Man Without Qualities

Friday, March 28, 2003

Is Baghdad Stalingrad or Hue?

There has been a great deal of consideration recently given to whether the coming attack on Baghdad might bog down into a long siege like the Battle of Stalingrad or or into messy "urban warfare" a fight without scruples for the high ground of propaganda that exploits civilian losses and denies the intruder's superior might. "Urban warfare" is said to be a particular threat, especially if the Republican Guard retreats into the city. Some of the people doing the speculation are actually looking forward to such "urban warfare."

I don't mean to dismiss the possibility of "urban warfare" in Baghdad, or to pretend that I am any kind of military expert. But I think that the threat of "urban warfare" in Baghdad is very limited exactly because it is the capital in which the government is trapped - with no place to go. That's not true of a remote city - such as Hue or Basra - in which many low-tech fighters and installations can be destroyed by the US, but possibly replaced to the extent that the original destruction is all but meaningless. If the Iraqi government and central military command is destroyed or cut off, replacement will not be easy. That appears to me to means that if US attacks - even a single attack - destroy or cut off Saddam Hussein and his central command, then the war probably winds down from there pretty fast. Without anyone to coordinate an "urban warfare" defense of the city, Baghdad should essentially turn into a mopping up operation - messy, but not a bottomless pit.

Put another way: In large measure, kill the brain, you kill the ghoul.

And such an attack seems likely. Eventually the US will determine the whereabouts within Baghdad of Hussein (assuming he is alive) and his central command. And regardless of how deep those Iraqi presidential bunkers may be, it seems unlikely to me that the Iraqis could stop a determined US attack on any particular destination within that city. Such an attack on Hussein's bunker wouldn't be an underpowered hit like the one in Black Hawk Down. That doesn't mean no urban warfare is possible - but its likely scope seems quite limited, at least to me.

It has been reported that video copies of "Black Hawk Down" have circulated among senior members of the Iraqi government. It seems inapposite. "A million Mogadishus" - or any form of "urban warfare" that really bogs down the war in Baghdad - seems unlikely.

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Crony Capitalism On The Ropes?

Newsweek reports:

After taking some political heat, Halliburton is stepping out of the kitchen. The giant energy and construction firm once managed by Vice President Dick Cheney is no longer in the running for a $600 million rebuilding contract in postwar Iraq, NEWSWEEK has learned.

Surely this development will be a big disappointment to the many on the left who just KNOW that the fix is in. They can't quite put a finger on what the fix is, since Mr. Cheney now has no position with or holdings in Halliburton, but they KNOW it's out there.

Newsweek notes: What remains unclear is whether Halliburton took itself out of the running for the contract, was asked by the Bush administration to do so or whether its bid was simply not deemed competitive. If Halliburton was the best contender and has been excluded (or excluded itself) in order to avoid political fallout, that would be unfortunate, because Halliburton has much to offer.

Does this mean that crony capitalism is on the ropes? Just when the pickings should be getting good? Dear me.
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No Weill III: MWQ Gets Results

In the prior post linked above, I noted:

[W]hile it is perfectly reasonable that [Citigroup Inc. Chairman Sanford] Weill should have a seat on the NYSE board in some other capacity, that Mr. Weill could even potentially be considered as a "public representative" on the basis of the silly argument proffered above also shows how inconsistent and hypocritical the NYSE has been in it's "independence" evaluations. Mr. Weill was to become a member of the NYSE own board. But compare the make-weight arguments used to support Mr. Weill's nomination with the complaint of Warren Buffett over the new tripwire NYSE rules defining "independent directors" of listed companies such as Berkshire-Hathaway ...

Perhaps somebody at the Securities and Exchange Commission reads this blog - or maybe the point was obvious. But in any event, the Wall Street Journal reports:

The Securities and Exchange Commission has asked U.S. exchanges to study their own corporate governance and report on findings by May 15. SEC Chairman William Donaldson said he wants markets to be "examples of good governance" for investors and companies. "If you're going to set standards for other people, you've got to set standards for yourself," Mr. Donaldson said Wednesday. .... Mr. Donaldson said the move wasn't prompted by the New York Stock Exchange, which came under fire for nominating Citigroup Inc. Chairman Sanford Weill to serve on the NYSE board. .... At a time when exchanges are insisting on tougher standards for listed companies, he said it's only logical for them to study their own governance practices. "Just as every board is looking internally to its structure, it's only logical that the exchanges should be looking at theirs," said Mr. Donaldson .

Ah, the language of diplomacy!
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Chump Change II: Herr Doktorprofessor Autobackpats

The FERC is now proposing to increase modestly the $1.8 Billion California energy refund already recommended by an administrative judge and termed a "pittance" by Governor Gray Davis, mostly adopt that judge's findings (findings which were considered a disaster by that same Governor) and has produced a staff report that says (page ES-1):

While Staff found significant market manipulation, this evidence does not alter the Commission’s original conclusion, set forth in its December 15, 2000 Order, that significant supply shortfalls and a fatally flawed market design were the root causes of the California market meltdown.

But Paul Krugman today writes about this same FERC action:

There's no longer any doubt: California's power shortages were largely artificial, created by energy companies to drive up prices and profits. ... I am patting myself on the back for getting it right.

Herr Doktorprofessor keeps bouncing matters off Vice President Cheney's energy report:

The Cheney task force ... concluded, in brief, that the energy crisis was a long-term problem caused by meddling bureaucrats and pesky environmentalists, who weren't letting big companies do what needed to be done. ... For we now know that everything Mr. Cheney said was wrong.

Well, most supply shortfalls and a fatally flawed market design [that] were the root causes of the California market meltdown, sure seem to be caused by meddling bureaucrats and pesky environmentalists. [Herr Doktorprofessor also tosses in a line about "corporate welfare" - but since it's not worth even a sentence to him to explain what he means by that, I will also bypass it as irrelevant.] Indeed, one of California's major power companies is still in Chapter 11 precisely because the stupid regulatory system made it absorb huge increases in wholesale energy the root cause of which the FERC continues to find were supply shortfalls and a fatally flawed market design - not manipulation. The Cheney Report cited California's then-ongoing energy shortages as indicating the national need for increased energy supply and a rationalized energy market structure - and warned of the long term adverse consequences of price controls. So the main Cheney report findings all seem to be consistent with the FERC's findings.

It is also true that Mr. Cheney and his committee did not detect the "manipulation" that the FERC finds. But while the FERC report agrees that the California energy market was likely subject to manipulation, the "manipulative" devices the FERC finds involved natural gas trading - not the electricity trading that Herr Doktorprofessor previously described as the "smoking gun:"

The significance of the "smoking gun" Enron memos that came to light a few days ago is that they show exactly how swell those power executives really were. It turns out that Enron was indeed rigging the markets, with schemes that had smart-alecky nicknames like Fat Boy, Death Star and Get Shorty. Who said business isn't fun?

The new FERC report does not seem to back off from the Commission's prior conclusions that most "abusive" electricity trading practices did not affect prices much - even if they did violate the applicable tariffs, and were therefore not "just and reasonable" to the extent of such violations, thereby requiring Mr. Davis' "pittance" of refunds. But if I understand its staff report correctly, the FERC believes that gas trading devices indirectly affected the market for electricity since electricity was often priced by reference to gas prices. So did Herr Doktorprofessor "get it right?" The FERC says both of Messrs. Cheney and Krugman were wrong in part: Mr. Cheney did not detect manipulation where it existed, and Herr Doktorprofessor saw it everywhere, even where it didn't exist. But Mr. Cheney is not now misrepresenting his prior misunderstanding, but Herr Doktorprofessor is. Further, the FERC findings are based on technical interpretations of the "anti-gaming" provisions of the relevant "energy tariffs." This is a legal matter - not an economic matter. Herr Doktorprofessor seems to be bragging that he knows how to construe the language of those tariffs - indeed his prior column on "Fat Boy" etc. admitted that the legal memo he considered there was key evidence. Goody. I had thought his was an economic analysis - but now it appears he moonlights as an associate lawyer. Perhaps he's smarting from his last turn as a law firm associate, when he asserted, "Mr. Cheney, in clear defiance of the law, has refused to release any information about his task force's deliberations; what is he hiding?" - where the courts construed the "clear" law quite otherwise.

Herr Doktorprofessor Krugman declares the California "crisis" to have abated because of "energy conservation and price controls." But this is absurd. California always had access to energy - the "crisis" resulted from its reluctance to accept the high cost of that available energy. The "crisis" abated when California agreed to pay a lot for a lot of energy - and the weather changed. California energy prices are now still punishingly high - and are probably going to get a lot worse in the long term - exactly because there are so many regulatory problems to building plants and distribution systems, many of them simple NIMBY effects. Can this long-term crisis identified by Mr. Cheney be solved by "energy conservation and price controls?" Well, most good economists would not consider "conservation" brought on by what appears to be much higher energy prices than an efficient market would produce - which is what the FERC is saying we have here in California - to be a "solution." Unlike Herr Doktorprofessor, they would call that a long-term "problem" - maybe even a "crisis." For example. Vernon Smith, the 2002 winner of the Nobel Prize in economics seems to rather pointedly disagree with Herr Doktorprofessor's explanations, but seems to mostly agree with Mr. Cheney: Foremost among the recent burnouts was, of course, the plight in California. But the crisis is not one of energy; it is a crisis in bad market design.

Perhaps the biggest mystery buried in this lump of Krugmania is why Herr Doktorprofessor thinks the current FERC action is something big, new and a vindication. Of course, his focus in this column continues to prove the correctness of his famous prediction of January 29, 2002 ("I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society."), if it is construed as a statement of his personal policy to ignore the major economic facts of the day if they are related to September 11 (in this case, the entire Iraq war) in favor of even minor Enron blips. But, look here, these FERC actions are not even final - the energy companies will have a chance to refute what the FERC is saying here and have already signaled that they will. Last December Federal Administrative Judge Birchman issued his findings and ordered various energy companies to refund $1.8 Billion. Because the total amount owed by California to suppliers is $3.0 billion, after the refund offsets California would still owe its suppliers $1.2 billion. The present FERC action would eliminate the need for either side to make further substantial payments to the other. Governor Gray Davis said about the $1.8 Billion refund: "They threw out just about everything we could claim and the amount we got back was a pittance." Loretta Lynch, president of the state Public Utilities Commission, called the refund amount "a slap on the wrist." Judge Birchman's decision was widely considered a defeat for California, and the Los Angeles Times, for example, reported that California was doubtful even the $1.8 Billion refund would be confirmed by the FERC and also reported that Wall Street analysts are betting that the regulatory commission will order no more than $3 billion or $4 billion in refunds and will order California to honor the power contracts it signed in early 2001.

Herr Doktorprofessor is crowing because two days ago the Federal Energy Regulatory Commission proposed adopting most of the Birchman finding, but using a somewhat different method of computing what the price of natural gas should have been than Judge Birchman did, which may raise the amount of the refund - $3 Billion is a number cited as a possible outcome. If that figure is correct, it would be about what Wall Street had anticipated as the worst that would probably happen, and be only one-third of what the $9 Billion refund that California government has been claiming (in fact, State officials have sometimes claimed that power sellers overcharged California energy users by as much as $30 billion during the 2000-01 energy crisis). But even that $3 Billion figure is likely high - energy suppliers mostly disagree with the FERC, which will hold hearings to listen to them, and, as noted in the prior post on this subject, the increase in the refund is expected to be in the millions - not billions. And it does not appear that the FERC is going to void or force the renegotiation of those hugely expensive energy supply contracts that Governor Davis's administration signed to get power into the state. Still, the FERC's confirmation of (and possible modest increase in) Judge Birchman's methodology and refund was enough to set the energy suppliers' stock prices down substantially.

Another interesting aspect of the FERC staff report is its central focus on Enron: Staff concludes that large-volume, rapid-fire trading by a single company, in what was incorrectly assumed to be a liquid market, substantially increased natural gas prices in California.

As I have noted before, Enron has failed and is bankrupt and demonized. Nobody much argues Enron's case any longer - even Enron's current management is at pains to blame their predecessors and distance themselves from prior methods. How confident does one feel of a conviction in abstentia? Even Herr Doktorprofessor understood this when he wrote: If Enron hadn't lost its clout by going bankrupt, you can be sure that we would never have heard about Fat Boy and Death Star. Assuming that the FERC is right about Enron, the FERC approach seems to anything but suggest that Herr Doktorprofessor "got it right" when he wrote:

The great risk now is that this will be treated purely as an Enron story. That's wrong; Enron was mainly a trader rather than a power producer, and as such could have only limited impact on electricity prices. The bigger story involves market manipulation by a number of producers. The circumstantial evidence for that manipulation is overwhelming.

Herr Doktorprofessor says the FERC vindicates him. But FERC actually finds the problems that may require FERC to increase the "pittance" awarded by Judge Birchman were caused by large-volume, rapid-fire trading by a single company - Enron. While other companies are named as "manipulators," Enron is clearly featured by the FERC as the Great Satan that gathered all the other Satans about it.

On the whole, since I want my lights to stay on here in Los Angeles without the need to mortgage my house to pay the power bill, I prefer to pay attention to Mr. Cheney's report - not to Herr Doktorprofessor balletic autobackpats.

But anyone who really wants to understand the significance of the FERC actions will have to wait until Lynne Kiesling finds time to write it down.

UPDATE: Don Luskin has more. And he provides links to excellent deconstruction posts by Weidner and Maguire.

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Thursday, March 27, 2003

Dim Awareness II

French foreign minister Dominique de Villepin ... said he was ... confident that France and the United States would re-establish the close ties they enjoyed before the Iraqi crisis unfolded.

Can he be serious?

Frighteningly, he can be. Yes, people this stupid really seem to be running France.
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O, History!

"The war situation has developed not necessarily to Japan's advantage."

- Emperor Hirohito, 1945

"My timing wasn't the best."

- Senate Minority leader Tom Daschle, D-S.D., 2003, stepping back from comments he made last week that President Bush failed "miserably" in diplomatic efforts to avoid war with Iraq.

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Sometimes People Are Smarter Than You Think

Fox News television is reporting a new poll that shows lots of support for the Iraq war, and also shows a substantial supermajority think that the amount of resistance the Iraqis are putting up is about what should have been expected. It seems to me that this is obviously correct. (About 15% think the Iraqis are putting up both more and less resistance than expected.) And the Pentagon has been giving this "about what was expected" line this right along - even as much of the media declared that resistance was unexpectedly high. Of course, the amount of resistance is unexpectedly high compared to the premature and overly optimistic reports and conclusions those media were reaching and reporting at the end of last week.

Another foolish error the media seems to be making repeatedly is this: When the coalition takes steps to allow or cause a beneficial (if low probability) event to occur, the media seem to report or suggest that the coalition was counting on that event. Hence the reports that the early attempt on Saddam Hussein's life failed, Failed ... FAILED, I TELL YOU! Then negotiations to allow the Republican Guard to surrender without a fight. Then civilian uprisings. And on and on and on ...

The results are strange. The coalition seems loathe to release positive news – perhaps because they are concerned that another optimism bubble like last week’s will foam up, to be followed by the same kind of preposterous bursting of the bubble based on equally insubstantial evidence (such as a non-com driving some jeep taking a wrong turn – thereby calling the entire war strategy into question).

Rumsfeld’s interview suggested a man trying to keep a hot gas in a bottle.
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Chump Change

Much is being made in some quarters of the Federal Regulatory Commission's new findings that attempts to manipulate the California energy market were "epidemic." But the real news here is that the newly discovered "epidemic" did little, if anything, to drive up energy costs - even of one accepts the legitimacy of what appears to be the FERC's post hoc reinterpretation of applicable trading rules, rules which often reduced the efficiency of the market. As the Wall Street Journal reports:

Unless they can prove their innocence, the companies may eventually be forced to disgorge these profits and pay penalties -- both likely measured in millions, not billions, of dollars. The strategies condemned by the FERC are largely a dead issue today. Wholesale energy markets imploded in the wake of Enron Corp.'s December 2001 bankruptcy filing, causing many firms to abandon energy trading. Three companies were accused of such serious market abuse -- Reliant, Enron and BP Energy Co. -- that the FERC proposed stripping them of the authority to sell energy at competitive prices.

It's probably all just as well, since how would Enron - now a bankrupt company - repay the billions of dollars people such as Governor Davis keep claiming Enron owes. Unfortuneately for the people of California, they still need more energy - and none of the Davis administration, the California legislature nor the California regulators are doing anything effective about that. It must take too much time just grandstanding about chump change for them to really focus.

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Wednesday, March 26, 2003

Dynamic Scoring

The Wall Street Journal runs two items on the first "dynamic scoring" of the budget by the Congressional Budget Office - that is, evaluation of a budget (especially taxcuts) which includes their stimulative effects. The first such item is by a staff reporter, and it states in part:

For the first time, CBO used what's known as "dynamic scoring" to estimate the favorable macroeconomic and revenue effects of budget proposals, a move tax-cut advocates have long urged and deficit-phobes feared. The range of estimates released Tuesday by CBO said adding supply-side effects could add as much as 10% to conventional estimates of the five-year cost of the Bush budget or subtract as much 17%, depending on the model used. The administration plans this week to release its own estimates that suggest Mr. Bush's proposed dividend and other tax cuts would recoup some 30% to 40% of their cost by generating more economic growth and tax revenue, a senior administration official said Tuesday.

Fair enough. But the second item - an op-ed item by Kevin A. Hassett and R. Glenn Hubbard, the latter the just-departed chairman of President Bush's Council of Economic Advisers who is now a professor of economics and finance at Columbia University - is more interesting because it indicates what is really going on:

One surprise was finding so little difference between the static and dynamic scores of the president's proposals. How could that happen? Clues in the report indicate the CBO found that the negative effect of higher spending and expanded entitlements offset the positive effect of the marginal tax rate reductions. Relying on models similar to those used by the CBO, the president's Council of Economic Advisers estimated that the dividend proposal would, all else equal, add about one percentage point to GDP growth in 2003 and 2004. Yet all else is not equal in the budget, and the remaining changes offset the beneficial impact of pro-growth policy. These offsetting effects largely work through the crowding out of capital formation by consumption of individuals and government. The CBO dynamic score allows for far more such crowding out than empirical evidence suggests. Even so, now that dynamic scoring has been proven possible, economists can stop debating its existence and turn to the important work of improving the models.

The two items form a complementary pair that helps the reader understand the economics of dynamic scoring issues. That is likely why the Journal ran them both on the same day and its also likely why Brad DeLong ignores Professor Hubbard's explanation. Why does Good Professor DeLong find Professor Hubbard so threatening that his comment must be so willfully ignored? Only a few month ago the Good Professor condescendingly and gratingly argued:

He has let himself get boxed into a position the soundbite version of which ("no evidence" that swings in the deficit of the scale seen in the United States affect interest rates; the belief that the 1990 Bush and 1993 Clinton deficit-reduction packages substantially fueled the 1990s boom is "Rubinomics... complete nonsense") is radically inconsistent with what Glenn believes and teaches students in his Money, the Financial System, and the Economy textbook (see especially page 661, but there are lots of other pages as well). ... Bluntly, White House Media Affairs, White House Political Affairs, and the White House Chief of Staff now know that you will say whatever they want you to say. Hence when the inside-the-White-House balancing of interests and power groups that determines what options get submitted to the president takes place, your views are ignored--for you will play along anyway, and there are other groups to be appeased and conciliated that will not.

Well, Professor Hubbard is not in the White House now, and he is not subject to all those pressures from White House Media Affairs, White House Political Affairs, and the White House Chief of Staff - and he's still arguing that the CBO dynamic score allows for far more such crowding out than empirical evidence suggests. In other words, the Good Professor's nasty assertions that Professor Hubbard doesn't believe all those supply-side arguments that he's been propounding about the Bush tax cuts are wrong. And his advice probably wasn't "ignored" in the Administration - despite the Good Professor's hopes to the contrary. But don't expect that much intellectual honesty from the Good Professor - he won't even acknowledge the existence of Professor Hubbard's piece in the Wall Street Journal. The Good Professor seems to have, shall we say, a complex relationship in his own mind with Professor Hubbard. On one level there is a serious desire to pick a fight - perhaps born of a deep resentment that Professor Hubbard has held positions of economic and academic influence that dwarf anything the Good Professor has been allowed to get near, including in their current academic positions and their positions within their respective presidential administrations. But then there is his wavering understanding that Professor Hubbard has just deserved his influence and positions. The demons in the Good Professor's mind battling over Professor Hubbard can be detected, for example, in the many "addenda" to his original snarky post cited above.

Similarly, the Good Professor's observations about Money, the Financial System, and the Economy say more about him than Professor Hubbard. This is an economic textbook. It is true that some authors of textbooks construct them entirely from the perspective of their own personal or professional beliefs. That approach - which the Good Professor seems to think is the only approach - has the unfortunate tendency to produce an economics textbook bearing an uncomfortable resemblance to political agitprop. But many more textbooks are written so that the student using the book can learn what is being done and generally believed in the field. In that kind of textbook the author suppresses his or her own personal or professional beliefs and takes a more objective approach. A textbook and curriculum are not good indicia of what many academics personally believe - or of what they would tell the President if they had his ear, as Professor Hubbard did for quite a while.

Correspondingly, there are economics teachers whose teachings (and blogs) are constructed entirely from the perspective of their own personal or professional beliefs - and then there are teachers who actually try to teach what is being done and generally believed in the field. It appears that the Good Professor is of the first variety of teacher and that Professor Hubbard is of the second variety of teacher.

MORE: From Luskin.
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Powell: U.S. Should Not Yield to U.N.

The Washington Post reports:

The United States will not cede control of Iraq to the United Nations if and when it overthrows President Saddam Hussein, Secretary of State Colin Powell said Wednesday, [March 26].

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Managing Dictators

Daniel Drezner cites a substantial number of cases around the world of dictators cracking down on dissidents. He ascribes this to a conclusion reached by such dictators that the world, and especially the United States, is distracted by the Iraq war:

These crackdowns are part of the costs of war [C'mon, how do you know that these actions wouldn't have taken place anyway?--ed. They very well might have, but the various governments would have had to respond to press inquiries and U.S. policy responses.

Mickey Kaus has also commented.

The soundness of the methodology here is not clear to me:

1. Where is the evidence that the number of "crackdowns" has increased - or that such groups of crackdowns don't happen from time to time anyway? Just rounding up a list of what's going on now is hardly more than a teaser. What's the standard for a defining a "crackdown" in a generally repressive society? The term hardly seems self-defining.

2. Where is the evidence that such dictators have actually in the past moderated their behavior in response to press inquiries and U.S. policy responses? Are we to assume that Mr. Castro, for example, moderates his behavior towards his critics in response to press inquiries and U.S. policy responses? Is that what happened when he shipped us all those Marielitos? Isn't the proposition that chattering at dictators makes them behave just restating the discredited Jimmy Carter approach to human rights? What's the difference?

3. The issue is not whether these actions wouldn't have taken place anyway. Dictators normally crack down on dissidents to safeguard the dictator's hold on power - although dictators do have a record of excessive efforts. How do we know that these dictators are not just watching another dictator (Saddam Hussein) lose power, and want to send a message to their own trouble-makers not to get any ideas?

4. What evidence is there that US or press scrutiny of any of these dictators has been lower during the war, or that any of them thought it would be lower. In fact, coverage of and attention to Castro's crackdown has been rather intense.

To say the least: I am not convinced.

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Fussing II

The Man Without Qualities does not believe that William Safire's columns alleging a French company's brokering of rocket fuel sales to Iraq are the right way to approach the French problem even if the columns are correct, including their assertions of French government complicity.

The evidence Mr. Safire marshals is a set of fragmentary, largely ambiguous e-mails which can always be claimed to have been quoted out of context. My concern here includes the likelihood that that kind of evidence is almost certain to result in a bogged-down, pointless, conflicting set of accusations and denials - even if Mr. Safire is right. And assuming he is vindicated, how big a deal is brokering compared to actually selling or delivering the prohibited items?

And exactly that seems to be happening. I don't treat things that appear in Tom Paine very seriously, but this piece does demonstrate one reason why the Safire approach is just not worth the effort.
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Trending Away In Iraq II

US Secretary of State Colin Powell dismissed a widely-publicized suggestion that he resign from President George W. Bush's administration over the war in Iraq. .... "Personally, I'm very much in sync with the president and he values my services. ... I also have to take note of the fact if you would consult any recent Gallup poll, the American people seem to be quite satisfied with the job I'm doing as secretary of state."

Asked whether he planned to stay in the Bush administration, Powell replied: "Oh, absolutely."

Could somebody arrange for the Secretary, Condi Rice and Donna Brazile to all have lunch together? I'd be happy to be the waiter - no tip accepted although I'd provide very good and friendly service - if I could just listen in!
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Earnings And Options And Mr. Buffett II

One of the core justifications for expensing options (and one often employed by Mr. Buffett) posits that where there is a liquid market in the stock underlying the option, a reasonable value can be placed on the dilutive effects of the option - and not reducing current earnings by that much (that is, not expensing the options) therefore is "dishonest accounting." If that is true, then as the underlying stock price falls or rises, ongoing adjustments can also be made - and "honest accounting" requires that they be made. If the stock price increases after the options are originally issued, then the company will forego more when they are exercised. The date of issuance is arbitrary as far as investors are concerned.

Even in Mr. Buffett's world executives focus on what their options are worth currently much more than they do on what the options were worth at the time of their issue. "Honest accounting" should put executives and investors on a level playing field. In short, Mr. Buffett's position leads to the conclusion that options should not only be expensed - they should be marked to market in each accounting period. But such a policy would couple the earnings of a company inextricably to its stock price - and it is hard to imagine a bigger divergence from "honest accounting" than that. It is not that hard, for example, to imagine a successful company having years of profit essentially erased year after year by mark-to-market-options accounting as the stock price rises - with the end result of all this "honest accounting" being a highly solvent company with, say, One Billion Dollars in cash, but which had never had any current earnings.

Most people retreat from that horror - and the result is proposals to treat the options expense in the balance sheet on a historic basis as a fixed reduction in retained earnings. But that leads to problems if the options submerge over time and when they expire. For example, non-liquid assets such as real property are carried at historical cost - but when the asset is sold the gain (or loss) is taken into the income statement in the then-current period. If that were done with options, a company would experience a huge surge in phantom "earnings" when its submerged options expired or otherwise terminate. That would be intolerable. So a further distortion is generally introduced: increasing retained earnings in the balance sheet and bypassing the income statement entirely. (Of course, if the company is issuing options continually, this problem may repeat itself continually.) That's all a real gift to the likes of Berkshire-Hathaway.

Mr. Buffett often castigates executives as having a keen awareness of the value of the very options they are arguing are beyond valuing. His argument ignores the difference between the legal standard required for valuing an option ("reasonable basis") and the personal standard required for sustaining a hunch. For example, Mr. Buffett may have had a personal hunch that he would one day be worth many billions of dollars, and have fought strongly for that hunch - but he would have had no reasonable basis for putting that hunch in the Berkshire-Hathaway SEC disclosure documents. Put another way: Perfectly rational and talented people (including many executives and Mr. Buffett) often fight for things and believe in things for which they have no "reasonable basis" as the SEC defines that term. And Mr. Buffett is wrong therefore to suggest that just because executives are willing to fight for their options are if they have great value that those executives would feel comfortable stating their value in a legal, public disclosure document.

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Trending Away, She Said

Donna Brazile, who managed Al Gore's 2000 presidential campaign, is awake and alarmed and - regardless of whether one agrees with her policies - very smart:

"We cannot afford to be talking just to the anti-war people. That's easy. We have to talk to everybody, especially independents," about the war, she said. "After I heard [the Arab television network] Al Jazeera broadcasting that videotape showing what the Iraqis did to the American POWs, I was livid. ... We have to send out the strongest possible message of support. Talk to any Americans, and they have relatives or they know someone on that battlefield. They want to hear that message that we support their kids. Right now we have to support our men and women over there. ... It's personal for me, having family members and friends in the armed services. At the end of 2002 I was moving more and more to the right on the war. ... Hussein is a very dangerous man."

Miss Brazile's father served in the Korean War.
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Not Just Gas

Lynne Kiesling is in the process of generating a wonderful series addressing the economics and politics of hydrogen power.

Take the opportunity!

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Tuesday, March 25, 2003

Dim Awareness

Worried it could be shut out of business deals in postwar Iraq, France is drawing up plans to win French companies access to lucrative oil and reconstruction contracts, officials said Tuesday.
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Unconfirmed Report

A "popular civilian uprising" is reported to be taking place in the southern Iraqi city of Basra, according to British military intelligence officials. A spokesman in Kuwait has said there appeared to be some form of civilian revolt taking place, but as yet there is no independent confirmation of the report.

Perhaps there has been no such uprising. But there should be. The British have held off demolishing the city - but the Iraqi government forces the British hand by hiding its men and "assets" among civilians. As long as the British play nice, the Basra population has no particular reason to get upset. But the British have now announced to the city that it will be taken notwithstanding the Iraqi strategy - and have begun shelling.

That should concentrate the minds of the civilian population - and likely provoke a nice riot. There's nothing like the prospect of losing your life, family, business and home because of the decision of an unpopular national army to breach the Geneva accord by hiding in your garden. The residents of Baghdad should pay attention, too.

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The United Nations Drifts Further Out To Sea II

The New York Times brings good news for the world and bad news for the silly UN and French and German governments:

The United States is preparing to establish immediate sole control of postwar Iraq, initially without recourse to the United Nations, with a civilian administration under the direct command of the military, according to senior administration officials.

And the United States should run Iraq solo even if Jacques Chirac again holds his breath until he's blue in the face.

UPDATE: Mr. Blair, who will also meet with Mr. Annan, said London and Washington agreed that it was vital that the United Nations play a pivotal role in Iraq after the war.

Mr. Blair's statement is completely consistent with the United States plans to run Iraq solo. It is vital that the UN play a pivotal role in post-war Iraq. It was also vital that the Security Council pass the so-called "Second Resolution" authorizing the Iraq liberation. The French and like-minded countries probably won't allow the UN to play a pivotal role in post-war Iraq unless their demands are met - which means they probably won't allow it. So this will probably be another case of the French, etc. blockading a vital UN action.

What else is new?

FURTHER UPDATE: Secretary of State Colin Powell urged France on Tuesday to recognize that the government in Iraq is finished and to join the United States in planning for a better life for the Iraqi people. .... On postwar Iraq, French President Jacques Chirac also has thrown up roadblocks, threatening to veto in the United Nations any attempt to "legitimatize the military intervention" and "give the belligerents the power to administer Iraq."

One can only hope he makes good on his veto treat.

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Boy, Is PETA Going To Be Angry About This

Flipper goes to war!

Sea lions, too. And PETA is really mad about it:

"It is simply not ethical to put animals in harm's way. War is a human endeavour and while people and political parties may decide war is necessary, animals cannot," Dawn Carr, a spokeswoman for People for the Ethical Treatment of Animals (Peta) told BBC News Online. "They never enlisted, they know nothing of Iraq or Saddam Hussein and will probably not survive," she added.

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Gleichschaltung From Ostelfenbeinturm

Today Paul Krugman peers with alarmed, gimlet eye from the highest reaches of Ostelfenbeinturm, capital of Krugmania, and into the deepest recesses of the American Republic, and sees ... YES! .... SURPRISE! .... that the nation is threatened by a CONSERVATIVE CONSPIRACY headed by President George W. Bush - a man Herr Doktorprofessor Krugman continually reminds us is an idiot, notwithstanding all those sinister and apparently limitless machinations!

What is it this time? Well, it seems Herr Doktorprofessor doesn't care for Clear Channel Communications, which FORTUNE magazine has just named one of America’s Most Admired Companies, but which he describes as "a behemoth based in San Antonio that controls more than 1,200 stations and increasingly dominates the airwaves." He says Clear Channel is "behind" some pro-American street rallies and resistance to the anti-American Dixie Chicks. There have been Dixie Chick CD-burnings, you understand, and that - to Herr Doktorprofessor - seems to be the 21st Century answer to book-burnings! Somehow this is all supposed to knit together into a plot involving the loosening of FCC media ownership rules which will allow Clear Channel to roam the earth seeking the ruins of souls everywhere by dumbing down their music!

He is alarmed and asks desperately: Why would a media company insert itself into politics this way? It's an interesting question, in a way. Assuming Herr Doktorprofessor is right, why would a media company choose to express itself by supporting public demonstrations that are distributed to the public mostly by other media companies - rather than just distort its own editorial and news coverage of the events, the way the New York Times does, for example? But Herr Doktorprofessor tarries for not an instant to consider whether Clear Channel's Iraq War coverage has been unreasonably skewed in favor of Administration policies - there probably just wasn't enough time in his busy, busy schedule to actually listen to the target of his innuendo. What he claims Clear Channel is doing is much more consistent with a simple expression of its political views, unsullied by conspiratorial intent. And, contrary to Herr Doctorprofessor's insinuations, Clear Channel has no more obligation to explain or not dissemble as to where those views are originating within its structure any more than the Times has an obligation to explain which of its opinions or acts originate with the Sulzbergers. Is Mr. Hicks - the head of Clear Channel and a supporter of Mr. Bush - causing Clear Channel to express these views? Maybe he is - and maybe he's lying about it. So what? Herr Doktorprofessor's equation - [First Amendment expression] + [support of President] + [regulated entity] = [likely Nazi-like conspiracy] - is wrong. Worse, if generally accepted by the public or the government, such a path to supposition would pose a real danger to First Amendment liberties.

But, even worse than that from a professional standpoint: Herr Doktorprofessor is entirely oblivious to the fact that he is writing a column about a topic which is informed by a fairly well-developed economic theory: regulatory capture. A lot of economic research has gone into analyzing what symptoms one should look for to determine whether a regulated business controls its regulators. But Herr Doktorprofessor ignores all that learning and structure to reach his unsupported conclusion that Clear Channel has put the fix in. But it can’t be ignored. If the “fix” is so obviously a quid pro quo, how will other media competitors take it? And why aren't other competitors trying to do the same thing? Further, federal regulation and regulatory capture works mostly through the Congress – not the Administration. But Herr Doktorprofessor just entirely cancels Congress out of both sides of his equation.

Introducing Congress into the equation would expose that Herr Doktorprofessor is also ignoring a second branch of modern economics: public choice theory - the branch of economic that concerns economic choices made by democratic societies. As so often the case with this columnist, resort to silly conspiracy charges substitutes for the hard work of applying difficult economics. He can leave that to real geniuses like Dr. James M. Buchanan, who won the 1986 Nobel Prize in economics for his contributions to public choice theory. A man has to know his limitations.

There's no need to worry about any of that scary stuff, tough, because Herr Doktorprofessor is right in one respect: There's something happening here. But what it is is pretty clear: laziness on the columnist's part. Herr Doktorprofessor's column is a rehash of much current German media coverage of the war and its coverage by the American media, as noted in the Wall Street Journal, for example: In Germany, the press has engaged in lengthy dissections of U.S. news organizations, often concluding that the U.S. media has gone through "Gleichschaltung," an ominous word used to describe how the Nazis took over key public institutions, including the media (rough translation: "bringing into line"). Hilariously, almost all of the German media involved endorse their government's policies in this matter. But, then, conscious irony has never been a German strong point.

From the evidence he offers Herr Doktorprofessor's conclusions and suspicions are absurd in the American context - most of the biggest American media are somewhat hostile to the Administration: Disney, Viacom, AOL-Time Warner, the NY Times, the LA Times the Washington Post, etc., etc. These media, however, are not very effective in their anti-War (and anti-Bush) efforts, which is frustrating to people such as Herr Doktorprofessor. It may make sense in Germany to assume that where any media outlet supports the government one should suspect a quid pro quo, but it takes a lot more than that and a Presidential friendship in the United States. Herr Doktorprofessor has told the German magazine Der Spiegel: I can always ask the [German] Federal Republic for asylum [from the United States]. I hope, you can take me in an emergency. [translation revised] His current column suggests that he has already availed himself of the move - at least in his mind.

Today’s tour of Krugmania again reveals the paranoid side of its regime. But there is a consolation: there's no economics in today’s column, since Herr Doktorprofessor ignores the entire fields of both regulatory capture and public choice theory. And that means there is no express bad economics in today’s column. His bad economics this time is all implied by omission. We should count our blessings.

MORE: Don Luskin shows that Herr Doktorprofessor's silly, ignorant version of "regulatory capture theory" would serve to indict the New York Times much more than it does Clear Channel. The Times should be very grateful that today's Krugmaniacal rant will influence no opinion of any sensible person.

STILL MORE: From Kaus, who explains that according to the New York Times whatever happens economically in Bush's term is all bad. High saving rate? Low savings rate? Birth rate or employment up? Birth rate or employment down?

It doesn't matter. It's all bad to the Times.

Bad, bad, bad.

Maybe Brad DeLong can explain it all!

AND STILL MORE: Jay Caruso tracks the decline.

LOTS MORE: Maguire.

And Bevan and Hogberg and Waters - these thanks to Hanks.

And still more Weidner and Johnson - these thanks to Luskin.

The apparent consensus: A jaw-droppingly ignorant and offensive new low in the continuing intellectual limbo-act that is Paul Krugman's contribution to the New York Times! How can he possibly outdo this one?

But somehow I'm sure we all have faith that he will rise to the task.

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Monday, March 24, 2003

No Weill II

The Wall Street Journal reports:

The Big Board's process for selecting its own directors "is bad and it's got to be changed," maintains Patrick McGurn, senior vice president of Institutional Shareholder Services in Rockville, Md., which advises institutional investors on corporate-governance matters. "In order to preach good government practices, they have to fix their own." .... In addition to the Weill dust-up, several recent Big Board directors were either ousted from their jobs or have come under government scrutiny, including Michael Carpenter, the ousted chief of Salomon Smith Barney; Linda Wachner and Jean Marie Messier, ousted from their chief executive posts amid financial woes at Warnaco Inc. and Vivendi Universal SA, respectively; and Martha Stewart, CEO of Martha Stewart Living Omnimedia Inc., the focus of criminal and civil probes into whether she engaged in insider trading. Ms. Stewart has denied wrongdoing. "I can't remember a three-month period going by when there wasn't a board member leaving under a cloud, or when there were just questions raised because of the curious choices they had made for nominees," Mr. McGurn said. "This is almost like a soap opera at this point. But for shareholders there's not a happy ending in sight."

Big Board officials say such criticism is unfair. NYSE officials note that the selection process for directors is headed by an independent committee, which consults with the NYSE staff and Mr. Grasso, but makes the final call on selecting board members. And, the officials add, the problems faced by some of the directors in recent months only arose after the executives were named to the NYSE board. ....

On Feb. 6, Mr. Grasso briefed the NYSE's directors... on plans to select Mr. Weill as a director to represent the "public." It was an unusual choice since executives who represent securities firms are supposed to be barred from such posts; "public directors" are supposed to represent the interests of investors, not those of the brokerage industry. But Mr. Weill passed muster because as CEO of Citigroup, he controls a vast financial conglomerate, one that derives only part of its revenue from a traditional brokerage business... The whole issue of what is a public director has been controversial even before the Weill nomination. In 2001, William Harrison, the CEO of J.P. Morgan Chase & Co., was named to the board as a public director, even though he oversees a large financial institution that has handled securities transactions.

It is remarkable that the Journal does not name the members of this remarkable independent committee that perpetrated this nomination. Moreover, while it is perfectly reasonable that Mr. Weill should have a seat on the NYSE board in some other capacity, that Mr. Weill could even potentially be considered as a "public representative" on the basis of the silly argument proffered above also shows how inconsistent and hypocritical the NYSE has been in it's "independence" evaluations. Mr. Weill was to become a member of the NYSE own board. But compare the make-weight arguments used to support Mr. Weill's nomination with the complaint of Warren Buffett over the new tripwire NYSE rules defining "independent directors" of listed companies such as Berkshire-Hathaway:

That gets to an often-overlooked point about directors’ compensation, which at public companies averages perhaps $50,000 annually. It baffles me how the many directors who look to these dollars for perhaps 20% or more of their annual income can be considered independent when Ron Olson, for example, who is on our board, may be deemed not independent because he receives a tiny percentage of his very large income from Berkshire legal fees.

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Earnings And Options And Mr. Buffett

A prior post described certain ways in which Warren Buffett would apparently benefit, in a not entirely wholesome fashion, if the Security and Exchange Commission's requires that executive options of public companies be expensed. That post focused on the balance sheets. In the sultry post-Enron era, the mantra of many putative corporate governance reformers has been the importance of the balance sheet - with the corresponding evil of "off balance sheet" structured finance products established accordingly. Indeed, Mr. Buffett has used the Enron debacle to advance his view that expensing options is needed to avoid deceiving investors.

But Mr. Buffett has emphasized the effect of option expensing on corporate earnings, rather than the balance sheet, as evidenced in his most recent Berkshire-Hathaway letter to stockholders:

The Chicago Tribune ran a four-part series on Arthur Andersen last September that did a great job of illuminating how accounting standards and audit quality have eroded in recent years. A few decades ago, an Arthur Andersen audit opinion was the gold standard of the profession. Within the firm, an elite Professional Standards Group (PSG)insisted on honest reporting, no matter what pressures were applied by the client. Sticking to these principles, the PSG took a stand in 1992 that the cost of stock options should be recorded as the expense it clearly was. The PSG’s position was reversed, however, by the “rainmaking” partners of Andersen who knew what their clients wanted – higher reported earnings no matter what the reality. Many CEOs also fought expensing because they knew that the obscene megagrants of options they craved would be slashed if the true costs of these had to be recorded. Soon after the Andersen reversal, the independent accounting standards board (FASB) voted 7-0 for expensing options. Predictably, the major auditing firms and an army of CEOs stormed Washington to pressure the Senate – what better institution to decide accounting questions? – into castrating the FASB. The voices of the protesters were amplified by their large political contributions, usually made with corporate money belonging to the very owners about to be bamboozled. It was not a sight for a civics class.

That's remarkably intemperate language on Mr. Buffett's part - and it is language that focuses on the income statement. Current earnings are disclosed on the income statement, but are incorporated into next year's retained earnings - which are disclosed balance sheet. So it would very strange indeed if Mr. Buffett's concern focused entirely in the effect of how options accountings in the income statement distorts investor valuations - while disregarding or discounting any effect on public valuations from the effects of such "dishonest accounting" on the balance sheet.

But it is possible to effect Mr. Buffett's argument and reform through the income statement by assuming (contrary to the current obsession with balance sheets) that investors focus on the income statement, but essentially ignore charges to balance sheet items that bypass the income statement. Under this assumption, suppose eliminating "out-of-the-money" options is simply taken as a direct charge to retained earning at the time the options are terminate - and that the elimination has no effect on the earnings statement. Such an approach is not conceptually consistent with the justification for expensing the options and then carrying the original options charge on a historic basis on the balance sheet - but the "refome" could be imposed this way anyway. In other words, assume that accounting rules are "reformed" so that a company's original grant of options is treated as an expense and deducted from current earnings (in the earnings statement) - and that the effect of that charge is thereafter incorporated into retained earnings in the balance sheet, but when "underwater" options expire or are cancelled there is no corresponding increase in current earning resulting from any reversal of the charge in the income statement ether at the time the options slip under water or when they are terminated - but simply results in an increase to retained earnings, which is also assumed to be a balance sheet item which investors don't care about. Does this set of assumptions and reforms eliminate the advantage Mr. Buffett would otherwise obtain?

Well, it doesn't seem to. He still seems to benefit because the reasoning supporting his "reform" is based on the assumption that investors are misled by inflated "earning" when options are granted. That means that as a decline in the stock price causes the options progressively to fall "underwater" (because the assumed volatility of the stock over the life of the options yields a smaller positive contribution over the strike price in the corresponding Black-Scholes valuation) investors are "misled" in each accounting period by an under-reporting of current earnings equal to the amount of the options "submersion." That means that in each period investors see current earnings which are too low (under Mr. Buffett's assumptions) by the amount the options have slipped under water in that period. So (if Mr. Buffett is right) investors will undervalue the company when Mr. Buffett comes to buy it.

It appears that under such assumptions and reforms Berkshire-Hathaway will still do its own options evaluation, disregard all the accounting distortions the "reforms" have induced, eliminate the options after the acquisition, and realize a quick profit in the Berkshire-Hathaway stock price.

Next: Berkshire-Hathaway has more recently been concentrating on "sweetheart" minority investments. Does options accounting matter in that case?

UPDATE: More people seem willing to state publicly that expensing options isn't the answer. Much of the misquided mania continues, of course. Sadly, this pseudo-solution just distracts investors from the real problem: restrictions on the market for corporate control have aborted the most effective check on the pernicious consequences of the separation of public ownership (stockholder) from control (management). Of course, Mr. Buffett doesn't care about that. He is always an insider.
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Short Staffed?

The Washington Post must be short staffed on competent reporters. How else to explain this preposterous article:

Iraqi troops and militias used ruses, ambushes and other guerrilla tactics yesterday that exploited the risks inherent in the fast-moving Pentagon war strategy, inflicting more than a score of American casualties and raising questions about how effective the U.S. approach has been in convincing Iraqi troops and civilians that President Saddam Hussein's removal is inevitable.

How could any reasonable person think that a handful of casualities and the long-predicted Iraqi use of ruses, ambushes and other guerrilla tactics raises significant questions about the invasion of an entire country?
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Remembering Desert Storm I

For some reason, the completely predictable - and widely predicted - Iraqi resistance has caused many people to re-evaluate their belief that the war will be a short cake walk.

We are now again warned by the media of the likelihood of street-to-street resistance in Baghdad. But even if this is a "war of liberation" in the sense that a majority of the Iraqi people would welcome the removal of the Hussein dictatorship in favor of a government installed by some American-supported procedure, one would not expect Baghdad to welcome American forces the way Paris did. Hussein is, after all, a domestic ruler with sufficient support among the Iraqi people to hold on to power. If even, say, 20% of Iraqis support Hussein and, say 80% are indifferent or outright hostile to him, that still leaves plenty of room for nasty street-to-street resistance in Baghdad.

Maybe widespread nasty street-to-street resistance in Baghdad will happen - and maybe it won't.

But at this point, perhaps it is time to reconsider that critics of the 1991 decision not to take Baghdad often seem to assume that such a task would have been pretty easy, given what had already happened in Kuwait. Well, the current march from Kuwait was pretty easy at first, and now there is lots of hand wringing about how much harder Baghdad will be.

Consistent with the current anxiety cloud and "new understanding," shouldn't the critics of the 1991 decision be trimming their sails a bit?
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No Chemical Weapons Found

Dow Jones Wire says it's all old stuff.

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Sunday, March 23, 2003

No Weill

The Man Without Qualities is no fan of many actions, policies and statements of New York attorney general Eliot Spitzer. But his response to the nomination to the New York Stock Exchange board of Citigroup Inc.'s Chairman and Chief Executive Sanford "Sandy" Weill is exactly right:

"To put Sandy Weill on the board of the exchange as the public's representative is a gross misjudgment and a violation of trust." Spitzer told the New York Times that he was "apoplectic" when he read that Weill had been nominated.

Mr. Weill has now wisely withdrawn his nomination.

What in God's name was the nominator thinking? Who was the individual instigator of that nomination, anyway? What's wrong with the New York Stock Exchange that such a nomination was entertained for even a moment?

Names should be named. In public.
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Krugmania At War: Five Million Years To Earth

Paul Krugman's most recent column demonstrates that his famous prediction of January 29, 2002 ("I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society.") was in fact correct, if properly construed! Herr Doktorprofessor Krugman now makes clear that he intended his famous prediction to be taken as a statement of his personal policy. That is, Herr Doktorprofessor Krugman was entirely correct on January 29, 2002 to predict that he personally would ignore many of the most important consequences of September 11, while eagerly adopting the accounting and disclosure standards and practices he personally attributes to Enron.

An exquisite sense of timing causes him to assert that "On almost every front the outlook for the United States now seems far bleaker than it did two years ago, on the very the day his own newspaper informs us stocks soared ... sending the Dow Jones industrial average to its best weekly performance in more than 20 years. ... After weeks of gloom about a possible war, investor sentiment has reversed quickly. Of course, because the two-year period to which he draws our attention includes September 11, 2001, one might quibble with, let us say the taste and judgment, of his final triumphant if cliched misquote of Shakespeare: The fault lies not in our stars, but in our leadership. But ascribing blame for September 11 is not what the rest of the column is about, so let's not tarry there.

Herr Doktorprofessor's new column deliberately ignores the very developments which drove the Dow average to its eighth day of gains, a gain of almost 1,000 points since its March 10 low (He says that "all Americans now hope that the foreign front proceeds according to plan. Meanwhile, let's talk about the fiscal front."). Instead, he prefers to discuss a "study" that purports to calculate the "actuarial balance" of Social Security by comparing the amount of federal revenue expected to be "lost" from tax cuts obtained and proposed by the Bush Administration over the coming seventy-five year period with prospective deficits of Social Security and Medicare over that period. It is essentially a simple "discounted present value" exercise based on an assumed discounting interest and various future payments flows. He embraces this "study," which he describes only as "a new study that compares the size of the Bush tax cuts with that of the prospective deficits of Social Security and Medicare ... carried out by the Center on Budget and Policy Priorities" without disclosing that (1) the CBPP is a partisan liberal advocacy group, or (2) at least one author of the "study" is a former senior member of Bill Clinton's economic team, or (3) the "study" surreptitiously employs the long-discredited "lockbox" model of Social Security, or (4) the interest rate employed by the "study" for discounting purposes is likely incorrect and misleading, or (5) the "study" ignores all pro-growth, supply-side effect of the Bush tax cuts, although the debate on this point has concerned the size of that effect or (6) the 75 year period on which the "study" is based makes the effects of the Bush tax cuts seem worse than they really are, or (7) the "actuarial balance" of private insurance companies are not based on a fixed period (such as 75 years) because of exactly such distortions, although Herr Doktorprofessor describe the "study" as performing an estimate the "actuarial balance" of Social Security and Medicare the same way a private insurance company would. Of course, the choice of a 75 year period attracts attention at once. Why 75? Why not, say, 120 - the traditional maximum human life expectancy. Why not 5,000,000?

But Herr Doktorprofessor goes Enron one better - he includes no footnotes to his assertions at all - confusing, incomplete or otherwise.

I would like to add just a few more footnotes that a version of the Securities and Exchange Commission charged with maintaining intellectual honesty in the marketplace of ideas would surely require Herr Doktorprofessor to include in such columns to escape intellectual criminal liability. Perhaps the largest scale and material misrepresentation in this column is that this "study" - even if its methodology were corrected - could serve as significant support for of his assertion that "nothing short of an economic miracle can save us from a fiscal crisis."

Private defined benefit retirement plans - which is what the "study" analogizes to Social Security - have existed for a long time, and calculating their actuarial balance has generally been useful for investors in determining certain solvency risks - that is, the chance that the private pension plan will not be able to pay what it owes. That is not very true of Social Security. For example, unlike COLA-burdened Social Security, a traditional private defined benefit plan pays nominal returns - if inflation occurs, the retiree loses, but the plan's solvency is generally enhanced. Solvency of such plans is generally enhanced because the plan's income from any short-term investments will nominally increase (and nominal income from long-term investments such as long term government bonds will not be generally affected). Of course, the plan may have trouble attracting new members because the real value of the defined benefits it is paying out decline along with the real value of the inflated dollars in those payments. But the current members generally can't pull out - a defined benefit plan is not an open-ended investment company. In contrast, Social Security has no income from any real investment fund to finance its obligations - to the extent Social Security is not funded by taxes it is funded by an "investment pool" of federal government obligations. But Social Security itself is already a federal government obligation.

The actuarial balance for a transfer payment program such as Social Security is not wholly without novelty or interest. But, unlike the private plan case, the actuarial balance of Social Security has something of the novelty and interest of, say, thinking about the burn-out of the sun in 5 billion years (or is it 4 billion?). That's because Social Security's future is largely determined - for good and ill - by factors a private plan does not need to take into account when it calculates its actuarial balance. Consider inflation, for example. Herr Doktorprofessor Krugman has just told us that he is terrified that the federal government is going to start inflating the currency to "pay" the federal debt. But wouldn't a government that is going to do that also likely to limit Social Security COLA bumps, and then inflate away Social Security's obligations, too. As noted above, that's what would happen to the beneficiaries of the typical private defined benefit plan in the event of all that feared inflation - why should Social Security recipients be expected to do better than other people holding government obligations? I'm not saying that inflation is threatened, or that it would "solve" the Social Security mess, but I frankly cannot understand why something that only last week preyed so heavily on Herr Doktorprofessor's mind that he refinanced his mortgage is now just so much dross, not even worth a mention.

The reasons the actuarial balance of a universal public transfer payments retirement program such as Social Security is not that significant compared with the private plan case don't stop with inflation. Seventy-five years ago no one could have usefully predicted the baby-bust of the Depression and Second World War, the Post-War Baby Boom, the new immigration wave (including the education and productivity levels of the new immigrants) - and, of course, wide-spread birth control and the break-down and shrinkage of the family together with the demographic consequences of these developments. All of those developments have profound effects on Social Security. Would it take an "economic miracle" for the birth rate to uptick enough to have seriously positive consequences for Social Security? But, most importantly - nobody could have reliably predicted the extent to which Congress would continually ratchet up Social Security benefits. And the effects of that Congressional tendency, or any countervailing Congressional tendency to modify such benefits rather than demolish the finances of the government, is completely omitted in "doing the math." Those effects are found only in the interstices of the democratic process.

Which may explain why Herr Doktorprofessor misquotes that Shakespeare. The original line from Julius Caesar is much more apposite:

The fault, dear Brutus, is not in our stars, But in ourselves.

That's often the case in a democracy.

UPDATE: Markets continue to be strongly influenced by the results of September 11 - but not Herr Doktoprofessor.
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Here They Are, Hans! Come Take A Sniff!

Fox News is now reporting that the Pentagon says American forces have found and taken a "huge" 100 acre suspected chemical weapons facility near Najaf in Iraq. The UN inspectors say they have no knowledge of the plant - although the UN inspector did inspect the town and its environs.

UPDATE: Reports that US troops have found a suspected chemical factory in Iraq were "premature", the Pentagon said today.



General Tommy Franks, head of the US Central Command, would not confirm whether chemical weapons had been found at a plant near the town of Najaf in central Iraq that the Pentagon said was under close scrutiny.

"I can say it would not surprise me if there were chemicals in the plant and it would not surprise me if there weren't," he told reporters at Centcom's forward command post here.

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