"The Box That Changed the World," Project Syndicate, September 2006

Brad DeLong
Sep 1, 2006
1 comment

The Box That Changed the World

J. Bradford DeLong

It is 40 feet long, 8.5 or 9.5 feet high, and eight feet wide. It carries up to 29 tons in its 2,000 cubic feet of recommended available space – goods worth roughly $500,000 (or more) when sold at retail. It, and what it carries, can be transported in a month anywhere in the world where there are suitable harbors, railways, locomotives, flatcars, truck tractors, diesel fuel, and roads.

It is the modern cargo container, and it is able to move non-fragile, non-perishable goods from any modern factory with a loading dock to any modern warehouse anywhere in the world for about 1% of retail value. Indeed, it can be transported for a marginal cost of perhaps $5,000 – less than the price of a first-class airplane ticket, as Marc Levinson, author of the excellent The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, puts it.

All of this has happened since 1960 or so. Back then, the costs of international trans-ocean shipment for most commodities could easily amount to between 10% and 20% of retail value. The cargo container has changed everything.

When my family bought a German-made washing machine from a warehouse store in San Leandro, California, more of its cost was absorbed in the ten minutes the saleswoman spent telling us about it than in the entire journey from the factory in Schorndorf, Germany, to the loading dock in San Leandro, or in forklifting it from the loading

dock to its place in the serried ranks of washing machines which filled that corner of the warehouse. In the end, it cost to us of getting our washing machine to our front door was about eight times the cost of the machine’s voyage from the German factory to the warehouse where we purchased it.

The world is certainly not “flat,” as the New York Times columnist Thomas Friedman believes. But, in an economic sense, it is extremely small for non-perishable, non-fragile goods. Every modern factory with outgoing volume large enough for container traffic and a suitable loading dock is next door to every modern warehouse with similar features.

Yet it is not the whole world that is so small, but only that part of it that is attached to the global container-handling network. Areas that lack the necessary infrastructure are still far away from the global trading system that carries high-end German manufactured washing machines from Westphalian factories to California warehouses for just a penny a pound.

For example, if your electricity is unreliable, so that you can’t count on being able to pump the diesel into the truck tractor, you are not attached to the network. If the volume of your production is too small to fill 2,000 cubic feet of space headed for a single country, you are not attached to the network.

Likewise, if the money to fix your roads was embezzled, so that nobody wants to risk their tractors on them, you are not attached to the network. If your courts function so badly that few outsiders are confident that what you say is theirs really is theirs, you are not attached to the network. If nobody has yet noticed what your workers can produce, you are not attached to the network. If your entrepreneurs cannot build organizations at container-scale without attracting politically well-connected extortionists, you are not attached to the network.

For any poor segment of the world economy, getting attached to the global container network is an immense opportunity. But it is an opportunity that requires that everything – infrastructure, scale, public administration, governance, and foreign knowledge of your production capabilities – work just right. And if you have not first built up the social networks that enable your workers and their bosses to know what kinds of manufactured goods would generate high demand in the rich post-industrial core of the world economy, it doesn’t matter even if you are attached to the global container network.

Many have written about how telecommunications technology is bringing about the “death of distance.” Indeed, nowadays, you can talk to anybody, anywhere. But it is the cargo container that appears to have brought about a more effective and – so far – more significant “death of distance.” For, in a commercial sense, at least, the goods we ship across oceans still far outweigh the words we chatter around the world.

"Man’s Fate/Man’s Hope," Project Syndicate, October 2006

Man’s Fate/Man’s Hope

J. Bradford DeLong

For quite a while now—certainly since the terrorist attacks on the US of September 11, 2001, and before as we watched the slaughters in Kosovo, Sarajevo, Srebrenica, Rwanda, and Congo on our televisions—the news has been dominated by war and rumors of war, by violent death and threats of violent death. Everyone, everywhere is keenly aware of the power of our weapons. From nuclear-tipped missiles down to trucks full of fertilizer or explosives worn as belts, we have used our technology to amplify greatly the dark parts of our nature as a violent—and not even a properly predatory—species.

I certainly do not want to downplay or dismiss this side of humanity’s history and our current events. I do not want anyone to forget that over less than half of the years contained in the past century—from the outbreak of World War I to the famine that followed Mao’s “Great Leap Forward”—about one in every ten people alive on this planet was shot, gassed, stabbed, burned, or starved to death by his or her fellow human beings.

But that is not the whole story. Indeed, the human abattoirs of the twentieth century—and even the slaughterhouses that various humans are preparing now—may not appear from the perspective of the future to be the most important part of our experience and condition, and of what our descendants will regard as their history. For them, the most important features of what our experience may instead be:

· What UN demographers foresee as the end of the population explosion: the halting of the growth of the human population at ten billion or so around the middle of this century;

· The coming of a truly humane world as the numbers of those engaged in subsistence agriculture, or those whose wages are kept at subsistence-agriculture levels by labor market pressure from those who have migrated from the countryside into teeming cities, fall to a small fraction of human populations.

For most of the twentieth century, large chunks of the world remained desperately poor for one or more of four related reasons: (1) criminal misgovernment; (2) lack of the machines to do anything useful and productive in the world economy besides subsistence agriculture and unskilled service work; (3) lack of the public education system needed to give people the literacy and the skills to operate the machines; and (4) barriers (legal and physical) that kept people where demand was low from selling the products of their work where demand was high.

But over the course of the late twentieth century, these four causes of desperate poverty have largely fallen away. Governments as bad as Kim Jong-Il’s in North Korea are now extremely rare. Nearly all countries in the world are at most one generation away from near-universal literacy. The fast pace of technological progress has created a cornucopia of invention and innovation that is open to every place that can send someone away to get a master’s degree in engineering.

Most important, the barriers to making goods and services in Mauritius, Mozambique, or Mauritania and selling them in New York or Berlin, Santiago or Tokyo are dropping swiftly. The gargantuan container ships that first appeared a generation ago brought one revolution to world trade.

The use of information technology to manage transportation and distribution channels is likely to have a similarly profound effect. Moreover, the advent of the Internet and the fiber-optic cable will do as much to make service-sector work internationally tradable as the coming of the iron-hulled steamship a century and a half ago did to make bulk agricultural products and manufactures internationally tradable.

It will take at least a generation for these changes to make themselves felt in most corners of the world. But inside the industrial core of the world’s rich countries there is already concern about these looming revolutions. Indeed, this concern will only become sharper and stronger, as citizens in rich countries fear that as the remaining barriers to international trade fall, industrial-core income distributions, social orders, and politics will be shaken to their foundations.

For the world as a whole, however, the next two generations are ones that will bring an extraordinary opportunity for economic growth and world prosperity. Perhaps at the end of history there is a pot of gold, after all.

"Has Neo-Liberalism Failed Mexico?" Project Syndicate, November 2006

Brad DeLong
Nov 1, 2006
1 comment

Has Neo-Liberalism Failed Mexico?

J. Bradford DeLong

Six years ago, I was ready to conclude that the North American Free Trade Agreement (NAFTA) was a major success. The key argument in favor of NAFTA had been that it was the most promising road the United States could take to raise the chances for Mexico to become democratic and prosperous, and that the US had both a strong selfish interest and a strong neighborly duty to try to help Mexico develop.

Since NAFTA, Mexican real GDP has grown at 3.6% per year, and exports have boomed, going from 10% of GDP in 1990 and 17% of GDP in 1999 to 28% of GDP today. Next year, Mexico’s real exports will be five times what they were in 1990.

It is here – in the rapid development of export industries and the dramatic rise in export volumes – that NAFTA made the difference. NAFTA guarantees Mexican producers tariff and quota-free access to the US market, the largest consumer market in the world.

Without this guarantee, fewer would have invested in the capacity to satisfy the US market. Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing.

Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity. Likewise, greater efficiency should have been reinforced by a boom in capital formation, which should have accompanied the guarantee that no future wave of protectionism in the US would shut factories in Mexico.

The key word here is “should.” Today’s 100 million Mexicans have real incomes – at purchasing power parity – of roughly $10,000 per year, a quarter of the current US level. They are investing perhaps a fifth of GDP in gross fixed capital formation – a healthy amount – and have greatly expanded their integration into the world (i.e., the North American) economy since NAFTA.

But the 3.6% rate of growth of GDP, coupled with a 2.5% per year rate of population and increase, means that Mexicans’ mean income is barely 15% above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago. (Indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico.)

Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade. We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years.

To be sure, economic deficiencies still abound in Mexico. According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. But these deficiencies should not be enough to neutralize Mexico’s powerful geographic advantages and the potent benefits of neo-liberal policies, should they?

Apparently they are. The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.

We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption. We thus implicitly suggest that Mexicans would be far wose off today without NAFTA and its effects weighing in on the positive side of the scale.

That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.

"Friedman Completed Keynes," Project Syndicate, December 2006

Brad DeLong
Dec 1, 2006
1 comment

Friedman Completed Keynes

J. Bradford DeLong

The most famous and influential American economist of the past century died in November. Milton Friedman was not the most famous and influential economist in the world -- that honor belongs to John Maynard Keynes. But Milton Friedman ran a close second.

From one perspective, Milton Friedman was the star pupil of, successor to, and completer of Keynes’s work. Keynes, in his General Theory of Employment, Interest and Money , set out the framework that nearly all macroeconomists use today. That framework is based on spending and demand, the determinants of the components of spending, the liquidity-preference theory of short-run interest rates, and the requirement that government make strategic but powerful interventions in the economy to keep it on an even keel and avoid extremes of depression and manic excess. As Friedman said, “We are all Keynesians now.”

But Keynes’s theory was incomplete: his was a theory of employment, interest, and money. It was not a theory of prices. To Keynes’s framework, Friedman added a theory of prices and inflation, based on the idea of the natural rate of unemployment and the limits of government policy in stabilizing the economy around its long-run growth trend – limits beyond which intervention would trigger uncontrollable and destructive inflation.

Moreover, Friedman corrected Keynes’s framework in one very important respect. The experience of the Great Depression led Keynes and his more orthodox successors to greatly underestimate the role and influence of monetary policy. Friedman, in a 30-year campaign starting with his and Anna J. Schwartz’s A Monetary History of the United States , restored the balance. As Friedman also said, “and none of us are Keynesian.”

From another perspective, Friedman was the arch-opponent and enemy of Keynes and his successors. Friedman and Keynes both agreed that successful macroeconomic management was necessary - that the private economy on its own might well be subject to unbearable instability and that strategic, powerful, but limited economic intervention by the government was necessary to maintain stability. But, while for Keynes, the key was to keep the sum of government spending and private investment stable, for Friedman the key was to keep the money supply -- the amount of purchasing power in readily spendable form in the hands of businesses and households-- stable.

A relatively minor, technical difference in means, you might say. A difference of opinion that rested on different judgments about how the world works, which could (and ultimately was) resolved by empirical research, you might say. And you would be half right. For this difference in means, tactics, and empirical judgments rested on top of deep gulf in Keynes’s and Friedman’s moral philosophy.

Keynes saw himself as the enemy of laissez-faire and an advocate of public management. Clever government officials of goodwill, he thought, could design economic institutions that would be superior to the market -- or could at least tweak the market with taxes, subsidies, and regulations to produce superior outcomes. It was simply not the case, Keynes argued, that the private incentives of those active in the marketplace were aligned with the public good. Technocracy was Keynes’s faith: skilled experts designing and fine-tuning institutions out of the goodness of their hearts to make possible general prosperity -- as Keynes, indeed, did at Bretton Woods where the World Bank and IMF were created.

Friedman disagreed vociferously. In his view, it usually was the case that private market interests were aligned with the public good: episodes of important and significant market failure were the exception, rather than the rule, and laissez-faire was a good first approximation. Moreover, Friedman believed that even when private interests were not aligned with public interests, that government could not be relied on to fix the problem.

Government failures, Friedman argued, were greater and more terrible than market failures. Governments were corrupt. Governments were inept. The kinds of people who staffed governments were the kinds of people who liked ordering others around.

At the same time, Friedman believed that even when the market equilibrium was not the utilitarian social-welfare optimum, and even when government could be used to improve matters from a utilitarian point of view, there was still an additional value in letting human freedom have the widest berth possible. There was, Friedman believed, something intrinsically bad about government commanding and ordering people about -- even if the government did know what it was doing.

I do not know whether Keynes or Friedman was more right in their deep orientation. But I do think that the tension between their two views has been a very valuable driving force for human progress over the past hundred years.

Teaching California Teenagers About Ramadan

A week or two ago, in preparation for the virtual drinking party at the Valve next week, I was thinking about this paragraph from Walter Benn Michaels's The Trouble with Diversity:

American Prospect Online - The Trouble With Diversity: So with respect to race, the idea is not just that racism is a bad thing (which of course it is) but that race itself is a good thing. And what makes it a good thing is that it's not class. We love race -- we love identity -- because we don't love class. We love thinking that the differences that divide us are not the differences between those of us who have money and those who don't but are instead the differences between those of us who are black and those who are white or Asian or Latino or whatever. A world where some of us don't have enough money is a world where the differences between us present a problem: the need to get rid of inequality or to justify it. A world where some of us are black and some of us are white -- or bi-racial or Native American or transgendered -- is a world where the differences between us present a solution: appreciating our diversity. So we like to talk about the differences we can appreciate, and we don't like to talk about the ones we can't...

At that moment the Daily Bulletin from the sixteen-year-old's high school hit my inbox. It said, in part:

RAMADAN & YOM KIPPUR: Leadership is very interested in helping the students celebrate and/or observe the religious holidays of Yom Kippur and Ramadan. If you observe either of these and are interested, please stop by B-1 sometime and let Mr. Petrocco know. The hope is to set up some displays in the library. Be aware in the future the Leadership Class will be displaying other religious holiday materials as the holidays occur...

Now normally--in my usual mind--I am an enthusiastic supporter of what I take to be Walter Benn Michaels's central point: that we have collectively gotten ourselves off balance because we are responding to the fact that celebrating diversity is easy and doing something about upward mobility and the intergenerational reproduction of economic and social inequality is hard.

When I am in my usual mind I grumble that the $400,000 a year that we at Berkeley are about to start spending on an Associate Vice Chancellor for Diversity would be better spent hiring ten full-time outreach coordinators and on-campus tutors to make the idea of equality of opportunity less of a joke, and to make the population that does attend Berkeley a little bit more like the population that could benefit from attending Berkeley--if only things had broken right for them before they reached college age.

But I must be outside my usual mind. Because my reaction right now is that we love identity not just because we don't like to think about economic and social class, but because loving identity is a genuinely good thing in a diverse world, especially for America and Americans if we are to become who we are.

Some of us are rich and some of us are poor. Some of us send our children to high schools where they will take two years of calculus. Some of us send our children to high schools where they will still be shaky on their multiplication tables when they leave. Some of us send our children to high schools where they teach five sections of AP European History to tenth graders. Some of us send our children to high schools where they don't. And as a card-carrying child of Adam Smith and company, I think that is the most important polarizing dimension in America today.

But it is also true that some of us are black and some of us are white; some of us are Muslim and some of us are Mormon; some of us have grandparents who speak Spanish and some of us have grandparents who speak Cantonese. These dimensions of difference are important also, perhaps especially so because we as a nation are pretty good at dealing with them.

Were Ken Lay and Jeff Skilling "Innocent"?

Megan McArdle thinks that Ken Lay and Jeff Skilling and Richard Causey (who in the end pled guilty just before the trial, thus playing havoc with Skilling's and Lay's planned defenses) were factually innocent. Or maybe she doesn't:

Asymmetrical Information: the only solid evidence that Messrs Skilling and Lay were "just as guilty" as Mr Fastow comes from... Mr Fastow, who got a drastically reduced sentence for telling the prosecutors this. Mr Fastow is the fellow we know stole from the company; the conviction of the others is based largely on his testimony. I haven't followed the case all that closely....

There is a small (but I believe growing) school of thought on Enron which argues that Enron was a fairly healthy business--done in not by deteriorating financials, papered over by accounting fraud, but rather by a collapse in trust in the market place, helped along by appallingly bad financial journalism, which basically caused a bank run. Since Enron was a trading operation, which requires liquidity to stay in business, profitability was irrelevant; they were killed by a credit crunch.

I don't assert that this is the case, mind you, though I find it at least plausible given my knowlege of the case.... Mr Fastow is the only higher-level executive against whom the government possessed a smoking gun. So this isn't a case of Fastow getting the ride on the lifeboat because he was the first conspirator to break, which is the general excuse for such plea bargains. In this case, the most obviously, incontravertibly guilty person in the case got a much, much lighter sentence because he testified against others whose guilt was more arguable....

According to Enron, it had stockholders' equity of $11 billion at the end of 2000. It gained an extra $2 billion from the California energy crisis in the winter of 2001. Yet by the fall of 2001 all of that was gone--Enron was bankrupt.

A bank that runs into confidence problems--that has a "run on the bank"--can go bankrupt. A bank has lots of short-term liquid liabilities, and lots of long-term illiquid assets that it can turn into cash only at heavy discounts.

But Enron was not a bank. Enron was--or was supposed to be--an asset-light trading operation. Its assets and liabilities were (a) securities and (b) promises to buy or sell energy and other commodities in quantity at various times in the future. These are not the kinds of assets that should lose much value even in a fire sale--even if it is accompanied by "appallingly bad financial journalism."

When Enron lost credibility--if it were a trading company--it should have been able to unwind its operations coherently, sacrificing some but not all of its $13 billion in equity to grease the deals. It was--or was supposed to be--a properly-hedged trading company with liquid assets, not a highly-leveraged bank with illiquid assets. But Enron went belly-up. Its unsecured creditors got 30 cents on the dollar. They are now (with Andy Fastow's help) hunting for the heads of the banks that did the paperwork for Enron's financial frauds.

It seems overwhelmingly likely that the $13 billion in stockholders' equity never existed. Enron marked its positions to market--which means that when it signed a contract with, say, a midwestern city to provide it with power for the next 20 years, it claimed the whole value of that contract as income in that quarter. And how did it calculate the long-run present value of the contract? It let the person who negotiated the contract say what it was worth.

Enron had--before Skilling--had a somewhat more sophisticated risk-control system. They had people in charge of reviewing and monitoring the contracts made--experts in figuring out what the contract would be worth if it were a liquid security. People like Vince Kaminski, who one day, Kurt Eichenwald reports, got a call from Enron President Jeff Skilling:

"There have been some complaints, Vince, that you're not helping people do transactions," Skilling said. "Instead, you are spending all your time acting like cops." A pause. "We don't need cops, Vince."

When you remove the "cops," you create the mother of all principal-agent problems. Each time a contract was completed, the contract was valued as if it were a liquid security by the negotiator who closed the deal. This meant that a negotiator desperate to reach a deal could (a) give away the store to the counterparty, (b) still make assumptions in his "mark to market" valuation that made the deal look really profitable, and so (c) help Skilling and Lay report another banner quarter for earnings. But you are reporting profits that do not really exist--and claiming stockholders' equity that is not really there.

For example:

http://www.thunderbird.edu/wwwfiles/pdf/about_thunderbird/case_series/a15040016.pdf#search=%22arthur%20anderson%20enron%20restatement%20of%20assets%22: The Dabhol, India, project was a microcosm of Enron’s business model. In December 1993, after roughly 18 months of negotiations, Enron Development signed a long-term power sales contract with the electricity board of Maharashtra, India (MSEB). Enron would build a 2000-megawatt natural gas- fueled power plant at an estimated cost of $2.8 billion. The Maharashtra energy board agreed to buy 90% of the power produced by the plant at a U.S. dollar-denominated price for a minimum of 20 years.

From the very beginning, problems mounted. It took Mark more than two years and millions of dollars in negotiations, court cases, and contract restructurings to get the financing in place. Within months, a change in the Maharashtra government resulted in an outpouring of project opposition. Once again, Mark went into overdrive for months of negotiations and renegotiations. Finally, on February 23, 1996, a new contract was signed between Enron and the MSEB. By December, financing was in place and the project’s construction resumed. But opposition continued, and it became clear that the MSEB would never be willing or able to pay for the power (estimated at over $30 billion for the project life).

The project was dead. In the words of one Wall Street Analyst on Enron’s India activities, “I’ve never been to another country where every single person hates one company.” Phase I of the project was operational for only a short period of time, and Phase II, as of December 2003, was still only 80% complete. The Dabhol power plant today is considered a failure for everyone involved but Rebecca Mark. Mark earned bonuses for both the original deal [in 1993] and the successful renegotiation [in 1996]. In 1996, Enron International generated 15% of Enron’s total earnings, and was expected to grow at double-digit rates for years to come. Rebecca Mark was named CEO of Enron International. Many people believed that Rebecca Mark would be Enron’s next CEO...

And:

[I]n July 2000 Enron signed a 20-year agreement with Blockbuster Video to introduce entertainment on demand.... Pilot projects in Portland, Seattle, and Salt Lake City were created to stream movies to a few dozen apartments.... Based on these pilot projects, Enron... recognized... profits of more than $110 million from the Blockbuster deal...

And:

Enron entered into a $1.3 billion, 15-year contract to supply electricity to the Indianapolis company Eli Lilly... [booked] the present value of the contract... more than half a billion dollars, as [current] revenues. Enron then had to report the present value of the costs of servicing the contract as an expense. However, Indiana had not yet deregulated electricity, requiring Enron to predict when Indiana would deregulate and how much impact this would have on the costs of servicing the contract...

And we haven't even gotten to Andy Fastow and his special purpose entities yet...

One Trouble with "The Trouble with Diversity"

It is somewhat odd. You would think that I would be an aggressive cheerleader for Walter Benn Michaels's The Trouble with Diversity. After all, if you proposed to take six ladder-faculty slots from Berkeley's Ethnic Studies Department and move two of them to Economics, two of them to Sociology, and two of them to the business school to hire people to really study the workings of the labor market, the intergenerational transmission of inequality, and compensation patterns within organizations--I would say that that would be a wonderful idea, and that it would make Berkeley a better university and the world a better world.

If you were to ask me who did more for the American minorites who are underrepresented at elite universities, and gave me a choice between (a) all the diversity deans in America and their staffs or (b) the neoliberals on the Clinton economic policy team who pushed through the 1993 expansion of the Earned Income Tax Credit that boosts the collective incomes of poor Americans by what is now some $30 billion a year, I would have no hesitation in coming down on the side of Bill Clinton and his team--including, in a minor spear-carrying role, me--who changed in our own minor way not social consciousness but social being back in 1993.

I ought to be part of this book's core constituency.

But, instead, The Trouble with Diversity raises my hackles.

Let's dip into it. I flip it open, and land on page 85:

p. 85 ff: But the greatest value of diversity is not primarily in the contribution it makes to students' self-esteem. Its real value, as the widespread acceptance of affirmative action shows, is in the contribution it makes to the collective fantasy that institutions like Harvard and UIC are... meritocracies. For if the students at Harvard are appropriately diverse, we know that no student is being kept from Harvard because of his or her race or culture.... How, then, do some students end up at Harvard and some at UIC? Since the differences between them that produce this divergence are not (indeed cannot be) cultural (remember, cultures are equal), they are attributed instead to the merit of the individual....

This helps explain the popularity on campus... of affirmative action: it is a powerful tool for legitimizing their sense of their individual merit.... Affirmative action guarantees that... the white students on campus can understand themselves to be there on merit because they didn't get there at the expense of any black people. The problem with affirmative action is..,,, that it produces the illusion that we actually have a meritocracy.... [I]magine what that Harvard classroom would look like if we... [made] the [parental] income distribution at Harvard... look like the income distribution of the United States, over half the [current students]... would be gone.... Its no wonder that rich white kids and their parents aren't complaining about diversity. Race-based affirmative action... is a kind of collective bribe rich people pay themselves for ignoring economic inequality. The fact (and it is a fact) that it doesn't help to be white to get into Harvard replaces the much more fundamental fact that it does help to be rich....

Hence the irrelevance of Harvard's 2004 announcement that it wouldn't ask parents who earn less than [$60,000] a year to [contribute anything to tuition].... While this is no doubt great news to those financially pressed students who have gone to top high schools, taken college-prep courses, and scored well on their SATs, it is bound to seem a little beside the point to the great majority of the poor, since what's keeping them out of elite universities is not their inability to pay the bill but their inability to qualify for admission in the first place....

[...]

We like diversity and we like programs such as affirmative action because they tell us that racism is the problem... that solving it requires us just to give up our prejudices. (Solving the problem of economic inequality might require something more; it might require us to give up our money.)...

[...]

So on the one hand, we get affirmative action in universities, which solves a problem that no longer exists. It's their lack of family wealth, not the color of their skin, that disproportionately keeps blacks out of elite colleges.... The injury done to the poor... has taken place long before anybody gets to Harvard. But this doesn't mean that these solutions to fake problems serve no purpose. The purpose they serve is to disguise the real problem. We need, as I've already suggested, to believe that poor people aren't kept out of our elite universities in order to also believe that the economic advantages conferred by going to them are earned and so are justified. If going to Harvard is more a reflection of your family's wealth than it is of your merit... then, of course, the legitimating effect disappears. So the real point... the function of the (very few) poor people at Harvard is to reassure the (very many) rich people at Harvard that you can't just buy your way into Harvard...

I find that I cannot help but be annoyed by this.

I am annoyed by the shoddy sloppy neo-functionalist false-consciousness sociology. Perverse functionalist consequences that are asserted without supporting evidence are the "real" "purpose" of affirmative action programs. That's simply wrong in fact, and illegitimate in argument. It's taking 1970s-style cultural Marxism and eliminating the rational kernel while retaining only the mystical shell. Get rid of affirmative action in America tomorrow, and I guarantee that there will not be a great movement to tackle and repair the educational and other inequities and barriers that are driven by our Second Gilded Age distribution of income and wealth.

The primary purpose of affirmative action at elite universities is to partially--partially--counteract the steep differences in wealth distributions across races and ethnicities that our ancestors passed down to us, and give us as a society a chance to make full use of the talents and capabilities of the most fortunate and lucky slice of the rising generation of African-Americans, Hispanics, et cetera--not just of whites and Asians. The primary purpose is not to make the current cohort of students sleep more soundly.

The argument that Michaels is making is, I think, a version of what Albert Hirschman calls "the argument of the perverse effect" in his little book on The Rhetoric of Reaction: the claim that one's intellectual adversaries, are not just directing their efforts at low-value targets, but are doing positive harm. I see this argument every year when I teach Malthus. In Malthus's formulation, the argument is:

You Enlightenment liberals think your attacks on Throne and Altar are liberating humanity from the chains of superstition and ignorance. Fools! Break those chains and you will find humanity enslaved to its sexual appetites, population will rise until checked by famine and epidemic, and life will become even nastier, more brutish, and shorter than before.

Michaels's argument seems to me to have the same structure:

You twenty-first century diversity liberals think that you are reducing inequality. Fools! The more you reduce race, ethnic, and cultural inequality the more you legitimate and reduce pressure on the big enchilada, economic inequality.

I do think there is a difference between Malthus and Michaels. Malthus makes arguments and presents evidence. To counter Malthus's arguments--and I think that for the post-1500 period they can be countered--you have to engage him on the substance. Michaels, by contrast, makes assertions--where is the evidence? How can you respond? By saying, "Your father was a hamster and your mother smells of elderberries. Now go away, before I taunt you again"?

And Harvard's "irrelevant" policy of not asking for money for parents making under $60,000 a year? I think that there are 1,000 families today for whom that policy is not "irrelevant." It's $2 million a year.

"Looking Tough" Is Not a Plan--Well, Not a Good Plan Anyway

Very odd. Jeff Herf is a smart man, but he thinks that NATO's decision to put intermediate-range nuclear missiles in Europe in the early 1980s was an important cause of the collapse of the Soviet Empire at the end of the 1980s:

Open University: The British historian Michael Howard's essay collection, The Causes of War presents a number of trenchant essays about "the forgotten dimensions of strategy" that applied this tradition to the cold war in Europe. In 1991 I published, War by Other Means: Soviet Power, West German Resistance and the Battle of the Euromissiles. It brought together the study of the political culture of West Germany with an examination of the balance of power between the Soviet Union and the Western alliance. Oddly, it remains one of the few, perhaps the only work that gives the battle of the euromissiles the historical significance it deserves as one precondition for Western victory in the cold war. One can still read recently published accounts of the cold war that barely mention it or even assume that it had nothing to do with the subsequent implosion of the Soviet Union and its empire and that the events of 1989 were overwhelmingly, and again, the result of events and trends internal to the Soviet Union. In writing and researching that book, it became clear to me that policy makers in West Germany and in Washington paid a far more attention to the impact of events within societies on the capacity of states to sustain "will" and generate power than historians focused on internal histories of societies assumed would be the case. Many of them also believed that the battle of the euromissiles, far more than a "star wars" system that was never built, was one of the turning points of the cold war. Historians of the cold war have yet to give those events the significance they deserve...

War by Other Means: Soviet Power, West German Resistance and the Battle of the Euromissiles is a very good book. But I cannot help but think that for "policy makers in West Germany and Washington" we should read "neoconservative nutboys" eager to justify the waste of money on intermediate-range nuclear missiles.

NATO's deployment of IRBM's did not strengthen but weakened the alliance's strategic position. The IRBM's were expensive--the money could have been been spent on something useful. The IRBMs created a new point of vulnerability--another weak point where some insane colonel could set in motion events that might kill us all. The IRBMs did not add to NATO's strategic options: they could do nothing that Trident missiles could not do at least as effectively.

Herf says that the deployment of the IRBMs was a "victory" for NATO because it demonstrated that the alliance governments had the "will" to, in the face of mass demonstrations, deploy an expensive and useless weapons system that increased the danger of nuclear catastrophe. And this triumph of the will is supposed--somehow, the links are not drawn (and I do not believe could be drawn)--to have "been an important cause of the collapse of the Soviet Empire." I, by contrast, say: thank God NATO did not have many more such "victories."

I suspect that Jeff Herf may have fallen victim to a common neoconservative disease: that it is a positive benefit to acting stupid because it makes you "look tough," and "looking tough" is good. But in reality what neoconservatives call "looking tough" is "being stupid."

Pre-Industrial Malthusian Population Dynamics

In the year 1--we guess--world population was about 170 million. In the year 1650--we guess--it was about 540 million. This tripling of world population over the course of one and two-thirds millennia was accompanied by very little improvement in the standard of living of the median peasant (though things may well have been very different for the upper-class elite). We can thus say that world real GDP--at least when measured in terms of necessities rather than luxuries--roughly tripled over this one and two-thirds millenium.

We can feed these numbers to a standard Solow growth model with natural resources, as in:

J. Bradford DeLong (2006), "Lecture Notes: Econ 101B: Explorations in the Theory of Economic Growth: Natural Resources and Malthusian Population Dynamics" http://delong.typepad.com/print/20060905_lecture_notes.pdf

We then conclude that the rate of real GDP and population growth over this period was roughly 0.07% per year. Under the further assumption that natural resources had a parameter of roughly 0.3 in the world economy's production function back then, we can calculate that total factor productivity growth in the pre-industrial world averaged 0.02% per year.

Compare and contrast that to the 2-3% per year of total factor productivity growth in the world today.

Fire George F. Will

Brad DeLong's Semi-Daily Journal: Why Oh Why Can't We Have a Better Press Corps? (Yet Another Washington Post Edition)

It really is a small thing. Or is it? It's a column by jounamalistic opinionator George F. Will on October 18, 2006 http://www.washingtonpost.com/wp-dyn/content/article/2006/10/18/AR2006101801502.html. One sentence begins:

Economic hypochondria, a derangement associated with affluence, is a byproduct of the welfare state: An entitlement mentality gives Americans a low pain threshold -- witness their recurring hysteria about nominal rather than real gasoline prices...

The very next sentence reads:

Economic hypochondria is also bred by news media that consider the phrase "good news" an oxymoron, even as the U.S. economy, which has performed better than any other major industrial economy since 2001, drives the Dow to record highs...

I repeat: one sentence condemns economic hypochrondriacs for not noting that it is nominal and not real gasoline prices that are at all-time highs, and the next sentence--the very next sentence--condemns economic hypochondriacs for not being enthusiastic about the fact that the nominal (but not the real) Dow-Jones Industrial Average stock market index is at an all-time high.

It is bad, and it is bad, to talk about the nominal rather than the real level of gasoline prices--to fail to adjust for inflation and so fail to note that the real cost of acquiring a gallon of gasoline in terms of tangible resources rather than paper banknotes is less than it was twenty-five years ago. It is surely also bad, and just as bad, to talk about the nominal, not inflation-adjusted "Dow... [driven] to record highs."

Adjusting for inflation is a good thing to do that leads to less inaccurate information and better analyses. It would be a good thing for George F. Will to do to do when noting the point makes his argument against what he calls "economic hypochondria" stronger. It would be a good thing for George F. Will to do when noting the point makes his argument against what he calls "economic hypochondria" weaker.

George F. Will, of course, does not see things this way. That real prices are much more important and relevant, and that nominal prices are misleading and uninformative, is not--in his view--a general analytical principle. It is, instead, a rhetorical point: a point worth making only when it strengthens his case. The possibility that there is something out there called "the truth" which is best explicated by correct economic analysis adjusting for inflation, using real rather than nominal prices--that idea is simply not in George F. Will's conceptual world. He does not view his readers as clients to be informed. He views them as cattle to be driven to whatever conclusion his own prejudices, ideologies, and personal commitments find convenient.

To put it bluntly: American journalism is badly broken. The fact that opinionators like George F. Will hold on to their journalistic market shares in America is quite horrifying to an economist who really does believe in markets, and expects market competition and consumer choice to drive prices of goods and services down and the quality of goods and services up. Competition has indeed driven prices down: you can read George F. Will for free on the world wide web. But competition has not driven the quality of the Washington Post's editorial page up: George F. Will still appears on it, and appears to feel no need to have anybody check his columns for economic illiteracy before he submits them, and the Washington Post editors appear to feel no need to fact-check his columns before they publish them.

And it is not as though this is an exceptional column, or even that the passages I quote are exceptional within the column. Economist Kash Mansouri, at his new weblog "The Street Light," says that he finds: "Every single one of the points that Will makes... misleading, disingenuous, beside the point, or all three..."

It's a big problem: Without informed citizens, we are unlikely to have informed policymakers. And without informed policymakers, we are unlikely to have good economic policies. So we economists urge all you readers to do your part in making the market for good journalism about economics and economic policy work. Find trustworthy sources of information who regard you as clients to be informed. View with suspicion all those who switch their arguments and analytical frameworks from week to week and even sentence to sentence--who regard you as cattle to be driven rather than clients to be informed.

Berkeley 101b Fall 2006’s Neighborhood