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September 30, 2009

Economist's View - 5 new articles

Government Spending Multipliers Once Again

Since the WSJ is, essentially, rerunning op-eds:

Stimulus Spending Doesn't Work, by Robert Barro and Charles Redlick

May as well rerun a few of the responses:

War and non-remembrance, by Paul Krugman
Spending in wartime, by Paul Krugman

Paul Krugman on Robert Barro, by Brad DeLong

Fiscal Policy and Economic Recovery, by Christina D. Romer

[See also Don't know much about history. by Paul Krugman.]

"Monetary Policy, Fiscal Policy, Capital Markets Policy"

Brad DeLong places government policy into "three boxes," fiscal policy, monetary policy, and capital markets policy:

Monetary Policy, Fiscal Policy, Capital Markets Policy, by Brad DeLong: Paul Krugman is three doors down the hall right now, but I am going to talk to him through the magic of the internet rather than mosying down:
Does unconventional monetary policy solve the zero bound problem?: Some comments on my post on the true cost of fiscal stimulus argue that the zero lower bound aka liquidity trap isn't really binding, because the Fed is using other measures to expand the economy. A few commenters imply that I haven't been paying attention.
Well, yes I'm aware that BB is doing a bunch of unconventional stuff. But the available — albeit thin — evidence is that it takes a huge expansion of the Fed's balance sheet to accomplish as much as would be achieved by a quite modest cut in the Fed funds rate. And the Fed isn't willing to expand its balance sheet to the $10 trillion or so it would take to be as expansionary as it "should" be given, say, a Taylor rule.
Which means that the zero bound is still binding, which means that right now we're very much still in liquidity trap territory.
I would put it somewhat differently. There's fiscal policy--using the government to expand output holding the risky long-term real interest rate that governs business investment and household borrowing decisions constant. There's monetary policy---using open-market operations to boost or retard the economy holding the short-term safe nominal interest rate constant. And then there is capital markets policy: operating on the wedge between the risky long-term real interest rate and the short-term safe nominal interest rate.
If you set up those three boxes, then a huge number of things fall under the rubric of "capital markets policy"--banking recapitalization. loan guarantees, nationalizations, bank rescues, asset purchases, and the sending of signals that alter the expected rate of future inflation.
You can call Federal Reserve policies aimed at the sending of signals that alter the expected rate of future inflation "monetary policy" if you want, but then you lose analytical clarity--because the way such policies work (if they work) is not the "normal" way that "normal" monetary policy works. Normal monetary policy works by shifting the private sector's asset holdings toward assets that people spend more readily and rapidly, thus boosting spending. Quantitative easing at the zero bound does not do that: it simply exchanges one zero-yield government asset for another. What is does do is to change bond prices, rather by raising the safe short-term nominal interest rate and thus giving people an incentive to spend the money they already have more quickly.

I would add risk management to the definitions (e.g., I have called the central bank the "risk absorber of last resort"). When the Fed (or any other government agency) trades T-Bills for risky private sector assets, it changes the overall level of risk in the private sector since the risk has been absorbed onto the Fed's balance sheet (this is not the only way to reduce risk, e.g. government provided insurance against losses would also have this effect, and most of these actions can also create moral hazard). The risk management function of policy is something Brad has talked about in the past as well, and I'm not sure if he'd identify risk management as a separate category, or whether it fits into the the capital markets policy categories he identifies (it would also operate on the wedge between safe and risky assets by reducing the risk premium, so I'd include it there). Either way, I think it's worth mentioning since these actions can also affect the level of economic activity. When markets are frozen with fear, reducing the chance that hidden losses will be discovered after a transaction is complete can help to restore these markets.

W/P = MP?

Bankers are, apparently, being rewarded generously for their fine performance in recent years:

In 2008, salaries of the top 10 banks reached $75 billion (up from $31 billion in 1999), while cash dividends to shareholders were only $17.5 billion. Management took 4.3 times more than shareholders at a time when shareholders were injecting capital and government was guaranteeing deposits.

If people were really compensated according to the value they create, wouldn't bank managers would owe us money?

Does America Need "A Moral Revival"?

Andrew Leonard's bad day:

The brighter side of high unemployment, Andrew Leonard: ...BusinessWeek contributor Gene Marks ... gloats about how high unemployment is good for his business. I guess any publicity is good publicity... But he didn't pick a good day. Having already been irritated enough by David Brooks, I can't say I was exactly in the mood for an explanation of why high unemployment is great for small businesses because now there are so many "good, bright, educated people" who are "willing -- no, let's admit -- grateful to work for less money and longer hours."
Even better, the bad economy provides cover for getting rid of that "dead weight" that you were feeling too guilty to throw overboard. ... And the capper:
Because let's face it: The upside to the high unemployment rate is that it has helped us control our payroll costs. No one's asking for raises. No one's demanding more benefits. ...It's now easier and more politically correct to hire part-timers, subcontractors, and other outsourced help to fill the gaps. That's because when people are out of work, they'll do whatever they've got to do to bring in cash.
I understand that Gene Marks is ... a small business owner (he sells customer relationship management tools), who is attempting to speak to other small business owners, all of whom, presumably, are also delighted that the potential hiring pool is so chock full of talent desperate to be exploited right now.
But one wonders who exactly is supposed to purchase all those products and services from the small businesses of the world, if unemployment creeps up to the 10 percent mark or higher? High unemployment means low consumer demand. Which usually means small businesses end up going out of business, or at the very least, laying off more employees, who push the unemployment rate even higher. And so on. Low employment might mean it would be harder to find qualified employees, but it also means more customers with money burning a hole in their pockets. Which scenario, do you think, is better for society in general?
I have no problem with contrarian arguments. But a look back at the oeuvre of Gene Marks suggests that in his efforts to be routinely contrarian, he ends up coming off as, well, how can I be polite? What's the opposite of insightful?

Here's what set him off:

The decline and fall of David Brooks, by Andrew Leonard: America needs "a moral revival," declares David Brooks... We are drowning in a sea of debt, and this is because we have lost our moorings; we have abandoned our tradition of Calvinist restraint, self-denial and frugal responsibility. If we don't start living right, we run the risk of cultural failure, that time-honored historical pattern in which "affluence and luxury lead to decadence, corruption and decline."
My my my. I've seen some high horses in my day, but David Brooks is perched on a saddle so far aloft in the clouds of self-delusion that he can't even see the earth, much less reality. Let's examine his thesis more closely.
Americans ran up a lot of debt in the last few decades. There's no question about that. But one of the most striking developments of the last year has been how Americans have responded to the financial crisis at an individual level. We made a collective decision to start saving and stop spending. Is this because we woke up one morning last fall and suddenly became born-again Calvinists? No, it seems clear that we were responding rationally to economic incentives. The economy crashed, unemployment surged, home prices plummeted, and presto: We all started pinching pennies. Morality, insofar as expressed via our spending habits, is merely a reflection of the economy.
To his credit, Brooks acknowledges this point. But then he immediately dismisses it:
Over the past few months, those debt levels have begun to come down. But that doesn't mean we've re-established standards of personal restraint. We've simply shifted from private debt to public debt.
This, Brooks suggests, proves that "there clearly has been an erosion in the country's financial values." Elsewhere he suggests that our cultural decline began sometime around 1980.
Brooks displays a bizarre historical amnesia throughout his column. For example, he never even mentions the transition from the Roaring Twenties to the Great Depression. Maybe it's because the shift from decadence to thrift at that point was also obviously a response to economic incentives. Even worse, a moral revival didn't restore economic growth after the Crash -- government action and ultimately the fiscal stimulus provided by World War II did the trick.
But a far more pertinent point of reference comes much earlier. Has Brooks somehow forgotten that just nine years ago the U.S. operated under a balanced budget and enjoyed a budget surplus? The explosion of public debt since that point has very little to do with the moral failings of Americans, and everything to do with objective fact. George W. Bush cut taxes, but did not match those cuts with spending cuts. Instead, he ramped up spending dramatically, on two wars, healthcare, and finally, a huge bailout of Wall Street.
Bruce Bartlett has calculated that even without Obama stimulus-related spending increases, the current deficit for fiscal year 2009 would be about $1.3 trillion instead of $1.6 trillion. If you are a believer in Keynesian economics, you can make a pretty good case that Obama's additional spending is designed to get the economy growing again, so as to avoid even worse deficits in the future. Do nothing, and a shrinking economy means lower tax revenues and higher social spending. Morality has very little to do it -- the appropriate, responsible fiscal choice at this point is for government to spend, while the people save.

Obama would be in much better position to do what's appropriate, of course, if he hadn't been saddled with a trillion-dollar deficit when he walked in the door. But the responsibility for that does not belong with some widespread betrayal of America's founding puritan values. It belongs explicitly to the party in control over the last eight years.

Update: Paul Krugman:

Moral decay? Or deregulation?, by Paul Krugman: Andrew Leonard is unhappy with my colleague David Brooks for suggesting that rising debt in America reflects moral decay. Surprisingly, however, Leonard doesn't make what I thought was the most compelling critique.

David points out, correctly, that something changed around 1980 — that consumers started spending a larger share of national income and that debt began increasing. Although he doesn't point this out, this was also when the federal government first began running substantial deficits even in good years.

David would have you believe that what happened then was a decline in Calvinist virtue. But, um, didn't something else happen around 1980? Can't quite remember .. someone whose name begins with the letter "R"?

Yes, Reagan did it.

The turn to budget deficits was a direct result of the new, Irving-Kristol inspired political strategy of pushing tax cuts without worrying about the "accounting deficiencies of government."

Meanwhile, the surge in household debt can largely be attributed to financial deregulation.

So what happened? Did we lose our economic morality? No, we were the victims of politics.

links for 2009-09-29

September 29, 2009

Economist's View - 7 new articles

"New Income Inequality Data: Surprising and Frightening"

Bruce Judson is worried about what the latest reports on economic inequality say about our future:

New Income Inequality Data: Surprising and Frightening, by Bruce Judson: The newest economic inequality numbers ... are frightening. Yesterday, the Associated Press released an article titled, US income gap widens as poor take hit in recession. The opening paragraph of the article, based on recent census data, reads:
The recession has hit middle-income and poor families hardest, widening the economic gap between the richest and poorest Americans as rippling job layoffs ravaged household budgets.
The article ... failed to mention that the Census Bureau considered the differences between 2007 and 2008, with regard to economic inequality, statistically insignificant. But, whether the Census Data shows a meaningful increase, or not is irrelevant. The Census Data reports that, contrary to the almost universal expectations of economists, economic inequality most likely did not decrease in 2008. Experts had anticipated that the declines in income of the rich would lead to a reversal in this groups ever–widening share of our national income. Instead, the Census reported that the 2008 income losses by the top 10% of Americans were offset by larger losses among middle class and poorer Americans. ...
Early next week, my new book It Could Happen Here will be released... The book is an in-depth look , based on a historical analysis, of the implications of our historically high levels of economic inequality for the nation's ultimate, long-term political stability. As economic inequality grows, nations invariably become increasingly politically unstable: Should we complacently believe that America will be different?
A central conclusion of the book is that once economic inequality reaches a self-reinforcing cycle it is halted only by inevitably controversial, hard-fought, bitterly opposed government action. ... In 1928, economic inequality was near today's levels. Franklin Roosevelt succeeded in reversing the trend toward the continuing concentration of wealth, but it was a turbulent battle. ...
In FDR's era and in our own, money brings power: both explicitly and implicitly, in hundreds of different ways, both large and small. Today, the wealthiest Americans, together with a number of financial and corporate interests that act on their behalf, protect their ever-increasing influence through activities that include, among others, lobbying, supplying expertise to the councils of government, casual conversation at dinner parties, the potential for jobs after government service, the power to run media advertisements that influence public opinion. Indeed, MIT economist Simon Johnston, writing in The Atlantic asserted that the U.S. is now run by an oligarchy...
The new inequality data suggests that the potential problems for the nation associated with the concentration of wealth and power are even more severe than previously recognized. Two weeks ago, I wrote that "Once income concentration becomes a reinforcing cycle of the kind we are witnessing, it is never stopped by pure market forces." This mechanism is now in full swing. ...
The great strength of American democracy has always been its capacity for self-correction. However, Robert Dahl, the eminent political scientist, recognized that political power fueled by wealth may ultimately neutralize this central aspect of our democracy. In his 2006 book, On Political Equality, Dahl wrote:
As numerous studies have shown, inequalities in income and wealth are likely to produce other inequalities..
The unequal accumulation of political resources points to an ominous possibility: political inequalities may be ratcheted up, so to speak, to a level from which they cannot be ratcheted down. The cumulative advantages in power, influence, and authority of the more privileged strata may become so great that even if less privileged Americans compose a majority of citizens they are simply unable, and perhaps even unwilling, to make the effort it would require to overcome the forces of inequality arrayed against them.
In the chapter following this quote, Dahl notes "that we should not assume this future is inevitable." He's right. But he was clearly concerned. ...
Many current Executive Branch initiatives deserve our support and praise: However, nothing proposed to date will effectively halt growing economic inequality, and its corrosive impact on our economy and the long-term future of the nation. ...
My analysis in It Could Happen Here concludes that without a vibrant middle class, the the American democracy as we know it, is not sustainable. Before the Great Recession, the middle class was in far worse shape than was generally acknowledged. In an economy with a record number of job seekers for every available job, the potential for nearly one-half of all home mortgages to be underwater, and increasing foreclosures, the collapse of the middle class will accelerate. With each job loss and each foreclosure, another family becomes a member of the former middle class.
America has never been a society sharply divided between have's and have not's. Unfortunately, this new data says to me we continue to head in that direction. Economists assumed that the Great Recession would be a circuit breaker that would halt this advance, at least temporarily. It did not. ...
Could our democracy survive a transformation into a nation composed principally of a privileged upper class and an underclass that struggles from paycheck to paycheck that lacks basic economic security. My analysis of a broad sweep of history, suggests it could not.
We will only stop the growth of economic inequality if the President and the Congress are ready to fight in the style of Franklin Roosevelt. FDR was a divider not a conciliator. Before World War II, he fought an all-out war at home. Today, "There's class warfare, all right," as Warren Buffett said, "but it's my class, the rich class, that's making war, and we're winning."
I fervently hoped that we have not passed the point of no return, described by Professor Dahl. The recent news shows we are one step further on this road. If we continue down it, our nation may be on the path to becoming a House divided against itself, which ultimately cannot stand.

Are you as concerned as he is? I don't know if we are headed down the path of no return or not, but the part that concerns me is that recent changes in inequality do not seem to be driven by market forces that properly evaluate and reward productive activity.

Republicans worry a lot about the effect that small changes in tax rates would have on economic activity (something there's not a lot of evidence to support) because taxes distort the relationship between effort and reward. But if the rewards have become generally separated from productive effort, particularly the large rewards at the very top of the income distribution where the Republicans argue these incentive effects are the strongest, then there are large distortions in the system that have nothing to do with taxes. That is what Republicans ought to be worried about if they are truly concerned with ensuring that the rewards people receive match their productive effort.

Social Mobility

Andrew Leigh says this is a "a terrific piece on social mobility":

American dreams, by Peter Browne: When Barack Obama spoke to schoolchildren at Wakefield High School in Virginia last week, he drew on his own experiences to argue that all young Americans, regardless of their family's wealth and income – even kids who "goofed off" at high school, like he did – have the potential to rise to the top. ...
But how typical is [this]? ... The seductive idea that anyone can move up the income scale might mean that Americans are more tolerant of a degree of inequality that would cause much deeper unease in many other western countries. ...
[R]ecent research drawing on a series of studies from Europe, the United States and Australia ... has concluded ... that among comparable countries, the United States has an unusually rigid social system and limited possibilities for mobility. ...
President Obama is no doubt aware of this research, and has made oblique references to the problems facing low-income families and neighborhoods in speeches and interviews. But the mobility myth is so widely believed and so deep-seated that it's not surprising he hasn't tried to confront the problem head on. When the Economic Mobility Project [2] surveyed 2100 adults and ran ten focus groups earlier this year it found that respondents overwhelmingly believe that personal attributes – "like hard work and drive" – are the prime determinants of how economically successful an individual can be. A smaller majority also disagreed with the statement that "In the United States, a child's chances of achieving financial success is tied to the income of his or her parent."
As the studies show, that statement is true for ... a higher proportion of American children than in most comparable countries. Among the twelve countries analyzed by economist Anna Cristina d'Addio in a 2007 OECD report,... the United States was in a group of four – with France, Italy and Britain – where family background plays the greatest role in influencing adult income. Children born into a poor family in any of these countries had a much lower chance of breaking into a higher income group than in any of the other countries in the study. ...
Britain came out worst, with around 50 per cent of a person's income explained by his or her parents' income. ... Italy and the United States weren't far behind, at around 47 per cent. At the other end of the range were Denmark, Norway, Finland and Canada, where parental income explained less than 20 per cent of the child's eventual earnings. ...[I]t's those four countries, rather than the United States, that come closest to realizing the American Dream.
Some studies have found that mobility is not only limited in the United States but has worsened in recent decades. ...
Why do some countries fare so badly...? The OECD report offers the most comprehensive list of likely factors, but its conclusions are tentative. ... But looking at the factors that the OECD believes contribute "significantly" to differences in mobility, it isn't hard to see why the United States performs badly...
First, there's the problem of entrenched income inequality. "In general," says d'Addio..., "the countries with the most equal distributions of income at a given point in time exhibit the highest mobility across generations." Among the twelve countries examined in the report, the United States has the most unequal distribution of income. ...
Equally interesting is the role of immigration in pushing up mobility. Overall, immigrants tend to be more upwardly mobile than the broader population. ... Yet the United States doesn't seem to have gained the ... benefits from migration... This clearly has something to do with how well migrant students perform at school. ...
The other key factor identified indirectly by the OECD, and more explicitly in a new Economic Mobility Project [8] report, is a strikingly low level of mobility among black Americans. ... The author of the Project's report, New York University sociologist Patrick Sharkey, finds that growing up in a high-poverty neighborhood "increases the risk of experiencing downward mobility and explains a sizable portion of the black-white downward mobility gap."
These neighborhoods usually suffer from other warning signs for low mobility identified in the OECD report, including a high rate of male unemployment at the time of a child's birth and a high rate of relationship breakdown. ...
For Barack Obama, the ... reform that's causing him the most difficulty at the moment – healthcare – also has implications for economic mobility. Child birth-weight is a "significant" factor in explaining low mobility, and the child's mental health and parents' physical health are "significant and large" factors, according to the OECD. Like any measures designed to break down the rigidity that keeps many Americans poor, improvements in health will take some time to influence overall mobility. But a system of health insurance for all Americans would certainly have an impact in the long term.

Ironically, the remarkable rise of Barack Obama could make it harder for Americans to recognize the shaky foundations of the American Dream. And the fact that so many people continue to believe the myth could make the problem worse. As the American researcher Isabel Sawhill writes, "When those who are relatively poor believe that they or their children will rise in status over time, they are less likely to complain about the status quo and more likely to accept the prevailing system." ...

Is it true that we tolerate inequality because we believe we are highly mobile, and that merit rather than family background is the most important factor in determining social outcomes? Even if it were true that merit is the most determinant of social mobility, that is not enough. The opportunity must be present before those with merit can take advantage of it, and ensuring that everyone has a chance to succeed is an important step in fixing the mobility problem. Nothing will ever be completely equal, some people will always have more opportunity than others to get ahead, but we could do a whole lot better than we are doing now at creating the opportunity for people to reach their full potential.

I am not generally predisposed to redistributive policies, and the best solution to the mobility problem is to ensure everyone has an equal chance to succeed. But since equal opportunity is a long way from reality, I believe that redistribution that compensates for differences in opportunity is justified.

"An Inside Look at How Goldman Sachs Lobbies the Senate"

I am not as negative toward naked short-selling as Matt Taibbi (feel free to convince me I'm wrong), but his insights into the lobbying effort against financial reform are useful, and I share his concerns about the distortions (e.g. regulatory capture) this brings to the reform process:

An Inside Look at How Goldman Sachs Lobbies the Senate, by Matt Taibbi: ...Later on this week I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns and Lehman Brothers collapses. The story ends up being more about naked short-selling and the role it played in those incidents than I had originally planned..., but it turns out that there's no way to talk about Bear and Lehman without going into the weeds of naked short-selling...
It's the conspicuousness ... that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn't a better example of "regulatory capture" ... than this issue.
In that vein, starting tomorrow, the SEC is holding a public "round table" on the naked short-selling issue. What's interesting about this round table is that virtually none of the invited speakers represent shareholders or companies that might be targets of naked short-selling, or indeed any activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees are either banks, financial firms, or companies that sell stuff to the first two groups.
In particular, there are very few panelists — in fact only one, from what I understand — who are in favor of a simple reform called "pre-borrowing." Pre-borrowing is what it sounds like; it forces short-sellers to actually possess shares before they sell them.
It's been proven to work, as last summer the SEC, concerned about predatory naked short-selling of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement...
The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care round table last spring, when no single-payer advocates were invited. So who will get to speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.
In advance of this panel and in advance of proposed changes to the financial regulatory system, these players have been stepping up their lobbying efforts... Goldman Sachs in particular has been making its presence felt.
Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss's office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. When I went to actually get the document, though, the aide had had a change of heart.
Which was weird, and I thought the matter had ended there. But the exact same situation then repeated itself with another congressional staffer, who then actually passed me Goldman's fact sheet.
Now, the mere fact that two different congressional aides were so disgusted by Goldman's performance that they both called me on the same day — and I don't have a relationship with either of these people — tells you how nauseated they were.
I would later hear that Senate aides between themselves had discussed Goldman's lobbying efforts and concluded that it was one of the most shameless performances they'd ever seen from any group of lobbyists, and that the "fact sheet" ... was, to quote one person familiar with the situation, "disgraceful" and "hilarious." ...

"The Side He Picked in Economics was an Odd One"

David Warsh on Irving Kristol:

The Straw That Stirred the Drink, by David Warsh: Irving Kristol, who died earlier this month at 89, meant many different things to many different people. One way to remember him is as the editor who, with his friend and City College of New York classmate Daniel Bell, founded The Public Interest in 1965, at just the moment the phenomenon known as "the counterculture" was beginning to grip the popular imagination of the West.
The first issue featured Robert Solow on "Technology and Unemployment," Daniel Patrick Moynihan on "The Professionalization of Reform," Nathan Glazer on "The Paradoxes of Poverty," Jacques Barzun on "Art – By Act-of-Congress," Daniel Greenberg on "The Myth of the Scientific Elite," Martin Diamond on "Conservatives, Liberals and the Constitution," and Daniel Bell on "The Study of the Future."
And for the next fifteen years, while the Americans lost their way in Vietnam, the Soviet economy stagnated, the Chinese people suffered Mao Tse Tung's Cultural Revolution, The Public Interest was the quarterly that kept its head, serving as a focal point for meliorists of all kinds. Magazines such as People, Money and Rolling Stone built huge audiences in those years; The Public Interest rarely sold more than 12,000 copies. But the people who read it would in due course take over the nation's politics.
An extraordinary galaxy wrote for Kristol in those days on nearly every social issue of the day (Bell, a professor of sociology at Harvard, cut back his participation after the two disagreed on the presidential election of 1972): Peter Drucker, Milton Friedman, Seymour Martin Lipset, James Coleman, Robert Nisbet, Henry Fairlie, Aaron Wildavsky, William Bennett, James Tobin, Richard Zeckhauser, Thomas Schelling, Herbert Stein, Gordon Crovitz, Anthony Downs, David Gordon, John Meyer, Jeffrey O'Connell, Paul Starr, Christopher Jencks, Charles Reich, Michael Novak, Charles Lindblom, Josiah Lee Auspitz. They were conservatives and liberals alike, but the quarterly's content steadily trended over the years towards the stance that in time would become known as "neoconservative." (A terrific full issue-by-issue archive can be found here.)
Kristol "was able to pick a side without losing his clarity," wrote David Brooks in his New York Times column last week.
The side he picked in economics was an odd one. A 1975 issue featured a pair of articles: "The Social Pork Barrel" launched the career of a young Michigan Congressman, David Stockman, who would become budget director for Ronald Reagan; and "The Mundell-Laffer Hypothesis – a New View of the World Economy," by Wall Street Journal editorial writer Jude Wanniski, introduced the world to economists Arthur Laffer and Robert Mundell, and their newly-invented brand of "supply side economics."
The striking thing about Wanniski's article was its anti-establishment tone, anti-Chicago as well as anti-Cambridge, Mass. The new hypothesis might be as transformative as the Copernican Revolution, he averred – or at least that of John Maynard Keynes. Mundell and Laffer's enthusiasms for a gold standard, fixed exchange rates, large tax cuts and tight money were picked up and greatly amplified by the editorial page of The Wall Street Journal. The Republican Party was divided – insouciant economic populists in one wing, sober technocrats in another.
In the neo-conservative firmament, the stars of ordinarily first-magnitude conservatives Milton Friedman and Martin Feldstein dimmed, while Laffer and Wanniski brightened. The success of The Way the World Works, Wanniski's 1979 book for editor Midge Decter, nearly ripped apart the boutique social science publisher Basic Books, where Kristol worked as an editor as well.
By then The Public Interest was losing its force. As James Q. Wilson wrote the other day in The Wall Street Journal, "It began to speak more in one voice and the number of liberals who wrote for it declined." Daniel Bell quietly resigned, in 1980. It didn't matter. The Republicans were in power; and Kristol was ready for a second act. He would become widely known as "the Godfather" of neo-conservatism, dispensing favors and advice as a political activist operating out of the American Enterprise Institute in Washington.
In its obituary last week, The Economist summed up this second act of Kristol's career: "American conservatism, before he began to shake it up, was dour, backward-looking, anti-intellectual and isolationist, especially when viewed from the east coast. By the time Mr. Kristol … had finished with it, it was modern and outward looking, plumped up with business-funded fellowships and think tanks and taking the lead in all policy debates."

Success profoundly changed the game. The Cold War ended. The discipline and sense of fair play seemed to go out of civic life. There hasn't been anything like The Public Interest since. But for fifteen crucial years in the late '60s and '70s, Kristol's editing was the straw that stirred the drink.

I'm running short on time, so I'll leave the commentary to all of you, but I will note this:

Irving Kristol explains where the economics articles he published in The Public Interest came from:

Among the core social scientists around The Public Interest there were no economists.... This explains my own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems. The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority - so political effectiveness was the priority, not the accounting deficiencies of government...

"Crunch Time: The Fight to Fix the Financial System"

Simon Johnson and James Qwak wonder how much political capital the administration is willing to use to meaningfully reform the financial system:

It's Crunch Time: The Fight to Fix the Financial System Comes Down to This, by Simon Johnson and James Kwak, Commentary, Washington Post: The next couple of months will be crucial in determining the shape of the financial system for decades to come. And so far, the signs are not encouraging.
The Obama administration is trying to refocus our attention on regulation, beginning with the president's speech in New York two weeks ago. ... Barney Frank, chairman of the House Financial Services Committee, says that he still plans to pass a regulatory reform bill before the end of the year.
But in a clear indication of trouble ahead, Frank signaled his intention last week to scale back the proposed Consumer Financial Protection Agency, one of the pillars of the administration's reform proposals. ...
We have criticized the administration's reform proposals, in particular for not going far enough to address the problem of financial institutions that are "too big to fail." But we support much of what was in the original package... The question now is how hard Obama and Geithner will fight for it.
Financial regulation, like health care reform, has entered the phase where speeches and proposals matter less than arm-twisting and horse-trading on Capitol Hill. With health care, President Obama attempted to go over the heads of Congress, directly to the American people. With financial regulation, that is no longer an option, given the extent to which it has faded from public consciousness. Instead, the administration is playing on the home turf of the banking industry and its lobbyists. ... Is Obama up for this fight? ...
Elections have consequences, people used to say. This election brought in a popular Democratic president with reasonably large majorities in both houses of Congress. The financial crisis exposed the worst side of the financial services industry to the bright light of day. If we cannot get meaningful financial regulatory reform this year, we can't blame it all on the banking lobby.

The initial bill needs to be as strong as possible, and I agree that the administration needs to do what it can to prevent the bill from being scaled back. However, the initial legislation won't be as strong as I'd like even if the administration does prevail. But I hope we aren't thinking that we'll take one stab at financial reform and then we'll be done with it. Like climate change and health care, it will require a series of bills to achieve effective reform.

"Come Dine with Me: The Economics"

Chris Dillow says the British TV show Come Dine with Me "raises important issues about the nature of rationality and preferences":

Come Dine With Me: the economics, by Chris Dillow: It's insufficiently appreciated that Come Dine with Me raises some profound issues in economics. Here are three:
1. The importance of norms of fairness. The format of CDWM is simple. There are four people. Each hosts a dinner party for the other three. The guests score their host out of 10. The person with the highest score wins £1000.
In this game, the optimum strategy for a guest is to score their hosts zero. This would mean the maximum score one's rival hosts could make would be 20, which in a normal game would not usually be sufficient to win. So, if your three rivals play normally, scoring them zero greatly increases your chances of winning.
If everyone knows this, we end up in a Nash equilibrium in which everyone scores zero; this is a one-shot game with scores revealed only after all four dinner parties, so tit-fot-tat doesn't apply.
But this never happens. Even contestants who claim to want to win score their rivals reasonably. This suggests that norms of fairness overwhelm selfish optimization*.
This raises the question, though: why is CDWM so different from Golden Balls - which is a pure Prisoners' Dilemma game - where we often see the selfish defect-defect strategy?
The answer, I suspect, lies in the abundance effect. The difference between CDWM and Golden Balls is that in the latter money is much more salient. And research (pdf) shows that, the more people think about money, the more selfish they behave.
The lesson is that context - not just incentives - matter.
2. The trickiness of inter-personal comparisons of utility. Let's assume that games are scored purely according to perceptions of fairness. It doesn't follow that everyone has an equal chance.
Take, for example, two people. One is a gourmand, used to fine dining and the highest standards. The other has low expectations. Our gourmand might well score a fair-to-middling dinner much lower than the diner with low standards. On this account the gourmand would have more chance of winning than the other diner, even if both are cooks of equal ability.
One might question the justice of this. More importantly, it raises the question: why should expressed preferences carry so much weight when they can be heavily affected by factors which should perhaps be irrelevant?
3. The importance of ordering. The four people are strangers. This means the first host is in a different position to the last host. The first is likely to judged heavily on his food, as the guests barely know him. But later hosts are more likely to be judged on personality as well, as by then the four have gotten to know each other.
This can cause diners to regret their earlier scores. We saw this last night, when Rachel said that, had show known how big an arse Stuart - the first host - was, she would not have scored him so highly.
This poses a big problem for conventional rational choice economics. It typically takes preferences as given, and revealed by choice. However, CDWM shows that preferences are sensitive to the order in which options appear. For Rachel, the choice: "score Stuart, then score Josh" yielded a different result than "score Josh, then score Stuart" would have done. I suspect this is related to Allais's paradox.
So, CDWM raises important issues about the nature of rationality and preferences. Watched even in narrow economists' terms, it is much more interesting than politicians' waffle about the crisis.
* Or it could be that the producers just tell the contestants not to play silly buggers.

links for 2009-09-28

September 28, 2009

Economist's View - 5 new articles

"Crowding In"

Paul Krugman on Crowding In:

I'm at two deficit conferences Wednesday ... on what to do about the deficit,...[and] why we need to run deficits now. I'm trying to organize my thoughts...
Why, exactly, do we think that budget deficits are a bad thing? The textbook answer identifies two reasons — two ways in which budget deficits now make us worse off in the future. They are:
(1) The fiscal burden: deficits now mean higher debt later, which will have to be serviced, and that means higher taxes and/or less spending on other, presumably desirable things.
(2) Crowding out: when it runs deficits, the government competes with the private sector for funds, so deficits crowd out private investment, which reduces potential growth
All this makes sense under normal conditions. But right now we're not living under normal conditions. We're in a situation in which the economy is deeply depressed, and monetary policy — the usual line of defense against recession — is hard up against the zero-interest-rate bound. This weakens argument (1) — and it actually reverses argument (2).
On argument (1): it's still true that an increase in government spending raises future debt. But not one for one: because higher spending raises GDP, it leads to higher revenue, which offsets a significant fraction of the initial outlay. A back-of-the-envelope calculation suggests something like a 40 percent offset is plausible, so fiscal stimulus only costs 60 percent of what it costs.
But the really dramatic difference is for argument (2). Under the kind of conditions we're now facing, the main determinant of business investment is the state of the economy, as evidenced by the plunge in investment shown in the figure. This, in turn, means that anything that improves the state of the economy, including fiscal stimulus, leads to more investment, and hence raises the economy's future potential.
That is, under current conditions deficit spending doesn't lead to crowding out — it leads to crowding in. In fact, you could argue that the worst thing we can do for future generations is NOT to run sufficiently large deficits right now.
Things won't always work this way. Eventually we'll emerge from the liquidity trap, and the normal rules of economic prudence will reassert themselves. But we are not there, or anywhere close to there, right now.

Let me also suggest: Crowding-Out and Crowding-In. Here's the bottom line:

...Let us summarize what we have learned ... about the crowding-out controversy.

• The basic argument of the crowding-out hypothesis is sound: Unless the economy produces enough additional saving, more government borrowing will force out some private borrowers, who are discouraged by the higher interest rates. This process will reduce investment spending and cancel out some of the expansionary effects of higher government spending.

• But crowding out is rarely strong enough to cancel out the entire expansionary thrust of government spending. Some net stimulus to the economy remains.

• If deficit spending induces substantial GOP growth, then the crowding-in effect will lead to more saving-perhaps so much more that private industry can borrow more than it did previously, despite the increase in government borrowing.

• The crowding-out effect is likely to dominate in the long run or when the economy is operating near full employment. The crowding-in effect is likely to dominate in the short run, especially when the economy has a great deal of slack.

• Surpluses have just the opposite effects. When slack exists, they are likely to slow growth by reducing aggregate demand. But in the long run, budget surpluses are likely to foster capital formation and speed up growth.

And finally, see also ZIRP Deficits cause Crowding In of Investment, by reducing Deflation.

"The Public Option Lives On"

Robert Reich says of the public option for health care insurance, "yes we can," even if it means overriding the promises of the person identified with the phrase:

The Public Option Lives On, by Robert Reich: Tomorrow (Tuesday) is a critical day in the saga of the public option. Democrats Charles Schumer ... and Jay Rockefeller ... are introducing an amendment to include the public option in the bill to be reported out by the Senate Finance Committee -- the committee anointed by the White House as its favored vehicle for getting health care reform.
Before you read another word, call and email the Senate offices of Democrats Max Baucus (Montana), Tom Carper (Delaware), Robert Menendez (New Jersey), Kent Conrad (North Dakota), and Ben Nelson (Florida) -- telling them you want them to vote in favor of the public option amendment. And get everyone you know in these states to do the same. Hell, you might as well phone and email Republican Olympia Snowe (Maine) and make the same pitch.

Background: Every dollar squeezed out of Big Pharma and Big Insurance is a dollar less that you'll have to pay ... to cover healthcare costs. The two most direct ways to squeeze future profits are allowing Medicare to use its huge bargaining leverage to negotiate lower drug prices, and creating a public insurance option to compete with private insurers...

But last January, the White House made a Faustian bargain with Big Pharma and Big Insurance, essentially scuttling both of these profit-squeezing mechanisms in return for these industries' agreement not to oppose healthcare legislation with platoons of lobbyists and millions of dollars of TV ads, and Pharma's willingness to cut drug prices by some $80 billion over the next ten years. The White House promised these industries they'd come out way ahead -- getting tens of millions of new customers who'd be buying private health insurance policies and thereby paying for an almost endless supply of new drugs. Healthcare reform would be, in short, a bonanza.
Big Pharma and Big Insurance have so far delivered on their side of the deal. In fact, Big Pharma has shelled out $120 million in advertisements in favor of reform. Now the White House is delivering on its side.
Last Thursday, for example, the Senate Finance Committee rejected Ben Nelson's amendment to require Big Pharma to give some $160 billion in discounts to Medicare -- thereby reducing the bonanza Pharma would reap from the healthcare bill. Not surprisingly, all Republicans voted against the amendment. But it was defeated only because Dems Baucus, Carper, and Menendez voted with the Republicans.
Carper later explained ... why he voted with the Republicans. The amendment, he said, would "undermine our ability to pass" health care reform, because the White House had made a deal with Big Pharma ... and White House officials had told him "a deal is a deal." The Times described the vote as a "big victory" for the White House.
Schumer voted for the amendment. He said he was "not at the table" when the White House and Big Pharma made their deal so didn't feel bound by it. But even if he had been at the table, he wouldn't be bound. No member of the Senate is bound to a deal made between industry and the White House. Congress is a separate branch of government.
Big Pharma and big insurance hate the public insurance option even more than they hate big Medicare discounts. And although the President has sounded as if he would welcome it, political operatives in the White House have quietly reassured the industries that it won't be included in the final bill. ...
But the public option lives on, nonetheless. It's still in the Senate Health, Education, Labor, and Pension bill. It still headlines the House bills, and Speaker Nancy Pelosi says she's still committed to it. The latest Times/CBS poll shows 65 percent of the public in favor of it.
Now, Schumer and Rockefeller are introducing a public option amendment in the Senate Finance Committee. Carper, Menendez, Baucus, and other Dems on the Committee should vote for it, or be forced to pay a price if they don't.

Paul Krugman: Cassandras of Climate

Why aren't people getting hot under the collar about climate change?:

Cassandras of Climate, by Paul Krugman, Commentary, NY Times: Every once in a while I feel despair over the fate of the planet. If you've been following climate science, you know what I mean: the sense that we're hurtling toward catastrophe but nobody wants to hear about it or do anything to avert it.
And here's the thing: I'm not engaging in hyperbole. These days, dire warnings aren't the delusional raving of cranks. They're what come out of the most widely respected climate models... The prognosis for the planet has gotten much, much worse in just the last few years.
What's driving this new pessimism? Partly it's the fact that some predicted changes, like a decline in Arctic Sea ice, are happening much faster than expected. Partly it's growing evidence that feedback loops amplifying the effects of man-made greenhouse gas emissions are stronger than previously realized. For example,... global warming will cause the tundra to thaw, releasing carbon dioxide, which will cause even more warming, but new research shows far more carbon dioxide locked in the permafrost than previously thought, which means a much bigger feedback effect.
The result of all this is that climate scientists have, en masse, become Cassandras — gifted with the ability to prophesy future disasters, but cursed with the inability to get anyone to believe them.
And we're not just talking about disasters in the distant future... The really big rise in global temperature probably won't take place until the second half of this century, but there will be plenty of damage long before then.
For example, one 2007 paper in the journal Science ... reports "a broad consensus among climate models" that a permanent drought, bringing Dust Bowl-type conditions, "will become the new climatology of the American Southwest within a time frame of years to decades." ...
In a rational world, then, the looming climate disaster would be our dominant political and policy concern. But it manifestly isn't. Why not?
Part of the answer is that it's hard to keep peoples' attention focused. Weather fluctuates..., any year with record heat is normally followed by a number of cooler years...
But the larger reason we're ignoring climate change is that Al Gore was right: This truth is just too inconvenient. Responding to climate change with the vigor that the threat deserves would not, contrary to legend, be devastating for the economy as a whole. But it would shuffle the economic deck, hurting some powerful vested interests even as it created new economic opportunities. And the industries of the past have armies of lobbyists in place...; the industries of the future don't.
Nor is it just a matter of vested interests. It's also a matter of vested ideas. For three decades the dominant political ideology in America has extolled private enterprise and denigrated government, but climate change ... can only be addressed through government action. And rather than concede the limits of their philosophy, many on the right have chosen to deny that the problem exists.
So here we are, with the greatest challenge facing mankind on the back burner, at best, as a policy issue. I'm not, by the way, saying that the Obama administration was wrong to push health care first. It was necessary to show voters a tangible achievement before next November. But climate change legislation had better be next.
And as I pointed out in my last column, we can afford to do this..., economic modelers have been reaching consensus ... that the costs of emission control are lower than many feared.
So the time for action is now. O.K., strictly speaking it's long past. But better late than never.

Stiglitz Interview

James Surowiecki interviews Joseph Stiglitz about "the mishandling of the financial crisis, the relationship between government and markets, and the future of capitalism around the world."

links for 2009-09-27

September 27, 2009

Economist's View - 4 new articles

When You Believe in Things That You Don't Understand...

Robert Shiller defends financial innovation:

In defense of financial innovation, by Robert Shiller, Commentary, Financial Times: Many appear to think that the increasing complexity of financial products is the source of the world financial crisis. In response to it, many argue that regulators should actively discourage complexity. ... They do have a point. Unnecessary complexity can be a problem ... if the complexity is used to obfuscate and deceive, or if people do not have good advice on how to use them properly. ...
But any effort to deal with these problems has to recognize that increased complexity offers potential rewards as well as risks. New products must have an interface with consumers that is simple enough to make them comprehensible, so that they will want these products and use them correctly. But the products themselves do not have to be simple.
The advance of civilization has brought immense new complexity to the devices we use every day. ... People do not need to understand the complexity of these devices, which have been engineered to be simple to operate.
Financial markets have in some ways shared in this growth in complexity, with electronic databases and trading systems. But the actual financial products have not advanced as much. We are still mostly investing in plain vanilla products such as shares in corporations or ordinary nominal bonds, products that have not changed fundamentally in centuries.
Why have financial products remained mostly so simple? I believe the problem is trust. ... People are ... worried about hazards of financial products or the integrity of those who offer them. ... When people invest for their children's education or their retirement, they ... may not be able to rebound from mistaken purchases of faulty financial devices...
Thus, to facilitate financial progress, we need regulators who ensure trust in sophisticated products. ... They must ... be open to ... complex ideas ... that have the potential to improve public welfare.
Unfortunately, the crisis has sharply reduced trust in our financial system..., people do not trust some good innovations that could protect them better. ... I have proposed ... "continuous workout mortgages"...[to] protect against exigencies such as recessions or drops in home prices. Had such mortgages been offered before this crisis, we would not have the rash of foreclosures. Yet, even after the crisis, regulators seem to be assuming a plain vanilla mortgage is just what we need for the future. ...
Another innovation that is underused is retirement annuities... There are ... annuities that protect people against outliving their wealth,... that protect against inflation,... that protect against having problems in old age... and generational annuities that exploit the possibilities of intergenerational risk sharing. But most people do not make use of any of these.
Ideally, all of these protections for retirement income should be rolled into a unified product. Such products are not generally available yet. Certainly, people might be mistrustful of committing their life savings to such a complex new product at first even if it were available. So, such products are not offered and people often do nothing to protect themselves against most of these risks.
Behind the creation of any such new retail products there needs to be an increasingly complex financial infrastructure... It is critical that we take the opportunity of the crisis to promote innovation-enhancing financial regulation and not let this be eclipsed by superficially popular issues. ... Regulatory agencies need to be given a stronger mission of encouraging innovation. ...

Something has to assure people that these product are safe before they will purchase them. We might have expected the market to regulate risk not so long ago, and trusted it to do so, but that seems like a bad bet now. An "interface with consumers that is simple enough to make [the products] comprehensible" could build trust if people could believe that the person doing the simplifying had considered and understood every possible risk that is attached to the product, but did anybody really comprehend the big picture in our most recent crisis? If there were such people, there weren't very many of them, not enough to inspire confidence and trust more generally.

Another method of building confidence is ratings agencies, but they won't be trusted again any time soon. Regulators that make the public confident that nothing can go wrong would help too, but building that kind of trust in regulators after what just happened is a tall order. Private insurance of some sort is an option, but absent some sort of government guarantee, can private insurance companies be trusted with your life savings if there is a severe financial meltdown? People have even lost faith in government's ability to insure people against medical and financial calamity in old age, so when it comes to providing financial insurance, government is not the solid, trusted institution it was not so long ago.

As you tick down the list of ways trust might be restored, you find one failure after another in terms of providing reliable information on the risks of particular financial products or strategies, and no matter what regulators or anyone else tries to do to rebuild the trust in financial institutions and products that has been lost, recent track records make it likely that this will be a long, drawn out process. Given that forgetting about such risks over time seems to be an ingredient in the development of bubbles, I'll let you decide whether that's good or bad.

"Gold Buggery"

Barkley Rosser:

Washington Post Puffs Gold Buggery, by Barkley Rosser: The business section of today's Washington Post contains one of the most ridiculous news stories I have seen yet. I would not mind if this were a column, but "What's Making Gold a Hot Commodity" by Frank Ahrens is supposedly a news story, and as such it should not contain whoppingly erroneous statements without some correction. So, Ahrens himself says the following: "In the long term, with each new dollar introduced into the system, each dollar you hold becomes worth less. That's more than just inflation, which we think of as simply rising prices. That's debasement of not only our currency, but the globe's reserve currency." It may well be that nonsensical thinking such as has this pushed the price of gold back over $1,000 per ounce again, but why should a business section reporter repeat it without the slightest doubt. It is not even good monetarism, as monetarists only view money supply expansions beyond growth of real output and not offset by velocity changes as inflationary. A bit later, Ahrens uncritically quotes Peter Boockvar, an equities trader at Miller Tabak: "It amazes me that any self-respecting central banker is not alarmed that gold is over $1,000 an ounce and the dollar is trading at all-time record lows." All-time record lows? Only against gold. Currently the dollar is about 1.46 against the euro, while it hit 1.5990 in July 2008. It is around 92 against the yen, but in 1995 got as low as 79.95. It is a bit over 1.5 against the pound, but was at 1.98 last year (and further back in history was over 4.0). Utter drivel. I do recognize that later in the article Ahrens brings up some factors that might caution people a bit against buying gold too frenziedly, such as how much of it is held by central banks, and how little demand for it is due to industrial use (only about 10%). But he never mentions that it has already been above $1,000 twice before, only to fall back, and in the late 1970s was much higher in real terms, at well over $800, only to fall very far below that and stay well below that for decades. The warnings could have been a bit clearer, along with avoiding mindlessly repeating totally ridiculous non-facts spouted by wacko gold bugs.

"250 Years of Clever Counting"

Stephen Ziliak emails:

Only moralists and economists know that Adam Smith's Theory of Moral Sentiments (1759) turned 250 years old this year.
However worthy an Adam Smith party, I thought you'd like to know about another party and sentiment, "Arthur's Day" - the Guinness Brewery's 250th birthday party - to be celebrated Thursday, September 24th, all over the world:
My article, "Great Lease, Arthur Guinness - Lovely Day for a Gosset!" (prepared for a special "Beeronomics" issue of the Journal of Wine Economics), shows how clever counting at Guinness did not stop two and a half centuries ago when Arthur signed a 9,000 year lease for the brewery, house, and land at St. James's Gate in exchange for 45 pounds a year (nominal, not inflation adjusted)!
"The great innovation in statistics in the era after Galton and Pearson was made in the private sector of the economy, between 1904 and 1937, at Guinness's Laboratory, to the end of improving, however gradually, production of a consistent beer at efficient economies of scale" (Ziliak 2009, p. 4).

Here's the article "Great Lease, Arthur Guinness—Lovely Day for a Gosset!":

Abstract: Small sample theory—the great innovation in statistical method in the period after Galton and Pearson—was ironically discovered by a brewer during routine work performed at a large brewery, Arthur Guinness, Son & Company, Ltd. For four decades William S. Gosset applied small sample experiments to the palpable end of improving, however gradually, the production and control of a consistent unpasteurized beer when packaged and sold at efficient economies of scale. Introducing, "Guinnessometrics." Annual output of stout at Guinness's Brewery may have topped 100 million gallons but Gosset's scientific knowledge was built one barleycorn at a time; in fact, the inventor of small sample theory worked closely with botanists and breeders. In the process, the brewer, William Sealy Gosset (1876-1937) aka "Student," an Oxford-trained chemist—though self-trained in statistics—solved a problem in the classical theory of errors which had eluded statisticians from Laplace to Pearson. In addition, though few have noticed, Gosset's exacting theory of errors, both random and real, marked a significant advance over ambiguous reports of plant life and fermentation asserted by chemists from Priestley and Lavoisier down to Pasteur and Johannsen, working at the Carlsberg Laboratory. Central to the Guinness brewer's success was his persistent economic interpretation of uncertainty, what Ziliak and McCloskey (2008) call the "size matters/how much" question of any series of experiments. An enlightened change in Guinness human resources policy gave an incentive structure that also seems to have nudged "Student," who rose in position to Head Brewer, to find a profit when the opportunity knocked. Beginning in 1893, Guinness vested "scientific brewers" such as Gosset with managerial authority. In fact Gosset was at times involved with price negotiations over hundreds of tons of barley and hops—perhaps hours or minutes before he ran (that is, calculated) a regression on related material. In brewing circles William Gosset is remembered less nowadays than he might be. He did not give two cents for arbitrary rules about statistical significance—at the 5% level or any level arbitrarily assumed. How the odds should be set depends on the importance of the issues at stake and the cost of getting new material, he said from 1904. Yet even in brewing journals, both academic and trade, and for the past 85 years, statistical significance at the 5% level continues to draw its arbitrary line segregating a meaningful from a non-meaningful result, a better barley from a worse.

links for 2009-09-26