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May 14, 2010

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Paul Krugman: We’re Not Greece

Posted: 14 May 2010 12:39 AM PDT

Right now, scare stories about the national debt are "everywhere you look":

We're Not Greece, by Paul Krugman, Commentary, NY Times: It's an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need.
The truth, however, is that America isn't Greece — and, in any case, the message from Greece isn't what these people would have you believe.
So, how do America and Greece compare? Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will... Why?
One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P. ... Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn't.
The U.S. economy has been growing since last summer, thanks to fiscal stimulus and expansionary policies by the Federal Reserve. I wish that growth were faster; still, it's ... showing up in revenues. ...Congressional Budget Office projections ... imply a sharp fall in the budget deficit over the next few years.
Greece, on the other hand, ... faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.
It's worth noting ... that Britain — which is in worse fiscal shape than we are,... remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.
In short, we're not Greece..., our fiscal outlook ... is vastly better.
That said, we do have a long-run budget problem. But what's the root of that problem? ... Bear in mind that the drive to cut taxes largely benefited a small minority of Americans... And bear in mind, also, that taxes have lagged behind spending partly thanks to ... "starve the beast": conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.
Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they're not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried "Death panels!"
So here's the reality: America's fiscal outlook over the next few years isn't bad. We do have a serious long-run budget problem, which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes. But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.

Drill, Baby, Drill. Spill, BP, Spill

Posted: 14 May 2010 12:24 AM PDT

It looks like the oil spill in the gulf is much larger than we've been led to believe. BP deserves it's share -- a large share -- of the criticism for what has happened, but has the administration done everything it could do to help with the oil spill problem. Has it mobilized all possible resources, taken control of the response, etc.? Or has it left too much of the task to BP, and, as convenient, accepted lowball estimates of the magnitude of the problem hoping somehow it would go away?  Are you satisfied with the administration's response? I'm not:

Size of Oil Spill Underestimated, Scientists Say, by Justin Gillis, NY Times: Two weeks ago, the government put out a round estimate of the size of the oil leak in the Gulf of Mexico: 5,000 barrels a day. Repeated endlessly in news reports, it has become conventional wisdom.
But scientists and environmental groups are raising sharp questions about that estimate, declaring that the leak must be far larger. They also criticize BP for refusing to use well-known scientific techniques that would give a more precise figure.
The criticism escalated on Thursday, a day after the release of a video that showed a huge black plume of oil gushing from the broken well at a seemingly high rate. ...
The figure of 5,000 barrels a day was hastily produced by government scientists in Seattle. It appears to have been calculated using a method that is specifically not recommended for major oil spills.
Ian R. MacDonald, an oceanographer at Florida State University who is an expert in the analysis of oil slicks, said he had made his own rough calculations using satellite imagery. They suggested that the leak could "easily be four or five times" the government estimate, he said. ...
BP has repeatedly said that its highest priority is stopping the leak, not measuring it. "There's just no way to measure it," Kent Wells, a BP senior vice president, said in a recent briefing.
Yet for decades, specialists have used a technique that is almost tailor-made for the problem. With undersea gear that resembles the ultrasound machines in medical offices, they measure the flow rate from hot-water vents on the ocean floor. ...
Richard Camilli and Andy Bowen, of the Woods Hole Oceanographic Institution in Massachusetts, who have routinely made such measurements, spoke extensively to BP last week... They were poised to fly to the gulf to conduct volume measurements.
But they were contacted late in the week and told not to come, at around the time BP decided to lower a large metal container to try to capture the leak. That maneuver failed. They have not been invited again. ...
The issue of how fast the well is leaking has been murky from the beginning. For several days after the April 20 explosion of the Deepwater Horizon rig, the government and BP claimed that the well on the ocean floor was leaking about 1,000 barrels a day.
A small organization called SkyTruth, which uses satellite images to monitor environmental problems, published an estimate on April 27 suggesting that the flow rate had to be at least 5,000 barrels a day, and probably several times that.
The following day, the government — over public objections from BP — raised its estimate to 5,000 barrels a day. ...
BP later acknowledged to Congress that the worst case, if the leak accelerated, would be 60,000 barrels a day, a flow rate that would dump a plume the size of the Exxon Valdez spill into the gulf every four days. BP's chief executive, Tony Hayward, has estimated that the reservoir tapped by the out-of-control well holds at least 50 million barrels of oil. ...

"About That Mediterranean Work Ethic"

Posted: 14 May 2010 12:15 AM PDT

Do Greeks work less than Germans?:

About That Mediterranean Work Ethic, Twenty Cent Paradigms: According to many accounts of the financial crisis in Europe, one reason intervention has been slow is that it is hard to convince Germans, widely seen by themselves and others as hard-working, thrifty and virtuous, to "bail out" those lazy, spendthrift Greeks.

This bit of OECD data on hours worked per worker (via Economix) runs contrary to the stereotypes:
That is, according to the OECD, the average Greek worker logs 2120 hours per year - 690 more than a German worker.

links for 2010-05-13

Posted: 13 May 2010 11:05 PM PDT

Intelligently Directed Evolution

Posted: 13 May 2010 10:08 PM PDT

Chemical and biological engineers are hoping to be able to do intelligent design within the next few decades, but for now, for the most part, they'll have to let evolution do the work:

Directed Evolution, by Anne Trafton, MIT News Office: In nature, evolution takes place over eons... But evolution can also happen on a small and fast scale in the laboratory.
The approach is called "directed evolution," and scientists are using it to generate proteins that do not occur in nature — for example, cancer drugs, new microbial enzymes for converting agricultural waste to fuel, or imaging agents for magnetic resonance imaging (MRI).
Most protein structures are so complex that it's nearly impossible to predict how altering their structure will affect their function. So the trial-and-error approach of directed evolution is usually the fastest way to come up with a new protein with desirable traits, says Dane Wittrup, an MIT professor of chemical and biological engineering...
Such experiments often yield proteins that researchers never would have come up with on their own. ...For example, let's say you want to create an antibody that will bind to a certain protein found on tumor cells. You start with a test tube full of hundreds of millions of yeast cells, engineered to express a variety of mammalian antibodies on their surfaces. Then you add probes containing the molecule you want your new protein to target, allowing you to pick out the proteins that bind to it.
Next, you take the proteins that bind the best and mutate them, in hopes of generating something even better. This can be done by irradiating the cells, or by forcing them to replicate their DNA in a way that is prone to mistakes. Those new proteins are screened the same way, and each time, the best candidates are used to create more proteins. "At the end, you have proteins that bind very tightly and specifically," says Wittrup. "In the lab, it's the same rules as natural evolution, but we get to set the criteria for who survives."
Wittrup and his students recently created a new antibody that binds tightly to tumor cells and to a radioactive compound used for chemotherapy, potentially allowing for very precise targeting of the cancer treatment.
First developed about 15 years ago, directed evolution has become ... easy enough that a first-year graduate student can produce a suitable protein in a couple of months, Wittrup says.
He and others at MIT ... have also tried to design proteins ... using computer models to predict how changes in a protein's sequence will affect its structure and function. In 2007, their simulation successfully produced a new version of the cancer drug cetuximab that binds to its target with 10 times greater affinity than the original. However, this approach is very expensive and only works when researchers start with a great deal of information about the protein interactions being modeled.
"In a limited way, we could do rational design," says Wittrup. "Fifty years from now, maybe everyone will be doing that.

Nation States and the "The Three-Layered Chess Box"

Posted: 13 May 2010 02:43 PM PDT

In an examination reminiscent of Dani Rodrik's "Political Trilemma," Tomas David-Barrett exams the international economy using Joseph Nye's "three-dimensional, three-layered box":

The Three-Layered Chess Box, by Tomas David-Barrett: A central question of global economics concerns the architecture of policy institutions. If you regard the global socio-economic system as a single unit -- a not entirely unreasonable assumption, perhaps -- then it is strikingly obvious that the system's optimal management would call for much stronger global governance functions than exist today. Global economics calls for efficient global monetary and fiscal policy, global financial regulation, enforceable global solutions to the global climatic issues, the rapid loss of biodiversity, overfishing, and so on. This just does not happen. The 2007-2009 crisis of the global economy was perhaps the best chance so far to create on overarching economic policy umbrella for the world economy, an opportunity left unused despite the multitude of summits ending with the Great Leaders' press conferences, which in turn were followed by uniformly unilateral action. The failure of Copenhagen ... speaks of similar ineptitude when it comes to managing the climate.

Why is this? Why are sovereign states so reluctant to coordinate policy, let alone give up power for the protection of the shared economic and ecological commons?

Tuesday I got to meet an international relations thinker, Joseph Nye. He, as an extension of his earlier innovation smart power, suggests that the traditional two-dimensional chess board of the power game among states should be replaced by a three-dimensional, three-layered box, in which the traditional hard power layer is accompanied by one where the dynamics among economies take place, and another one where transnational sociopolitical processes dominate.

From a global economics point of view this model is strikingly state-centered. If the main focus of the analysis is military power, compared to which other forms of inter-state persuasion can be softer or alternative, then the natural unit of analysis is of where the military is: the sovereign state. Yet, there seems to be something wrong with this picture.

The economy layer of Joseph Nye's analysis has changed tremendously in the past hundred years. While even a few decades ago each national economy more or less corresponded to a state, we are hard-pressed to find truly local economic processes today. Finance is global wherever you go. Manufacturing systems that used to be local, then became regional, are now predominantly global. The pharmaceutical market is global. Raw materials are global. The transportation system is global. Even the ultimate local product, that of farming, has gone global. Therefore, perhaps it can be argued that there is no layer that is formed by national economies. Although it's tempting to talk about the Chinese economy, the Indian economy, the American economy, or even the European economy, these are increasingly useless categories. Their borders became fuzzy. Integration into one large economic system, the emergence of a truly global economy seems to be a more appealing model.

The trouble is that the rise of the new, global organizational level has not been accompanied by governance institutions with the same scope. We are trying to manage what is essentially a global process using national level economic policy institutions.

The transnationals, that is, the third layer that Joseph Nye suggests as a building block of the three-dimensional global power structure, has similar problems. For what a decade ago might have been somewhat negligible side phenomena, such as NGO efforts in international reaction of the Haitian earthquake, or the anti-malaria activities of the Gates foundation, or the PR exercises of Greenpeace, is now giving way to a global movement. The trigger, it seems to be increasingly obvious, is a major ecological catastrophe that is to dominate the coming decades. The rapidly changing climate, and the collapsing biodiversity is creating a strong demand for collective global action. Just as in the case of the global economy, we are trying to meet this demand using state-level governance tools, and hence are predictably falling short.

And thus one might turn the logic around, and ask if it is the location of the hard power, the fact that it is anchored to the bureaucracy of the sovereign state which stops the formation of the global governance institutions. In other words, is it possible that the failure of Copenhagen, the never-emergence of a global financial regulatory system, or the we-have-not-even-got-done-to-tackle-it overlogging and overfishing problems stay unresolved because of states that mistake their hard power for global omnipotence. ... Or, perhaps, could there be a general link between the hard power of a state and its unwillingness to to hand over governance functions to transnational institutions? ...

[The post goes on to try to find empirical support for the hypothesis in the last sentence.]

Shiller: How Nutritious Are Your Investments?

Posted: 13 May 2010 12:33 PM PDT

Robert Shiller hopes that regulatory reform will include the requirement that financial products have "a standardized disclosure label analogous to the nutritional labels on foods":

How Nutritious Are Your Investments?, by Robert J. Shiller, Commentary, Project Syndicate: Those labels that you see on packaged foods listing their ingredients and nutritional values had their beginnings in an international scandal and in the efforts by governments to deal constructively with the public outrage that followed.
The scandal erupted with the publication in 1906 of Upton Sinclair's novel The Jungle... The public response to the book's description of unsanitary conditions in the industry was so strong that the United States Congress enacted the Pure Food and Drug Act – the first law to require labeling of contents on food packages – the very same year. ...
These labels are undoubtedly useful to consumers, but it is unlikely that many manufacturers, if given the choice, would have introduced them on their own.
That is how regulatory progress is often made. The history of legislative reform is ... long periods of time during which public apathy prevents any progress, interrupted by scandals that suddenly make progress possible. Entrenched interests ... resist change with all of their lobbying efforts, but public outrage is too strong for them to win.
We have to hope that the same kind of outcome will emerge from the financial scandals that have produced public outrage analogous to that directed at the food industries in Upton Sinclair's day. As was the case then, public outrage today is at a level that might well overwhelm the lobbying efforts of entrenched interests. ...
For today we need laws that will require purveyors of financial products to provide the essential information that consumers need. ...[I]nvestment products like mutual funds should include a standardized disclosure label analogous to the nutritional labels on foods. The structure of the label should be developed by a committee of academics, regulators, and industry executives with the objective of promoting informed comparison among consumers of investment products. ...
The ... standardized disclosure should give the consumer an understandable measure of long-term risk. ... Not all investors will be able to interpret even ... simple measures of the outlook for an investment. But neither are all consumers of food able to interpret the quantities of nutrients that are shown on nutritional labels. These facts should be there to allow those people who will look at them to do so, and to encourage them to spread the information...
The standardized disclosure label should not, however, include past returns on investments. This is because most investors overreact to past returns... Moreover,... when an advertisement for an investment product does report a prior average return, it should also include a statement of the uncertainty associated with that return. ...
Including such information on financial products would give an enormous boost to the efficiency and efficacy of our financial products in serving customers' needs. The only reason that such labeling has not yet been required is the same reason that nutritional labels were not required long ago on foods. Public outcry at a time of scandal forced progressive change then; we should hope that it does so now.

I don't think it's on the financial reform agenda, though there was talk of providing "plain vanilla" options for some financial products awhile back to help with this problem. But that got dropped due to opposition from the financial industry.

Is there a good reason not to do this? I couldn't think of one. There is a small cost to the banks to develop the labels, but if it's a standard form that shouldn't be too costly, particularly relative to the potential benefit to consumers from overcoming the informational market failure.

"Proponents of a Failed Philosophy"

Posted: 13 May 2010 09:45 AM PDT

Barry Ritholtz takes on the crowd trying to blame the financial and subsequent economic crises on the government:

Get Me ReWrite!, by Barry Ritholtz: My approach to everything I have written, studied and analyzed in this space is pretty straight forward: Start with the data and evidence and go forward from there ... in order to make intelligent investing decisions for myself and my clients.

There are others who do not share this objective. Their goals are either political (winning the next election) or ideological (having their belief system become dominant). Truth is irrelevant to these people.

Not surprisingly, these folks — many of whom contributed to the crisis in a mighty way — are desperately trying to duck responsibility for what happened. Those who helped cause the crisis are engaged in an ongoing effort to rewrite its history.

Their goal? Exonerate their own bad behavior, throw off any responsibility to the collapse, blame anything but their own ideology and horrific decision making. They want to keep pushing their tired political agendas, despite the damage they may have caused.

When writing ... I blamed Democrats and Republicans — not equally, but in proportion to their what they did. Unsupported theories, tenuous connection, loose affiliations were not part of the analysis. ...

You will note that the CRA is not ... a cause or even a minor factor. If they were, the housing bubbles would not have been in California or S. Florida or Los Vegas or Arizona — Harlem and South Philly and parts of Chicago and Washington DC would have been the focus.

Nor do I blame Fannie and Freddie. Now understand, there is no love lost between myself and the GSEs. For years, I have called them "Phoney and Fraudy."  Since George Bush and Hank Paulson nationalized them, I have accused the government of using these two as a backdoor bailout for banks — a hidden PPIP/TARP used to buy all the garbage mortgages that banks are desperate to get off their balance sheets. Longtime readers will recall we very publicly shorted Fannie based upon their fraudulent practices and horrific balance sheet.

But even I cannot reconcile the movement to place all of the world's troubles at the feet of the GSEs. Not, at least, according to the data.

That lack of evidence, however, doesn't stop ideologues from making the attempt. Consider this attempt at rewriting the causes of the credit crisis by Kevin Hassett:

"The worst financial crisis in generations was set off by a massive government effort, led by the two mortgage giants, to make loans to homebuyers no matter whether they could make the payments. Lenders were willing to lend money to just about all comers, no matter how low their income. Why? Because the lenders knew Fannie and Freddie would purchase the loans from them for a high price before bundling them into securities to sell to investors."

Now, this makes for a fascinating narrative that plays into a number of different ideological beliefs. It exonerates the radical free market deregulators, it ignores what the private sector did, and it somehow ignores the fact that Congress was controlled by a very conservative GOP from 1994 to 2006 — the prime period of time covered leading up to and including the beginning of the crisis.

But worse than all of that, the data supporting Hassett's position simply isn't there.

Over the past 2 years, I have repeatedly asked the people who push this narrative to provide some evidence for their positions. I have offered a $100,000 if they could prove their case.

Specifically, I have requested some data or evidence that DISPROVED the following facts:

-The origination of subprime loans came primarily from non bank lenders not covered by the CRA;

-The majority of the underwriting, at leats fro the first few years of the boom, were by these same non-bank lenders

-When the big banks began chasing subprime, it was due to the profit motive, not any mandate from the President (a Republican) or the the Congress (Republican controlled) or the GSEs they oversaw.

-Prior to 2005, nearly all of these sub-prime loans were bought by Wall Street — NOT Fannie & Freddie

-In fact, prior to 2005, the GSEs were not permitted to purchase non-conforming mortgages.

-After 2005, Fannie & Freddie changed their own rules to start buying these non-conforming mortgages — in order to maintain market share and compete with Wall Street for profits.

-The change in FNM/FRE conforming mortgage purchases in 2005 was not due to any legislation or marching orders from the President (a Republican) or the the Congress (Republican controlled). It was the profit motive that led them to this action.

These are data supported fact...

Of course, folks like Hassett hate this factual history, as it conflicts with their goals and politics. Rather than produce evidence, they create story lines unsupported by facts.  ...

I demand evidence, data and facts. The blame Fannie & Freddie crowd have managed to remain blissfully data free. They have steadfastly ignored all calls for proof.

Its way past the time to call out their intellectual dishonesty. If you cannot show any data, if you cannot prove what you are alleging with actual facts, you need to be called out for what it is you actually are: Proponents of a failed philosophy.

I have also written quite a bit on the CRA and Fannie and Freddie's (non) role in causing the crisis (posts on Fannie and Freddie, posts on the CRA).

[Update: Russ Roberts responds.]

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