Why no one in the U.S. really wants to get tough on China

The House has just passed a bill that would allow the President to impose tariffs on China in retaliation for China's currency manipulation. Although the traditional defenders of the currency status quo have been predictably shrill in their reaction to this "protectionism," cooler heads realize that the bill means nothing. The Senate is not going to pass the bill soon (and most likely never), and even if it passed, the bill only gives Obama permission to impose tariffs; remember, Obama has passed up the opportunity even to label China a currency manipulator. Chinese officials, for their part, are not overly concerned. Nor should they be: America is not going to get tough with China anytime soon.

The reason America is not going to get tough with China anytime soon is actually pretty interesting, since it involves a unique confluence of factors. Both of the two main political blocs in America want to avoid doing anything about China's currency manipulation, but for very different reasons.

For Republicans, it is because China is making them rich. In addition to a massive supply of cheap labor, China offers American business owners low costs via lax protection of property rights and the environment. Here's how it works: When a businessman in China wants to build a factory, he gives a kickback to a local official, who allows him to dump toxic waste in the river and kick as many peasants off their land as he wants. That allows the Chinese businessman to provide goods to U.S. multinationals at extremely low cost, boosting U.S. profits and forcing down the wages of U.S. workers. Naturally, these effects are exaggerated hugely by the undervalued yuan.

In other words, China has given America's capitalist class what they have long dreamed of: in the words of Hyman Roth from The Godfather Part II, "a real partnership with [a] government." This gravy train is probably the main reason why capital's share of income in the U.S. has reached record highs (and labor's share record lows). Note that the same has happened in China.

But there's more. China's currency manipulation requires that China's government buy lots and lots of U.S. debt. That lowers interest rates in the U.S., which in turn allows U.S. finance companies to borrow lots of money very cheaply, thus boosting their profits (which reached 45% of all U.S. profits in the early '00s). Although many contend that these artificially low rates were a big cause of the recent bubble and financial crisis, finance companies - who, despite what the Tea Partiers would have you believe, are big supporters of the Republicans - continue to depend indirectly on Chinese financing for their yearly bonuses.

But what about liberals? You'd think that soaring inequality and collapsing middle-class wages would have Democrats thundering for retaliatory tariffs, but no; for reasons all their own, liberals don't want to get tough on China either. Many, such as Brad DeLong and Matt Yglesias, fear that trying to force China to change its ways will start a new Cold War. That is something they really don't want. The first Cold War was a (temporary) disaster for liberalism - it boosted the power and importance of the U.S. military, encouraged red-baiting, and led to wars. A decades-long standoff with China might well tip U.S. culture back toward militarism. As a result, though Democrats have been perfectly willing to scuttle trade deals with small, weak countries like South Korea or the countries of Central America, China's great-power muscle has proven overwhelmingly intimidating.

Thus, although a few prominent figures (Paul Krugman among them) have urged the U.S. to take a harder line toward China, the bipartisan consensus is still overwhelmingly against taking any sort of action that would anger the Chinese. And the People's Republic, for its part, is prevented by its own domestic politics from correcting a currency policy that might soon cause dangerous imbalances. So the world's two superpowers will remain locked in an unhealthy, co-dependent embrace, until things get so bad that they force one or the other country to act. By then, of course, the cost of action will be much higher.

Update: Paul Krugman suggests that irrational fear of "protectionism," indoctrinated into Americans since the disastrous Smoot-Hawley tariffs, is a big factor in scaring Americans into not doing anything about Chinese mercantilism. A friend suggested this to me. I'm not sure how big a role ingrained fear of "protectionism" plays in all this, but my point is that irrational fear isn't necessary to explain why America refuses to resist Chinese mercantilism. Most people are simply too leery of the consequences (higher production costs, higher interest rates, and worsened U.S.-China relations) that resistance would entail. The mercantilism problem, big as it is, isn't yet big enough to spur people to action.

Update: More from Krugman, who is pretty angry about the situation:

So, why did Tim Geithner feel the need to declare,

We’re not going to have a trade war; we’re not going to have currency wars. I don’t know what that means, but people are saying that.

I suspect that he was trying to reassure the markets — but if we’ve learned anything lately, I hope it is that actions, not talk, matter.

And look, if China continues on its present course, eventually we will have some serious currency and trade conflict. Furthermore, we should.

All Geithner did here was signal to the Chinese not to worry, U.S. officials will keep making excuses for China’s behavior and doing nothing, regardless of provocation. Remember, this statement comes after China blatantly reneged on earlier promises about the exchange rate. They must take us for fools — because we (or at least some of us) are.

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Is Obama anti-business?

The Economist has two articles (one, two) on whether Obama is "anti-business." According to both, business leaders are increasingly convinced that this is the case. The Economist writers can't figure out exactly why these attitudes exist, though...and since The Economist is probably the newsweekly that is read most by the business class, if they don't know, who does? The notion of Obama as anti-business, it turns out, is not really supported by the facts:

No matter that other Western politicians have publicly played with populism more dangerously, from France’s “laissez-faire is dead” president, Nicolas Sarkozy, to Britain’s “capitalism kills competition” business secretary, Vince Cable (see article); no matter that talk on the American right about Mr Obama being a socialist is rot; no matter that Wall Street’s woes are largely of its own making...

A president who truly wanted to wage war on business would have hung onto GM, not rushed to return it to the private sector. Card check has not been pushed. The finance bill, though bureaucratic, is not a Wall Street killer. With the exception of a China-bashing tyre tariff and a retreat on Mexican trucks, Mr Obama has eschewed protectionism. A lot of government cash has flowed to businesses, not least through the stimulus package. And above all his policies have helped pull the economy out of recession.

and:

Yet does Mr Obama really have a case to answer? Certainly, some of the wilder allegations by some businesspeople should never have left the 19th hole. Mr Obama has consistently made it clear he favours a mixed capitalist economy. The big incursion of the state into finance took place on his Republican predecessor’s watch. And although he doubtless went further than a McCain administration would have done to help GM and Chrysler survive, he has stuck to his pledge to return them quickly to private ownership. He used this year’s state-of-the-union message to commit himself to helping corporate America double its exports, and has appointed a council to propose ideas for promoting more innovation...

Moreover, the main reason so many American bosses are down in the dumps is the sluggish economy. Mr Obama inherited the recession from his predecessor, and the economy has recovered, somewhat, since then. Besides, it was corporate America, in the shape of the Wall Street banks, that was largely to blame for the depth of the recession. It might have helped Mr Obama’s relationship with business if he had gone on less about “shameful bonuses” on Wall Street; but some shame was surely in order.

Even a Republican administration would have been obliged to reform financial regulation, and, though there is a lot to quibble with in the Dodd-Frank act, the administration responded to requests from Wall Street to kill some of the more alarming reform proposals from Democrats in Congress.

Furthermore, the writers of the two articles are divided on what Obama could possibly do to seem more business-friendly; one heartily endorses the idea of tapping a CEO to replace outgoing economic advisor Larry Summers, the other dismisses this as a superficial PR move. It's not surprising that the writers don't know what to recommend; if you don't know the disease, how can you know the cure? In the end, both are forced to the same conclusion: Barack Obama is perceived as being anti-business because he smells like a socialist:

[Obama] has some rhetorical form as an anti-business figure—unlike the previous Democrat in the White House, Bill Clinton, who could comfortably talk the talk of business. Mr Obama’s life story, as depicted in his autobiography and on the campaign, was one of a man once mired in the sinful private sector (at a company subsequently bought by The Economist), who redeemed himself only by becoming a community organiser; his wife had a similar trajectory. There are the endless digs at Wall Street and Big Pharma, not to mention the beating up of BP. He remains a supporter of “card check”, which would dispense with the need for secret ballots in establishing a trade union. His legislative agenda has centred on helping poorer individuals (the health-care bill, part of the stimulus bill) or reining in banks (the financial-reform bill). The only businesses he has rescued are the huge union-dominated General Motors and Chrysler.

and:

[A]s a person with first-hand experience of Mr Obama’s decision-making points out, the “atmospherics really do matter”. The mere perception that the administration is anti-business is “starting to make the bosses of Fortune 500 companies more risk-averse,” says a billionaire who used to run one of America’s leading internet firms...

As for Mr Obama, when he meets businesspeople at fund-raisers and the like, he too often shakes hands and moves on, leaving them feeling he was more interested in a photo-op than a conversation. He caused offence and disbelief a while back by turning up for a meeting with a group of prominent chief executives and then reading to them from a teleprompter.

I think that this story is basically right. Businessmen fear Obama simply because he is not one of them. Obama comes from an academic and nonprofit background, and has in the past been sympathetic to socialist ideas. Even though his actions have been broadly pro-business, his identity is as a guy who comes from sectors whose attitudes are often inimical to industry. The fear among the business class - the "uncertainty" that one article claims is now starting to hurt the real economy - is simply the fear that, at any moment, Obama will revert to his roots and start madly swinging the wrecking ball of socialism through the American private sector.

I personally believe this fear is ungrounded. Obama is an obviously a guy who is inclined to listen to the "experts" on basically everything, and on business issues those "experts" are people who are far more sympathetic to the business class than Obama was in his youth. And I also believe that "uncertainty" over Obama's potential metamorphosis into a socialist Comrade Hyde is far down the list of things holding our economy back.

That said, however, I think it's counterproductive to allow this myth to persist at a time when other types of social strife (think: Tea Party vs. blacks and Hispanics) threatens to strain America to the breaking point. We do NOT need businessmen flooding the racist Tea Partiers with cash simply because they're scared that Obama will go all commie on 'em. And so Obama would do well to make friends with America's business class.

How can this be done? I think the second article has some good ideas about image management. Start dishing up pro-business rhetoric in speeches (and confine anti-business rhetoric to criticism of the finance industry). Have regular candid meetings with business leaders, and take their concerns to heart. Establish regular liaisons between the administration and the business community. Start trumpeting the pro-business nature of policies like export-promotion and research support that are already pro-business in substance.

Also, there are pro-business policies that are pretty obviously good for the country. Our corporate tax needs to be cut from 35% to 20% (with the revenue replaced by personal income tax or value-added tax). Cutting corporate tax is something that a series of Republican presidents has somehow managed to avoid even suggesting, so there's a big opportunity there; and, conveniently, it's something that will help poor people (low-wage workers and consumers) just as much as rich people. This could be a big winner for Obama.

But in the end, whatever happens to the Obama administration, this issue shows that America suffers from a sectoral divide that we should find a way to heal. For too long, many in academia and the nonprofit sector have viewed private business activity as inherently suspect and disreputable; profit is often denigrated and frowned upon. Listening to rhetoric I've heard from some (certainly not all!) academic and nonprofit sector workers, I'm not surprised that U.S. businessmen fear a president who comes from that walk of life. Until we recognize, as a nation, that all of our sectors are important for national prosperity, class warfare of this type will hamstring sensible policy at the highest levels.

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Anchor Babies

In response to my last post, commenter "l" writes:

The birth-right citizenship was created for the slaves already in the US after the civil war. The way it is being used now is not the original intent and is basically a way to reap the benefits from a neighboring country by strolling over a river, and I'd feel the same way about Canadians streaming over and having kiddos.

Most naturalized immigrants HATE the anchor baby situation here. Completely unfair to them.

I think this raises/demonstrates several interesting points:

1. This is a perfect case of the "Oh, that's not what they really meant" argument that people pull out when the Constitution happens to disagree with their policy preferences. Other examples include "Oh, the Founders didn't really want to separate church and state," and "Oh, the Founders really meant that only militias should have the right to bear arms." Obviously, liberals and conservatives both do this from time to time, but the fact that conservatives have to whip out this type of argument so much more often these days is evidence that, as today's politics are reckoned, the Constitution has a liberal bias.

2. Does "l" really think the authors of the 14th Amendment were too stupid to imagine that universal birthright citizenship would be mostly applied to the children of immigrants? The argument kind of strains credibility. And has it occurred to "l" that birthright citizenship has been in place for about 150 years? You'd think that if the amendment were being used in a way not intended by the authors, someone would have gone "oops!" and made a push to amend it sometime during that century-and-a-half. But they didn't.

3. I assume that when the commenter says "naturalized immigrants," he means "green card holders," since naturalized immigrants are citizens and parents of "anchor babies" are not. So, where does he get his evidence that "Most naturalized immigrants HATE the anchor baby situation here"?? I searched and couldn't find a poll. So maybe the commenter means that "green card holders, by rights, should resent the unfairness of anchor babies." Is that true, though? Do anchor babies reduce the number of green cards we hand out?

4. Anchor babies are mostly a myth. Wikipedia says:

The term "anchor baby" is a misnomer to the extent that it implies that by having a baby in the US, temporary or illegal immigrants can "anchor" themselves in the US. In fact, a US citizen child cannot file for a US visa for its parents until the child is 21 years of age, and upon reaching that age the child must also be earning at least 125% of the US poverty threshold to be able to apply. Thus, temporary or illegal immigrants who have babies in the US have no means of remaining legally in the US; they must return home and wait until the child reaches age 21. Illegal immigrants usually cannot immigrate even after the child turns 21 since they usually face a multi-year or lifetime ban from immigration to the USA regardless of sponsorship.

5. People who oppose birthright citizenship may not have stopped to consider what our society would look like without it. Can you imagine a whole class of people, living in America, raised speaking only English, with no ties to any foreign country, yet who are not American citizens because their grandparents were illegal immigrants? I can imagine such a class of people, because I have seen them in Japan, a country that does not have birthright citizenship; they are called "Zainichi Koreans," and let me tell you, they are not particularly patriotic toward a country that treats them as second-class citizens because of who their parents were. Does commenter "l" really want to create that kind of underclass here in America?

So, to sum up: I haven't seen any convincing case for why birthright citizenship is a bad idea. It seems very clear that to eliminate it would be asking for trouble in a big big way.

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PaintbrushJS: A lightweight image-processing library

Developer Dave Shea has released PaintbrushJS, a lightweight image processing library that can apply a variety of filters to images on a web page.

Under the covers, PaintbrushJS uses the HTML5 canvas tag to implement its effects, automatically inserting canvas tags based on class names. You can choose effects and control their parameters by adding attributes to various tags. For example:

<img src="jordan.jpg"
width="200" height="133"
class="filter-blur"
data-pb-blur-amount="5">

PaintbrushJS works in any modern browser — which means IE 8 and below won’t see the effects.

For a full list of effects available, check out the documentation or head over to the demo page.

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Conservatives know that their real enemy is the Constitution

I argued in a past post that American conservatives' true enemy is actually the American Constitution. Conservatives have always wanted to turn America into a traditional nation, in which membership in the polity is defined by race, religion, and language - the kind of nation that France and Japan and Germany and Korea used to be (and to some extent still are). The Constitution prevents that by ensuring things like freedom of speech and religion, birthright citizenship, and majority rule. Therefore, if conservatives really want to create the blood-and-soil nation they dream of - I called it "Amurka" - they'd have to repeal the very document that they often profess loudly to defend.

Conservatives are starting to realize this. Some prominent leaders on the right have recently begun calling for the repeal of the birthright citizenship provision of the 14th Amendment. I recently discovered that repealing the 17th amendment (direct election of senators) has long been a cause celebre of the conservative grassroots; direct election of senators, of course, is a type of one-person-one-vote majority rule. And now I hear about conservatives pushing to repeal the 16th amendment, which allows for a national income tax (income tax, of course, allows the majority to vote to tax the minority).

So the right definitely knows that birthright citizenship and majority rule are the Constitution's ways of hamstringing their dreams. As for freedom of speech and religion, they haven't come out and said they think the First Amendment should be repealed (probably because it's the "first", and therefore holds special psychological power). Instead, they've concentrated on pushing alternative interpretations of the amendment that allow unification of church and state.

But the broad pattern is clear. Conservatives of various stripes are calling for repeal of multiple parts of the Constitution. Liberals, for the most part, are not (though some would undoubtedly like to repeal the 2nd amendment). Actions speak louder than words; it is clear that the Constitution is biasing American policy towards the liberal side, and conservatives are frustrated about it.

For all their sound and fury about wanting to defend the Constitution, America's blood-and-soil nationalists want precisely the opposite; an America whose identity is defined by a tribe, instead of by a 200-year-old piece of paper in a glass case in Washington, D.C.

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Why the Tea Party doesn't scare me (much)

Could America be the new Weimar Republic? Could a combination of bad economic times, military setbacks, and racial/ethnic paranoia fuel a desire for a strongman to restore, as Glenn Beck puts it, our national "honor"? I'll admit that this possibility keeps me up at night. As Foreign Policy magazine reports, the unprecedented powers that have recently been vested in the office of the presidency (including steady erosion of civil liberties under both Bush and Obama) make it more likely that a Hitler-like leader could ride a wave of nativist paranoia to office and end our democracy.

It's clear that this is on a lot of other Americans' minds as well, even Tea Partiers themselves, who regularly decry Obama as a Hitler figure. But it seems blatantly obvious to me that if a Hitler does arise, his power base will be not the left, but the Tea Party right - the nation's traditionally dominant ethnic group, united around a common religion and culture and political ideology, grabbing their guns and goose-stepping into action for the first fascist strongman who promises to "give them their America back." Already, Tea Party leaders are calling for "Second Amendment remedies" to the nation's problems - i.e., armed insurrection by a disaffected and dispossessed white ethnic core. Don't fool yourself: If America has wannabe Nazis, those wannabe Nazis are called Tea Partiers.

So why am I not panicked about the rise of the Tea Party?

Simply put, it's because they're old.

Jacob Weisberg writes in Slate:

So who are these people and what do they want from us? A series of polls, as well as be-ins like Glenn Beck's Washington rally last month, have given us a picture of a movement predominated by middle-class, middle-aged white men angry about the expansion of government and hostile to societal change. But that profile could accurately describe the past several right-wing insurgencies, from the California tax revolt of the late 1970s to the Contract with America of 1994—not to mention the very Republican establishment that the Tea Party positions itself against.

Angry middle-class men may have outsized political clout, but they are not revolutionaries. To get a Hitlerian takeover, you need the Hitler Youth; you need armies of disaffected young men eager to join organizations like the Brown Shirts and the SS. And American conservatives do not have such an army. They have, in fact, been spectacularly unsuccessful in their efforts to boost white birth rates through religious revivalism and popular exhortation.

Which is not to say Tea Partiers wouldn't like to grab their guns and overthrow the Constitution. They would love nothing better. After all, it's the Constitution that's killing them, through its provision of birthright citizenship, freedom of speech and religion, and majority rule. But they won't do it, because despite the collapse of their housing prices and the steady erosion of their earning power, middle-aged middle-class white folk still live spectacularly comfortable lives. The Tea Party thus seems unlikely to generate any kind of mass organized violence.

The real danger is more mundane: another Bush, a messianic leader for the Right of the type they imagine Obama to be for the Left. Only this time, a Bush-type leader would mean business. No more "compassionate conservatism." No more placating business interests who want more immigration. No more shying away from full assumption of dictatorial powers for the presidency. In other words, a Cheney-type president. A tin-pot mini-Hitler who would smash our national institutions, but who would fall far short of starting a civil war or turning America into a totalitarian state. There are plenty of megalomaniac doofuses lining up for a crack at this job, not least among them (of course) Sarah Palin.

How do we prevent this sorry outcome? One key is to give more relative power to Congress. That requires elimination of the filibuster, the de facto supermajority requirement that has utterly paralized our legislature, and is therefore the number 1 reason that people have no confidence in Congress. A second key is to put pressure on Obama to publicly and explicitly state that the presidency will never have certain powers - arbitrary detention, warrantless surveillance, suspension of habeas corpus, etc. That would set a legal and public-opinion precedent that would help tie the hands of a President Palin.

Because if we can keep the Tea Party at bay long enough - if we can prevent this wave of tribalism from smashing our national institutions - the wave will pass. Racial intermarriage, immigrant assimilation, and demographic inevitability will quiet the Tea Party's rage to a simmering memory. We just have to wait the old geezers out.

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Soaking the moderately rich

Much fun in the blogosphere today, as Brad DeLong links us to a couple of posts by law professor Todd Henderson, who is complaining that his family's $455,000 income would be severely strained by the repeal of the Bush tax cuts. DeLong first sends us to Michael O'Hare, who mocks Henderson for being a poor-little-rich-boy who whines about making 9 times the U.S. median income. After Henderson calls DeLong "Deling" in a reply, the infuriated Deling goes on an epic rant, pointing out that Henderson is probably just upset because he's comparing himself to people even richer than himself. Deling then notes that Henderson wasn't exactly screaming bloody murder when Bush cut taxes in 2001, a move which ballooned the deficit and ensured that higher taxes would be needed in the future. After this epic beatdown, Deling transforms back into his alter ego, the mild-mannered Dr. DeLong...

Fun stuff.

I tend to be somewhat ambivalent on the issue of whether Henderson's consumption would take a meaningful hit if his taxes went back to 1999 levels. I mean, were people with $455,000 incomes really forced to scrimp and save in 1999? I doubt it. Then again, Henderson is perfectly within his rights to say that moderately-rich people are people too, and they are used to the lifestyles they've been living. To tell them they can be happy with less is a bit like telling people "Hey, your parents were perfectly happy back in 1980, so give us your iPhone because you obviously don't need it to have a good life." Consumption habit formation is a real phenomenon, and rich people's utility is real utility.

Of course, all this is beside the point. As "Deling" points out, Bush cut taxes and raised spending, and now there's nothing to do for it but raise taxes and cut spending to avoid a disastrous explosion of debt. Henderson may be right that higher taxes will cramp his lifestyle, but who would he suggest is in a better position to bear the burden? Someone who makes $50,000 a year, perhaps?

The moderately rich are not being soaked by socialists. They soaked themselves (well, more than half of them, anyway) by voting Republican in 2000 - by taking short-term gratification in the form of unsustainable tax cuts. They should have been smart and avoided the pain that would inevitable come from discovering that their lifestyle wasn't sustainable. But they were not smart.

(Anyway, I'd like to close with a side note, about something that has always bugged me. In these tax discussions, many of the moderately rich people who complain about higher tax rates seem to think they earn more money than they do. This is a basic economics error, and it's called "failure to understand tax incidence." Let me explain. Henderson seems to think that, because his pretax income is now $455,000, that if his tax rate went to zero he would take home $455,000 in his pocket. This is just not the case. If Henderson didn't have to pay income tax, his employer could afford to hire him for a lower pretax salary.

How much lower? That depends on two things: 1. the elasticity of Henderson's labor demand (i.e. how easily his employer can replace him or do without him), and 2. the elasticity of his labor supply (how much of a salary cut he is willing to take before he quits). If Henderson thinks that he could take home $455,000 in a zero-tax world, he is assuming that he's absolutely irreplaceable, but could easily find another equally good job if he wanted. Sorry, Todd, you're awesome, but you are just not that awesome.

So to reiterate: if you "pay $100,000 in income tax," you're actually only paying part of that. Your employer is paying the rest. Just one more reason the moderately rich aren't getting soaked as badly as they seem to think they are.)

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China: it's tariffs or nothing

In the news today, I see another instance of Tim Geithner pretending to get tough on Chinese currency manipulation:

In his testimony, Mr. Geithner is not expected to rule out declaring China a currency manipulator, a finding that could lead to retaliatory trade measures. The administration has so far refused to take such a step, relying instead on persuasion, though with little success.

What? Geithner "won't rule out" a step that "could lead to" retaliatory trade measures? Hu Jintao must be quaking in his boots!

I mean...come on...Tim Geithner?! This is the guy who, during his time in office, has met with the CEO of Goldman Sachs more often than the Speaker of the House or the Senate Majority Leader. The guy is a creature of the shadow banking system, which depends on cheap Chinese financing (a.k.a. Chinese currency manipulation) for its super-profitable shenanigans. He is not getting tough on China now, and he never will. Instead, what he will continue to do is what he has always done: make vague rumblings in China's direction, in the hope that it will placate the red-meat protectionist crowd back home into accepting the status quo for another few months. This kabuki theater is, of course, obvious to defenders of the currency status quo, such as The Economist's Ryan Avent:

As always, I'll reiterate: promises that revaluation will eliminate America's trade deficit and create hundreds of thousands of jobs are overselling what appreciation without structural reform can accomplish...But there's an election on, and populism is ascendent, and the trade warriors in Congress will have their day. I just hope the legislature holds to its recent pattern of behaviour—all talk and no action.

Whether Congress will continue to play "bad cop" and ultimately take no action, of course, remains to be seen:

“There is no question that the economic and trade policies of China represent clear roadblocks to our recovery,” Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the banking committee, said at a hearing with Mr. Geithner seated before him.

“I’ve listened to every administration, Democrats and Republicans, from Ronald Reagan to the current administration, say virtually the same thing,” Mr. Dodd, who is not seeking re-election, said. “And China does basically whatever it wants, while we grow weaker and they grow stronger.”

He added: “It’s clearly time for a change in strategy.”

The top Republican on the banking committee, Senator Richard C. Shelby of Alabama, was even harsher. “There is no question that China manipulates its currency in order to subsidize Chinese exports,” he said. “The only question is: Why is the administration protecting China by refusing to designate it as a currency manipulator?"

Big talk, but we've seen a lot of big talk, and not a lot of action, on this issue. Past experience tells us that this is more of the same-old same-old, but there's always hope that we'll be surprised.

Meanwhile, as Paul Krugman reminds us, China's currency policy continues to screw us over:

Regular readers may remember that I’ve spent more than a year trying to knock down the idea that the United States dare not get tough with China, because we need them to keep buying our bonds; as I wrote way back in May 2009, given the fact that we’re in a liquidity trap, a decision by China to buy fewer of our bonds would actually be doing us a favor — it would weaken the dollar, and help our exports.

I’ve failed, despite repeated attempts, to get through with this point here — but the Japanese get it. They’re complaining to China about its purchases of yen-denominated bonds, which they argue — correctly — hurts Japan by strengthening the yen.

It's not just the speed of our recovery that's being impeded; Chinese currency policy contributes to inequality here in America by making manufacturing workers less valuable and finance workers more valuable. It also arguably contributes to asset bubbles, in particular the housing bubble we just witnessed.

It has been clear to me for years that the issue of Chinese-generated global imbalances will only be resolved with U.S. tariffs on Chinese goods. That is not the optimal solution; the optimal solution is for China to change its policy voluntarily. But it will not. Not now, and not ever, unless tariffs force it to do so. For this issue to be resolved - and it must be resolved, or our economy and society will continue to be dysfunctional - it is tariffs or nothing.

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What will destroy us in 2012?

Tyler Cowen says that the most likely world-ending event for 2012 is destruction of the Earth by space aliens.

That is silly. First of all, there is no reason for the aliens to wait for the end of the Mayan calendar, and no reason why the Mayans would know the aliens' plans thousands of years in advance.

Second of all, we have no evidence for the existence of aliens (much less world-destroying ones), while we have plenty of evidence for the existence of other world-shattering events. In particular, we know about asteroid strikes. We know their frequency, and we know their power. A very big one would certainly be capable of snuffing out the human race.

As for other possible world-destroying events, I doubt a single supervolcano eruption would be enough to finish us off; it wasn't last time, after all. A series of many supervolcano eruptions might do the trick, but as far as we know, these are only caused by (or coincide with) asteroid strikes.

As for other theories - a black hole, the end of the Universe, blah blah blah - there's no evidence for these being possible, so I discount them. If the human race is destroyed in 2012, it'll be a space rock that does it.

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Neoclassical economics, post 2 - are public goods a socialist plot?

Stephen Williamson, in his defense of "neoclassical"/"Minnesota" economics, says some very smart and reasonable things about public goods:

[F]or a person with an urge to fix what is wrong with the world, a course in microeconomics might be quite discouraging. Mostly (and this of course depends very much on how it is taught), conventional micro is a series of exercises in how governments can screw things up...There are, however, ways out for good-deed-doers. There are externalities (positive and negative), market failures, and monopoly power. Working out how to fix the externalities, complete the markets, or regulate the monopolies requires work, though. It may be the case that one can fix the externality through a clever market mechanism - cap and trade for pollution for example. However, the government may actually be no better at supplying some item the private market fails to provide or monopoly power might actually not be so bad - it may actually promote innovation. The answers are not clear at the outset. One has to weigh alternatives, and carefully measure the costs and benefits of government intervention.

And, later:

There are government-provided goods and services, for example those associated with National Parks, that provide consumers with direct benefits. There are items like roads and bridges that make private sector production (e.g. trucking) more profitable. For some of these types of spending (e.g. government-provided goods and services are perfect substitutes for private goods and services), the multiplier can be zero. In other cases (complementarities), we can get substantial multipliers. This boils down to the issue of whether the government is more efficient than the private sector at providing particular goods and services, or particular kinds of capital inputs. We have a whole field of economics that deals with this: public economics.

Actually, this is totally great! It's exactly what I've basically been saying since I took a public economics course and realized the importance of public goods. Yes, there are things that the government is better at providing than the private sector! Yes, it is hard to figure out what these things are, and hard to get the government to do them. But that just means we have a hard job ahead of us. That doesn't mean we should give up, and say "Well, it's hard, so let's just not do it at all."

So why do you never see "neoclassical" macroeconomists talking about public goods?

I think the answer is that neoclassical economists are worried first and foremost about the threat of socialism. They worry that perfectly reasonable justifications for government intervention in the economy will be used by socialist "do-gooders" as an excuse to permanently expand government's role, with the ulterior motive of redistributing wealth.

You can see this fear in Stephen Williamson's language. How does he refer to people who want to make the economy more efficient through better public good provision? He calls them "do-gooders." Why should they be do-gooders? Maybe they are nationalists, who want their country to have a strong economy, and recognize that public goods are useful for that purpose. Maybe they are opportunists, who know that if they provide the public goods that raise people's incomes, they will be elected to power.

But no, Williamson assumes that the people who want to provide public goods are "do-gooders" - that they are motivated by a desire to increase the "equity" in our society.

Incidentally, he also thinks that this is the motivation behind Keynesian macroeconomic theories:

What does Paul Krugman want [as a Keynesian]?...What he says he wants, given the current circumstances, is for fewer people to be unemployed and more people to be employed. Why does he want that? It appears that he is concerned with equity. For him, it is criminal that some people are doing well and won't help out the unemployed, who are in dire straits.

It's clear from the preamble to Williamson's piece that he sees economics through a political lens. Having grown up in socialistic Canada, he sees a socialist around every corner, lurking in the fine print of every non-classical economic theory. The economics world is, to him, a war between those who think "equity" (wealth redistribution) is just, and those who think it is unjust. That partisan vision is shared, of course, by many economists on the other side of the political divide.

Of course, those of us who would like to see econ become more of a truly scientific discipline think this political focus is poppycock ("poppycock" is my new favorite word, btw). The job of economists is, first and foremost, to describe reality. If a government policy boosts GDP, it does, and if it doesn't it doesn't. We do not have the luxury of picking which theory we think would lead to our favorite policy prescriptions...or, rather, we shouldn't have that luxury, but too often we indulge in it anyway, and the result is that we are perceived more as lawyers than as scientists.

When will the economics profession forget about the socialism/capitalism thing, and start simply trying to predict how the economy works? I hope it's soon. I fear it's never.

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Neoclassical economics, post 1 - math and macro

Stephen Williamson has written an impassioned defense of the "neoclassical" (or "Minnesota" or "RBC") approach to macroeconomics. This provides me with an opportunity to have hours of fun procrastinating my dissertationtaking it apart.

The first point I want to address is Williamson's defense of the way math is used in macroeconomics:

There seems to be a view among some people that interest in Minnesota macro is all about the aesthetics of mathematics. I certainly think that a functional equation is an object of beauty. I also think that the average North American has a bad attitude toward mathematics. Indeed, some people seem quite proud, rather than ashamed, of the fact that they don't know it. Mathematics is a language that, in some circumstances, is simply an efficient tool for getting the job done. I could be like Adam Smith, and write it in words, or I could be like Bob Lucas and write down an economic model and analyze it using some mathematics. I can walk 8 miles from the University to the Fed (and maybe get lost on the way), or I can get there on the train.\

I agree that Americans tend to be math-phobic (though this seems to be common to all rich countries; I've encountered a lot of it in Japan, which once was known for its math prowess). Math is a useful thing to be able to do.

This does not mean that we should always do it. Some things are easy to understand with scientific thinking, but hard to model with math. As an example, take Louis Pasteur's discovery that germs cause disease. Explaining infection in the language of math would have been an impossible task in 1862 (even now, with supercomputers solving partial differential equations using algorithms written by hordes of biophysics PhDs, we've barely begun to get results with this approach), but understanding the basic principle of infection was easily possible given the science of Pasteur's day.

Neoclassical/Minnesota macro people would have us believe that formal mathematical models are the best language to describe the economy, because math is the most precise descriptor of the natural world. But precision and accuracy are two very different things; the amount of math needed to accurately describe a system as huge and complex as an economy is far beyond what Minnesota macroeconomists can do, and the data they have to work with is far patchier than what Pasteur knew about the human body in 1862.

And so the neoclassical people resort to making the models that their math permits them to make - simplistic silly models with easy math that describe little and predict absolutely nothing. Yet this approach survives and dominates, because A) the sneering of the Minnesota people lowers the reputation of any macroeconomist who refuses to speak in pure math, and B) Republican types are willing to shell out big bucks to economists who produce simplistic silly models (i.e. models too simple for government to have a useful role).

I am not suggesting that economists give up math as an analytical tool. Indeed, economists should get a lot better at math, and diversify their mathematical toolkits. But we should recognize that an economy is a very complex system - possibly as complex as a human body - and that we should therefore rely on naturalistic observation first and foremost. Only once we understand a few things about how the economy works, from watching how it works and from poking around in it, should we whip out the math and start making formal predictive models. And to be honest, I don't think macro is there yet. Williamson is putting the cart before the horse.

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Adobe Developer Connection revamped

Adobe Developer Connection (ADC) website is now live on Day Communiqué 5.

For additional details on the ADC launch, see the informative blog by Adobe's Craig Goodman.

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Rise of the machine-owners

In recent years, more and more credence has been given to the scary notion of "skill-biased technological change" - the idea that technology is no longer usable by everyone, and so is causing an increase in inequality. Basically, the theory says that thinking machines have begun to replace some of us, but not yet all of us; those who own the thinking machines (capitalists) and those who are smart enough to operate them (tech workers) will get more and more of what our automated society produces. I'm not convinced this theory describes our current world, but it certainly seems like it could happen sometime, as computers get smarter but human capabilities don't improve. What do we do if 70% or 80% of humanity becomes no more employable than dogs?

Matt Yglesias suggests that the rich people make the poor people their pets:

One way to think about the skill-biased technological change issue that I think is useful is to construct for yourself an exaggerated hypothetical in which SBTC is definitely driving a big increase in inequality...what would be the correct policy response? I say—higher taxes to finance more and better public services, the exact same thing that’s the correct policy response to the actual world.

Note that he's not exactly saying that rich people should give their wealth to the poor. He's saying that rich people should give their wealth to an organization that provides services for the poor. In Yglesias' ideal world, not only will the poor depend on the (willing or forced) largesse of the rich for their daily bread, but they won't get to decide how to spend that bread; instead, they will live in a playground that is crafted and shaped for them by others, receiving their livelihood indirectly in the form of "public services."

In other words, they will be pets.

Why do humans keep pets? Because the pets are cute, lovable, companionable, etc., which is just another way of saying because we like them. We pay pets to live in a world that we prepare and create for them, simply because it makes us feel good to do so. Yglesias' solution to skill-biased technological change is to do the same for obsolete human beings.

This sounds nightmarish. But in fact there is no easy solution to the problem of SBTC, as the most obvious alternative - simply ban the technology that makes humans obsolete - is utterly unworkable in practice. What are we to do, then? Will the rise of thinking-machines inevitably force us to choose between "pet-owner socialism" and "ditch-digger socialism"?

It is my opinion that the only acceptable, workable long-term solution to the SBTC problem is to use society's resources to focus on inventing technologies that augment human capabilities - things like intelligence enhancement and cyborg modification for human-machine interface. Furthermore, we should use the government to redistribute not wealth, but inborn capability (much as we try to do now with public education), making sure that things like heightened intelligence and human-machine interface are available equally to even the poorest citizens. In other words, we must battle skill-biased technology by creating and disseminating skill-boosting technology.

I know that sounds really weird, but isn't that better than having a society that's divided between those who own and operate thinking-machines, and those who live as pets for the former? Someday, this will be the choice we face.

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Econ 101

Paul Krugman:

[T]he [Obama administration's] new [infrastructure] initiative is a chance for me to air one of my pet peeves: the stupidity of the claim, which you hear all the time — and you’ll hear again now — that it’s always better to provide stimulus in the form of tax cuts, because individuals know better than the government what to do with their money.

Why is this claim stupid? Because Econ 101 tells us that there are some things the government must provide, namely public goods whose benefits can’t be internalized by the market.

So suppose we’re going to put $50 billion of resources that would otherwise be idle to work. Is it better to use them to produce public goods like improved roads, or private goods like more consumer durables? That’s not at all obvious — and anyone who tells you that basic economics settles the question, that is says that devoting more resources to production of private goods is better, doesn’t understand Econ 101.

And there’s a pretty good argument to be made that we are, in fact, starved for public goods in this country, so that it would actually be a good idea to shift some resources to public goods production even if we were at full employment; in that case, we should definitely give priority to public goods when trying to put unemployed resources to work.

Yes.

Also see Ryan Avent and Mark Thoma.

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O look, ecommonists r smrt!

Thomas Sargent, a famous economist, is one of the main pioneers and proponents of Dynamic Stochastic General Equilibrium models - the kind of models that pretty much all macroeconomists use these days (to see how one of these works, watch this). These models have been criticized a lot recently (see here, here, and here for my own criticisms). But Sargent is a believer, and he's speaking up to defend the modeling approach he helped invent:

Rolnick: ...Examples of...criticisms are that modern macroeconomics makes too much use of sophisticated mathematics to model people and markets; that it incorrectly relies on the assumption that asset markets are efficient in the sense that asset prices aggregate information of all individuals; that the faith in good outcomes always emerging from competitive markets is misplaced; that the assumption of “rational expectations” is wrongheaded because it attributes too much knowledge and forecasting ability to people; that the modern macro mainstay “real business cycle model” is deficient because it ignores so many frictions and imperfections and is useless as a guide to policy for dealing with financial crises; that modern macroeconomics has either assumed away or shortchanged the analysis of unemployment; that the recent financial crisis took modern macro by surprise; and that macroeconomics should be based less on formal decision theory and more on the findings of “behavioral economics.” Shouldn’t these be taken seriously?

Sargent: Sorry, Art, but aside from the foolish and intellectually lazy remark about mathematics, all of the criticisms that you have listed reflect either woeful ignorance or intentional disregard for what much of modern macroeconomics is about and what it has accomplished. That said, it is true that modern macroeconomics uses mathematics and statistics to understand behavior in situations where there is uncertainty about how the future will unfold from the past. But a rule of thumb is that the more dynamic, uncertain and ambiguous is the economic environment that you seek to model, the more you are going to have to roll up your sleeves, and learn [to] use some math. That’s life.

Here we see Sargent employ the "Well, you're just a dummy" defense against critics who say there's too much math in macro. Sadly, the interviewer pretty much sets him up for this cheap shot, by caricaturing the DSGE critics. Rolnick pretends that DSGE's critics' main problem is with the use of math, rather than which kinds of math and how that math is used. Thus, Sargent gets a free pass.

But there are problems with the ways DSGE theorists use math. Let me point out a couple of these.


Problem 1: DSGE math is unwieldy as heck. The math used by macroeconomists has a reputation for being really hard. In a way, it is, but not in the way that, say, the proof of Fermat's Last Theorem is hard. Take it from me: DSGE math is stuff that most physics undergrads could understand with little difficulty. It is not string theory. It is about as "elegant" as Thomas Sargent's haircut. What DSGE math is, is extremely tedious to use. To calculate the predictions of even the simplest DSGE models requires computing power that wasn't even commonly available until the 1990s.

This is bad because it biases DSGE analysis toward oversimplification. The only DSGE models that can be (relatively) easily computed are the simplest ones - the ones that assume government is useless, that businesspeople and consumers always make the right decisions, that everyone has full information, that all contracts are enforceable, that prices are fully flexible, and that the entire economy is composed of just one aggregate "representative agent". Of course, such a simple model can't predict anything useful. But just try to add realistic stuff - heterogeneous agents, imperfect information, learning processes, incomplete contract enforcement, etc. etc. - and you'll quickly find yourself bogged down for literally years in computer modeling hell while your colleagues pump out simple models that explain nothing but appear to contain math just as "hard" as yours.

(And of course, the simple, quickly computable models just happen to be the models that assume that government has no role in the economy, that businessmen are all-wise, and that the economy runs perfectly with no interference. Surely this fact did not escape the notice of the eminent economists who insist that we use DSGE math for every model...)


Problem 2: DSGE math is often irrelevant to DSGE models. Read a DSGE paper, and you'll read a couple pages of assumptions (stated in as stiffly formal and obtuse a manner as possible), and then about 30 pages of technical details. Much of those 30 pages is a tiny variant on the same undergrad-level math used in every other DSGE model, but you end up reading it anyway looking for the one line that's different. Then you read how the researcher computed the damn thing (or, rather, how his Scandinavian co-author computed it), and you trust he did it right, and you look at the results and you realize - Hey! We could predict it would look like this just from reading that one page of assumptions! All those pages of unwieldy formalistic math served little purpose other than to distract you from the unrealistic silliness of the assumptions (and maybe to make the field of macro opaque to outsiders who might try to inject some common sense into the discussion).

(Now, after reading all this, don't you want to take a look at a DSGE paper and see what I mean? I know you do! Check out "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy", by Larry Christiano, Martin Eichenbaum, and Charles Evans.)


Taken together, these problems make it hard to make complex, realistic DSGE models, but easy to cover up the preposterousness of simple, unrealistic DSGE models. As one would expect, this means that the world of modern macro is populated with a bazillion models, one of which can be picked to explain any given phenomenon. In short, we have cargo cult science.

And in fact, Thomas Sargent seems pretty happy with this!!

Sargent: I like to think about two polar models of bank crises and what government lender-of-last-resort and deposit insurance do to arrest them or promote them...I call them polar models because in the Diamond-Dybvig and Bryant model, deposit insurance is purely a good thing, while in the Kareken and Wallace model, it is purely bad. These differences occur because of what the two models include and what they omit...Both models leave something out...an important theme of research for macroeconomics...has been about how to strike a good balance.

So instead of insisting that one model explain different phenomena, Sargent et. al. take two contradictory models, each of which explains only one phenomenon, and then use judgment and intuition to patch them together into a policy recommendation. That's like if an engineer said "Well, this physics theory predicts this laser will be red, and this other theory says it'll be blue, so I'm gonna go ahead and say it's gonna be...um...green!"

And economists wonder why nobody trusts them.

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Once again, America destroys Amurka

Reihan Salam's take on the recent Beck/Palin rally in D.C.:

Palin, like Beck, was talking about a spiritual restoration, a return to time-tested virtues that had been celebrated by the more homogeneous America of the past, in which non-traditional families were stigmatized and relatively rare, church attendance was far more common, and the dominance of Anglo-Protestant culture was unquestioned.

But as most of those who attended Beck’s rally understand in their bones, that world is gone. And President Obama, for all his efforts to expand the reach of the federal government, has had very little to do with this deep transformation. Rather, the country has long since been transformed by powerful demographic and economic forces that very much threaten what we might call Glenn Beck’s America.

Instead of accepting or embracing this transformation, a large and growing number of white Americans are, knowingly or otherwise, taking a page from minority protest movements of the past by asserting themselves and demanding recognition from political and cultural elites...

[I]t seems more plausible that Fox News is following its audience rather than leading it — that this anger and alienation has existed for years, and has only now found a decidedly unconventional tribune in the form of Glenn Beck.

I basically agree with this take. There's a bunch of white people out there who see their culture melting away, replaced with modernity and a mishmash of immigrant cultures. These traditionalist whites feel embattled, endangered, under threat, and as a result they're angry and afraid.

But here's the key: they don't know who or what is responsible for the death of their culture. Is it immigration? Is it secularism? Is it sex in movies and rap songs? Is it the first black president? Is it socialism? At various times, these have all been the targets of right-wing rural/suburban white ire, but none of them by itself represents a villain powerful enough to explain the rapidity with which the old white culture - call it "Amurka" - has been eroded. And so the right keeps switching its villains and switching its prophets; Glenn Beck has eclipsed Bill O'Reilly and Rush Limbaugh and Pat Robertson, but there will be another scare and another scaremonger.

Now here's the crucial thing to understand: the right has been going crazy like this for a hundred years. In the 20s, there was Charles Coughlin. In the 50s there was the John Birch society. Has the rural/sururban white lifestyle really been under dire threat for that long?

I think the answer to this question also contains the secret of the identity of the real villain who is destroying Amurka. The dark lord behind the erosion of traditional culture is none other than the American Constitution.

The Constitution was written in order to make America a very special kind of nation. It defends freedom of speech, which ensures that new ideas and new cultural memes will be able to spread as far as the media can take them. It protects freedom of religion, and explicitly forbids any religion from gaining special status in the law. It guarantees due process, which prevents local communities from persecuting residents who stand out. It ensures birthright citizenship, which ensures that America's ethnic mix will never stop changing. And, most importantly, it enshrines majority rule, which means that traditional culture will always find itself overwhelmed by the sheer numbers of the variegated rabble that wants something new. In combination, the Constitution's protections of speech, religion, due process, immigration, and majority rule ensure that the nation's entrenched culture will be smashed again and again and again.

If we look to history, we find that this is not the first Tea Party moment. As far back as the 1800s, the Know-Nothing Party was persecuting German and Irish immigrants, but the Germans and the Irish stayed and redefined the mainstream. Then Germans, Irish, and British Americans teamed up to fight the wave of Eastern Europeans at the turn of the 20th century, and again they lost. At the same time, Christian conservative hysteria failed to make Prohibition stick, failed to suppress the teaching of evolution, failed to suppress the First Wave of feminism, and failed to convince America that Roosevelt's New Deal was a socialist takeover. Amurka - the Amurka of the 20s - died, only to be reborn as a new Amurka when hippies and commies threatened in the 50s, etc. etc.

The point is that America, the nation defined by the values enshrined in the Constitution, is death to the kind of blood-and-soil-and-religion-and-community culture that has grown entrenched in most of the other nations of planet Earth. Glenn Beck's followers are merely failing to protect the kind of society that Japanese and French and Kenyan people have largely succeeded in protecting. That doesn't stop the Amurkans from trying, of course, but as long as conservatives fail to overhaul the Constitution (as they are clamoring to do), they are destined to lose. Amurka will fall...and in thirty or fifty years it'll be reincarnated, as Mexican-Americans join hands with whites to fight the new wave of Indian immigrants (or whoever), and rail against whatever moral and religious degeneracy and dangerous socialism threatens their "traditional" way of life.

The danger, of course, is if conservatives someday do find some way to slay their nemesis - a military coup, or a repeal of one or more Constitutional amendments. If Amurka finally rises up and strikes down America, all bets are off.

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