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ataxingmatter ends an essay on oil money and our philosphy of money with:

…yet talk about understanding ordinary Americans because they didn’t grow up rich and in which the have-nots suffer from the results of a focus on growth but not opportunity, wealth but not shared well-being.

Anyone hear the words opportunity or well-being this campaign? Or noticed the kind of legislation coming out of Congress that looks very ‘pre-2006’ in scope and intent?

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More Settlements: A Sham Peace Process

Remember all the Bush hoop-la about a new Middle East Peace initiative? Let’s see: There was a Two-State solution in 2003; the last was the Annapolis plan. Like the subprime bubble, they have been exposed as shams, conjured up by right-wingers in the U.S. and their rabid Lakud brothers in Israel. “How so,” you ask?

Consider the issue concerning the settlements. A a now-disclosed secret deal permits more settlements.

Last April, the Washington Post ran a story about a letter between Bush and Sharon, giving the Israel permission to expand the West Bank settlements.

A letter that President Bush personally delivered to then-Israeli Prime Minister Ariel Sharon four years ago has emerged as a significant obstacle to the president’s efforts to forge a peace deal between the Israelis and Palestinians during his last year in office.
Ehud Olmert the current Israeli prime minister, said this week that Bush’s letter gave the Jewish state permission to expand the West Bank settlements that it hopes to retain in a final peace deal, even though Bush’s peace plan officially calls for a freeze of Israeli settlements across Palestinian territories on the West Bank. In an interview this week, Sharon’s chief of staff, Dov Weissglas, said Secretary of State Condolezza Rice reaffirmed this understanding in a secret agreement reached between Israel and the United States in the spring of 2005, just before Israel withdrew from Gaza.

(The texts of the letters in question can be found here.)

Israeli News has an appropriate spin on that letter:

So Weisglass’ interview today serves two functions. It reinforces just how tightly wrapped Bush was around their fingers and makes it that much more difficult for Bush to bring into being that Palestinian state which he and Sharon worked so assiduously to prevent. A truly crafty, devious Machiavellian, Weissglas is.

Since the rise of Likud–and the after the assassination of the great Yitzhak Rabin by a right-wing radical–, honest discussion about the Israeli-Palestinian issue has been all but impossible in the U.S. Indeed, right-wing American Jewish groups have provided substantial monetary support for Likud’s efforts to stay in power. I would not doubt that these same groups provide similar support to some here, which is in itself not illegal. But it is always nice to know who is buttering whose toast. Eh, Leiberman?

For a full explantion of the kind of argument now swirling around Rice, Bush, Powell, and Israeli leaders, Glen Kessler of the Washington Post presents a good picture.

Would any presidential candidate actually address this problem, I wondered? Are they all now captive to Lakud spin? McCain certainly is. Is Obama?

Apparently, Obama has decided that Jerusalem will be the new Israeli capital. I thought that issue was still on the table. That tidbit was a pleasant sop tossed Lakud’s way. Needless to say, his remark caused quite a stir in the Arab world.

It certainly looks like Obama is cow-towing to the Likud hard-line lobby–at least on the issue of Jerusalem. (The American Thinker has an interesting take on Obama’s Israeli bona fides. (For the American Thinker, unquestioning support of any Lakud policy is an absolute requirement.)

For a refreshing take on one presidential candidate’s take on the whole issue, try Nader’sNader:

And I give you the example, the Palestinian-Israeli issue, which is a real off the table issue for the candidates. So don’t touch that, even though it’s central to our security and to, to the situation in the Middle East. He [Obama] was pro-Palestinian when he was in Illinois before he ran for the state Senate…. Now he’s, he’s supporting the Israeli destruction of the tiny section called Gaza with a million and a half people. He doesn’t have any sympathy for a civilian death ratio of about 300-to-1; 300 Palestinians to one Israeli. He’s not taking a leadership position in supporting the Israeli peace movement, which represents former Cabinet ministers, people in the Knesset, former generals, former security officials, in addition to mayors and leading intellectuals. One would think he would at least say, “Let’s have a hearing for the Israeli peace movement in the Congress,” so we don’t just have a monotone support of the Israeli government’s attitude toward the Palestinians and their illegal occupation of Palestine.

Nader’s criticism of Obama may sound harsh; certainly Obama is not taking a leadership position in openly supporting the Israeli peace movement. Jerusalem will be the capital of Israel? Obama’s handlers did not like Nader’s reminding voters about Obama’s old positions:

“Barack Obama’s longstanding support for Israel’s security is rooted in his belief that no civilians should have to live with the threat of terrorism,” the campaign statement said. “In Gaza, Hamas continues to fire rockets indiscriminately at Israeli civilians every day, and that’s why it is long past time that Hamas renounces terrorism, recognizes Israel’s right to exist and abides by past agreements.”

That kind of remark is standard no-think fare, a cover for Israeli brutality and duplicity. More and more, Nader seems to have a point. No mention is made of Israeli brutality…or of Israeli settlements. Who is noticing? Mention a new settlement, defenders of Israeli policies cite the standard line: Palestinians have to stop protesting, i.e., sending in rockets.

While Obama was not asked about the settlements, he certainly seemed to be toeing the official Israeli line–and the official line of our own right-wingers.

A few days ago, I read again that Israeli

officials on Thursday revived plans to construct a new settlement in the occupied West Bank, two years after U.S. pressure forced Israel to shelve the idea.

And, of course, pouring new Israelis into old settlements has not abated:

The new settlement would be the first in a decade and would contribute to a wave of building going on across the West Bank, as Israel adds thousands of new homes to existing settlements despite international calls to halt construction. An estimated 260,000 to 280,000 Israeli settlers live in the West Bank, not including those who live in parts of East Jerusalem that Israel has annexed, a move not recognized internationally.

Interesting slant, especially when we consider that letter between Sharon and Bush four years ago. Doesn’t “Machiavellian charade” describe the whole “peace” process? And we wonder why the Palestinians and other Arabs do not trust us, and why, God forbid, they may actually hate us.

As Americans, we are all too willing to look the other way, to complain loudly at the insanity of suicide bombers, to acknowledge politely that the Wall does cause some inconvenience, and to tsk tsk when people throw rocks at tanks and expect not to get hurt. What, Rachel Corrie, a young American woman, protesting Israeli occupation in Gaza was crushed when she confronted an Israeli bullozer? Guess she should have know better. Officially, We studiously ignored her sacrifice. Ho hum.

Often Americans will simply throw up their hands, saying the whole thing is too circular: action-reaction: Violence begets violence. This kind of thinking Israeli right-wingers will indulge; it does not call into question their policies. It does not look at the tanks, the bulldozers, soldiers, and warplanes that move with impunity across Palestine. It does not look at the systematic and economic violence being done to an impoverished people.

Think about it: Three hundred Palestinians to one Israeli. Houses bulldozed; new settlements popping up, checkpoints established, roads controlled. Ask yourself: What if a Moslem country had the power to divide up America in this fashion. Would you, protest? Toss a few rockets? Maybe even, if despair seized you, tie a bomb to your waist and march forward? Take the analogy a bit further. Suppose Russia was the powerful arbiter of a presumed peace process between you and that Moslem country. And suppose you knew that Russia and that Moslem country were in cahoots. How would you feel about Russia? How would you feel about that Moslem country? Sorry, you don’t get any nukes with which to play.

This kind of analogy may seem extreme, but consider it a task for the imagination.

Now, again, there are more settlements. There has not been an honest peace process.

To Arabs, the Palestinian plight has been “our calling card” and their rallying cry.

The Israeli-Palestinian conflict is “central to our security.” Ignore it and we continue to radicalize other Arabs, with the possible result, of war…right where the oil is. Ignore it and we will continue to fret about our security, spending untold billions. Ignore it and we will continue to abandon our freedoms as we shudder in fear about the next attack. Ignore it and we risk our safety, our wealth, and our identity. We are better than this, fairer than this. Guantanamo is an extension of this conflict.

We risk everything in not demanding parties talk without preconditions…that means Israel must agree to talk with Hamas without preconditions. That means that all parties must obey the rules…and that includes Israel, especially Israel because it is demonstrably the more powerful of the two. Israeli power requires that Israel act with real restraint. No more settlements means not only no more settlements, but no settlements at all. Further, there can be no private and secret arrangements between the U.S. and Israel on the shape of things to come. If we cannot stand up to Lakud and the right-wing radicals in Israel, , we will give the radical Ben Ladens of the world more power.

In the final analysis, we are not Israelis, nor are we Palestinians. We are Americans: Our interest comes before Israel’s. Roll back all the settlements, now. No settlement should stand. All must go. We cannot allow each new settlement to be a new bargaining chip at the peace table. No debate here. Such an action is in our best interest. It will demonstrate that we are indeed honorable.

Thus the sting is drawn from the Ben Ladens of the world.

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National Review Applauds McCain’s Dishonest Attack on Obama

Rich Lowry opines on the controversy surrounding Obama not visiting Landstuhl:

I buy the basic Obama defense of his decision not to visit Landstuhl. I don’t think he was deliberately snubbing wounded troops. So I think the McCain ad is unfair, but it hits on a key vulnerability of Obama—the sense that he’s above-it-all and entirely too grand for his own good. I think Jay Cost pretty much nails it here. If Obama’s trip proves to have been a mild negative it will be because it reinforced this sense of him.

Kevin Drum comments on Lowry:

Shorter Lowry: Yeah, he was lying, but that just makes the ad even more awesome! OK, now I’m being unfair. But considering how scurrilous this accusation was, couldn’t Lowry muster up just a slightly stronger condemnation than “but it makes a good point anyway”?

But was it unfair for Kevin to suggest that Lowry endorses brazen dishonesty. After all – the National Review routinely lies to its readers!

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Stimulus Outreach Needed?

While others are looking towards the next economic stimulus package, the Center on Budget and Policy Priorities sends word that some 5 million payments have yet to be claimed. Claiming the payments requires filing an income tax return, but some otherwise eligible individuals — notably seniors and disabled veterans — have total incomes too low to require filing a return under normal circumstances. It’s hard not to think of low-income pensioners as having a high marginal utility of $600. They have until October 15 to file.

Now, 5 million returns might not seem like a lot relative to the 134 million individual income tax returns filed in 2005 (the latest year in the Statistics of Income data). However, according to IRS data graciously provided by the CBPP, it’s 28% of the population of Social Security and VA beneficiaries needing to file. The geographical variations are pretty interesting, too:

Data courtesy of CBPP. Not shown: Alaska and Hawaii (in the top 35-39 rate group).

Somehow I don’t think it’s easier to be on a low fixed income in the Northeast or West Coast states than it is in Iowa or South Dakota. Perhaps it’s harder to reach the target population among the urban poor? More outreach appears to be in order.

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It’s All About the Governors

Roger Ailes notes that Tim Kaine (D-VA) is the frontrunner for Dem VP, while KathyG (whose post on Cass Sunstein is a must-read) notes that Tim Pawlenty (R-MN) appears likely to be McCain’s choice, likely ensuring one ovation at the Minneapolis convention.

Hmm. The man who presides over his state being described as “the state where “a child is most likely to have a successful life (Education Week 2007)’” or the man who “vetoed a highway bill that would have provided funding to repair the state’s crumbling infrastructure — including, yes, that Interstate 35W bridge” and may have lied about the status of the bridge in public.

Such difficult choices.

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Monetary Policy and Economic Shocks

OSO writes from down under:

Monetary Policy and Economic Shocks:

Poor Ben Bernanke. You gotta feel for the poor guy. Faced with a whole bunch of economic problems all occurring at once he took the only option that seemed to be open to him – which was to create more money and postpone the inevitable.

In my famous (at least famous to me) 2005 “Perfect Storm” prediction, I gave four reasons why the US economy was heading for disaster:

1) Higher oil prices caused by Peak Oil.
2) An asset price bubble in the housing market that will pop and devastate the housing market.
3) A high current account deficit caused by an overvalued US dollar that will eventually fall.
4) High levels of Federal government debt caused by budget deficits.

With all these shocks hitting the US at once, what could have been done in the last 12 months to soften the blow? Would there have been any fiscal or monetary policy that would have worked?

No – not in my opinion. Moreover there is no point trying to limit the damage because the tools at our disposal to limit the damage can’t handle the current crisis. We are in a crisis similar to that of the 1970s – whichever solution we choose the result will be bad.

One of the big problems with these four crises hitting now (and they will continue to hit for years to come) is that their effect upon monetary conditions is not uniform. Consider:

Peak Oil – inflationary
Housing Bubble – deflationary
US Dollar devaluation – inflationary
Public Debt – inflationary

If we were able to remove the housing bubble from the equation, then the solution to the crisis looks very much like raising interest rates – yet the housing bubble is very much the issue currently destroying wealth in the US. The other problems are certainly present, but their impact is not as strong. Not yet, anyway.

Yet it might be tempting for people to argue that “well, if the housing bubble popping is deflationary, the surely the inflationary effects of high oil prices will actually help”.

But, as Milton Friedman told us, “Inflation is always and everywhere a monetary phenomenon.” If one economic shock causes inflation and another economic shock causes deflation, the fact that each cancels out the other’s monetary effects really means nothing – it just means the economy collapses without any inflationary or deflationary effects at all.

I’ve been trying to scour my mind for an image or an illustration that explains this. This is the only one that has come to mind:

Imagine you own a house on a flood plain. One day, your house catches on fire. At exactly the same moment, a massive rainstorm hits upriver and causes a flood. You look at your burning house and think “Thank goodness, some water to put the fire out”. But the flood is only one metre deep – enough to cause major damage to the bottom half of your house. Meanwhile the top half of your house burns away and no fire engine can get to you to put it out. So the top half of your house burns up while the bottom half rots away underwater.

The fact that the housing bubble is deflationary does not mean that inflation caused by high oil prices fixes it. After all, it is quite possible that house prices will fall greatly while everything else in an economy rises horribly. No, instead we have multiple shocks hitting the economy and no way of mitigating them. The property bubble popping may have flooded your house, but the high oil prices are burning up the roof.

Many econ-bloggers have firm opinions of what is going on. Mish argues for a deflationary hit and pooh-poohs the idea of a stagflationary environment. Not many others seem to adhere to an inflationary or stagflationary point of view. The deflationists (such as Mish and PGL at Angry Bear) argue for standard monetary and fiscal stimulation.

Since I’ve spent time discussing the problem of monetary policy, I should also make a few points about fiscal policy and its limits. If the US government (under Congress and Bush) had actually been fiscally prudent since 2001, any fiscal stimulation plan would have some teeth to it. But since net public debt is now so high in the US (60% of GDP if I remember rightly), any attempt to run even larger deficits by the federal government will be met with even higher interest rates over the medium term, along with more current account blowouts which will shake even further the confidence that investors have in the US Dollar. That is why I have labelled “Public Debt” as having an inflationary effect earlier in this article.

Think back to the 1970s and the problems we had with inflation back then. Ian Macfarlane, the former governor of the Reserve Bank of Australia, helpfully pointed out in a series of lectures that inflation was starting to be a problem far earlier than popularly thought. He pointed out that inflation became a problem in the mid 1960s and was not caused by the oil shocks that hit the world economy in the 1970s. This, of course, is meaningful, because it shows that inflationary pressures were being generated by an overheating world economy and were thus what we would identify now as a normal part of the business cycle (high growth, low unemployment, rising inflation). Of course, when the oil shocks hit, they destabilised most industrialised nations. By themselves they caused an economic downturn along with higher levels of unemployment. But, as all former lovers of the Phillips Curve lament, the inflationary effect of the shock confused policy makers in trying to work out the best solution. In the end, fifteen years of inflation and multiple recessions was brought to a very painful close by Volcker’s interest rate hammer.

As I pointed out back in 2005, the “Perfect Storm” which is now happening is likely to plunge America – and the world – into a protracted recession. There is a chance that this may be the worst economic downturn since the great depression. Yet I would argue that the problem will not be the quickly rising unemployment rates, nor quarterly GDP in minus figures, nor losses reported by corporations, nor plunging share prices – all those things will happen, but they happen in all recessions. What will typify this particular recession will be felt not now nor in the next 6-12 months but in the next 3-5 years. It will be felt in the rise of long term unemployed, it will be felt in stagnant GDP growth quarter after quarter, it will be felt in corporations releasing less than impressive balance sheets and in share prices sitting around doing nothing. It will, in the words of Paul Krugman, end up being an “L-ish” phenomena rather than a “V” shaped recovery.

With this before us, what can we do? Monetary and fiscal tools are pretty much powerless to stop the downturn or even limit it. Moreover, if Bernanke and Congress use them unwisely they may make things worse. In the end, therefore, the only thing I think is a viable solution is for monetary policy to be used simply to control inflation and not be concerned much with economic growth – which will, by ignoring it, be the best thing to help promote it. Using monetary policy to stimulate the economy because a recession is underway is no excuse when inflation is already too high. For fiscal policy the only real solution is to limit the deficit in the short term and erase it in the medium-long term. This won’t help now – but it will help to make things better later. This, of course, is counter-intuitive, but I would argue that to increase public debt when debt levels are already unsustainable will make things worse over the long run.

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Climate

CoRev sends a note: Al Gore used the term again in his speech and testimony before Congress. But what is it we are saving the planet from? Jennifer Marohasy has put up an article titled: Denying the Climate Crisis: A Comment from Jim Peden.
We have well over 200 comments and still no Climate Crisis can be defined.
Be especially careful of the “Weather” reference.

Rdan here: Can we define the “Climate Crisis” without mentioning a laundry
list of weather events? A flood, a highest/lowest temperature, even a
hurricane are weather events, and may even set records . But they are definitely NOT CLIMATE, and therefore not a crisis. So can we define the “Climate Crisis” so often mentioned.

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What Do Economists Think About When They Think About Rationality?

Fabio Rojas has some questions for economists at Orgtheory.net.

  1. Isn’t evolutionary psychology the real challenge to neo-classical rational choice? Isn’t a tool kit of mental functions more plausible and interesting that the utility maximizing model? Isn’t that much more radical than behavioral economics, which is like neo-classical with a cherry on top?
  2. Why don’t economists have a model of when people change their preferences? For example, people seem to change as the age. Is this not true? If it is true, then why don’t we focus more on changing utility functions? Do we really prefer the same stuff all our lives in the same way?
  3. In an argument, economists will concede that people seek stuff other than money, but this is rare in published papers and nearly non-existent in economic theory. Do economists have a theory of when people maximize money as opposed to other stuff (e.g., prestige)? Or which goods are like money (smooth, continuous) and which aren’t? Or which goods are surrogates for money?
  4. Do economists ever believe in endogeneity of preferences? Do economists ever believe that institutions lead to preferences, rather than preferences leading to institutions? For example, isn’t the real reason most Americans belive in democracy is because they grew up in one, not because it maximizes their utility functions?
  5. Do economists really believe Becker’s “as if” argument? Shouldn’t there be many situations where people can’t figure out the optimal outcome? Why can’t “task difficulty” be an important feature of an economic model? Do economists cherry pick situations where optimal moves are easy for people to figure out? Doesn’t the existence of consultants and R&D departments show that firms don’t have easy access to optimal strategies and have to spend much effort in finding them?
  6. Finally, given the critiques from experimental econ, evolutionary psychology and other quarters, why is the basic model of economics still the rational actor? Have economists systematically shown it to be superior the other competitors? If so, where can I read about it?

They have some good responses in their comments section, and FWIW my response is here. I suppose if you’re a thinking non-economist and have gotten your account of economics from Becker, or worse yet from Posner, it would be fair enough to wonder if we actually believe the Chicago School’s account of the world. Many of us will say hell, no! As I recall, Dani Rodrik had a good post up some time ago making the important point that the economics tool kit shouldn’t be judged by its perhaps tendentious and/or overly influential results derived from more obviously false assumptions on reality. (I view all social science theorizing as involving a degree of falsity in service of [hopefully] clarifying one’s thinking, and I’m definitely not convinced that the other social sciences necessarily have their theoretical heads less in the clouds.) Maybe there’s a reason why we make the big bucks after all?

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City Journal’s Propositions of Economics

Mark Thoma asks for comments on a set of supposed propositions of economic science that ran in the City Journal, a/k/a the glibertarian Manhattan Institute’s house organ. I thought the best thing I could do would be to fill in some ellipses from Mark’s extended citation:

1. The market economy is the most efficient of all economic systems.

Some market economies are more market, and more efficient than others. (At the same time? Hey, is that an underpants gnome over there?!)

2. Free trade helps economic development.

Unless it’s trade in intellectual property.

3. Good institutions help development.

However, we have no idea what exactly those are.

4. The best measure of a good economy is its growth.

Growth is also acceptable as a measure of a not-so-good economy.

5. Creative destruction is the engine of economic growth.

So is non-creative destruction (see also #4).

6. Monetary stability, too, is necessary for growth; inflation is always harmful.

Especially wage inflation.

7. Unemployment among unskilled workers is largely determined by how much labor costs.

Because some sectors of the economy only have supply curves.

8. While the welfare state is necessary in some form, it isn’t always effective.

1. Freedom. 2. ??? 3. Dinner on the table!

And don’t take away our cars.

9. The creation of complex financial markets has brought about economic progress.

In the finance and/or litigation sectors.

10. Competition is usually desirable.

But we’re flexible on this in surprising ways.

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McCain Economic Advisor on McCain’s v. Obama’s Tax Proposals

Did someone feed truth serum to Douglas Holtz-Eakin:

“The choice in this election is stark and simple,” John McCain said at recent Denver event, repeating a phrase that is a staple of his stump speech. “Senator Obama will raise your taxes. I won’t.” Seems clear enough, right? It’s an old argument you already know — Republicans cut taxes, Democrats raise them. Except it’s not true, at least not in the way that it seems. But don’t take my word for it. Here is Douglas Holtz-Eakin, McCain’s chief economic policy adviser. “I used to say that Barack Obama raises taxes and John McCain cuts them, and I was convinced,” he told me in a phone interview this week. “I stand corrected.”

So McCain’s own economic advisor is saying McCain’s attack rhetoric on this issue is full of it. There’s more to this story by Michael Sherer:

But don’t expect McCain to change his rhetoric on the stump. That’s not how this game is played. On Wednesday, the Obama campaign put out a press release claiming that McCain’s economic plan was “$2.8 trillion more expensive than his advisers previously admitted.” These were ominous words, playing into the old storyline about Republicans using budget gimmickry. But it is largely based on an interpretation of a tax plan — for an optional alternative income tax system with a flat rate — that McCain has never described in detail, let alone with enough specificity to gauge. And it uses a budgetary scoring system that the Obama campaign rejects in calculations of its own proposals.

If Obama is saying McCain has turned into the double talk express and that his proposals if enacted would increase an already large Federal deficit – great. But let’s be honest. Although Obama’s proposals if enacted would not be as much of a fiscal train wreck as what McCain is suggesting, this is not exactly the fiscal austerity that this deficit hawk has been preaching:

It takes some serious work to figure out what they are actually getting at. Neither candidate has laid out an actual plan, with specific numbers, to bring America’s fiscal house into order. They do, however, offer plans that differ strikingly from each other. McCain’s tax plan benefits mostly those in higher income brackets, while Obama’s plan benefits mostly those in lower and middle income tax brackets. McCain wants a tax cut for corporate profits, while Obama has proposed a whole host of tax cuts that will benefit those in the middle-income brackets. Both candidates have new spending programs, though Obama appears to have more. And both candidates say they will cut spending elsewhere, though they fail to provide many specifics about how.

Once we factor in the deferred taxes from deficit financing, I doubt middle class Americans will see a long-term tax break regardless of who becomes our next President. But if McCain becomes President, it does appear that higher income individuals may see lower taxes, which means the average Joe will see higher taxes in the long-run.

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