of dollars in stock value, and much of her valuable reputation and public image, are not going to impede the stride of justice - this is a matter of principle, damn it!

It's not that there's a difference in regulatory standard here as between Ms. Stewart and the banks. We already know, because Larry Thompson, the deputy attorney general who chairs the Corporate Fraud Task Force, has told us: Corporations should not be treated leniently because of their artificial nature, nor should they be subject to harsher treatment.

It all makes sense. You understand, don't you: she avoided losses of $45,673.

You have to draw the line somewhere!
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Davis Descending XXII: No Di Fi Today

Reports (Kausfiles and Daniel Weintraub and the Los Angeles Times - but the Times only reports that Senator Feinstein is being "urged" to run by others) that Dianne Feinstein may place her name on the ballot as an alternative/replacement to Governor Davis are far fetched.

For one thing, if that happened, Senator Feinstein would get the brunt of the Governor's coming multi-million dollar demonization campaign. She's not going to want to stand for that - why should she?

The entire Davis wing of her own party - and that wing does exist - would hate her.

Such a move would be all but fully contrary to her prior statements of solidarity with Davis - and would also be contrary to Terry McAuliffe's assurances.

And where is the drop in the Governor's polls that would justify such a step? Yes, a new internal poll by the California teachers union reportedly shows him with a recall winning by a 57-43 margin. But, if anything, his ratings should be on the rise after the budget deal.

Moreover, if she jumps in, she may open the way for more Democrats to do it - thereby splitting the vote. She could come out looking ridiculous and disloyal.

That's not the Di Fi we know.

UPDATE: Hardly were the electrons of the preceding post through the semiconductor switches when Kausfiles reported:

Buried lede: But kf's omnipresent spies say Arianna's been telling her co-conferees at Walter Isaacson's Davosesque Aspen "Brainstorm" conference that she's learned Feinstein's not running--and that she, Arianna, is. ...

Imagine that. Whowuddathunkit? California politics are just so wild, crazy and unpredictable!

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Tuesday, July 29, 2003

The Bostonian Captivity Of The Church

In a prior post, the Man Without Qualities strongly disapproved of the holdings of Massachusetts state judge Sweeney, who sought to impose a clearly unconstitutional "reasonableness" standard on the operation of the Catholic Church there:

"Reasonableness" standards are objective standards determined by weighing costs against benefits. Judge Sweeney seems to think that such a balancing can be effected on secular factors alone. That is grossly wrong. A religious administrator must weigh both the religious and secular costs and benefits of any decision. Secular risks must sometimes be taken to save souls, which (within the precepts of the religion) are invaluable, and secure other benefits seen (by the religion) as not of this earth. But a civil court cannot take spiritual benefits into account. Judge Sweeney's approach therefore requires a civil court to second guess the administrator or religious organization by conducting the court's own cost/benefit analysis while assigning a zero value to any religious benefit the decision may have. In other words, under Judge Sweeney's approach religion and spiritual benefits are officially and expressly determined to be worthless as a matter of policy by civil authorities. It is hard to imagine a ruling more inconsistent with the First Amendment.

Whatever "reasonableness" means in this case, there are certainly people who are incapable of reliably providing "reasonable" supervision. Judge Sweeney makes religious groups run by mystics who spend all their time in religious contemplation - to the exclusion of reasonable matters - now mere fodder for the tort bar. ... No more wise old rabbis or parsons or eccentric dottering Anglican ministers, nearly blind and plagued by creeping senility but nonetheless holding on and dispensing periodic jewells of wisdom and experience. Judge Sweeney says they don't have what it takes to fend off the tort lawyers. .... The church is not a corporation. A church is not created by the state and need not take the form of a corporation, a limited liability company, a partnership, nor any other government-recognized entity - and the state is not entitled to impose what it believes to be good policies of corporate governance on a church. .... The religion clauses of the First Amendment take all American governments out of the business of regulating or structuring the religious or secular government of religious bodies. It is often said that the First Amendment imposes a "wall of separation" between church and state.

There must be something in the Bay State water that makes state officials think they are Pope, because not only does Judge Sweeney want to run and restructure the Catholic Church there, but so does the State Attorney General, as a Wall Street Journal item notes:

Massachusetts Attorney General Thomas Reilly ... has been widely seen as exercising admirable restraint in sparing the archdiocese from indictment, in fact the report discloses a disturbing pattern of probably unconstitutional intrusions into the religious liberties of the Catholic Church. ... Consider his assumption that the state "must" play a central role in dictating internal governance reforms that the church "must" adopt. ...

Mr. Reilly's overreaching becomes obvious when he recounts the role played by his office during the burgeoning scandal and criminal investigation. The report insists that the bodies adopted by the church to monitor, prevent and remedy clergy sexual abuse be "independent" rather than give the archbishop the "complete control over the selection of Review Board members who must be 'in full communion' with the church." Such a board, complains Mr. Reilly, is not sufficiently independent to "make decisions, judgments or recommendations adverse to the Archdiocese as an institution, but still in the public interest."

Of course, if internal church governance fails to stem abuse, prosecutors have the power to pursue abusive clerics. There is little danger in the current climate that victims will fail to report abuse to officials; indeed, if there is any danger, it would be of false reports resulting from the public sexual panic generated by the highly publicized scandal, with some victims seeking financial compensation for minor indiscretions or for acts that never even occurred. ....

Mr. Reilly notes that one clerical administrator, who took abuse seriously and attempted to deal with abusive priests "firmly," nonetheless did so "within a culture and system that treated these people as colleagues rather than criminals." Mr. Reilly, although himself a Catholic, appears to have no understanding of the implications of a church that believes in the redemption of sinners, where pastors see themselves as shepherds rather than adjuncts to prosecutors. A bishop comes in for criticism "because he viewed his role primarily as pastoral." The archdiocese is criticized because officials "believed that Canon Law--the church's internal policies and procedures--prohibited it from reporting abuse to civil authorities in most instances."

This is not to say that prosecutors should feel the slightest need to cut any slack for a priest charged, on the basis of credible evidence, of sexual abuse. Yet if the First Amendment, which assures "the free exercise of religion," means anything, surely it allows a high clerical official to insist on taking a religious rather than a prosecutorial approach to internal governance. Mr. Reilly's attempted micromanagement extends even to when priests may wear clerical garb: The archdiocese is criticized because "abusive priests," who were assigned to "restricted" ministries precisely to reduce their exposure to children, nonetheless "still were permitted to wear clergy attire in these placements and in public, which certainly could be expected to assist pedophile or ephebophile priests in gaining access to and the trust of young children."

In a concluding section, with edict-like recommendations, Mr. Reilly insists that the church give up its "misguided devotion to secrecy" and its "code of silence." The archdiocese "must adopt a new spirit of openness" and "must train all priests . . . to recognize and respond to and report signs of abuse" and "assure that applicants to the priesthood undergo psychological testing and background checks." Finally, "the Archdiocese must undergo regular independent audits to assure institutional compliance with each and every provision" of new and revised policies and procedures. ....

Mr. Reilly's report makes a disturbing revelation in a concluding footnote. Commencing April 2002, his office "initiated regular meetings with top officials in the Archdiocese to discuss immediate and long term changes to the archdiocese's policies and procedures" and "obtained an agreement from the Archdiocese to review any revised policies or procedures before their adoption and publication."

The attorney general had little choice in exonerating the archdiocese of criminal liability. Mr. Reilly admits that Massachusetts' statutes at the time were inadequate to support prosecution. However, he fails to note that a 1982 precedent case decided by the Supreme Court likely would have deemed it unconstitutional to prosecute the archdiocese even if state law had criminalized such administrative failings. In that case, the court exonerated the NAACP from liability for damage from violence that attended an NAACP-sponsored boycott of white merchants in Claiborne County, Miss., because it was an association engaged in First Amendment-protected activity--which, in the NAACP's case, was political and social change: "A court must be wary of a claim that the true color of a forest is better revealed by reptiles hidden in the weeds than by the foliage of countless freestanding trees." The same protection almost certainly would apply to an organization engaged in religious activity.

Gee, won't all these Popes get in each other's way? Didn't the Church go through all that in the 14th Century?

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Enron Game Called On Account of Reality II: Remembering Mr. Fastow

Remember Mr. Fastow? The architect of all - or, at least, most - of the supposedly fraudulent transactions that brought Enron down? Well, he's been indicted on charges mostly relating to his alleged corruption of some individual bankers, but also including charges of fraud against Enron and for taking kickbacks.

But when it comes to the main attraction, how does the reader think the settlements reached between J. P. Morgan Chase and Citigroup and government regulators will play in front of Mr. Fastow's jury?

The prosecutor presents the suspect transactions as obviously and egregiously fraudulent .....

... but admits that all possible charges against the banks that created, marketed and financed those very transactions were settled in agreements in which the banks admitted no wrongdoing.

And then the prosecutor can explain how everything depends on some weird distinction between "knowing" and "intending" fraud in a transaction which admittedly met legal and accounting requirements.

You see, ladies and gentlemen of the jury, it all has to do with the pineal gland!

And then there are the transactions in which the informal accounting rules-of-thumb would have been met, except for some essentially marginal pledge of a cash collateral account with a comparatively small amount of money in it. So Mr. Fastow is to go to prison in that case for breaking an informal rule of thumb.

Sure. O, yes. Sure.

The jury will buy all that.

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Davis Descending XXI: Salvation

Gray Davis will not be removed from office in the upcoming recall.

The California legislature has now passed a budget, which the Governor will sign.

That means that the Governor can turn full-time to demonizing the recall proponents. The negative publicity from the budget battles will now end, so his campaign will be meaningful. The percentage of voters favoring the Governor's recall has never been more than 51% - and that will now improve.

Barring some unexpected disaster, Mr. Davis is home free.

But it's unlikely he's ever going to the White House.

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Enron Game Called On Account Of Reality

The New York Times eats crow - excuse me - reports:

After more than a year of criminal and regulatory investigations, the nation's two largest banks agreed yesterday to pay almost $300 million in fines and penalties to settle accusations that they aided Enron in misrepresenting its true financial condition for years before the company collapsed.

The settlements, with J. P. Morgan Chase and Citigroup, are the broadest to date reached with advisers that played roles in the financing and structuring of the off-the-books partnerships and transactions that contributed significantly to the collapse of Enron in December 2001. ... But the bank settlements — reached with the Securities and Exchange Commission and the Manhattan district attorney's office — have significance far beyond the issues in the Enron case. That is because, for the most part, the transactions between Enron and the banks met legal and accounting requirements but still led to what regulators said was misleading information in the company's financial reports. ...

Under their settlements, the banks neither admitted nor denied any wrongdoing. ....

The district attorney's office said it would not prosecute individual employees of J. P. Morgan Chase or Citigroup for their conduct related to Enron. The S.E.C., though, said in a statement that its "investigations relating to Enron and Dynegy are continuing." A spokesman for the S.E.C., John Heine, declined to comment on whether that would include investigations of individuals at the banks.

Legal experts said the banks could hardly have refused the settlement offer because both still face lawsuits from Enron shareholders who lost money in the collapse. Under the securities laws adopted in the wake of the corporate scandals since 2001, settlement money that goes to investors through the government can be counted against any final settlement of class-action suits.

"From the defendants' perspective, this is a no-brainer," said John C. Coffee Jr., a professor at Columbia University Law School. "This money is going to do double duty. It settles all charges and it is going to go as a credit against the private class action." ....

Although the regulators extracted fines, the complexity of the deals made it difficult to prove that the banks had knowingly committed fraud, Mr. Morgenthau said, after a reporter asked why he had not prosecuted the banks. "We'd have to show intent to defraud, but we didn't feel we could show that here."

But Mr. Cutler said that the S.E.C. had filed a complaint in United States District Court in Houston contending that J. P. Morgan "aided and abetted" Enron's financial manipulations. "We thought we could prove they were at least reckless," he said.

The investigations have gone on for over a year. Where we are in the Enron game? Well, this pretty much sums up the legal status of the cases: Under their settlements, the banks neither admitted nor denied any wrongdoing.

Does that read like a big win for the governments in a case the New York Times has often and violently asserted manifests the most open and obvious fraud? In announcing the settlements, the various government employees involved do say nasty things about the banks, and how meaningful the settlement really is. That way, the regulators show how meaningful they really are. As the Wall Street Journal puts it:

Morgan ... issued a statement yesterday that insisted it "neither admitted nor denied the SEC's allegations." So the bank's official position is that it did nothing wrong but swears not to do it again. This is hardly reassuring about the bank's sense of responsibility, especially because the settlement depends on the bank's willingness to consider its lending decisions in the light of more than the letter of the law.

Simply put: settlements like these that do not require the defendants to admit any wrongdoing whatsoever are not meaningful no matter what the defeated regulator says. These are settlements by regulators who have nothing, nothing at all, and know it.

For example, the regulators imply that the banks "knew" that Enron was engaging in fraud - but that the governments can't prove that the banks intended to facilitate those frauds. The Journal is remarkably obtuse on this point:

On this evidence, the banks should consider themselves fortunate to have avoided criminal sanctions. One reason is because the law distinguishes between knowledge and intent. While the banks knew they were helping Enron cloak its books, it's more difficult to prove that they intended to commit fraud. The banks are also huge companies, with cross-cutting responsibilities, in which it is difficult to prove individual culpability beyond a reasonable doubt.

Really? These regulatory lawyers slice the baloney at least as thin as any of Enron's financial professionals they criticize. The decision not to prosecute or even bring a civil action against the banks is all predicated on the difference between the banks "knowing" they were facilitating fraud and "intending" to facilitate that fraud? If that were true, then why don't the banks admit in the settlement that they knew they were facilitating fraud? Why didn't the regulators require that the banks make that admission? And remember that this is a settlement of civil claims - meaning, contrary to the Journal's insistence, that the regulators would not have been held to a "reasonable doubt" standard at all, only a "preponderance of the evidence" standard. And criminal procedural safeguards like the exclusionary rule would not have applied, making proof all the easier for the government. Yet the governments decided not to go forward.

The settlement does change the banks accountability with respect to future transactions. But even with respect to those changed standards, the banks are making no admissions as to how the law (as opposed to the banks' "current standards)" would have applied to the supposedly fraudulent Enron deals:

Charles O. Prince, chairman and chief executive of Citigroup's corporate and investment bank, wrote, "The Enron transactions do not reflect our current standards and they would not happen now -- and will not happen in the future -- at Citigroup." .... Some lawyers viewed the proposed changes as toothless, because they don't carry any enforcement threats if the banks fail to comply.

It took a year for the government to get to this point? I noted long ago, that the banks obviously "knew" about those transactions and their effects when I asked with disbelief:

We are then further asked to assume that Citibank and JP Morgan (and the investment banks employing the financial analysts who were supposedly “misled” by Enron’s “opaque" financial statements), banks which maintain large staffs creating “off balance sheet” products these banks sell on a regular basis didn’t know how to analyze them or realize the risks they created.

Of course the banks knew about those “off balance sheet” products and the risks they created. But, lest it pass by like a blur, one should note the admission (apparently on the part of the Times and the governments) that the transactions between Enron and the banks met legal and accounting requirements. My, my, my. The transactions met legal and accounting requirements. So what if those transactions "still led to what regulators said was misleading information in the company's financial reports" - the banks don't admit that in the settlements. Morgan's press release denies it.

And, even if the banks did admit that, the financial incentives the banks have to settle obliterates any attempt to construe these settlements as admissions of significant wrongdoing by the banks:

Legal experts said the banks could hardly have refused the settlement offer because both still face lawsuits from Enron shareholders who lost money in the collapse. Under the securities laws adopted in the wake of the corporate scandals since 2001, settlement money that goes to investors through the government can be counted against any final settlement of class-action suits. "From the defendants' perspective, this is a no-brainer."

Amazingly, state prosecutors frankly admit they could not show any intent to defraud, while the feds say that they thought they could prove that the banks were at least "reckless" - which for these purposes is high negligence while being aware of the risk one is creating. So the feds are admitting that they couldn't prove "fraudulent intent" either.

Think about that.

As I noted in one of my prior posts on this topic:

Could it be – O heresy of heresies! – that Enron did not fail because of fraud? Could it be that the worst its accountants, attorneys and related professionals – and perhaps even its officers and directors – are guilty of is lack of imagination or maybe mere negligence? It’s very hard to say from most of the media coverage. But, unfortunately for the orthodox, the most likely outcome is that exactly this heresy is the truth.

To date:

No senior Enron officer has agreed to plead guilty - not even Mr. Fastow, who has been indicted on charges only marginally related to the alleged central "fraud" he perpetrated at Enron. Mr. Fastow's former assistant (finance executive Michael J. Kopper) has pleaded guilty to some crimes and cut a deal only after an apparent nervous breakdown resulting from government pressure - which will in all likelihood seriously undermine his effectiveness as a witness, by the same principle that causes juries to discount testimony by witnesses who have been tortured.

Other than Mr. Fastow, no senior officer or member of the Enron board has been charged with any crime, not even Ken Lay or Jeff Skilling.

Enron's main bankers who created, marketed and financed the very structured finance transactions that were supposedly so openly and obviously fraudulent are essentially off the hook for a pittance. Citigroup, with about One Trillion Dollars in assets, will pay $135 million - far less than what it earned from facilitating Enron's actions. Morgan will pay about $100 million.

Enron's accounting firm has been "convicted" only through a bizarre and exceedingly dangerous misreading of the law which will be eventually overturned, by a jury which refused to accept the confession of the Andersen partner and rejected as a joke the government’s assertion that the Enron paper shredding was an obstruction of justice.

The settlements impose a higher degree of intrusiveness on the part of the banks in a borrower's financial reporting, which some lawyers view as toothless, because they don't carry any enforcement threats if the banks fail to comply. So, in the future, the SEC can expect to get little memos from commercial banks saying something like "We have just completed a transaction with our client, X-corp which meets all legal and accounting requirements, but we thought we would tell you about it because it might nevertheless still lead to misleading information in the X-corp financial reports." Huh?

And, by the way, if Citigroup had all that copious "knowledge" of how bad they and Enron had been, and how hopeless the Enron financial situation was - what does that say about Robert Rubin when he called his former Treasury subordinate to ask for federal intervention to save Enron? Did he share all that "knowledge" when he attempted to induce highly material actions on the part of that government operative - as Mr. Rubin was required by federal law to do? And is it really true, as the Journal says, that Sandy Weill's recently announced decision to retire as CEO also removes the issue of responsibility at the top - even setting aside the fact that Mr. Weill will remain Citigroup's Chairman of the Board for at least two years?

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Mania, Panic, Crash

My father would occasionally wisely counsel me with the old nostrum: Son, if you can keep your head while all about you are losing theirs, you probably don't understand the problem. It would be a good idea to keep that nostrum in mind while reading a review of the life of Charles Kindleberger - a good, now physically defunct, economist - in the Economist magazine, which muses:

Perhaps more interesting has been the reaction of those most loth to abandon rational Homo economicus. Only a few old believers cling to the idea that the rise in dotcom share prices genuinely reflected likely profits, and that their sudden plunge was caused by regulatory (in)activity. Most prefer to ask why informed, rational investors failed to arbitrage away the absurdly high prices caused by irrational buying, as efficient-markets theory predicts.

What accompanies is a partial list of non-rationalistic and "market failure" approaches that have been tendered to explain the "dotcom bubble" - including the inevitable reference to “behavioural” economics. But the article's best quote is from Peter Garber: “Academics increasingly say there is a bubble as a substitute for thinking hard about the fundamentals of security valuation.”

Well, like the Marines, the Man Without Qualities vows to leave no rational Homo economicus behind! I don't think the dotcom run-up was much of a bubble. So allow me to cling - if not to the odd misstatement (or at least "misleading" statement) of rational economics proffered by the quoted language, at least to a concept more focused on investors buying discounted future profits than those appearing in the article's list. By way of background, I note that a Man Without Qualities a post written some time ago promised to return to the question of whether the dot com run-up was, indeed, a "bubble" in the sense that it was dependent mostly or entirely on "greater fool" buying and selling. This post is an attempt at that long-delayed return.

Unfortunately, I have to base my analysis on anecdotal evidence. I have not located any good systematic study attempting to ascertain what dotcom investors thought they were doing during the run-up (efforts of "behavioral" economists known to me are not to the contrary - despite all claims). Considering the amount of money involved, the effects on the economy and all the shouting about whether the dotcom run-up was or was not a "bubble," that is perhaps surprising. But, then, it is constantly remarkable that the participants in many big-time social science shout outs prefer to exercise their lungs rather than actually do hard research. A situation similar in at least that respect is the topic of a New York Times magazine article on the infamous and 100-year-old topic of repressed traumatic memories, as described by a researcher who actually did some research and of course got into hot water for doing it: ''You had two groups in opposite camps that were battling each other out'' over the validity of recovered memories, Clancy says. ''But nobody was doing research on the group that was at the center of the controversy -- the people who were reporting recovered memories. Memory function in that group had never been examined in the laboratory.'' Returning to the dotcom-as-bubble question, if somebody has actually spent time out of the sun checking the relevant central facts, I would be pleased to hear about it.

I believe that much of the dotcom investor belief in the dotcom (or internet) sector was rational, although much of it may have been mistaken. Generally, economists cannot re-run experiments as, say, a physicist or biologist can. Which means that economists are often reduced to more imperfect “tests” of their hypotheses. And those tests often confuse "rational belief" with "correct prediction." How can an economist - or anyone - reliably distinguish between a stock run-up based on a rational but false belief from a stock run-up based on irrationality? [Is it a coincidence that many of those who most easily believe in irrational "bubbles" seem (anecdotally) often to be people who easily pass from the observation "we have discovered no weapons of mass destruction in Iraq" to the conclusion "those who asserted there were weapons of mass destruction in Iraq must have been lying?"] There is no easy answer to that question - and that gap allows for a lot of bad economists to propose easy, seductive "irrational" or "bubble" hypotheses for which certain actors in the media and politics have an unhealthy appetite. By way of example only, John Kenneth Galbraith was an especially bad specimen of this species of hyper-articulate, bad, economist - a man who produced a seemingly unending series of such wonderful, awful ideas.

One way to distinguish some "rational false belief" run-ups from "bubbles" might be to examine the subjective psychology of the investors involved, since many (but not all) "bubble" arguments seem to involve a segue onto such terrain. The dotcom run-up was not accompanied by the general euphoria the normally accompanies bubbles - which of course suggests that the dotcom run-up was not a bubble at all. Of course, in Silicon Valley, certain niches on Wall Street and some pendant venues there was general euphoria - but that's not the relevant investor population. For one thing, the denizens of Silicon Valley spent the money, they weren't the source of it (it was said - mostly by people who don't understand the mechanics modern securities issuance - that Silicon Valley's main export was paper, as in the paper supposedly used to print stock certificates). In fact, during the dotcom boom, a large cadre of highly qualified and articulate investment professionals always and loudly preached that the whole thing was a stupid and expensive mistake. Value fund managers and "old economy" players were also squeezed, and they howled and expressed their skepticisms, too. Yes, each such skeptic was dismissed by dotcom investors with the aplomb all-night revelers at a West Hollywood club might use to dismiss a Calvinist preacher: "They just don't get it." But the dotcom run-up swam against a substantial and broad counter-current. What were dotcom investors expecting?

During the run-up I found it never hard to make even a committed dotcom investor admit that almost any identified dotcom company - even one in which the investor had just invested - had a business plan that made as much sense as the plot of a 1930's screwball comedy or the then-most-recent Clinton Administration plan for dealing with North Korean nuclear weapons. There were a few exceptions, such as Amazon and AOL, where a wide class of investors seemed to actually, subjectively, think that spectacular profits for those particular companies were within reach, although even with those companies there were plenty of nay-sayers bearing what could have been highly persuasive arguments. Why did those arguments not persuade more people, especially people who readily admitted that most dotcom business plans were loopy?

Well, because if confronted with weaknesses in particular investments, dotcom investors generally moved to a broader argument: Yes, this particular company you criticize has a loopy business plan ("Pets.Com" or "eToys.Com" or whatever). But, after all, in a classically competitive market any single, particular company has measure zero. While I may not believe in any particular dotcom company, I do believe that the internet is coming, and I hope that one or more of the stocks I buy for my portfolio will connect with that future. Such dotcom investors were certainly not expecting "likely profits" (as the Economist puts it) from any particular stock - but they were investing with a belief in a very unlikely but positive chance of an enormous return from at least one stock. In that sense internet investors may have been very rational in their diversified-up-to-the-sector approach to investing. Within the dotcom sector, investors were usually saying that they admitted to an almost complete inability to distinguish good business plans from bad.

But relocating the source of dotcom investor willingness to invest in their belief in the dotcom (or internet) sector still means that one has to ask: was that belief rational and, in any event, why did it end?

In brief: The belief of dotcom investors in those investments seemed to be based on a broad belief that the internet would permit widespread disintermediation of many middlemen (sometimes replacing them with much more efficient internet middlemen), as well as the elimination of whole classes of free riders and especially elimination of much regulatory and tax drag. In this sense, the dotcom run-up partially concealed a striking political agenda: the regulatory and tax drag that held the "old economy" to a growth rate of, say, 3% would give way - and a "new economy" freed by technology from regulatory and tax drag would boom along at, say 7% growth for the indefinite future. Instead of physical book stores, for example, that would be plagued by local taxes, local utility rate gouging, union demands, historical societies imposing design restrictions, and so on - Amazon would exist "nowhere," free from all that. Many of the "free riders" and "intermediaries" that bog down commerce and growth were thought to be eliminable. The famous de facto elimination of sales tax for e-tail purchases fed the belief that this political structure could maintain itself.

Again focusing on the psychology of dotcom investors: Developments in the Microsoft anti-trust case played a pivotal role in reversing dotcom investor confidence - an effect which clearly occurred but is not well understood. But the image of a no-neck federal judge, a creature from the briny depths of the old economy, reaching out from the beltway in a serious attempt to demolish the most successful technology company in history on the basis of flaccid, efficiency-reducing legal theory, seems to have put the brakes on investor confidence that the internet sector could avoid the regulatory and tax drag that holds down the "old economy." Once that investor confidence was gone, some of the most important rational underpinnings of the dotcom run-up collapsed. The Microsoft anti-trust action was justified by the urgent argument that Microsoft had leveraged itself into a commanding control position of the exact same hyper-profitable internet-dominated future on whose arrival the “irrational” dotcom investors were relying. The anti-trust action has quietly and gradually subsided into the bogs of intellectual embarrassment in which it belongs. But if the dotcom investors were “irrational,” how could the Microsoft action not have been “irrational.”

Were those investor beliefs "irrational?" Well, there are still smart people who argue that unauthorized downloading of music (and, presumably, other intellectual property) from the internet is both good for the economy and cannot be stopped by the government or private parties. Perhaps the internet will eventually gnaw through more of the "old economy" regulatory fabric. And, yes, recent history has shown that most of those dotcom investors were making some big mistakes, at least as to the timing of the arrival of an internet-dominated future and the prospect that a particular dotcom portfolio might contain at least a few winners, or at least survivors. But making mistakes is not in itself irrational. Some dotcom business plans have now materialized or evolved that seem to at least have a reasonable prospect of making reasonable profits, Amazon and especially e-Bay being the currently best known examples. But it is certainly not irrational for investors to misjudge the date a particular technology will transform the economy. I wonder if, say, ten years from now, the retailing sector has become mostly internet-based, if many people will be arguing that the dotcom run-up was a "bubble" - or just a premature guess? Isn't it too early to tell?

Further, while there surely was substantial "greater fool" trading, especially towards the end of the run-up, there is always "greater fool" trading going on in the market - every "momentum fund" is arguably based on that process. And, yes, there was too much liquidity in the market - a "money bubble." The Fed had increased the money supply greatly. But a focus on the money supply and general liquidity cannot answer the question: Why did that money go so much into stocks - especially internet stocks, instead of, say, housing, as has more recently occurred? While "greater fool" trading and liquidity effects were exaggerating features of the dotcom run-up, they do not seem to have dominated it.

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Monday, July 28, 2003

Pump Head Runs Dry

The once-mighty Walt Disney Company is so weakened that it is not even attempting to compete in the once-in-a-corporate-lifetime auction of Vivendi's American entertainment assets.

The Economist has an interesting article describing just why Disney's pump head in chief simply must go now.

While the article is good, the Economist also displayes some confusion, as can be seen by comparing these two curious excerpts:

ABC must go: The thorniest strategic problem facing Mr Eisner is how to stop the ABC television network losing millions of dollars each year. ... In the long run, though, says a former senior executive at Disney, the network is an “albatross” around the firm's neck and should be sold. As cable and satellite channels draw audiences away from broadcast networks that have only one source of revenue—advertising—only the strongest will survive the squeeze, he says. ABC has been out of the top league for too long.

But Disney should probably be sold: The likeliest suitor is Comcast, which could marry Disney's content with its distribution power. Comcast's executive vice-president, Stephen Burke, knows Disney's assets well, since he was president of ABC Broadcasting until 1998. The return of the lost leader; now there is a plot Disney should be able to understand.

So let's see if I've got this right. Disney needs to jettison ABC, but Comcast should buy Disney because Stephen Burke knows a lot about the ABC assets that have to go. If that's a plot Disney should be able to understand, then Disney is in even more trouble than the Economist understands.

But it's a good article, anyway. And it does suggest why Michael Eisner's mess is now getting so big, so fast, that if the Disney board doesn't act more quickly than it is probably going to do to get rid of him, the company may really go the way of the House of Usher - or Eisner - in not too much time.

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The New Look Of The Republican Party ...

... is not all that different in substance.
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EXTRA! EXTRA! Democratic Presidential Hopeful Devoured By Own Sentences!

"We have to diffuse the perception in reality of American occupation. The obligation of the United States government is to rapidly internationalize the effort in Iraq, get the target off of American troops, bring other people, particularly Muslim-speaking and Arab-speaking Muslim troops, into the region. The president clearly doesn't have a plan to do that, and we're paying a price for it.

Senator John Kerry, as quoted by The Guardian


For that matter, what is one to make of "the perception in reality of American occupation?" Surely some Bush mole tossed that in.

And did Yale-educated Senator Kerry really say "diffuse" (which means to pour out and permit or cause to spread freely) rather than "defuse" (which means to make less harmful, potent, or tense) or was that part just The Guardian at play? On the other hand, since "We have to diffuse [or defuse] the perception in reality of American occupation" does not appear to be an actual English sentence assuming either choice of vocabulary, perhaps the choice doesn't matter.

And, finally, what to make of: "The president clearly doesn't have a plan to do that, and we're paying a price for it?" Well, depending on what "that" turns out to be after the Senator's grammar and vocabulary is unpacked, maybe it's a price worth paying.

He just seems weirder and weirder.

(via Brothers Judd and Tacitus)

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Friday, July 25, 2003

Being Paul Krugman

Let's see. Paul Krugman's most recent column is out.

As I predicted yesterday (Thursday) - in a post that went up while he was writing the column - it is not about the dramatic and unexpected decline in jobless claims reported yesterday, although that is what a serious economist interested in politically significant developments would write about. No. The column is not about any of that because, as I also predicted, it is about the declining bond market (it's even titled "Dropping the Bonds") and how the United States is on its way to becoming the next Argentina (a country not mentioned by name, this time, but whose brooding omnipresence I take to be clearly implied by Herr Doktorprofessor's scathing reference to America's descent into debt) and, of course, that its all George Bush's fault - and especially how Alan Greenspan is the President's "accomplice" in all this economic mayhem who "has a lot to answer for."

Now the word "accomplice" has all kinds of conspiratorial connotations. And Herr Doktorprofessor ups the conspiratorial ante with: Let's not forget that back in 2001, Mr. Greenspan lent crucial political aid to the first Bush tax cut ... he tied himself in knots to find a way to give his political friends what they wanted Yes, the Fed is required by federal statute to be independent, but my goodness Herr Doktorprofessor knows a "wink, wink ... nudge, nudge" when he sees one! And then there's this: Mr. Greenspan still talks about the evils of deficits, but refuses to say the obvious! And just why would the Fed Chairman refuse to say the obvious - even under oath, even to Congress? My God, the fix is in!

OK, so it's not the juiciest set of Krugmaniacal conspiracy insinuations, but they will do to satisfy the yearning expressed in my post yesterday, in which I gave myself over to contemplation of today's Krugmania dropping: And maybe there will be a conspiracy of some sort, too. I just love Herr Doktorprofessor's conspiracy theories.

How did this happen that I predicted - that I knew - what Herr Doktorprofessor was writing even as I wrote my own post!? I confess. Behind a filing cabinet on the 7 1/2th floor, I found a small doorway. I crawled through it, and was whisked through some kind of temporal-spatial portal, ending up inside the brain of the professor Paul Krugman. Here I stayed for exactly 15 minutes, before falling from the sky next to the New Jersey Turnpike. Whoa! What an experience. My wife is pressuring me to turn it into a business, charging people to spend their 15 minutes inside Krugman!

Well, forget it, sweetheart. There's no money in that. The paying public could experience a higher class version of essentially the same thing by taking a ride through Disneyland's Space Mountain. This was a one-shot deal.

What exactly are Mr. Greenspan's sins about which Herr Doktorprofessor raves today? Well, Herr Doktorprofessor is for one thing miffed that Mr. Greenspan is optimistic about the economy, and that he was also optimistic about a year ago, and that Mr. Greenspan then said:

Although the uncertainties of earlier this year are as yet not fully resolved, the U.S. economy appears to have withstood a set of blows. Not surprisingly the depressing effects of recent events linger. Nevertheless, the fundamentals are in place for a return to sustained healthy growth,'' where Herr Doktorprofessor says there has been no return to sustained healthy growth.

But Mr. Greenspan's comments seem pretty well hedged to me, and, although he uses a different vocabulary, his comments don't seem all that different in substance from Herr Doktorprofessor's own forecast for 2003: My prediction [for 2003] would be two to three percent growth on a year-to-year basis. If you ask me if the US economy can fall back into recession, I'd say: yes, absolutely. On the other hand, can it grow by 5 percent? It is also possible.

And then there's this Krugmankvetch:

Since mid-June, however, [long-term] rates have been climbing rapidly. This week rates on 30-year mortgages hit their highest level since January. And Mr. Greenspan bears some of the responsibility. Until June, Fed officials had helped push down interest rates precisely by not being too optimistic - by indicating that they took concerns about deflation seriously, that they were not taking recovery for granted. Then they surprised markets with a small cut in the federal funds rate, a move that seemed to suggest that they were taking recovery for granted, after all.

But long term rates largely respond to inflation concerns. The bond market seems to be signaling a concern that by focusing on the possibility of deflation the Fed may be increasing the likelihood of future inflation. Mr. Greenspan may be mistaken in his evaluation of the deflation risk, but lots of people agree it's there - although it is a fear not shared by the Man Without Qualities. Indeed Herr Doktorprofessor has recently written about his own concerns of this sort. What is missing from today's column, of course, is any indication of what Herr Doktorprofessor thinks Mr. Greenspan should have done differently. For example, Herr Doktorprofessor seems annoyed that the Fed surprised markets with a small cut in the federal funds rate, a move that seemed to suggest that they were taking recovery for granted, after all. But a bigger cut would have signaled less concern about inflation - which might have driven the bond market into even deeper anxiety. Perhaps the economy will devolve into stagflation or the like, and if that happens Mr. Greenspan will be in some difficulty. But unless and until something like that happens, Herr Doktorprofessor's clarion call for Mr. Greenspan to be held to account has one problem: there's nothing to be held to account for, yet.

Herr Doktorprofessor also thinks: There is very little evidence in the data for a strong recovery ready to break out. As far as I can make out, Mr. Greenspan's optimism is entirely based on models predicting that tax cuts and low interest rates will get the economy moving. But where he has often cited recent employment statistics as evidence of economic health, here there is no mention that the number of people lodging new jobless claims plunged unexpectedly last week to the lowest level since February, which some economists think means a lot. Nor does he explain why those economists are wrong.

The fact is that there is plenty of evidence in the data for a strong recovery ready to break out. But there is also plenty of evidence in the data for concern. That is to say: there is a lot of uncertainty. It's the same kind of uncertainty that made Herr Doktorprofessor "forecast" 2003 growth in the US as somewhere between recession (say, -2%) and 5%. But it seems that Herr Doktorprofessor thinks only academic economists are entitled to that kind of spread - the Fed Chief is held to a different standard, a standard that looks a lot like vindictiveness.

The rest of the column is the same old Krugman ranting about the deficit being too big - "record" as he again puts it. But that is far from clear in the most meaningful sense - as this JOINT ECONOMIC COMMITTEE report shows. But considerations such as those explained in this report are completely ignored by Herr Doktorprofessor, also as predicted. And, in any event, even if the deficit must be brought down, it is by no means clear that taxes must or will be raised to do it. That is a political decision for the future - although Herr Doktorprofessor falsely treats it almost as the predetermined solution of an econometric equation.

UPDATE: As usual, lots of great stuff debunking this particular Krugmaniacal cat-scratch from Don Luskin's Krugman Truth Squad in NRO today.

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Thursday, July 24, 2003

That David Brooks?

... a twice-a-week columnist at the New York Times?

Does that mean Bill Safire is leaving? Or is Bill Keller going to have two conservatives on his op-ed page? And, in that case, is someone other than Safire leaving?

Paul or Big Mo to go?

And why no word so far from the Times? The paper of record is allowing itself to be scooped on its own internal staffing stories?

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No Religious Test Shall Ever Be ...

Article VI of the United States Constitution provides in part:

The senators and representatives before-mentioned, and the members of the several state legislatures, and all executive and judicial officers, both of the United States and of the several states, shall be bound by oath or affirmation, to support this constitution; but no religious test shall ever be required as a qualification to any office or public trust under the United States.

But a good many people sitting in the United States Senate seem to have forgot the spirit - and maybe the letter - of that provision:

A judicial confirmation hearing yesterday turned into a rancorous debate between Democrats and Republicans over whether it's possible for a devout Catholic to be confirmed to the federal bench.

The federal courts will not normally intervene in a case of internal Congressional process and rules - such as a filibuster. But there have been exceptions, as in the case of Adam Clayton Powell, Jr.:

On January 9, 1967, the House Democratic Caucus stripped Powell of his committee chairmanship. Furthermore, the full House refused to seat him until completion of an investigation by the Judiciary Committee. The following month, the committee recommended that Powell be censured, fined, and deprived of seniority, but on March 1 the House rejected these proposals and voted 307 to 116, to exclude him from the Ninetieth Congress. Powell won a special election on April 11, 1967, to fill the vacancy caused by his exclusion, but did not take his seat. He was reelected to a twelfth term in the regular November contest, but the House voted to deny him his seniority. Powell declined to take his seat when the Ninety-first Congress convened in January 1969. In June 1969 the Supreme Court ruled that the House had acted unconstitutionally when it excluded him from the Ninetieth Congress, and Powell finally returned to his seat albeit without his twenty-two years' seniority.

If a filibuster is indeed motivated by anti-Catholic animus, Article VI would appear to permit - even require - judicial intervention in Senate processes. And, of course, there is always the First Amendment. The point would seem to be particularly pertinent here because the Catholic Church's position was established and well understood long before the Supreme Court's decision in Roe v. Wade that created an new constitutional right.

In expanding the Constitution to contradict the teachings of long-established religious sects, is the Supreme Court reducing the ability of religious people from those sects to serve in the federal government by allowing Senators to impose religious tests expressly forbidden by the plain text of Article VI under the guise of "protecting Constitutional rights" in a filibuster?
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What Will Paul Do?

Paul Krugman may be working on tomorrow's column even now! What could it concern?

Well, there's really no doubt what a serious economist interested in politically significant developments would write about. Why, such a person would write about the dramatic and unexpected decline in jobless claims reported today! Last week's drop was to the lowest level since February. There's lots to write about, since the Labor Department cautions against reading too much into the improvement because July is always a volatile month, while some economists see the claims fall as showing surprising strength in the job market that is evidence the economy is on the mend. For example, John Lonski, chief economist at Moody's Investors Service in New York said: "I think this puts a stake in the heart of those that claim recession is still with us."

But my guess is that Herr Doktoprofessor will write about the declining bond market and how it signals that the United States is on its way to becoming the next Argentina and, of course, that its all George Bush's fault.

And maybe there will be a conspiracy of some sort, too. I just love Herr Doktorprofessor's conspiracy theories.

UPDATE: And I doubt that any of the very pertinent considerations found in this analysis of the federal deficit will feature substantially in tomorrow's column.

Link from Don Luskin.
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Kobe Chatter: Playing The Race Card

Media coverage of the Kobe Bryant rape accusation is a wonder on many counts, not the least of which is that while a major element in the whole mess is bound to be race, the media are loath to talk about race in this case, citing to some ridiculous notions of victim privacy which are completely irrelevant because the name and RACE of the accuser and even dubious pictures of her, are trivially obtainable on the internet. [The Washington Post reports: The woman's name has been on the radio in at least 60 cities and posted on various Internet sites, complete with address, phone number and, in several cases, photographs of the wrong women.]

RACE, RACE, RACE. Yes, the accuser and possible victim is an attractive WHITE woman - although the media coverage dances all around this central point without addressing it.

Bizarre articles go on for many column inches discussing "prejudice" the accuser may be experiencing - without even mentioning the racial aspect of the case. But it matters a lot. Some articles are simply incomprehensible because they make no reference to the race of the accuser - like this one comparing the Bryant matter with the O.J. Simpson case.

That the woman's race and identity are freely available to the public doesn't stop ESPN from hiding behind "victim shield" considerations in publishing this drivel: On the other side is a 19-year-old woman, unnamed by media outlets and unknown outside her hometown community of 3,700 in Eagle County, Colo.

O, yes. She's "unknown outside her hometown community of 3,700 in Eagle County, Colo." We get the point. She's from a small town in an all-non-black Colorado county. ESPN buries all discussion of the racial aspect all the way at the end of the very long article, and the mention is again indirect and the discussion airy:

One last unknown variable could be race.

The Eagle County community, according to the Post, is 74 percent white and less than 1 percent black. Colorado lawyer Lisa Wayne, one of two blacks on the board of the National Association of Criminal Defense Lawyers, said minorities have difficulties getting fair trials, particular in rural Colorado areas.

"There's always the hope that this kind of defendant, because of who he is, would transcend race," Wayne told The Denver Post. "But I have to tell you that when it comes to allegations of sexual assault involving a black man and a white woman, there's often a deep bias that is so ingrained with jurors that they don't even recognize it, and it can interfere with their ability to (recognize) his status."

Yes, racial bias is often thought to be a problem for jurors, and many people also believe racial bias can be a big problem with prosecutors. That's highly relevant in this case because ESPN also notes: A jury likely will decide whether Bryant can resume his previous life on a basketball court. But in the court of public opinion, the damage may have already been done. And, if the damage to Mr. Bryant has already been done, it has been done by a white state prosecutor from an almost-all-non-black county. Isn't that news? And the "74 percent white" reference seems to be tossed in to deflate racial concerns - but is there any evidence that Hispanic or Native Americans are any less inclined to be biased against African American men accused of rape? I'm not aware of any.

TIME magazine's coverage is all but a hallucination in this regard:

Bryant proved last week that he can be a charismatic testifier. But he may have a tougher audience in Eagle County, a Colorado district in which blacks total only 0.3% of the population. Even here, though, Bryant's benign image may trump his color. "Kobe the superstar is in some ways raceless," says Kenneth Shropshire, author of In Black and White: Race and Sports in America. "He could be like Michael Jordan, someone nonurban white folks think of as a superstar, and not primarily a black man." Color is one possible factor; class is another. There's a financial gulf between those who pay $175,000 for a golf-club membership and those who caddy for them. Most who work in Vail can't afford to live there. Trailer parks are home not just to carhops and maids but to social workers and the police. Could a local jury reflect the resentment the near poor have for the very rich?

The accuser's race is not reported in this TIME article at all. It's not that TIME doesn't think race is important - only that it has to be brought in indirectly ("Color is one possible factor..."). Apparently TIME's readers are suppose to dig out of the squidgy language of this article that Mr. Bryant may have a problem because he is an African-American man charged with raping a white woman and may have to stand trial before a no-black jury in a nearly no-black county. In other words, Mr. Bryant may have a To Kill a Mockingbird problem? And what's with the loony "class is another" bit? Is TIME suggesting that rich men are sometimes convicted of rape because the jury resents their money? Such a suggestion is just idiotic. "Kobe the superstar is in some ways raceless?" Does anyone in his right mind think Kobe Bryant feels "raceless" when he walks around a Colorado county that is 99.7% non-black and thinks: "That's my jury?" Does anyone think that African-Americans are not going to be having race in mind as they watch what happens to Mr. Bryant?

RACE! RACE! RACE! The media won't say it, but I will say it:


That doesn't mean the residents of that Eagle County, Colorado, are racist or bad. It doesn't mean the accuser is wrong or right. But it does raise the questions of whether Mr. Bryant has been already wronged on account of his race, and whether the jury may be biased on account of his race, and whether he will "play the race card" to seek an unjust acquital at some point if his trial proceeds poorly. In short, it is not possible to understand this matter without discussing its racial aspects.

For God's sakes, race matters - and should be reported where it matters.

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Davis Descending XX: Total Recall

The recall election is set for October 7, which is the best possible date for Governor Davis that Cruz Bustamante could have chosen. That choice should cast more cold water on speculation that Mr. Bustamante is trying to cause mischief for the Governor. In addition, contrary to much amazing and groundless speculation that Mr. Bustamante was trying to obtain the governorship for himself without need to run as an substitute/alternative to Mr. Davis, we have this:

Bustamante said the recall election will have two parts, with voters first deciding whether or not to oust Davis and then choosing from a list of candidates to replace him. People voting "no" to the recall would still have the opportunity to cast a vote in the second part.

While the late recall election date is what Mr. Davis wanted, it also allows potential candidates (including Mr. Bustamante) much more time to decide whether to place their names on the ballot - and it allows the Democrats much more time to panic if their polls keep deteriorating. If Mr. Davis is seen as doomed, the Democrats will be seriously reconsidering Terry McAuliffe's premature assertion that there will be no Democratic name on the substitute/alternative list.

But he is very far from doomed at this point, especially since a state budget now seems within reach. If that budget is brought home, Mr. Davis can turn to what he does well - demonizing his opponents.

UPDATE: Kausfiles has lots of good stuff, although I repeat that I do not agree that Cruz Bustamante ever said anything that warranted the alarmist "He's attempting a coup!" accusations. His comments were baroquely extended by media hungry for something to report. He was probably seeking nothing more than some way to hold the recall and substitute/alternative elections separately.
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A Lesson In The Economics Of Marginal Cost

A basic discovery of micro economics is that a seller will sell product as long as sales proceeds of one additional unit (marginal proceeds) exceeds the total cost to the seller of selling that additional unit (marginal costs). In the case of a unitary, freely competitive market, there is an additional constraint on the seller: the seller can only charge one price for all of the seller's goods.

So what?

Well, national boundaries - the one between Canada and the United States being one example - disrupt the "unitary, freely competitive market," especially where the goods in question are subject to import restraints imposed at the discretion of the seller. Patented drugs are the example now much in the news as Congress considers a law governing drug reimportation, a law that would allow American drugs that sell for less in foreign countries (especially Canada) to be reimported and sold here at a price based on the foreign sale price which is lower than the domestic price.

Some people have argued that such a drug reimportation law would cause private drug research funds to dry up, since the law would impair earnings from the drugs produced by the research. That's possible - but if this law has meaningful effect, it is likely to do far more harm to Canada and other foreign countries than the United States - while raising United States drug prices by some measures.

Patented drugs sold in Canada represent marginal sales for the drug companies - similar to a gas station's sale of, say, model cars or soft drinks. [For purposes of this post, I will use "Canada" as synonymous with "non-US," although that is not strictly correct.] American drug companies do not depend on Canadian sales for most of their profits. Drug companies sell to Canada at lower prices because those sales do not now affect United States profits, so the marginal return to the drug companies is positive even at the lower foreign price. If Congress mandates that open drug reimportation be permitted, and drug companies can stop selling in Canada altogether, they will likely do that rather than gut their core profitability in the United States market by exporting to those marginal, foreign markets. (Actual Canadians - that is, not just non-Americans - amount to 2 to 3 percent of the prescription drug market; Americans, 65 percent. Actual Canadians get a substantial free ride on the research and development for the American market.) So Canada will suffer unless drug companies are allowed to raise their Canadian prices - which will gut the effects of the proposed reimportation law, since there will be no "cheap foreign drugs." At the moment Canadian drug prices are determined through a heavy dose of government intervention and a deal involving the prices of generic and patented drugs - so a drug reimportation law will require some heavy political decisions on the part of Canada.

The United States will also likely be harmed by the reimportation law. The positive side of a drug company's decision as to whether to go forward with research for a particular drug depends on expected aggregate revenue from sales. Canadian sales may now be marginal, but they are still profitable - and therefore factor into a drug company's decision as to whether to go forward with a particular drug. If the drug reimportation law causes drug companies to cease sales to Canada, then expected aggregate revenue from sales will equal expected aggregate revenue from sales in the United States but not Canada. Some drugs that would have been sufficiently profitable if Canadian sales were possible will (with open drug importation mandated) not be profitable - and will therefore not be pursued. Only drugs likely to be profitable from United States sales alone will be privately researched. That will put upward pressure on average drug prices for new drugs. So it is even possible that the reimportation law could have positive effects - if the result is that Canadian drug prices are forced to go up. In that case, the expected aggregate return to research will increase because Canadian sales will result in more profit to the companies, and therefore more drugs will be researched by the companies.

So, unless Congress is willing to mandate cheap Canadian sales of drugs, or Canada is able to force drug companies to sell a full line of their drugs in Canada cheaply, both Canada and the United States will likely suffer badly from this proposed Congressional action. Of course, if either Congress or Canada take such actions, private drug research funds will dry up, since the law will impair earnings in the United States from the drugs produced by the research.

[One can only shudder to imagine the results of the incentives created by such regulatory efforts for a company to evade them, efforts which would probably soon surpass in complexity and economic distortion the efforts made to avoid the corporate income tax. Will companies holding a patent for a new drug sell it - or spin it off - to a single-purpose company set up solely to make and sell that drug - thereby avoiding regulatory pressure which might be brought on a company selling a broad line of patented and generic drugs? That would only be a simple beginning.]

In any event, the negative consequences will all happen after the next election - so it's probably okey-dokey with Congress. Besides, if the majority of the most immediate negative results of the law fall on Canada, through the loss of American drugs or a rise in Canadian drug prices or whatever, Congress cares less. That United States citizens and the rest of the world suffer from a fall off in drug research and a focus on more expensive drugs is a more subtle long-term effect that can be denied by fudging the statistics in the usual academic/beltway fashion - in the same way such fudging allows some academic economists to pretend they doubt that raising the minimum wage increases unemployment.

Too bad one can't get a job - or make a malignant tumor or an HIV infection go away - with fudged statistics.


UPDATE: The House has approved the reimportation bill.

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