Man Without Qualities

Friday, December 12, 2003

For The Holidays, Send A Gift With A Wish Attached

The purchase of debt issued by a sovereign nation is correctly known in banking circles as "a gift with a wish attached."

It appears that many people - a lot of those people being Continental Europeans - made gifts to Iraq while Saddam Hussein was in charge. Some $120 Billion worth of gifts. That's a lot of wishing on a deranged dictatorial star of Arabia.

Now the President has dispatched James Baker to bring Saddam's gifters back down to earth. Although a sovereign nation is not obligated to repay its debts under international law, most do when they can because they don't want to obtain the reputation of not paying, since that would deter people from lending to the sovereign in the future.

Of course, that consideration has little force in obligating Iraq to repay Saddam's $120 Billion. There is a clear break between the incoming government and the old Saddam government. A repudiation by Iraq of its old debt will have effects similar to those of a bankruptcy reorganization that wipes out the old creditors so new financing can be obtained on a going-forward basis. Did the Federal Republic assume the debts of the old Nazi regime? Of course not - and the German economic miracle flourished!

In exchange for their repudiated debt, the existing Iraq gifters/lenders can be given some kind of equity interest in Iraq's future appreciation - what is sometimes called a "carried interest." That is, if Iraq prospers from its reconstruction, the lenders/gifters-cum-equity-participants will be entitled to a share of the appreciation. Investment bankers are really very clever at crafting such instruments. It should be sophisticated fun for all the individual professionals involved in the work-out - real Bang-On-A-Can stuff!

Although it will not be so much fun for the institutional gifters/lenders, at least not at first.

Mr. Baker is surely the right man for the job. And despite the ridiculous posturing of the New York Times the Pentagon has done him a huge favor by barring obstructionist European nations from reconstruction contracts. That act - and the President's endorsement of it - credibly evidences United States willingness to have Iraq unilaterally repudiate every last dime of that $120 Billion.

Citing out-of-the-loop senior diplomats telling tales out of school, the Times and other opportunist hand-wringers, such as Herr Doktorprofessor Paul Von Krugman, argue that the Pentagon decision and its "highly offensive language" about national security needs constitute a gaff that has made Mr. Baker's job harder, even though the White House signed off on the Pentagon decision ahead of time.

Maybe. But, personally, I don't believe a word of it.

The Iraq gifters/lenders are the same bunch who refused to contribute more than a pittance to the construction effort. Having refused voluntarily to contribute funds directly, these same players are not going to agree to do the same thing indirectly by voluntarily agreeing to debt foregiveness. THIS IS GOING TO BE A CRAMDOWN.

What Mr. Baker needed was a club and a lot of bad-cop credibility. And he got it from that Pentagon decision - especially its nasty tone and "highly offensive language." I'll bet he's a very happy debt negotiator right now.

Heck, even Herr Doktorprofessor could have figured that one out ... if he spent any time now-a-days thinking about economics. Instead we get another one of his silly hunts for "deeper meanings" and implied, paranoid conspiracy riffs - this one about Mr. Baker supposedly being some kind of emissary from the first Bush Administration and some neo-cons at the Pentagon undermining our reconciliation with Europe. But more and better of the same kind of fantasy thinking hits the silver screen on December 17.

It's impossible to take any part of Herr Doktorprofessor's December 12 column seriously, but I can't resist reproducing an exquisite Taranto catch on this one:

"Yes, Halliburton is profiteering in Iraq--will apologists finally concede the point, now that a Pentagon audit finds overcharging?"--former Enron adviser Paul Krugman, New York Times, Dec. 12

"The officials said Halliburton did not appear to have profited from overcharging for fuel, but had instead paid a subcontractor too much for the gasoline in the first place."--news story, New York Times, Dec. 12

As I said, even Herr Doktorprofessor could have figured that one out ... if he spent any time now-a-days thinking about economics ... or reading the Times.

UPDATE: Astute reader Dennis Culkin writes:

Dear Man Without Qualities:

Kudos on the commentary re Halliburton and Iraq.

As a one-time USAID program manager with some experience in overseeing federal contracts with profit/non-profit entities for work overseas, I've found the illiterate, demagogic, at times absurd "coverage" of the whole Halliburton thing among the most annoying and outrageous examples of poor current journalism (which is saying A LOT).

The only timid counter-punch based on reality so far has been a thin op-ed in the WashPost by a former senior federal contracting type (a Clinton appointee). He at least took on the notion that contracts are handed out to friends of VP Cheney, or anything remotely like that. The op-ed grossly understated its case, and most importantly failed to heap deserved vituperation on the lazy and biased journalists who continue to keep this paticularly baseless myth alive.

It's a deadly dull topic, but not one that's impossible to explain to the public.

As on several other issues, however, the passivity or incompetence of the administration in explaining the realities of the Halliburton case are perhaps of equal importance. It's a self-inflicted wound for the administration, but more importantly it's a disservice to the taxpayers, to the mostly honest and hard-working federal employees overseeing contracting, and to the mostly honest and hard-working Halliburton/KBR employees (some of whom literally are risking their lives).

On the related topic of the widespread inability (NYT, major media, Dem. candidates, even some GOP office-holders) to understand how this is a marginal positive contribution to Baker's mission, you also nail it.

Dennis is right. The leftish mainstream media's fixation on Halliburton has become nothing short of obsessive. That Halliburton is providing incredibly valuable, competent services in Iraq - services that would otherwise have to be performed by overstretched American military units - is almost a grudging footnote in much of the coverage.

Watching CNN, for example, while working and not paying too much attention, one could easily get the impression from the tone of much of the coverage that Halliburton is actually in the employ of Saddam Hussein. There is a sickness festering in some of the American liberal mind that is manifesting itself here. And it isn't pretty.
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Gored Again VI: Hillary Clinton Has Already Won The Most Important Democratic Primary

John Ellis again cogently replies by e-mail:

Again, recent (Nixon '72, Reagan '84, Bush '88) crack-ups did not produce huge down-ballot shifts (Reagan '80 did, but the "incumbent" was being tossed, not retained). I suspect the GOP will make significant gains in the Southern Senate races that will outnumber their defeats elsewhere for a net Senate gain of 2-3 seats. The House has now been through three software-perfect re-districtings and thus is all but impervious to up-ballot wind shifts. The governors are, mostly, elected in presidential off-year and mid-term elections. So I don't think there were will something as spectacular as airliner-meets-Mt. Fuji down ballot.

There are to my mind three key indicators of the President's political health (any president's health) going into a re-election campaign. They are: rising right track/wrong direction numbers, rising consumer confidence and improving "re-elect" numbers. If he (or she, someday) has those three at his (her) back, then re-election is all but assured. If those numbers are going South, time to call United Van Lines.

These indicators are far more reliable than, say, an ARG poll of New Hampshire. Presently, the President has rising right track/wrong direction, improving consumer confidence and indifferent re-elect numbers. As the re-elect number generally lags the other two, I would agree that President Bush should be favored to win re-election. But predictions of a Reagan '84 blow-out seem premature, at best.

Frankly, just because the Dems were heading south in the South before the Rise of the Deanies doesn't mean the Rise hasn't made things worse for them in the South and almost everywhere else. That is: I agree with John's point, but it doesn't move the main issue: Will a Dean nomination substantially increase the risk of a big Congressional Democratic loss?

I think the answer is clearly "yes."

For one thing, a big Dean loss will seriously erode the ability of Democrats to win OPEN SEATS in Congress - especially the Senate. In a big Dean loss Illinois could move from "likely-Dem" to "likely-Rep" all at once - that's not the South. Here in California a REALLY BIG Dean loss could be real trouble for Senator Boxer. This is a state in which OVER SIXTY PERCENT of voters voted Republican in the recent recall election, including very substantial blocs of Hispanics and African-Americans. If that can happen here in Lotus Land, focusing on the absence of coat tails effects in '72 and '88 isn't that much comfort for the Dems.

And I think they know that.

What can the Dems do? Some people suggest Hillary! is their salvation, but Maguire thinks not.

I agree with Maguire. Hillary! is poison in the South - and for her to snatch the nomination from Dean at this point would risk a fissure in the Democratic Party that might create a disaster even bigger than the coming likely Deanerdammerung.

But she still might be able to work the snatch - because she would be snatching from within the Democratic Party, whose mechanisms and institutions she for the moment largely controls (read "superdelegates" and "proportional representation").

The Democratic delegates that are chosen in primaries and caucuses are awarded to candidates proportionally to the total number of votes each receives in state primaries and caucuses. As long as a candidate earns more votes than a threshold level, the candidate receives a certain number of delegates. If no clear front-runner emerges, several candidates could go into the Boston convention with relatively equal numbers of delegates. Even with the ominous Rise of the Deanies - now abetted by the Gorebot - polls suggest that multiple candidates are a real possibility.

What happens then? Well, the proportional representation system does not apply to "superdelegates," who are obligated to no candidate and who include Democratic members of Congress, governors and state party chairmen. Superdelegates will account for nearly 40 percent of the votes needed to clinch the nomination.

And Hillary! leads the Democratic establishment that provides those superdelegates. So tell me again who's leading in the primaries?

Yes, for Hillary! it's just Fun, Fun, Fun until Deanies takes the T-Bird away!!!!

If she's going to let that happen, that is. I'd say look for her to limber up her sock puppet, Wesley Clark, as an early warning sign of her intent to move in 2004.
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Gored Again V

If I understand John Ellis' answer correctly, he's discounting the possibility of a one-way Mount Fuji trip for the Democratic airliner with Howard Dean at the helm in 2004. But I'll stick to my belief that such a crack-up is a distinct possibility - perhaps the most likely probability. And I'm all the more cheeky in sticking to my position given this recent report from New Hampshire:

A stunning new poll shows President Bush would clobber Democratic front-runner Howard Dean by nearly 2-1 in politically potent New Hampshire - even though Dean has a giant lead over Democratic rivals in the state.
Bush gets 57 percent to Dean's 30 percent among registered voters in the American Research Group poll. In fact, Dean, from neighboring Vermont, does worse in the Granite State than a generic "Democratic Party nominee" who loses to Bush by 51 to 34 percent. Another ARG poll this month showed Dean with a 30-point lead over Sen. John Kerry (Mass.) for the Jan. 27 New Hampshire primary, the second test after the Jan. 19 Iowa caucuses.

New Hampshire is a swing state. So by John's calculations that 2-to-1 lead can't be happening - nothing like it can be happening. I admit that the 2-to-1 lead is very unlikely to hold in the general election. But if Dr. Dean loses to Mr. Bush by margins in the 10% range - a distinct possibility - there will be huge coat tails effects. If that were to happen, Congressional Democrats won't be able to hold their caucuses in a hall closet in 2005, but it would be close. And if that were to happen, I don't think they'd be chattering about how eager they are to have Al Gore or anyone else who got them there pick up the pieces.

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Thursday, December 11, 2003

There Was A Time When The French Knew About Personal and Political Rights

But it's hard to imagine a worse way to address expressions of religious differences in public schools than this:

A report delivered to President Jacques Chirac on Thursday called for a new law banning the wearing of "conspicuous" religious symbols in French public schools - large crosses for Christians, head scarves for Muslim girls, or skullcaps for Jewish boys.

The recommendation was the most striking in an official reassessment of how to preserve the principle of the separation of religion and state in France in light of such developments as the rise of a large Muslim population and a new wave of anti-Semitism.

In other words, to preserve the principle of the separation of religion and state in France the state is to take a highly intrusive official position against expressions of traditional religion. And to think that it is a true insult in France to call a person "stupid" - especially someone in public service.

The policy will apply to only "large" and "conspicuous" religious symbols. The adjudications required should be exquisite. For example, will the special undergarments worn by some Mormons be considered "conspicuous" under the law because they show up big time in the locker room? (Hey, for a while, the disrobing kid is wearing nothing else!) Just how long can an Orthodox Jewish boy let his hair grow before the state intervenes with the clippers? What if a student adds a blob of red paint to that small crucifix - or a glow-in-the-dark coating? Better have a judge on hand to decide! There will be many sensitive issues and refined distinctions to be made!

So why stop with a ban on "large" and "conspicuous" symbols. It's just not workable - and selective squelching of other people's religious expressions can be so tiring on a unionized teacher! A "zero tolerance" position is the way to go. Clear and crisp and mindless. That would really root out the "problem" - although there will be difficult issues remaining, like what to do when some sneaky little Catholic brings a bottle of Svyatoi Istochnik filled with Holy Water! There are precedents to follow in such cases.

What next? A government decision to destroy Paris in order to save it?
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Gored Again IV

As usual, John Ellis does not disappoint, but exhibits both political acumen and good breeding in his e-mailed reply:

Robert --

#1> "Obvious reasons Gore didn't run:" 1. popular incumbents generally win re-election. President Bush is a popular incumbent. 2. Gore needed distance from the 2000 defeat, 3. Money. He wasn't raising any money. And he didn't have any money (by upper elite measurement) of his own.

#2> Of course the Dean network is not a piece of software that can be inserted, like a CD, into the Gore computer or the Clinton computer or whatever. It's a peer network and not a client-server model. But it is, stand alone, a powerful force (ask John Kerry, Dick Gephardt, et alia) and because it is a network, based upon shared values, I would argue that Howard Dean's charisma (such as it is) is not the connective tissue. The Dean network is about community and force multiplication (in political terms). Dean may lose or win, but the community his campaign has created will endure regardless of the outcome and how that community feels about 2008 will be significant/important.

Successful presidential campaigns are successful because large (or significant) constituencies compel them forward. The largest, most significant constituency in the Democratic Party is the Dean-o network. If the majority of them coalesce around someone in 2008, that someone will have a solid base from which to run a campaign for the 2008 Demo Prexy nomination. Combine it with Gore's other strengths as a candidate (labor support and the like) and you have the makings of a possibly winning operation.

Obviously, no one knows what will happen (Gore or Dean or Hillary or me, for that matter). But if you were looking to begin to engage the Dean network as allies in the 2008 campaign, you could not have done a better job of it than Gore did this week.

#3> Airliners and Mt. Fuji.....Nixon won landslide in 1972, minimal GOP gains in Congressional races (and this was when, pre-redistricting software, there were Congressional races!), Reagan won landslide in 1984, virtually no GOP gains at all, Bush wins half-landslide in 1988, Connie Mack elected to the US Senate in FL (the only coat-tail).

On paper, it seems unlikely that the Democratic candidate (unless it's Sharpton) will win less than 44% of the vote and the various modeling that has been done suggests a 53-47% outcome (Bush wins) and a 60-100 point spread in the electoral college. It ain't Mt. Fuji, it's just a routine case of a popular incumbent winning re-election by a comfortable margin.

I will grant you that the Dems are likely to lose Senate seats in the South, but that was expected long before it was expected that Howard Dean would be the nominee.

UPDATE: Maguire's confused, too.

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One Of The Greatest

Robert Bartley

Surely no journalist of any political stripe has had an impact comparable to Bob Bartley's since Walter Bagehot wrote the unwritten British constitution in The English Constitution.

Robert Bartley was far more than an advocate or a polemicist or a popularizer - and he was never an opportunist. With apologies to James Joyce, Robert Bartley forged in the smithy of his soul and his opinion pages the uncreated conscience of modern conservativism.

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Wednesday, December 10, 2003

Herr Doktorprofessor Loots Trade Theory II: Hillary Clinton Says It's The Other Way Around

As noted in the post linked above, Herr Doktorprofessor Paul Von Krugman thinks that the big problems with President Bush flow from his unchecked desire to be re-elected to a second term.

But Hillary Clinton is worried about what happens when President Bush is unchecked in his second term by any need to be re-elected:

"I worry about four years of a second term of the Bush administration with no accountability — no election waiting at the end," Clinton said, adding that "extreme legislation (is) waiting in the wings if the president gets re-elected. There will be a move to turn the courts into an adjunct of the Republican Party and their extreme ideology and agenda."

There you have it. The only thing worse than George Bush's need to be re-elected is his having no need to be re-elected. Some Democrats seem to be living out (or living in) some version of a joke popular in Communist Poland:

"Capitalism is the exploitation of man by man! ... Communism is the other way around!"

And, by the way, is Senator Clinton speaking from her own experience in the White House - when Bill Clinton is widely believed to have thrown away his entire second term?

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Pending Revision

One of the more curious aspects of reports of the recent "weak job numbers" is the widespread failure of the media to note that such numbers are subject to revision - and have in fact been recently subject to substantial revision upwards.

The nifty new Senate Joint Economic Committee website goes into it more here and here and here.

At a minimum, before spinning any significant thoughts on why jobs growth has been "weak" it would be wise to wait for the revision.
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If Further Proof Were Needed That Sandra Day O'Connor Is A Victim Of Senile Legal Dementia

Without question, one of the most shameful Supreme Court fundamental rights decisions since Korematsu.

Be afraid. Be very afraid.

UPDATE: John Fund describes how Justice O'Connor has grown into her dementia.
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Gored Again III

I think pretty highly of John Ellis. So maybe he can help me out on this one. I understand that now that Al Gore has endorsed Howard Dean, that if Dr. Dean wins the White House in 2004 then Mr. Gore will be in a good position to claim various goodies. Check.

But I'm having a little trouble with what happens if Dr. Dean steers the Democratic Party into the political equivalent of an airliner collision with Mount Fuji in 2004, losing the White House and more seats in Congress - thereby weakening or eliminating the ability of Senate Democrats to block Republican judicial nominees. John explains:

[A]ssume that former Vermont Governor Howard Dean is defeated by President George W. Bush in the 2004 presidential election. Who picks up the pieces? .... There is one man ... who thinks that he will pick up the pieces after the 2004 Democratic debacle. His name is Al Gore, the former vice president and winner (in the popular vote) of the 2000 election. He chose not to run this time around, for obvious reasons, but left the door wide open for a Nixon-like return to the '08 campaign. And this week he all but announced his candidacy for the 2008 Democratic Presidential nomination by endorsing Gov. Dean for president.

John, explain to me again how by endorsing Dr. Dean and helping cause such a gigantic, historic wreck, Al Gore puts himself in a better position to pick up the pieces and claim the Democratic nomination in 2008. I think I must have missed the explanation the first time.

The argument seems to be bottomed on this claim: If Dean loses, Gore will be the rightful heir to the Dean apparatus; the single most impressive fund-raising and organizing operation in Democratic Party politics. But doesn't most of that "apparatus" depend on Dr. Dean's personality? Is that really transferable to Al Gore? And won't a big loss likely leave the "apparatus" more than a bit damaged? And couldn't all of Dr. Dean's technical devices - internet gimmicks, etc. - be copied functionally without actually endorsing Dr. Dean himself. I mean, isn't an endorsement rather a stiff price to pay for a campaign mailing list?

Another question: Exactly what were the "obvious reasons" Mr. Gore didn't run this time around?

I also didn't quite see how it was that Mr. Gore all but announced his candidacy for the 2008 Democratic Presidential nomination by endorsing Gov. Dean for president. If Dr. Dean actually wins in 2004, then Al Gore probably won't be able to run at all in 2008.

Is this whole Al Gore strategy supposed to be based on an assumption that Dr. Dean will lose the general election in 2004 - but not so badly that those closely associated with him are rendered radioactive?

If that's the case, Al Gore really is a refined thinker.

Help me out here, John. I'm in pain.

MORE: Good thoughts from Bill Quick.


John Ellis replies.
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Gored Again II

More people seem to be coming to the understanding expressed here that Al Gore's endorsement of Howard Dean is mostly a Gore uppercut to the Clintons.
But it's hard to know what to make of this bizarre observation rom the Daily News:

Behind the scenes, observers said the frosty response had more to do with 2008 - when both Gore and Hillary Clinton are projected as potential presidential contenders - than current affairs.

There are "observers" who think that there is a serious chance that Al Gore plans to be a contender in 2008? After completely passing up 2004? One is tempted to think that those must be the "observers" who stay behind the scenes because smoking dope in public is still illegal. But stranger things have happened - especially where Mr. Gore is involved.

Mr. Gore's endorsement does create a curious additional incentive for Senator Clinton. If Howard Dean is the nominee, then even if he is not elected he will have plenty of opportunity to rid the Democratic Party of lingering Clintonian influence - especially the egregious Terry McAuliffe and his flock. Mr, Gore's enthusiastic endorsement will make it all the easier for Dr. Dean to sweep out the Clintonian detritus.

Further, absent a complete Dean disaster in the general election (which is possible, even likely - but far from assured), Dean's influence in the Democratic Party establishment could long linger - just as the Clintons' influence has lingered. Worse, if Dean is nominated, Senator Clinton will have the unpleasant choice of (1) vigorously supporting Dr. Dean, thereby undermining her own institutional position and simultaneously associating herself more closely with a Dean disaster instead of positioning herself as the post-election-disaster savior, or (2) distancing herself from her party's candidate, thereby positioning herself as the post-election-disaster savior, but also undermining the candidate, giving herself a further reputation as a divisive figure in the party and making more and more intense enemies within the Party. Even if she evades all those rocks, Senator Clinton - who already controls much of the Democratic Party machinery - will be no better off than she is now following a Dean loss. And if he wins, she's finished forever as a Presidential possibility.

The conventional wisdom - and my opinion - has been that Senator Clinton is unlikely to run in 2004 because the conditions for a Democrat win are not good (especially on the economic front). But if she sees a Dean nomination - especially one coupled with the Clinton-hostile Gore endorsement - as reducing her chances in 2008 enough, she might well reconsider.

Does any of that help explain why her sock-puppet, Wesley Clark, is suggesting that Senator Clinton may be his running mate?

Or maybe it will just turn out to be the other way around.

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Tuesday, December 09, 2003

The Bad Economist? III: Of Hype And Hyperbole

As noted in a prior post, the most striking result of Herr Doktorprofessor Paul Von Krugman's entire academic career - his theory of the so-called "home market effect" - was dealt a severe but not fatal blow by Donald Davis, now the Chair of the Columbia economics department. Worse, the blow depended on Prof. Davis pointing out a serious problem that should and would have been disclosed by standard "sensitivity analysis" testing how much Herr Doktorprofessor's results would be affected by a failure of one or more of the "simplifying hypotheses" on which they were based. Herr Doktorprofessor appears to have conducted no such sensitivity analysis - or at least he does not disclose any prior to Prof. Davis' paper.

But Herr Doktorprofessor's status as a world class self promoter was cemented by his and his supporters (dependents?) recharacterization of this development as a great vindication of his work. Indeed, he went on to write a book with two co-authors: The Spatial Economy by Fujita, Krugman and Venables ("FKV"), a book that was, in turn, reviewed in a paper OF HYPE AND HYPERBOLAS: INTRODUCING THE NEW ECONOMIC GEOGRAPHY by J. Peter Neary of University College Dublin and CEPR. Some of the paper is rather technical - but many of his comments constitute interesting commentary on Herr Doktorprofessor's self-promotion and hyperbolic claims of his own importance:

[A]t times the authors risk getting carried away by their heady prose style. They find the predictions of one model so plausible that they call it "History of the World, Part I" (p. 253); they describe the pattern of world industrialisation implied by another as "a story of breathtaking scope" (p. 277); and on his website Krugman expresses the hope that economic geography will one day become as important a field as international trade. This sort of hype, even if tongue-in-cheek, is not to everyone?’s taste, especially when the results rely on special functional forms and all too often can only be derived by numerical methods. What next, the unconvinced reader may be tempted to ask? the tee-shirt? the movie?

Donald Davis (1998) criticize[d] [Krugman's original results] on two counts. He makes the empirical point that real-world transport costs appear to be at least as high for the latter, and he shows theoretically that this neutralises the home-market effect. Chapter 7 of the book derives similar results (without referring to Davis) but gives them a totally different spin. Whereas Davis concludes that there is "no compelling argument [...] that market size will matter for industrial structure", FKV note that a reduction of agricultural transport costs may trigger agglomeration. So, relatively low agricultural transport costs are either a necessary and implausible condition for agglomeration, or a source of yet more "stories of breathtaking scope": take your pick.

I have taken the appearance of FKV as an opportunity to review the "new" economic geography. It is not the only approach to location and agglomeration which economists have taken. Many authors such as Brian Arthur (1986) and Robert Lucas (1988) have theorised about the role of regions and cities in economic development. But no other body of work does quite the same thing as the new economic geography: explain agglomeration in a theoretical framework which is tractable, has solid micro foundations, and makes testable empirical predictions. So, to paraphrase Robert Solow (1962), everyone should read this book, or at least encourage their students to do so! Remember though that Solow?’s remark was made about the two-sector growth model, as emblematic of the 1960s as mini-skirts or the Beatles, though not as long-lasting. Will the new economic geography prove more durable? I suspect that it will, though maybe not as a distinct field. Instead, I am tempted to suggest that it will survive as "merely" another simple general equilibrium model, supplementing the trade theorist's tool-kit, to quote Solow 27 again, another "general equilibrium model of matchbox size" (since even a continuum of identical matchboxes arranged symmetrically around a circle is, well, just a matchbox). Saying this risks sounding disparaging (and falls short of the authors' ambitions). But it is high praise in my view. ... ([A]s Krugman (1999) notes, Ohlin himself gave an important role to increasing returns as a determinant of trade patterns.) In stressing the relevance to regional issues of models derived from trade theory, Krugman has not so much created a new sub-field as extended the applicability of an old one. So, hold on the tee-shirt, skip the movie, but do read this book, possibly the best on interregional and international trade and location since Ohlin.

So, Herr Doktorprofessor Paul Von Krugman's work will survive as "merely" another simple general equilibrium model, supplementing the trade theorist's tool-kit, and constitutes another "general equilibrium model of matchbox size" (since even a continuum of identical matchboxes arranged symmetrically around a circle is, well, just a matchbox) and Herr Doktorprofessor not so much creates a new sub-field as extended the applicability of an old one!

Does that read like the kind of summary of the work of an economist that might be found, for example, in the press release attendant to his winning the Nobel Prize?

Or the John Bates Clark Medal?

Ah! Immortality!
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Medicare Structure

President Bush has just signed a bill adding prescription drug benefits with an estimated 10-year cost of $400 Billion and other features to Medicare.

Many conservatives are lamenting this huge expansion of a government entitlement, and both conservatives and liberals are concerned at the effect on the federal budget and the "solvency" of Medicare.

Suppose one assumes that even before the new bill, the "solvency" of Medicare is already impossible to maintain without benefit cuts or tax rises (maybe even with some of both) and that Medicare's "solvency" will be adversely and substantially affected by the new bill. Could one still make an good argument in the bill's favor?

I think the answer is "yes." The reason is "structure." In fact, the new bill's threat to the "solvency" of Medicare may be exactly what may justify the new drug benefit.

One can attempt to justify Medicare on either economic principles (the program increases overall utility) or political principles (some such program is inevitable in any democracy, since the relevant interest groups will eventually come together and make it happen - even if the result decreases overall utility). It is hard to see how excluding prescription drugs across the board from plan coverage makes sense in either an economic or political analysis.

Consider the economic justification. Assume that Medicare has a maximum sustainable size (whatever that means) and that the program is already structured to go well beyond that size (in other words, its already heading towards "solvency"). If Medicare (or some program like it) can increase overall utility, then including some prescription drugs under the plan probably makes sense because some prescription drugs give a huge amount of value to the beneficiaries compared to services and products already covered. Adding a prescription drug benefit means defunding those lesser-value services and products once the "solvency" wall is actually hit, in favor of covered prescription drugs - then adding the prescription benefit should increase overall utility compared to what Medicare would have yielded in overall utility had the benefits not been added. Yes, the political pain of reducing overall Medicare from a higher

Consider the political justification. If adding the prescription drug benefit increases the aggregate utility of Medicare, then that alone is a big boost to justifying the new bill politically. But even if the economic justification for Medicare and/or the new bill is wholly incorrect, it still seems unlikely that a full exclusion of prescription drugs is the most defensible line politically. Wouldn't it be better as a matter of pure politics to define the structure of Medicare to include some prescription drug coverage for some people and then try to hold the line on the aggregate size of the restructured program?

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Monday, December 08, 2003

Gored Again

Word is out that Al Gore is about to endorse Howard Dean, which the New York Times reports would be a move that Democrats said would provide a huge boost to Dr. Dean's candidacy.

I'm not sure that the Times has that one right.

Howard Dean has indicated that he intends to purge the Democratic National Committee of Clintonian residues. Also, Wesley Clark has essentially been inserted into and maintained in the campaign by the Clintons as the "anti-Dean."

Mr. Gore's endorsement of the former Vermont governor may or may not be a big boost to his chances to obtain the Democratic nomination, but Mr. Gore's move is certainly a strong indication that Al Gore hates the Clintons ...

... and doesn't care all that much for his former runnning mate, Senator Lieberman, either.

UPDATE: An astute reader hits the mark with this e-mailed observation:

Also note that, according to the account I read, Gore is making the announcement in Harlem. Harlem, of course, is where Clinton located his office. There may be other reasons behind this choice, but it sure looks as if at least part of the motivation may be to snub Clinton on his own front steps.

That's it - rub it in, Al. Rub it in real deep.
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The Bad Man's Theory of International Trade Law

The great and hugely influential Justice Oliver Wendell Holmes, Jr. maintained that law should be viewed from the perspective of a self-interested "bad man." That is, someone who cares only about economic consequences of his actions. Holmes saw law as simply a system of pricing - and this was especially true of commercial contract law. Although some people have always lamented Holmes' contribution as pernicious (he intended it to be shocking) it is now understood even by the best such lamenters that for better or for worse Holmes' views and views directly derived from them are today commonplace - and actually dominant.

It is also a practical, real-world fact that commercial contracts are generally treated by their parties in exactly the way Holmes described. A company that enters into a contract to buy a certain amount of, say, coal from a coal producer does not see itself as morally obligated to buy that much coal. Rather, the decision to buy the coal will generally be treated as an economic matter along these lines:

If we buy the coal our net cost will be X, and if we don't buy the coal (and therefore breach the contract and obligate ourselves to pay the damages resulting from the breach) our net cost will be Y. Therefore, if X > Y, we will not buy the coal.

Nobody in the coal business will be shocked or surprised. In fact, to do otherwise would make other commercial actors wonder about one's intelligence. And the law (generally the Uniform Commerical Code) reflects these realities by assuming that monetary damages are normally sufficient remedy, and denying "specific enforcement" of the contract except in highly unusual cases. Ordinary people make such decisions every day - as when a homeowner walks from a non-recourse mortgage on a home that has depreciated or been destroyed by an earthquake. Indeed, for many months following the Northridge Earthquake the majority of home sales in the San Fernando Valley were forclosure sales. Many of those homeowners were perfectly capable of keeping up their home payments - it just wasn't worth while for them to do it on a house that had experienced, say, $100,000 in earthquake damage after already being hit with serious real-property deflation. Those home owners were "bad men."

Holmes' "bad man" approach to the law is even more accepted as usually (there are exceptions) being both the proper ("normative") structure of law and actual ("positive") practice, in the arena of international law. Nation states are generally thought to look out for their own interests - with the main question being how "enlightened" or "correct" their view of their own self-interest really is.

There is perhaps no arena in which the "bad man" theory is more dominant and casually accepted than the arena in which all of these factors favoring the approach align in a kind of grand, legal and commercial syzygy: international commercial trade agreements.

That is all by way of background.

The Man Without Qualities is no fan of the United States' just-rescinded steel tariffs. Those steel tariffs exhibit a law-abiding, "bad man" approach to the WTO. The US did not walk away from the law - it accepted the right of other parties to the WTO to impose countervailing duties, which is the remedy allowed to them. In exactly the same way a Holmesian "bad man" accepts the law's right to compel the payment of monetary damages for breach of a contract. That's the price of breaching the contract.

But its simply preposterous for EU trade commissioner Pascal Lamy to write today in the Wall Street Journal - with emotion whose genuineness is most comparable to that of the Walrus and the Carpenter expressed over the oysters they have just devoured:

But abuse comes at a price, and that price is systemic. The U.S. action may have already let the genie out of the bottle. Every protectionist move by others can now be justified with reference to U.S. measures. Many former arch-enemies of trade defense instruments, including major developing countries, are now among the heaviest users of anti-dumping rules. And there are plenty of steel-producing countries getting ready to cite the U.S. example to keep out imports. Unsurprisingly, there are also calls for fundamental reform of the trade defense sector in the context of the Doha Round.

Please. To insist that a country or other commerical contract party must actually perform under a trade agreement is all but equivalent to insisting that parties to such contracts are generally entitled to specific performance, not monetary damages - a position thoroughly rejected by commercial practice, legal theory and common sense. [Any argument that civil law establishes specific performance as the usual remedy for breach, unlike the common law preference for monetary damages, would reflect nothing but a naivete on the part of the one making the argument, since the civil law "preference" is so gutted with exceptions that in practice the result is essentially the same as the common law.]

Just by way of example: The EU has supposedly eliminated restrictions on imports of Japanese cars. But no Japanese car manufacturer thinks it can export unlimited numbers of cars to Europe - where consumers would love to buy them. Instead, the Japanese know that they must open plants in Europe and restrain their market share expansion. The actual EU stance towards Japanese car sales is like that of the United States - but much, much worse.

To pick another example: No sensible person believes that Japan does not practice the extensive non-tariff trade restraints that Japan (and it's more foolish-sounding apologists in the West) so violently deny, or that other Asian countries have not picked up many of these tricks.

One could go on and on. So what? Nobody is surprised by any of that that. Nobody is weeping on the pages of the Wall Street Journal that genies have emerged from bottles when Japan trumps up yet another "health and safety" regulation that stifles some import to the benefit of its Japanese equivalent.

Did the Bush Administration's steel tariffs mark a shift in US trade policy? Yes. It made them a little more those of the rest of the world. That's not necessarily a good thing - although it's humorous to see "internationalists" who argue so passionately in other spheres that the US should act more like the rest of the world fulminating over this Administration gambit.

It really asks a lot of even a hard boiled "bad man" to stomach the sanctimonious, disingenuous pretenses of Mr. Lamy and the carefully worded evasions of Herr Doktorprofessor Paul Von Krugman. [I have already noted in prior posts that Herr Doktorprofessor rarely argues from economic principles for free trade - he prefers to cite international law.]

The Administration's gambit may even have a strategic benefit for the American trade negotiation position. Mr. Lamy suggests that the gambit has resulted in calls for the fundamental reform of the trade defense sector in the context of the Doha Round.

Amazingly, Mr. Lamy writes as if such calls for fundamental reform were a bad thing.


Messrs. Krugman and Lamy ask uo to believe that Europe is appalled over the supposedly illegal US tariffs, where the EU itself is constantly faced with this kind of report concerning its member states' flouting EU regulations:

The latest Eurobarometer to be released this week found that just 48 per cent of EU citizens viewed membership as a "good thing", down from 54 per cent last spring.

[E]ven the French were below half for the first time after months of battles with Brussels over tax cuts and illegal aid to ailing firms.

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Corporate Governance In Disneyland: A Sad Chapter IV

The New York Times reports its version of the current state of Disney/Eisner affairs:

[Michael Eisner's] position as the chief executive of the Walt Disney Company appears secure... Yet former board executives, crucial employees and other people in Hollywood now feel emboldened to criticize Mr. Eisner in a manner more vociferous than at any other time in his nearly 20 years as chief executive. ....

But scathing on-the-record comments - at least those not part of legal proceedings, like Mr. Katzenberg's against Disney - are a rarity in a business where the knives truly come out when someone is considered finished.

It seems that the Times is rather coyly suggesting that what appears to be Mr. Eisner's security is not actually the case at all.

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