Ya gotta believe!

Thanks to Harry for sending me his 1984 paper, On the inevitable return of higher oil prices, in response to my post on CAFE standards. In that post I presented a graph based on the same data set as this one, but without the trend line:

Because I was talking about the post-1974 period, I had not noticed that the graph shows a persistent and substantial price decline from about $2.80 per gallon in 1919 to about $1.70 in 2007, based on the trend line.  After 88 years of steady real-world price decline, my faith in the theory might begin to weaken.  Hang in there, Harry. 

Update on Saturday, April 26, 2008 at 12:07PM by Skeptic

An email from Doug suggests I should have charted crude oil prices instead of gasoline prices. I agree.  EIA has a long series of gasoline prices but no crude oil prices before 1978. I've looked for crude oil price series in the past and the best I could find was on the website of WTRG Economics. This seems to be the best graph. 

Not having the data, I can’t compute a trend line. Your eyes are as good as mine. That the author puts in average and median price lines suggests that he may see the real crude price history as having a horizontal trend with some spikes.

Note the divergence between US prices and world prices between 1973 and about 1983, during which period US “old oil” was under price controls. That would account for gasoline prices in the mid-1980s not rising as much or as soon as world crude oil prices. We can argue about the unintended consequences or collateral damage of price controls, but they did constrain retail prices, didn't they?

Finally, I am not predicting what crude oil prices will do over periods of 5, 10, or 20 years.  I predict only that they will fluctuate.  I'm just saying that a supply-demand analysis that demonstrates the existence of an upward force but explicitly assumes away all of the downward forces such as economies of scale, competition, technology improvements, government interventions, new or expanded production, etc., and does not explain real historical data, is not a very persuasive basis for prediction. 

Update on Thursday, May 15, 2008 at 03:58PM by Skeptic

Here's a long crude oil price series compiled by someone who has gone back to the original price compilations and inflation adjustment factors.  He appears to use different inflation adjustment factors than are in the WTRG graph.  He says he got most of his data here, a spreadsheet available from EIA, which appears to be from BP via the International Energy Agency, and he cites his other sources. 

Update on Friday, May 16, 2008 at 09:47AM by Skeptic

Getting closer to the original source of the crude oil price series from 1861!  It comes from BP (page 16), and it is probably updated annually.  It may also be available in a less cumbersome form. 

CAFE standards are much better than high gasoline prices.

The question came up at lunch two weeks ago and again today in Paul Krugman's blog. Has the increase in average fuel economy of automobiles and light trucks been driven by higher fuel prices or the federal CAFE (Corporate Average Fuel Economy) standards?  Here's the answer and the evidence. 

In 2002 the National Research Council in Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards published these conclusions (at 15):

Figure 2.2 suggests that the CAFE standards were not generally a constraint for imported vehicles, at least until 1995, if then. Domestic manufacturers, on the other hand, made substantial fuel economy gains in line with what was required by the CAFE standards. The fuel economy numbers for new domestic passenger cars and light trucks over the past 25 years closely follow the standards. For foreign manufacturers, the standards appear to have served more as a floor toward which their fuel economy descended in the 1990s.

When in 1980-81 inflation-adjusted motor fuel prices were in the same high range they are now, new vehicles purchased were on average more fuel efficient--even getting ahead of the CAFE standards by about a year.  (Sorry I can't reproduce Figure 2.2 here; please follow the link.)  [Image of Figure 2-2 inserted 2 Feb. 2009.]  Then gasoline prices went down about as fast as they went up, and by early 1986, real pump prices were below where they had been in 1978.  We continued to have cheap gas for 17 years until 2003. 

From Energy Information Agency. 

Yet new domestic vehicle fleet economy did not go down because the CAFE standards were providing a floor. 

I agree that at some high level fuel prices will drive people to buying more efficient vehicles, but we don't know what price level is required to achieve which level of fuel demand reduction.  And, as we saw in 1980-81--and are seeing again now--prices high enough to have a substantial effect on new car preferences also have a ruinous effect on businesses and people's lives by crowding other goods and services out of people's budgets.  This is why I cringe when I hear it said that high petroleum product prices are the only way to decrease our use of petroleum, or even that manipulating prices is the best way to achieve that goal. 

For at least 20 years, we consumed much less petroleum than we would have without the CAFE standards, and we did it without ruinously high prices and giant transfers of American wealth to oil-producing nations.  We can have less consumption and low prices at the same time.  We've done it already.  CAFE standards were a brilliantly successful energy policy.  We should do more energy demand regulation like this and stop throwing federal cash and tax incentives at the supply side. 

Update on Thursday, April 24, 2008 at 11:47AM by Skeptic

I was disappointed that I could not reproduce Figure 2.2 in the NRC report with sufficient clarity and went looking for a better copy in one of the NRC sources.  No luck with that, but I found additional interesting data in EPA's annual Light-Duty Automotive Technology and Fuel Economy Trends:  1975 Through 2007. 

According to this first graph [inserted 2 Feb. 2009] in the Executive Summary, actual on-road fuel economy for cars has been essentially level since the mid-1980s.  (Actual on-road performance is generally about 25% below the laboratory results used to measure CAFE compliance.)  On-road fuel economy for light trucks peaked in the mid-1980s--coincident with the CAFE peak--and then gradually declined until 2004 when the revised CAFE standards for light trucks began to force efficiency upward again.  (In order to argue that light truck efficiency was forced up by increasing fuel prices instead of CAFE standards, one would have to explain why automobile efficiency did not move up in the same time frame.) 

Before this graph there is an interesting chart comparing selected characteristics of light duty vehicles for 1975, 1987, 1997, and 2007.  It reveals that once the auto industry got fuel economy up to the CAFE maximum, it used all additional efficiency-improving technology to add back weight and horsepower to the vehicles, not to further improve fuel economy.  Trucks went from 19% of sales to 49%.  Average vehicle weight in 2007 is 29% higher than it was in 1987 and horsepower increased 89%.  No doubt, those design changes gave us buyers more of what we wanted--bigger and more powerful vehicles--and no more of something we didn't care much about--still better MPG. 

I think one can still argue that government ought not do anything to influence the fuel economy of the vehicle fleet.  Certainly there is a libertarian argument and possibly an economic efficiency argument.  But once the nation has made the political decision that, for whatever reason, we must limit or reduce our consumption of highway fuels, the issue is just how best to do that. 

Since the Reagan Era, the conventional wisdom has become that "regulation" is always bad and that "markets" are always better.  From that has evolved the idea that if we really, really do need to regulate something, an externality for example, we should regulate indirectly by manipulating market prices.  This approach requires the perverse procedure of first figuring out what level of highway fuel consumption we want and then trying to translate that into the right size tax to achieve the desired result.  The imprecision of the taxation step is just unnecessary and pretty much assures that the results we get will vary from the results we wanted.  CAFE is direct regulation that works really well.  There is no reason whatever to take a leap of faith into a market manipulation alternative. 

Update on Saturday, November 22, 2008 at 11:13AM by Skeptic

Here via The Oil Drum are graphs from an excellent American Physical Society report on energy efficiency in buildings and transportation. It illustrates that after CAFE standards were met, further efficiency gains after about 1985-86 were used to support additional vehicle mass. It also shows that in the 30 years after 1975, the efficiency (measured in ton-miles per gallon) increased by a factor of just under 3 for cars and just over 3 for trucks.  Simultaneously, vehicles became safer and less polluting.  There is no reason to think this technological triumph is exhausted.

Update on Monday, December 15, 2008 at 01:57PM by Skeptic

Robert Rapier proposes improving highway fuel efficiency by phasing in a tax of up to $2 per gallon of gasoline (and reducing income taxes) in this post at The Oil Drum.  I pressed him to quantify the expected demand destruction that would result, but got nothing.  Another commenter, Neil1947, reported that the EU will impose (or raise?) CAFE standards in 2012.  Apparently the EU is not satisfied with the demand-reducing effects of their gas taxes, which have been for decades up to twice as much as Rapier's proposed $2 per gallon. 

Update on Monday, March 12, 2012 at 01:14PM by Skeptic

EPA's report on fuel economy trends through the 2011 model year is out and shows a strongly improving trend for cars and light trucks since 2004.

Hillary's Odd Choice

Yesterday Senator Clinton avoided elimination by winning the Pennsylvania primary by an impressive 10 percentage points.  Then IMHO she wasted her 10 minutes of free nationwide (cable) news coverage.  Why? 

Senator Obama got quickly and graciously through the obligatory congratulations and thanked and praised his supporters in Pennsylvania.  Then he segued into courting voters in the next elections with a short version of his standard stump speech (which is pretty good BTW).  In contrast, Clinton made her whole speech a victory celebration for herself, her family, her supporters, the Pennsylvania voters, etc. and really devoted no attention to courting voters in the next elections. 

In the sports world, we would think it odd that a team down 3-0 or 3-1 in the World Series or Stanley Cup series would celebrate so heartily after winning the next game.  Instead, we would expect it to focus immediately on the problem of winning 2 or 3 games straight to take the championship. 

All the pundits say raising money and corralling superdelegates are more urgent problems for Clinton than getting votes in the upcoming primaries.  But I don't see how she advanced either of those goals by using precious free air time the way she did.  Odd. 

Car of the Future

If you're interested in how automobile technology may change to reduce energy consumption and reduce greenhouse gas emissions, don't miss The Car of the Future on NOVA Tuesday, April 22 on PBS.  It is hosted by NPR's "Car Guys," and they did extensive interviews with Joe Romm who really knows what he's talking about.  Even better advice, if you're interested in these issues, follow Joe Romm's blog. 

PBS has posted on its website 30 clips of "Romminations" about this.  His bottom line seems to be this:  Hydrogen fuel cell cars commercially viable?  Not in your lifetime and probably never.  Plug-in hybrids?  Definitely, while I'm still young enough to drive.  Oh, and you could review my early post showing one reason why the hydrogen car can't pass the plug-in hybrid. 

Now I'm going back to trying to understand if corn-to-ethanol is a good thing or a bad thing.  (I'm already pretty sure it's not an absolutely terrible thing, which was my hypothesis when I started that project.) 

Update on Thursday, October 25, 2012 at 03:15PM by Skeptic

Joe Romm writes an obituary for hydrogen as a transportation fuel. An excerpt on its fatal illness:

Hydrogen fuel cell vehicles (HFCVs) require multiple technological (and other) miracles to succeed as practical, affordable, carbon-reducing consumer vehicles — and they require every plausible competitor, including electric vehicles, to fail first (see “Hydrogen fuel cell cars are a dead end from a technological, practical, and climate perspective” and “The car of the perpetual future” — The Economist agrees with Climate Progress on hydrogen).

. . . .

Running HFCVs on natural gas makes no sense at all since the full life-cycle GHG emissions (including methane leakage) are merely comparable to the best gasoline hybrids. Also, building an expensive hydrogen fueling infrastructure over the next two decades around a fossil fuel would vastly increase the total long-term cost since that infrastructure would have to be replaced in the two decades after that by carbon-free hydrogen fueling stations.

There's a problem with the economy.

Paul Krugman’s Crisis of Confidence column today is excellent. Recent polling shows more Americans feel their economic circumstances declining more than at any time in 44 years. He points out that the traditional measure of American prosperity, rate of change in GDP, masks the fact that the Middle Class is declining even when GDP is rising. I made this point in an earlier post and presented some graphics showing the trend started in 1973 and is getting worse.

PK points out in one of his recent blog posts that changes in the traditional “unemployment rate” mask a long term, persistent increase in underemployment and working age Americans who have given up looking. PK commented favorably there on a similar Floyd Norris blog post with a better graphic. Open the Norris graphic and notice that among men 25-54 the rate of joblessness (i.e. those who for whatever reason are not working) used to fluctuate around a mean of about 7 percent. From 1973 to 1983 it climbed to 15 percent and since then has been fluctuating around a mean of about 12 percent. Something broke in the 1970s and never got fixed.

High joblessness rates and declining median real household incomes may overlap a bit, but one does not fully explain the other. More middle class Americans are without jobs and those who are working are earning less on an inflation-adjusted basis.

Another milestone on American Have-Nots' journey to having less

For the first time since WWII, inflation-adjusted median family income will be lower at the top of a cyclical expansion than it was at the top of the previous cycle.  The New York Times has the full story and a graph here.  That means that more than half of American families were worse off at the end of the economic recovery that ended in 2007 than they were in 2000. 

As I pointed out in an earlier post, the decline of the American Middle Class started in 1973.  It is now plain that in families with $60,000 of annual income the children should expect their lives to be no better and probably worse income-wise than their parents'.  Can we use the phrases "great nation" and "declining middle class" in a sentence that doesn't make us blush? 

This is weird.

One of my early posts was titled "The Recession Is Coming! The Recession Is Coming!"  Now I hear these words coming out of the mouth of a Presidential candidate.  No, I don't think she reads my blog. 

Innovations in Financial Engineering

The decades-long push to the nearly complete deregulation of banking was supported rhetorically by the idea that regulation was stifling innovation in finance.  Now that we've had a chance to dig through the wreckage of Enron, Bear Stearns, and many others, a couple of things seem obvious about financial innovation.  One, in a broad sense there isn't any financial innovation--it's all about leverage and obfuscation of risk, just like it's always been.  Two, although innovations that get adopted in other fields generally displace permanently something inferior and ultimately lead to something even better, in the financial field "innovations" often fail and have to be replaced by the "way we used to do it." 

Update on Tuesday, June 17, 2008 at 08:10PM by Skeptic

Financial innovation meets bottom line. 

Update on Friday, April 17, 2009 at 02:33PM by Skeptic

Fed Chairman Ben Bernanke is concerned about obfuscation.

"Regulation should not prevent innovation, rather it should ensure that innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes," said Mr. Bernanke in a speech at a community-affairs forum in Washington. "We should be wary of complexity whose principal effect is to make the product or service more difficult to understand by its intended audience."

Thanks to Mark Thoma for the quotation.  Dani Rodrik agrees, and so does Paul Volker.

Update on Tuesday, July 21, 2009 at 05:38PM by Skeptic

Elizabeth Warren disposes of the main objections to a new agency to regulate financial products offered to consumers.  Why does the MSM not cover this?  Hat tip to Mark Thoma for the link.

Update on Saturday, August 1, 2009 at 08:47AM by Skeptic

Oops.  I omitted another goal of financial engineering--evasion of taxes or regulation, as Financeguy reminds us in a comment on this Rortybomb post. 

The post itself recounts how Lewis Ranieri, the inventor of securitized mortgages, has been insisting for more than 2 years that millions of mortgages must be restructured and that the financial industry can readily innovate a way to do that efficiently.  Hasn't happened, perhaps because the players in the middle who could possibly do it get fees for administering defaulted loans and foreclosures and get nothing for restructuring.  Also, the tax lawyers and accountants, whose views apparently were never previously solicited in connection with home mortgage renegotiations, are now advising that such restructuring gives the borrower forgiveness-of-indebtedness income and that lenders must send 1099s and borrowers must pay income taxes on it. 

Update on Thursday, August 13, 2009 at 11:17AM by Skeptic

Dani Rodrik describes 4 failed promises of financial innovation (emphasis added):

Here are some of the lies that the finance industry tells itself and others, and which any new Fed chairman will need to resist.

Prices set by financial markets are the right ones for allocating capital and other resources to their most productive uses. That is what textbooks and financiers tell you, but we have now many reasons to be wary.

In the language of economists, there are far too many “market failures” in finance for these prices to be a good guide for resource allocation. There are “agency problems” that drive a wedge between the interests of the owners of capital and the interests of bank CEOs and other finance executives. Asymmetric information between sellers and buyers of financial products can easily leave buyers vulnerable to abuse, as we saw with mortgage-backed securities.

Implicit or explicit bailout guarantees, moreover, induce too much risk-taking. Large financial intermediaries endanger the entire financial system when they use the wrong risk model and make bad decisions. Regulation is at best a partial remedy for such problems. So the prices that financial markets generate are as likely to send the wrong signals as they are to send the right ones.

Financial markets discipline governments. This is one of the most commonly stated benefits of financial markets, yet the claim is patently false. When markets are in a euphoric state, they are in no position to exert discipline on any borrower, let alone a government with a reasonable credit rating. If in doubt, ask scores of emerging-market governments that had no difficulty borrowing in international markets, typically in the run-up to an eventual payments crisis.

In many of these cases — Turkey during the 1990s is a good example — financial markets enabled irresponsible governments to embark on unsustainable borrowing sprees. When “market discipline” comes, it is usually too late, too severe, and applied indiscriminately.

The spread of financial markets is an unmitigated good. Well, no. Financial globalisation was supposed to have enabled poor, undercapitalised countries to gain access to the savings of rich countries. It was supposed to have promoted risk-sharing globally.

In fact, neither expectation was fulfilled. In the years before the financial crash, capital moved from poor countries to rich countries, rather than vice-versa. (This may not have been a bad thing, since it turns out that large (net) borrowers in international markets tend to grow less rapidly than others.) And economic volatility has actually increased in emerging markets under financial globalisation, owing in part to frequent financial crises spawned by mobile capital.

Financial innovation is a great engine of productivity growth and economic well-being. Again, no. Imagine that we had asked five years ago for examples of really useful kinds of financial innovation. We would have heard about a long list of mortgage-related instruments, which supposedly made financing available to home buyers who would not have been able to purchase homes otherwise. We now know where that led us. The truth lies closer to Paul Volcker’s view that for most people the automated teller machine (ATM) has brought bigger benefits than any financially-engineered bond.

The world economy has been run for too long by finance enthusiasts. It is time that finance sceptics began to take over.

Update on Friday, September 25, 2009 at 07:58PM by Skeptic

 Johnson and Kwak also point out that not every financial innovation is good, and they give criteria for discerning good from bad. Link.

The main purpose of financial innovation is to make financial intermediation happen where it would not have happened before. And that is what we have gotten over the last 30 years. As Ferguson said, “New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds, and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers.” But financial innovation is good only if it enables an economically productive use of money that would not otherwise occur. If a family is willing to pay $300,000 for a new house that costs $250,000 to build (including land), and they could pay off a loan comfortably over 30 years, then that is an economically productive use of money that would not occur if mortgages did not exist. But the mortgage does not make the world better in and of itself; that depends on someone else having found a useful way to employ money.

In addition, financial innovation can go too far much more easily than innovation in other sectors. Financial intermediation creates value by making credit more available to people who can use it effectively. But it is possible for the economy to be in a state where people have too much access to credit. With the benefit of hindsight, it is easy to see how the U.S. housing sector passed this point earlier this decade. With negative-amortization mortgages (where the monthly payment was less than the interest, causing the principal to go up) and stated-income loans (where the loan originator did not verify the borrower’s income), virtually anyone could buy a new house, leading developers to build tens of thousands of houses that are now rotting empty, their current value far less than their cost of construction. In short, excess financial intermediation, the result of hyperactive financial innovation, destroys value by causing people to make investments with negative returns. Put another way, we cannot say that innovation is necessarily good simply because there is a market for it. The fact that there was a market for new houses does not change the fact that building those houses was a spectacularly destructive waste of money. Therefore, when it comes to financial innovation, we must distinguish beneficial financial intermediation from excessive, destructive financial intermediation.

Update on Monday, January 18, 2010 at 03:47PM by Skeptic

Paul Krugman and Naomi Klein agree.

A good explanation of the sub-prime mortgage melt-down and the very big implications.

Those trying to understand what's going on in the financial markets and financial institutions--the sub-prime mess and beyond--will find this interview very helpful.  Paul McCulley is an economist and managing director of PIMCO, the leading debt fund manager.  Read the whole thing if you have the time, but here are some of his views in brief. 

Financial markets and institutions must be regulated because (as George Soros and others have previously said) the nature of these markets is to go crazy first in one direction and then the other.  The granting of authority to banks to regulate themselves (in other words de-regulation) has been been a disaster.  Instead, the Fed should have been extending its regulation to non-banks, as it has the power to do and is now about to do too late. 

The carnage will continue and get worse unless the federal government steps in with taxpayer money to assume some of the risks.  His portrayal of what's happening at the kitchen table and neighborhood level to drive headlines is very helpful.  Abhorrent though it is to allow home "owners" who took zero-down loans to get their debts reduced in size, not doing that will be much worse for the equity their neighbors may still have.  Chaiman Barney Frank is working on a bill to do this and other important things, but the White House and Senate Republicans are in opposition (and denial). 

Investors fleeing collateralized debt obligations have gone into commodities (like oil and gold) in a big way, pushing those prices above sustainable levels.  Commodities may be the next bubble to burst. 

To see these views from a self-described optimist is pretty scary.  Not quite Ann Coulter scary, but pretty scary.  BTW, as best as I can tell from looking at the PIMCO website, it does not invest in home mortgages or derivatives based on them.  PIMCO manages at least one large mortgage backed securities fund.  (Corrected 5/15/08.)

Exclusive Interview with Donald Rumsfeld about Iraq

Realitybase has obtained this exclusive transcript of an interview of Secretary of Defense Donald Rumsfeld in late May 2003 about the Iraq war plan and the dismantling of the Iraqi army.

Rumsfeld was interviewed by his dentist, Dr. Painless, while sedated with sodium thiopental. Not a lot of dentists use this drug anymore, but Painless likes it because patients don’t feel pain and because the “truth serum” properties let him elicit candor while he’s literally pulling teeth. Fortunately, long-time dentists like Painless can understand what a patient is saying with two hands in his mouth. Nevertheless, Realitybase regrets that there a few places where even Dr. Painless could not decipher the audio recording.

Painless: Congratulations on your victory in Iraq. That was a great picture of the President standing on the carrier deck in front of the big “Mission Accomplished” banner.

Rumsfeld: Thank you.

Painless: By the way, what was the mission exactly?

Rumsfeld: Regime change. Kill or capture Saddam and his family and top lieutenants, install Ahmed Chalabi as the head of a new government, and come home. That’s it in a nutshell.

Painless: What about the weapons of mass destruction? We were all really worried about those. Did we find them and get them under control?

Rumsfeld: No need to. The Iraqi army has them.

Painless: That doesn’t sound good. Wasn’t the purpose of the invasion to prevent the Iraqi army and Al Qaeda from threatening other nations with those weapons?

Rumsfeld: No, I just told you. The mission was regime change. Of course, the Iraqi army will tell us where all that stuff is, and we’ll keep tabs on it. Not to worry.

Painless: So is that why the Iraqi military and police are not stopping the looters? They’re all guarding the weapons of mass destruction?

Rumsfeld: The media are being so irresponsible in exaggerating that stuff! Besides, US and coalition troops are all over the only strategically important places—the oil ministry and oil facilities.

Painless: I’m just a dentist, but wouldn’t it make more sense for coalition troops to be “all over” the weapons of mass destruction—as well as the stockpiles of conventional arms—and have the Iraqis secure the infrastructure and prevent all that looting?

Rumsfeld: [Undecipherable.]

Painless: I heard we’re only going to have about a third as many troops in Iraq as General Shinseki said we would need to secure it. How are you going to make that work?

Rumsfeld: Shinseki was right that we don’t have enough troops in all of the Army, Marines, and National Guard to run the place. But we’re not staying. We never planned to stay. We’re turning security and reconstruction over to the Iraqis as fast as we can. Tommy Franks is retiring, and General Whats-His-Name will supervise the redeployment home, starting in less than 90 days.

[Editor’s note: That this was the plan was confirmed in the New York Times, Fateful Choice on Iraq Army Bypassed Debate: “The plan was outlined in a PowerPoint presentation that Douglas J. Feith, a senior aide to . . . Rumsfeld, gave a National Security Council meeting that Mr. Bush convened on March 12, eight days before the invasion began. Republican Guard units, the forces deemed most loyal to Mr. Hussein, were to be disarmed, detained and dismantled. But the rest of the army would be retained. Three to five of the divisions would be used to form the ‘nucleus’ of a new Iraqi Army, according to a copy of the slide, which was obtained by The New York Times. Other Iraqi troops would be used as a reconstruction force to rebuild the nation.”]

Painless: But aren’t Saddam Hussein and dozens of his top officials still on the loose? If we leave, won’t they just come out of hiding and take over the army, the WMD, and the government again?

Rumsfeld: Well, that is a problem, and we’re working on it.

Painless: So, what was the contingency plan for this—in case Saddam and his henchmen were not rounded up during the battle and it was necessary to stay for a while and try to run the place without enough troops?

Rumsfeld: As you know, you go to war with the war plan you have. It’s not the war plan you might want, or wish to have at a later time.

Painless: So, what are we going to do?

Rumsfeld: Already done it. Jerry Bremer issued orders on May 23 dissolving the Iraqi army and throwing all the Baathists out of the Iraqi government.

Painless: Yeah. I heard about that. Tell me, what did the President think about that big change in plan so soon after “Mission Accomplished?”

Rumsfeld: Jerry told him he was going to do it, and the President agreed. The President believes in delegating everything to his field commanders.

[Editor’s note: The President’s prior approval was also reported in Fateful Choice on Iraq Army Bypassed Debate.]

Painless: But Bremer issued those decrees before he had been in Iraq for even two weeks. Did the President think he was already an expert? And what did our generals in Iraq think about that?

Rumsfeld: [Undecipherable.]

Painless: Just one more question. If the Iraqi army doesn’t exist anymore, who’s controlling the weapons of mass destruction?

Rumsfeld: Not to worry. We have really good intelligence on that. We know right where they are, and our troops will secure them.

Painless: OK, all done here. Take some Tylenol if you have any discomfort. I need you back here in a week.

Rumsfeld: Why do I have to come back? I already had my wisdom teeth out years ago.

Painless: Obviously. I need to do a little more work on your chewing teeth. I’ll use laughing gas next time.

Skeptic is on geek leave.

Sorry I haven't been posting.  I've been installing a new computer and wireless network.  Transferring data and programs.  Learning new software.  Triumphing over adversity.  Back soon. 

The Democrats' Choice: Manager or Visionary

That's the title of Ezra Klein's article analyzing the difference between Clinton and Obama.  I had posted something like this earlier, but Klein deals with it at greater length and sums it up more precisely. 

After pointing out that there appear to be only subtle differences between Clinton and Obama on key economic issues, Klein says:

"Which gets to the real difference between the two candidates, . . . how they conceive of the president's role . . . .

"Where Obama speaks of trends and values, situating his policies within the broader forces shaping our culture as well as our society, Clinton speaks of individual problems and solitary obstacles, offering her proposals as discrete solutions to identifiable challenges. . . .  'The next president,' she said [in Knoxville, Iowa], 'will be a steward of our economy at a time when the bills from eight years of neglect and mismanagement will be coming due.' 

. . . .

"Obama's advisers, by contrast, are likely to point you toward his speech at the NASDAQ, which highlighted his desire to transform our economy through the application of moral leadership.  There, Obama went before an audience of bankers and stockbrokers and spoke, not of our growth numbers or our credit problems, but of our economic values . . . ."

[long, illustrative quotation from that speech omitted here]

. . . .  Clinton, as steward, promises to better manage our economic policies.  Obama, as moral leader, promises to better our economic politics.

. . . .

. . . [S]he largely accepts the circumstances [of prevailing economic principles and beliefs], or at least her inability to change them through the application of her own charisma.  Obama, by contrast, focuses more on changing the circumstances in which the legislation is made.  The promise of his presidency is less its capacity to change our policies than its capacity to change our politics." 

According to Klein, Obama seeks political transformation and quite overtly models himself on Franklin Roosevelt and Ronald Reagan, both of whom led transformations.  In contrast, Klein says, Hillary's plan is to be a somewhat more liberal Bill Clinton, who, "in a sense, was the progressive steward of the Reagan Revolution."  For example, it was Clinton, not Reagan, who declared, "The era of big government is over." 

I think Klein's piece is brilliantly insightful about this.  I take it a bit further. 

A visionary can potentially rely on others for implementation, but the opposite division of roles absolutely doesn't work.  Only the President can get into the bully pulpit, get national media coverage, and sell a vision.  It can't be done by the Secretary of the Treasury, the National Security Advisor, by an ex-President living in the White House, a Vice President, or a mere Senator from Illinois.  So, with Obama we could possibly get vision and implementation, but with Clinton what we see is what we'll get. 

So what's my choice here? 

I'm so fed up with "voodoo economics" (as it was accurately labeled by George H. W. Bush), which became Reaganomics, and large parts of which became today's conventional wisdom, that the prospect of another transformation is very appealing to me.  But transformation to what?  Visions are inherently general, value-laden and unprogrammatic.  Consider these Reaganisms:  a shining city on the hill, smaller government, a world free of the threat of nuclear weapons, personal responsibility, family values. 

Obama's economic vision is also--well, visionary--in his NASDAQ speech, where he borrowed heavily from the words of FDR in 1932:  We should not sit idly by and let our economic problems consume us.  Every American has a right to live comfortably.  Government must favor no small group at the expense of all its citizens.  Responsible heads of finance and industry, instead of acting each for himself, must work together to achieve the common end.  A renewed trust in the market and a renewed spirit of obligation and cooperation between business and workers.  A new social contract.  (Reportedly, this audience was able to contain its enthusiasm.)  Nothing specific here about NAFTA, WTO, globalization, tax policy, balanced budgets, regulation of financial institutions, Social Security and Medicare reform, health care, education spending, or any other program. 

A visionary creates discomfort because, although greater change is possible, we can't confidently foresee what the new programs will be.  Many Democrats will be more comfortable with the idea of just getting back into power with sufficient majorities to ram through specific programs they have in mind.  I voted for the visionary. 

The best argument for "free trade"

You won't get that from me.  I am Skeptic. 

A Los Angeles Times editorial today again urges us to "embrace" free "trade," which is the misleading term they and others use to imply that when barriers to international movements of goods, services, and capital are eliminated everything will be in balance.   The New York Times also regularly exhorts us to "embrace" this globalization.  Indeed, this is the view of so many other elites that it can be fairly called conventional wisdom.  I wrote this letter to the LATimes, and I invite anybody else to help me "embrace" the conventional belief with evidence and analysis. 

Clearly the Times believes every agreement that encourages movement of goods, services, and capital across all international borders is good for America.  What’s your best argument why we should believe that? 

Can you make the case with real-world data?  If you don’t know how much the winners won or the losers lost, how can you say the net was positive? 

If you make the theoretical argument that trade benefits both nations, how do you deal with the fact that trade theory assumes full employment in both nations and no cross-border movement of capital?  The most significant effects of our “trade” agreements are freer capital flows, and there is no full employment anywhere. 

And what exactly is our retrained and better educated work force going to make here and export?  Even traditional export powerhouses like Boeing and Caterpillar are manufacturing more abroad and less at home. 

BTW, I wouldn't normally put this letter on my blog until after the LATimes rejected it, but I am highly confident they will not print it, in part because they did print my letter on another subject less than 2 weeks ago. 

Bush has caused more HIV/AIDS than he has cured. (Guest Blogger)

There is no administration in history that has done more to spread STDs [sexually transmitted diseases], including HIV/AIDS in this country, than George Bush’s. No funding for family planning, no funding for STD clinics, no funding for sex education in school UNLESS ONLY ABSTINENCE IS TAUGHT. Can't teach the use of condoms to prevent STDs, oh no!! This all was brought up in keynote address at our Infectious Disease Society meeting by King Holmes, professor of Medicine, U. of Washington, Seattle, who has studied STDs all his career, and he got a 5 minute standing ovation from 10,000 Infectious Disease specialists. Now GW wants to take credit for helping AIDS victims in Africa. ID docs all over the country are puking up their breakfasts as they read the Sunday morning paper.

Posted by ID Doc

How Obama can beat McCain

If Obama is the Democratic nominee, he should argue that a vote for McCain is a vote for George Bush's third term.  Not only would this turn centrists against McCain, but it would also split the GOP base if McCain tries to distance himself from Bush. 

Rhetorically, this could be done with examples like this:  Do you want a federal government of checks and balances and power shared with Congress and the judiciary, or do you want a third term of George Bush's imperial presidency?  Do you want a federal government that will respond immediately to natural disasters or a third term of George Bush's incompetent presidency?  Do you want a government that speaks the truth to the American people or a third term of George Bush's lying and document-destroying presidency.  Do you want a government that realizes that too large a share of the costs of government has been shifted by the Republicans onto the Middle Class, or do you want a third term of George Bush's elitist presidency?  Do you want a federal government that awards contracts to the best-qualified and lowest-cost bidders or a third term of George Bush's crony presidency?  Do you want . . . or a third term of George Bush's . . . presidency? 

This strategem wouldn't work for Hillary because she is already portrayed as the candidate for Bill's third term.  Emphasizing that would diminish Hillary and help McCain unify and energize his base. 

Update on Friday, May 30, 2008 at 12:42PM by Skeptic

I think we're going to see a lot of this image of an awkward Bush-McCain hug.  It would make a good poster or yard sign and needs no words at all to be devastating to McCain. 

More Pete Peterson obliviousness

Pete Peterson will fund a tax-exempt organization to increase public awareness of his economic theories, according to this NYTimes piece.  Based on his previous statements, these will be the simple-minded laissez faire theories he imprinted on in the 1950s, comporting less with today's economic realities, or with current economic understandings, than they do with, say, creationism. 

In looking up the link for the article reporting this today, I noticed that the New York Times has a series of articles, Age of Riches, which explores the effects of wealth concentration to a degree not seen in America since the 1920s.  According to an earlier story,

"The new titans often see themselves as pillars of a similarly prosperous and expansive age [comparing to the Gilded Age before WWI], one in which their successes and their philanthropy have made government less important than it once was." 

Well, less important to them certainly, but not unimportant because who but government could set the tax rate differentials that create profitable arbitrage opportunities to change one form of business organization to another and then back again?  Peterson can put gazillions behind his propaganda mission in large part because his income at the Blackstone Group was taxed at only 15% as a "carried interest."  He concedes other tax rates might have to go up but not that one. 

Before he decided on this particular "philanthropy," Mr. Peterson should have spent time in a Wal-Mart store, where 90% of Americans shop, and followed a few customers home to see how their families live and find out what would improve their lives.  If he were promoting economic theories that would help them--and not just the already super-rich--move ahead, that would be philanthropy. 

Attention, Wal-Mart shoppers:  Government is not less important for you. 

Clinton succeeds Edwards as champion of the downtrodden and hopeless?

In a previous post, I presented a chart showing that real incomes for the bottom half or more of American families have been stagnant since 1973 and have declined markedly since 2000.  In his column today, David Brooks describes the endemic problems and pessimism of the non-college educated.  (Lack of education is strongly correlated with lower incomes.) 

"High school grads are much less optimistic than college grads.  They express less social trust.  They feel less safe in public.  They report having fewer friends and lower aspirations.  The less educated speak the dialect of struggle; the more educated, the dialect of sef-fulfillment."

But they are grounded in reality, are they not?  If the past 35 years, and especially the last 8, are any guide, there is no American dream for them:  They should not expect to rise higher economically than their parents or that their children can do so.  Their incomes are stuck, public K-12 education is declining in quality, higher education (even "public" colleges and universities) is increasingly unaffordable, as is health care, energy, and recently food. 

Brooks makes the interesting observation that many more of these folks support Clinton than Obama.  Apparently, Obama's hopeful message does not resonate because they have given up hoping for something better and simply want a champion to help them struggle to keep what they have.  Could be, but then why did Edwards not do better with his much stronger champion-of-the-little-guy message?  Maybe it was not the message but the messenger. 

Update on Saturday, February 9, 2008 at 09:42AM by Skeptic

This article reports that voters earning less than $50,000 per year favored Clinton while those earning more than $100,000 gave majority support to Obama.  The author describes Riverside and San Bernardino Counties, "The Inland Empire" of California, as being the "unofficial capital of the working class."  He quotes USC demographer Dowell Myers saying, "The inland areas are full of people struggling to hold onto middle-class status.  They're not risk takers."  It seems like Brooks's story told in economic terms instead of educational terms, and it seems equally insightful. 

Subprime loans like investments in the Third World?

I reacted to some of the comments to this post on Paul Krugman's blog by posting my comment.  It's #21.  I point out there that increased inequality of income and wealth is likely contributing to our economic malaise by constraining consumption, a point that is more germane to this earlier Krugman post, Third World America.  PK briefly discusses there a recent paper by others that shows how petrodollars pumped into the economies of developing countries led to the financial crises of those nations in the 1980s.  The paper suggests that a trillion foreign dollars have recently been invested in a "developing economy" within the USA--undersecured housing loans that are sure to generate major losses, raising the question whether the resolution of this will also involve a financial crisis.  Several comments to that post are insightful. 

Update on Saturday, February 9, 2008 at 12:06PM by Skeptic

Here is a more detailed discussion, with pictures, of the Reinhart and Rogoff paper cited by Paul Krugman.  The question raised is whether our current banking crisis will be associated with a prolonged economic slump, as were these banking crises:  Spain (1977), Norway (1987), Sweden and Finland (1991), and Japan (1992).  Reinhart and Rogoff are serious economists affiliated with the National Bureau of Economic Research. 

Universal health care using vouchers instead of mandates?

Peter Fuad has posted as comment #5 to this Paul Krugman post a very clever idea to improve and reframe the Democratic proposals for universal health care.  In addition to improving the workability of "mandates," it co-opts the Republican language of "vouchers."  Fuad points out that what is at stake is not a socialized medical delivery system but a socialized medical payment system. 

Update on Thursday, February 7, 2008 at 02:31PM by Skeptic

For Krugman's comment on why Obama is unwittingly undermining the Dem dream of universal healthcare, go here.  So far this has stirred up 95 comments (which I did not have the time/energy to read).

Why has the Bush economy been so lousy?

This is the title to a recent post on Paul Krugman's blog raising the questions of what has gone bad and how much is Bush's fault. 

I commented (#13 by Roger Chittum) that PK can indeed blame Bush for the recent tripling of oil prices because the range of world oil prices is politically administered by the governments of producing nations (except during times when demand is so slack that they can't maintain production discipline amongst themselves).  In a later post, PK indicates he is not impressed by non-market factors in oil pricing.  I respectfully disagree and think, on this narrow issue, I may have better information than he does. 

Another comment (#22 by Karl Smith ) is a very thoughtful and apparently informed discussion of the difference between the real economy and the financial engineering economy and why the latter has recently done much better than the former.  I want to know more about the two economies. 

Update on Friday, July 11, 2008 at 04:38PM by Skeptic

Well, I have to take back the assertion that OPEC administers prices.  That was true decades ago but not now.  I summarize the history and current status in this post.