Barack Obama's hypocrisy on school choice

Cato-at-Liberty points out Barack Obama's hypocrisy on school choice.

After telling a gathering of the American Federation of Teachers that he opposes school voucher programs ... Senator Obama added that: “We need to focus on fixing and improving our public schools; not throwing our hands up and walking away from them.”

Senator Obama sends his own two daughters to the private “Lab School” founded by John Dewey in 1896, which charged $20,000 in tuition at the middle school level last year. Though he says “we” should not be “throwing up our hands and walking away” from public schools, he has done precisely that.

That is his right, and, as a wealthy man, it is his prerogative under the current system of American education, which allows only the wealthy to easily choose between private and government schools. But instead of offering to extend that same choice to all families, Senator Obama wants the poor to wait for the public school system to be “fixed.”

The reason one should favor school choice is that our public school system is a monopoly and monopolies tend to be inefficient. Competition forces institutions to improve or die. Monopoly allows them to stagnate.

America's colleges have to compete with each other, so it is not surprising that our college system is widely considered the best in the world. Our local public school monopolies face almost no competition, so it should not be surprising that America's public school students generally rank quite low on international tests.

Graph: earnings by level of education

Notice that there are two big gaps in the graph. The first is between "some college" and a bachelor's degree. The second is between a master's degree and a doctoral/professional degree.

A discussion about nuclear energy as a solution to global warming

The German magazine Spiegel Online interviews David Crane, the CEO of NRG Energy about nuclear energy:

SPIEGEL ONLINE: Republican presidential candidate John McCain has proposed building 45 new nuclear reactors by 2030 with a longer term goal of 55 more. His Democratic opponent, Barack Obama, is also in favor of more atomic energy. Is the US experiencing a nuclear power renaissance?

David Crane: It's still in the early stages. Clearly, the defining incident when it comes to the acceptance of nuclear energy in Europe was Chernobyl in 1986. But in this country, it was Three Mile Island near Harrisburg, Pennsylvania, which was seven years earlier than Chernobyl and a much less serious incident. You basically have to be 45 or 50 years old in the US to remember Three Mile Island.

SPIEGEL ONLINE: You mean to say that people are beginning to forget about the dangers of nuclear power?

Crane: There is a perception that the American public is ready for nuclear. It's a combination of things, and one of them is generational change. The overriding concern in this country, just like in Europe, is global warming. The recognition by most pragmatic people is that nuclear is the only advanced technology that exists to replace coal-fired power plants on a significant scale. This has jump-started the renaissance. ...

SPIEGEL ONLINE: What should the energy mix of the future look like?

Crane: Obviously, we Americans are the most wasteful people on Earth. Right now, coal produces 50 percent of our power and nuclear 20 percent in the US. It would be nice over time — by 2050, the year most global warming legislation is aimed at — to have these percentages reversed. Right now, the US consumes 4.5 trillion kilowatt hours of electricity. Maybe you can get that down to 4 trillion, but that would demand a huge push towards conservation, which will be very difficult. If you turn all 240 million cars and light trucks in the US to electric-powered vehicles while boosting the share of nuclear power, the amount of carbon emissions that would be saved overall would be enormous.

SPIEGEL ONLINE: Imagining for a moment that so many new nuclear reactors do go on line, what is to be done with all of the radioactive waste? Even after years of debate on the issue, there is still no solution regarding final disposal.

Crane: A lot of people talk about a final solution, and we do need one. But this solution of on-site waste storage is deemed to be safe for a long time. Global warming is an immediate issue that nuclear energy can help solve. We should solve this issue now and solve the nuclear waste issue over the next 200 years.

What exactly is a recession? An answer from the National Bureau of Economic Research

The National Bureau of Economic Research is the official judge of U.S. recessions. There is a myth popularized by the press that it defines a recession as two quarters of declining real GDP. The real answer is a bit more complex. Here is what the NBER has to say:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

In choosing the dates of business-cycle turning points, we follow standard procedures to assure continuity in the chronology. Because a recession influences the economy broadly and is not confined to one sector, we emphasize economy-wide measures of economic activity. We view real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, we therefore place considerable weight on the estimates of real GDP issued by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce. The traditional role of the committee is to maintain a monthly chronology, however, and the BEA's real GDP estimates are only available quarterly. For this reason, we refer to a variety of monthly indicators to determine the months of peaks and troughs.

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. We also look at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

The committee's approach to determining the dates of turning points is retrospective. We wait until sufficient data are available to avoid the need for major revisions. In particular, in determining the date of a peak in activity, and thus the onset of recession, we wait until we are confident that, even in the event that activity begins to rise again immediately, it has declined enough to meet the criterion of depth. As a result, we tend to wait to identify a peak until many months after it actually occurs.

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.

Q: Isn't a recession a period of diminished economic activity?

A: It's more accurate to say that a recession—the way we use the word—is a period of diminishing activity rather than diminished activity. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when the economy is contracting. The following period is an expansion. Economic activity is below normal or diminished for some part of the recession and for some part of the following expansion as well. Some call the period of diminished activity a slump.

Raise the price of gas!

From Joel Stein, via Greg Mankiw:

I love $4 gas. It makes me appreciate freedom. I watch as the dollars spin and think, "You, Triceratops, did not get squished by an asteroid in vain. You got squished for a $60 drive to Vegas." ...

If MoveOn and Barack Obama really were going to bravely confront America with hard, necessary truths, they'd tell us how great $4 gas has been for us. With public transit use nationally at a 50-year high, traffic dropped 2.1% in the first four months of this year across the country. That mileage reduction — along with people driving smaller cars, and more slowly, to save gas — could mean that 12,000 fewer people will die in traffic accidents this year, according to a study by professors Michael Morrisey at the University of Alabama at Birmingham and David C. Grabowski at Harvard Medical School. Air pollution has been reduced enough, according to UC Davis economics professor J. Paul Leigh, to prevent 2,200 respiratory-related deaths over the last year. Less eating out and more walking and biking could mean a 10% reduction in obesity, according to Charles Courtemanche, an assistant economics professor at the University of North Carolina at Greensboro. And, apparently, higher gas prices also keep econ professors employed. ...

Cheap gas is unfair. Driving creates huge social costs in the form of traffic, health-damaging pollution and global warming that aren't suffered solely by the person buying the gasoline. Governments usually set up idiotic systems to offset such social costs (emissions trading, ethanol subsidies, taco truck regulations) instead of forcing individuals to pay for their own mess by adding a tax to remedy the imbalance. That kind of tax — the most fair kind, really — is called a Pigovian tax, and its use is why gas costs $8 to $10 a gallon in Europe, where they have fewer road deaths even though they drive like complete idiots. ...

If the U.S. were to slowly jack up gas taxes until we're in the $8 range, life would be better. We'd not only be safer and have reduced greenhouse-gas emissions, we'd probably be happier too. Studies show that the only thing that consistently increases personal happiness is social interaction; high gas prices have led to real estate prices falling faster in suburbs and exurbs than in cities, so we may soon have more content downtown-dwellers. Those same studies show that the thing that makes people least happy is commuting, and telecommuting is way up this year. We could use the tax revenue to fund public transportation. And we'd go back to the days when driving a car was a way to show people what a rich jerk you were. In other words, we would no longer need SUVs for that.

OPEC, not speculators, is responsible for rising oil prices

From Fortune Magazine:

The leaders of OPEC have a long list of culprits for high oil prices: the falling dollar, U.S.-Iranian tensions, and shady speculators.

Here's one they seem to forget: OPEC.

The Organization of Petroleum Exporting Countries consistently claims that supply is not a problem - that there's plenty of oil to meet demand.

But last year, as the price of oil nearly doubled, OPEC was actually cutting production. The cartel produced 1.5% less last year despite adding two countries, Angola and Ecuador, to its ranks. That cutback at a time of growing demand helped drive prices up.

"They made a mistake," says Adam Sieminski, chief energy economist for Deutsche Bank, who thinks OPEC's drop in production last year is the No. 1 reason for today's prices. "The Saudis are responsible for trying to manage the world market. They underestimated demand and they overestimated non-OPEC supply."

Harvard economist: "The global economy is a runaway train"

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard and former chief economist at the IMF, says rising commodity inflation is a sign that global economic growth is out of control.

The global economy is a runaway train that is slowing, but not quickly enough. That is what the extraordinary run-up in prices for oil, metals, and food is screaming at us. The spectacular and historic global economic boom of the past six years is about to hit a wall. Unfortunately, no one, certainly not in Asia or the United States, seems willing to bite the bullet and help engineer the necessary coordinated retreat to sustained sub-trend growth, which is necessary so that new commodity supplies and alternatives can catch up.

Instead, governments are clawing to stretch out unsustainable booms, further pushing up commodity prices, and raising the risk of a once-in-a-lifetime economic and financial mess. All this need not end horribly, but policymakers in most regions have to start pressing hard on the brakes, not the accelerator. ...

I am puzzled that so many economic pundits seem to think that the solution is for all governments, rich and poor, to pass out even more checks and subsidies so as to keep the boom going. Keynesian stimulus policies might help ease the pain a bit for individual countries acting in isolation. But if every country tries to stimulate consumption at the same time, it won’t work.

A general rise in global demand will simply spill over into higher commodity prices, with little helpful effect on consumption. Isn’t this obvious? Yes, there is still a financial crisis in the US, but stoking inflation is an incredibly unfair and inefficient way to deal with it. ...

The historic influx of new entrants into the global work force, each aspiring to Western consumption standards, is simply pushing global growth past the safety marker on the speed dial. As a result, commodity resource constraints that we once expected to face in the middle of the twenty-first century are hitting us today. ...

This runaway-train global economy has all the hallmarks of a giant crisis in the making – financial, political, and economic. Will policymakers find a way to achieve the necessary international coordination? Getting the diagnosis right is the place to start. The world as a whole needs tighter monetary and fiscal policy. It is time to put the brakes on this runaway train before it is too late.

Just so readers aren't confused, even though the U.S. economy is currently slowing, it is the exceptional growth in emerging markets that is causing global commodity inflation.

Do tax cuts increase economic growth?

The claim made by politicians who support "supply-side economics" is that tax cuts increase economic growth. In general they do to a point, but the EconoSpeak blog adds a caveat:

The claim that tax cuts lead to more output via incentive effects presumes that we are talking about fiscally neutral reductions in taxes and government spending. What we got from the Reagan and Bush 43 administrations – and what is proposed by McCain – is a reduction in taxes that is much larger than any proposed reduction in government spending (government spending as a share of GDP actually rose under Bush43). The impact of this fiscal stimulus was a reduction in the national savings rate, which lowers long-term growth.

Is housing near a bottom? Here is your answer.

It's the question that everyone keeps asking. Are we near the bottom in the housing market? Well, the red line in the graph shows a century of constant-quality, inflation-adjusted U.S. housing prices. Notice the housing bubble that started around the year 2000.


So, are we near the bottom? Not a chance in hell. We're still much closer to the top.

A proposed solution to America's energy crisis

As a partial solution to America's dependence on foreign oil, U.S. oilman Boone Pickens proposes to build wind farms throughout the Great Plains. The Economist summarizes the Pickens Plan:

AMERICANS spend $700 billion a year on foreign oil. According to one observer, this is an addiction, a crisis, and a trap. The country must pursue alternative energy sources as fiercely as it once shot for the moon. So far, so much liberal boilerplate. The critic in question, however, is a Republican oilman: T. Boone Pickens. As he puts it, in an Okie drawl: “I’ve been an oilman all my life. But this is one emergency we can’t drill our way out of.” He wants America to make a huge investment in wind-power infrastructure. During this election season, he will personally spend $58m to make the case. ...

A report from the Department of Energy said in May that America could build enough wind farms to provide 20% of the nation’s electricity by 2030. The Pickens plan calls for America to meet this goal by building wind farms throughout the windy corridor that runs up the country from Texas to the Dakotas. It would cost $1 trillion to build them, plus another $200 billion to connect them to places where the power is most needed, which lie inconveniently far away from the corridor.

That is a staggering outlay, but it would free up American natural gas, which now generates 22% of the country’s electricity, to be used for motor vehicles. The idea is that Americans could switch en masse to natural gas vehicles, and the country could stop importing so much oil.

From PickensPlan.com:

Is waterboarding torture? A journalist undergoes the treatment

Is waterboarding torture? Christopher Hitchens of Vanity Fair underwent the process and gives us his firsthand account:

Arms already lost to me, I wasn’t able to flail as I was pushed onto a sloping board and positioned with my head lower than my heart. (That’s the main point: the angle can be slight or steep.) Then my legs were lashed together so that the board and I were one single and trussed unit. ...

You may have read by now the official lie about this treatment, which is that it “simulates” the feeling of drowning. This is not the case. You feel that you are drowning because you are drowning—or, rather, being drowned, albeit slowly and under controlled conditions and at the mercy (or otherwise) of those who are applying the pressure. The “board” is the instrument, not the method. You are not being boarded. You are being watered. This was very rapidly brought home to me when, on top of the hood, which still admitted a few flashes of random and worrying strobe light to my vision, three layers of enveloping towel were added. In this pregnant darkness, head downward, I waited for a while until I abruptly felt a slow cascade of water going up my nose. Determined to resist if only for the honor of my navy ancestors who had so often been in peril on the sea, I held my breath for a while and then had to exhale and—as you might expect—inhale in turn. The inhalation brought the damp cloths tight against my nostrils, as if a huge, wet paw had been suddenly and annihilatingly clamped over my face. Unable to determine whether I was breathing in or out, and flooded more with sheer panic than with mere water, I triggered the pre-arranged signal and felt the unbelievable relief of being pulled upright and having the soaking and stifling layers pulled off me. I find I don’t want to tell you how little time I lasted. ...

An interval was ordered, and then I felt the mask come down again. Steeling myself to remember what it had been like last time, and to learn from the previous panic attack, I fought down the first, and some of the second, wave of nausea and terror but soon found that I was an abject prisoner of my gag reflex. The interrogators would hardly have had time to ask me any questions, and I knew that I would quite readily have agreed to supply any answer. I still feel ashamed when I think about it. Also, in case it’s of interest, I have since woken up trying to push the bedcovers off my face, and if I do anything that makes me short of breath I find myself clawing at the air with a horrible sensation of smothering and claustrophobia. No doubt this will pass. As if detecting my misery and shame, one of my interrogators comfortingly said, “Any time is a long time when you’re breathing water.” I could have hugged him for saying so, and just then I was hit with a ghastly sense of the sadomasochistic dimension that underlies the relationship between the torturer and the tortured. I apply the Abraham Lincoln test for moral casuistry: “If slavery is not wrong, nothing is wrong.” Well, then, if waterboarding does not constitute torture, then there is no such thing as torture.

I issue a challenge to anyone who thinks waterboarding is not torture to undergo the process. After all, if it isn't torture, what are you afraid of?

Democratic landslide?

The Democracy in America blog reports:

SOMETIMES I wonder if the Republicans have already given up on Congress this election year. Whether by circumstance or by design, the Democrats seem to have taken all of the advantages as they seek to expand their majorities, and they are using them. The latest, from the Wall Street Journal’s number crunchers, is that a slew of Democratic challengers are raising lots of money, coming close to or surpassing their opponents. Established GOP senators such as Alaska’s Ted Stevens, North Carolina’s Elizabeth Dole and Maine’s Susan Collins all face challengers with large war chests. On the House side, the Democratic Congressional Campaign Committee nurses a large money edge over its GOP rival, and Democratic incumbents are holding their own as well, leaving cash for unseating Republicans. It feels like the Republicans just don’t want it.

Democrats are also reusing some of their winning tactics from 2006. Real Clear Politics’s Reid Wilson examines how the Democrats have embraced the centre in their Congressional recruiting, while the Republican caucus becomes more conservative. A big question in the caucus has been whether seeking ideological purity on the right will make the GOP a permanent minority party again while the Democrats rebuild their big tent. This is more likely than not, barring a period of Democratic corruption and misrule. Republican congressional leaders had better learn to run the opposite direction and, for that matter, to raise more money.

Medicare: the growing federal budget crisis

Tyler Cowen proposes a solution to the impending Medicare budget crisis:

No matter who sits in the Oval Office next year, there won’t be many degrees of freedom in the federal budget. That’s because spending on entitlement programs is largely locked into place, and the situation will become much worse as Americans age and health care costs rise. Even if the government is conservative in its spending, just paying out promised benefits implies that tax rates will rise to a crushing level — a range of 60 to 80 percent of income — well before the end of this century.

The main problem is Medicare, which reimburses the elderly for many of their health care expenses. As Mark V. Pauly, professor of health care systems at the University of Pennsylvania, has said, “Medicare as we know it today cannot be sustained over the next 50 years and probably will run into financial difficulties within the next 15.”

There’s one important idea lurking in the shadows that neither campaign is keen to talk about: paying out government benefits more efficiently. To put it bluntly, it means paying out full benefits only to those who really need them, and cutting back on payments to everybody else. Most recently, this notion has been proposed by Peter H. Schuck, a Yale law professor, and Richard J. Zeckhauser, a Harvard political economy professor, in their book, “Targeting in Social Programs: Avoiding Bad Bets, Removing Bad Apples.”

“Means testing” — cutting back on payments to the relatively wealthy — is one way to better allocate benefits. For health care costs, this could be done by expanding Medicaid, which is focused on the needs of the poor, and making it an entirely federal program rather than one partly paid for by the states. At the same time, the government would need to limit the growth of Medicare, which is universally applied to all elderly people; as a segment of American society, the elderly are relatively wealthy. With limited resources, it would be better to reallocate health care subsidies toward the poor, whether they are young or old.

Furthermore, inducing the wealthy to pay for their own health coverage would create pressures to lower costs.

An alternative path is to put in place more means testing throughout Medicare. For instance, higher-income older Americans have already been paying larger Medicare premiums and receiving a lower prescription drug benefit; that’s part of what made it possible to expand the prescription benefit within budgetary constraints.

Here is Greg Mankiw's take on means testing for Medicare.

And here, Paul Krugman provides his input.

Something all Americans should know about Iran

The International Herald Tribune tells a gripping story of the escape to freedom of Iranian dissident Ahmad Batebi.

Meanwhile, The Economist points out something that all Americans should hear:

Mr Batebi thinks Iran could well turn solidly democratic some day. In neighbouring states, religious extremism is popular. In Iran, he says, the government is religiously extreme, but the people are not.

When a strict religious dictatorship controls a country, the people are likely to get firsthand experience with its downsides and then wish for the opposite: freedom and democracy.

Iraqis have mixed feelings about Obama's planned troop withdrawal

The International Herald Tribune writes about the Iraqi people's mixed feelings about Barack Obama's plan to withdraw U.S. troops.

A tough Iraqi general, a former special operations officer with a baritone voice and a barrel chest, melted into smiles when asked about Senator Barack Obama.

"Everyone in Iraq likes him," said the general, Nassir al-Hiti. "I like him. He's young. Very active. We would be very happy if he was elected president."

But mention Obama's plan for withdrawing American soldiers, and the general stiffens.

"Very difficult," he said, shaking his head. "Any army would love to work without any help, but let me be honest: for now, we don't have that ability." ...

"In no way do I favor the occupation of my country," said Abu Ibrahim, a Western-educated businessman in Baghdad, "but there is a moral obligation on the Americans at this point." ...

Even as some Iraqis disagreed about Obama's stance on withdrawal, they expressed broad approval for him personally as an improvement over Bush, who remains unpopular among broad portions of Iraqi society five years after the war began. No one interviewed expressed a strong dislike for Obama. ...

For Hiti, who commands a swath of western Baghdad, the American military is a necessary, if vexing, presence. He ticks off the ways it helps: evacuating wounded Iraqi soldiers, bringing in helicopters when things go wrong, defusing bombs, getting detailed pictures of areas from drone planes. ...

But for some Iraqis the American presence remains the backbone of security in the neighborhood. Saidiya, a southern Baghdad district, was so brutalized by violence a year ago that a young Iraqi television reporter who fled thought he would never come back. But a telephone call from his father in December persuaded him to return. An American unit had planted itself in the district, helping chase away radicals. The family could go out shopping. They could drive their car to the gas station. ...

Falah al-Alousy is the director of an organization that runs a school in an area south of Baghdad that was controlled by religious extremists two years ago. Former insurgents turned against the militant group, but local authorities still rely heavily on Americans to keep the peace; the Iraqi Army, largely Shiite, is not allowed to patrol in the area, Alousy said. "Al Qaeda would rearrange itself and come back, if the Americans withdraw," he said.

Fully removing U.S. troops from Iraq is important for the Iraqi people to regain their dignity after years of war. However, withdrawing U.S. troops before Iraqi troops are capable of providing a safe environment for innocent Iraqi civilians is likely to cause more harm than good.

How the FARC hostages were rescued: a classic man-in-the-middle attack

From Schneier on Security:

Last week's dramatic rescue of 15 hostages held by the guerrilla organization FARC was the result of months of intricate deception on the part of the Colombian government. At the center was a classic man-in-the-middle attack.

In a man-in-the-middle attack, the attacker inserts himself between two communicating parties. Both believe they're talking to each other, and the attacker can delete or modify the communications at will.

The Wall Street Journal reported how this gambit played out in Colombia:

"The plan had a chance of working because, for months, in an operation one army officer likened to a 'broken telephone,' military intelligence had been able to convince Ms. Betancourt's captor, Gerardo Aguilar, a guerrilla known as 'Cesar,' that he was communicating with his top bosses in the guerrillas' seven-man secretariat. Army intelligence convinced top guerrilla leaders that they were talking to Cesar. In reality, both were talking to army intelligence."

This ploy worked because Cesar and his guerrilla bosses didn't know one another well. They didn't recognize one anothers' voices, and didn't have a friendship or shared history that could have tipped them off about the ruse. Man-in-the-middle is defeated by context, and the FARC guerrillas didn't have any.

Bruce Schneier goes on to explain the implications for internet security. However, I'd like to mention the implications for the war on Al-Qaeda. More so than the FARC, Al-Qaeda is a disperse, loosely-linked organization where members don't know each other. That makes it the perfect target for a man-in-the-middle attack. If the CIA isn't already using it, they could really learn something from the FARC hostage rescue.

Bush administration may accelerate withdrawal of troops from Iraq

The Bush administration is considering withdrawing more troops from Iraq:

The Bush administration is considering the withdrawal of additional combat forces from Iraq beginning in September, according to administration and military officials, raising the prospect of a far more ambitious plan than expected only months ago.

Such a withdrawal would be a striking reversal from the nadir of the war in 2006 and 2007.

One factor in the consideration is the pressing need for additional U.S. troops in Afghanistan, where the Taliban and other fighters have intensified their insurgency and inflicted a growing number of casualties on Afghans and U.S.-led forces there.

More U.S. and allied troops died in Afghanistan than in Iraq in May and June, a trend that has continued this month.

Although no decision has been made, by the time President George W. Bush leaves office on Jan. 20, at least one and as many as three of the 15 combat brigades now in Iraq could be withdrawn or at least scheduled for withdrawal, the officials said.

The desire to move more quickly reflects the view of many in the Pentagon who want to ease the strain on the military but also to free more troops for Afghanistan and, potentially, other missions.

The most optimistic course of events would still leave 120,000 to 130,000 U.S. troops in Iraq, down from the peak of 170,000 late last year after Bush ordered what became known as the "surge" of additional forces.

Any troop reductions announced in the heat of the presidential election could blur the sharp differences between the candidates, Senators John McCain and Barack Obama, over how long to stay in Iraq. But the political benefit might go more to McCain than Obama. McCain is an avid supporter of the current strategy in Iraq. Any reduction would indicate that that strategy has worked and could defuse antiwar sentiment among voters.

Even as the two candidates argue over the wisdom of the war and keeping U.S. troops there, security in Iraq has improved vastly, as has the confidence of Iraq's government and military and police forces, raising the prospect of additional reductions that were barely conceivable a year ago.

Obama on aid to the world's poor

Via Chris Blattman's Blog:

Obama speaks today on development:

We will have to provide meaningful resources to meet critical priorities. I know development assistance is not the most popular program, but as President, I will make the case to the American people that it can be our best investment in increasing the common security of the entire world. That was true with the Marshall Plan, and that must be true today.

That's why I'll double our foreign assistance to $50 billion by 2012, and use it to support a stable future in failing states, and sustainable growth in Africa; to halve global poverty and to roll back disease. To send once more a message to those yearning faces beyond our shores that says, "You matter to us. Your future is our future. And our moment is now."

Aiding the poorest people of the world is always a noble cause. I just hope the money is used effectively. Aid is most likely to be helpful if it is used to fight disease and educate the people. The old saw is true: give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.

Let me also point out that profit-seeking global corporations have done much more to lift people out of poverty in southeast Asia than charitable organizations have done to lift people out of poverty in Africa. The reason is simple: what the world's poor really need are jobs, not handouts.

Bernanke on the state of the economy

Federal Reserve Chairman Ben Bernanke spoke before the U.S. Senate earlier today:

The housing finance crisis and spiraling energy costs will remain a drag on the U.S. economy for the rest of the year, Federal Reserve Chairman Ben Bernanke told lawmakers in a gloomy presentation about the economic outlook.

"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities," Bernanke told the Senate Banking Committee early Tuesday.

The nation's top central banker warned "many financial markets and institutions remain under considerable stress, in part because the outlook for the economy, and thus for credit quality, remains uncertain." ...

The combination of rising commodity prices and tighter credit "has sapped household purchasing power even as they have boosted inflation," Bernanke said.

Bernanke added that spending has held up better than expected, helped by the Treasury's economic stimulus program, which has so far pumped $92 billion into the economy. At the same time, he warned that spending by consumers "seems likely to be restrained over coming quarters" and that businesses also are likely to be cautious with spending plans.

He also expressed concerns about rising inflation risks due to high commodity prices, suggesting that the Fed might not be able to take steps to support economic growth because of the risk that they would feed inflation pressures.

Despite Bernanke's gloomy outlook — his most pessimistic since he took office in 2006 — he said the Fed had raised its forecast for overall economic growth. It is now looking for 1% to 1.6% growth for all of 2008, up from its April forecast of 0.3% to 1.2% growth.

Dozens of banks likely to fail

The International Herald Tribune says more U.S. banks are likely to fail over the next year.

The nation's banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.

But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.

"Everybody is drawing up lists, trying to figure out who the next bank is, No. 1, and No. 2, how many of them are there," said Richard Bove, the banking analyst with Ladenburg Thalmann, who released a list of troubled banks over the weekend. "And No. 3, from the standpoint of Washington, how badly is it going to affect the economy?" ...

The future of Fannie Mae and Freddie Mac is vital to the banks, savings and loans and credit unions, which own $1.3 trillion of securities issued or guaranteed by the two mortgage companies. If the mortgage giants ever defaulted on those obligations, banks might be forced to raise billions of dollars in additional capital.

The large institutions set to report results this week, including Citigroup and Merrill Lynch, are in no danger of failing, but some are expected to report more multibillion-dollar write-offs.

But time may be running out for some small and midsize lenders. They vary in size and location, but their common woe is the collapsed real estate market and souring mortgage loans. Most of these banks are far smaller than the industry giants that have drawn so much scrutiny from regulators and investors. ...

"Failed banks are a lagging indicator, not a leading indicator," said William Isaac, who was chairman of the FDIC in the early 1980s and is now the chairman of the Secura Group, a finance consulting firm in Virginia. "So you will see more troubled, more failed banks this year."

The thing that has really surprised me about this mortgage crisis is how few banks have failed so far compared with the late 1980s. Calculated Risk has a graph.

The flaw that is Fannie Mae

The International Herald Tribune describes the illusion behind Fannie Mae and Freddie Mac:

Over the course of this 18-month financial crisis, we have lurched from land mine to land mine.

Last week it was all about Fannie Mae and Freddie Mac, the giant government-sponsored enterprises set up to provide affordable housing.

By issuing debt, these shareholder-owned companies guarantee or own more than $5 trillion in home mortgages. Got that? $5 trillion.

Because the federal government established the companies, investors view them as backed, at least implicitly, by taxpayers. And that implied guarantee is what drove Fannie and Freddie's business models.

The advantages the companies gained from this unique arrangement were huge.

They had to keep less cash on hand than traditional lenders, for example.

They also made more money on their mortgages than lenders because they paid less to borrow money in the bond market. These profits enriched Fannie and Freddie shareholders over the years and bestowed significant wealth on the companies' executives.

Now it looks as if the bill for that largess is coming due. Of course it will be borne by the usual bag holders: U.S. taxpayers. You and me.

Massive federal budget deficit so far in 2008

From CNN Money:

The Treasury Department says the federal deficit swelled to $268.7 billion in the first nine months of this budget year as record spending during the period outpaced revenues. ...

The new year-to-date deficit of $268.7 billion was the third-highest on record. A flood of tax rebates, aimed at stimulating the sluggish economy, left the government's coffers and contributed to the bigger deficit, according to an analysis by the Congressional Budget Office.

Spending totaled $2.2 trillion, while revenues came to $1.93 trillion.

The Bush administration estimated in February that the deficit for this year would be $410 billion. That would be just under the all-time high of $413 billion logged in 2004. Some private economists think this year's budget deficit will turn out to be higher than expected as an economic slowdown has cut into tax revenues. ...

So far this budget year, the biggest spending categories are programs from the Health and Human Services Department, including Medicare and Medicaid, $520.4 billion; Social Security, $491.7 billion; military, $439.5 billion; and interest on the public debt, $377.3 billion.

Keep in mind that four years ago, President Bush promised to cut the deficit in half within five years. How's that going? Of course, a recession is not the time to try to balance the budget. According to Keynesian economics, the government should run surpluses during good economic times and deficits during weak economic times. Under President Bush, however, we have been running deficits under both.

Newsweek: Speculators not causing rising commodity prices

Robert J. Samuelson of Newsweek weighs in to say that financial speculators are not causing the increase in commodity prices. Instead, he properly puts the blame on increased global demand and harmful government policies.

Tired of high gasoline prices and rising food costs? Well, here's a solution. Let's shoot the "speculators." ... Gosh, if only it were that simple. Speculator-bashing is another exercise in scapegoating and grandstanding. Leading politicians either don't understand what's happening or don't want to acknowledge their complicity. ...

A better explanation is basic supply and demand. Despite the U.S. slowdown, the world economy has boomed. ... When unexpectedly high demand strains existing production capacity, prices rise sharply as buyers scramble for scarce supplies. That's what happened.

"We've had a demand shock," says analyst Joel Crane of Deutsche Bank. "No one foresaw that China would grow at a 10 percent annual rate for over a decade. Commodity producers just didn't invest enough." In industry after industry, global buying has bumped up against production limits. ...

But "speculators" played little role in the price run-ups. ... These extra funds might drive up prices if they were invested in stocks or real estate. But commodity investing is different. Investors generally don't buy the physical goods, whether oil or corn. Instead, they trade "futures contracts," which are bets on future prices in, say, six months. ...

Futures contracts enable commercial consumers and producers of commodities to hedge. Airlines can lock in fuel prices by buying oil futures; farmers can lock in a selling price for their grain by selling grain futures. What makes the futures markets work is the large number of purely financial players—"speculators" just in it for the money—who often take the other side of hedgers' trades. But all the frantic trading doesn't directly affect the physical supplies of raw materials. In theory, high futures prices might reduce physical supplies if they inspired hoarding. Commercial inventories would rise. The evidence today contradicts that; inventories are generally low. World wheat stocks, compared with consumption, are near historic lows. ...

Politicians now promise tighter regulation of futures markets, but futures markets are not the main problem. Physical scarcities are. Government subsidies and preferences for corn-based ethanol have increased food prices by diverting more grain into biofuels. ... Restrictions on offshore oil exploration and in Alaska have reduced global oil production and put upward pressures on prices. If politicians wish to point fingers of blame for today's situation, they should start with themselves.

Hat tip to Greg Mankiw.

For policy wonks only: A 180-page report on the subprime mortgage crisis

"The First Global Financial Crisis of the 21st Century" (PDF)

More on Iran's missile test deceptions

From the New York Times:

Iran’s war games this week featured more bluff and exaggeration than displays of menacing new power, military analysts said Friday.

The half-truths, the analysts said, included not only a doctored photo of a salvo firing but also misleading statements about the range of the largest missile and two videos that made the firings seem more numerous and fearsome than they really were.

“Deception was rampant,” said Charles P. Vick, an expert on the Iranian missile program at GlobalSecurity.org, a research group in Alexandria, Va. “The bottom line is that the Iranians are tweaking our noses.”

The missile firings on Wednesday and Thursday shook the oil markets, helping drive up the price of crude to a record of more than $147 a barrel on Friday from $136 on Wednesday. That rise, if sustained, would mean billions of added dollars for Iran, one of the world’s top oil exporters. ...

Aside from the theater of the missile firings and the prospect of windfall oil revenues, Mr. Allison said, “the question is, Does this represent any significant advance in any relevant military capability to do any damage? And I think the best judgment is, no.”

The Iranians, he added, “have a history of puffing out their chests and pounding on them.” ...

Overall, Mr. Vick concluded, the two days of missile firings represented no escalation over what the Iranians have done before in previous tests.

“I remain unimpressed,” he said.

Harvard economist asks: What if the Candidates Pandered to Economists?

Greg Mankiw, a professor or economics at Harvard, enumerates the issues that economists would like to see political candidates support:

On many issues, from universal health insurance to increased taxes on the rich, economists do not speak with a single voice. But on some issues we do. Here is an eight-plank platform designed to attract a majority of economists. It is based on discussions I have had with my colleagues — call them focus groups, if you’d like — and polls of my profession:

SUPPORT FREE TRADE Economists are nearly unanimous in their support of an unfettered system of world trade. Here, Senator Obama lags behind Senator McCain. Senator Obama’s bad-mouthing of Nafta and his opposition to free-trade pacts with Colombia and South Korea make most economists cringe.

Many economists would go even further than Senator McCain has suggested by, for example, repealing antidumping laws. The ostensible purpose of these laws is to prevent foreign companies from selling in the United States at prices below fair value, but the law’s notion of “fair” rarely makes sense. In practice, these laws are little more than an excuse for special interests to shield themselves from competition.

OPPOSE FARM SUBSIDIES Economists like free markets, a principle that applies to agriculture as much as any good or service. Again, Senator McCain has the lead. Senator Obama’s endorsement of the recent $300 billion farm bill, his support for domestic ethanol subsidies and his opposition to imported sugar ethanol may bring votes from farmers, but economists view these policies as a burden on taxpayers and consumers.

LEAVE OIL COMPANIES AND SPECULATORS ALONE With the stunning rise in oil prices, both presidential candidates have been tempted to demonize market participants. Senator McCain has complained about the “obscene profits” of oil companies and called for a “thorough and complete investigation of speculators.” By contrast, most economists see nothing more sinister than the forces of global supply and demand at work. There is little benefit, and potentially much harm, in the candidates’ populist finger-pointing.

TAX THE USE OF ENERGY Senator Obama wins a point by opposing a summer gas tax holiday, a McCain proposal that economists greeted with derision. Most economists advocate increased taxes on energy products. The recent response of consumers to higher gas prices — including the increased use of mass transit and greater purchases of small cars, scooters, and even bicycles — demonstrates that the price mechanism is the most reliable way to reduce energy consumption and to curtail a variety of driving-related problems.

RAISE THE RETIREMENT AGE Like both presidential candidates, most economists recognize that Social Security faces a long-term problem. Senator Obama says he wants to fix it by extending the payroll tax to high incomes. Senator McCain opposes tax increases and wants the Social Security system to include personal accounts, but he has avoided proposing specific benefit cuts needed to make the numbers add up.

Some economists endorse Senator Obama’s tax hike, and some endorse Senator McCain’s personal accounts, but a much greater number would increase the age of eligibility for benefits. As Americans live longer, we need to redefine old age — a theme that should resonate with Mr. McCain, who is 71.

INVITE MORE SKILLED IMMIGRANTS As part of their embrace of globalization, economists are more open to immigration than is the general public. Admittedly, unskilled immigrants raise some potential problems: They may depress wages for Americans at the bottom of the economic ladder, exacerbating the rise in inequality, and they may overburden the social safety net. By contrast, skilled immigrants promote economic growth, especially among poorer Americans, and pay more in taxes than they get in government benefits. The more, the merrier.

On this issue, economists very clearly practice what they preach. Many of the best economists at top American universities were born abroad.

LIBERALIZE DRUG POLICY Many economists marry their support of economic freedom with a similar support of personal freedom. Drug policy is a case in point. A 2006 poll of professional economists asked whether the United States should legalize marijuana. Those in favor outnumbered those opposed more than three to one.

RAISE FUNDS FOR ECONOMIC RESEARCH The government subsidizes economic research through an arm of the National Science Foundation. The amount of money is relatively small — measured in the millions, not billions — and spending has been about flat in inflation-adjusted terms over the last decade. If Senator McCain or Senator Obama wants to endear himself to economists, there is no easier way than by promising an extra few million dollars to improve our understanding of how the economy works.

You might view this policy as nothing more than a way to buy a few votes. Perhaps you view economists as mere mortals, as tempted as anyone else by special interests. Maybe you would regard more funding for economic research as not very different from the billions thrown every year at farmers.

If you are that cynical, I won’t try to dissuade you.

By "tax the use of energy", I think he primarily means tax fossil fuels, not clean energy like wind, solar, hydro, or nuclear. Also, while "raise funds for economic research" may have special appeal to people in the economic profession, funding primary scientific research in general is important to long-term economic growth.

CNN Money's take on oil speculation

CNN Money on oil speculation:

There's no question money from investment banks, pension funds, hedge funds and others that don't ultimately use oil has been pouring into oil markets over the last few years.

But whether they are chasing a trend — and actually helping keep prices lower by adding liquidity — or driving up prices in their own right is a matter of debate. So far, most experts say speculators are not to blame for the high prices, but many of them agree that the system is very opaque.

The causes of our crappy economy

Krugman on what has caused this decade's crappy economy:

First things first: pay no attention to apologists who try to defend the Bush economic record. Since 2001, economic conditions have alternated between so-so and outright bad: a recession, followed by one of the weakest expansions since World War II, and then by a renewed job slump that isn’t officially a recession yet, but certainly feels like one.

Over all, Mr. Bush will be lucky to leave office with a net gain of five million jobs, far short of the number needed to keep up with population growth. For comparison, Bill Clinton presided over an economy that added 22 million jobs.

And what does Mr. Bush have to say about this dismal record? “I think when people take a look back at this moment in our economic history, they’ll recognize tax cuts work.” Clueless to the end.

Yet even liberal economists have a hard time arguing that Mr. Bush’s cluelessness actually caused the poor economic performance on his watch. Tax cuts didn’t work, but they didn’t create the Bush bust. So what did?

At the top of my list of causes for the lousy economy are three factors: the housing bubble and its aftermath, rising health care costs and soaring raw materials prices.

Stocks: A time to buy?

From Greg Mankiw:

Bloomberg reports:

Optimism about U.S. stocks among newsletter writers slid to the lowest level since July 1994.

Contrarians view this as good news. In this regard, note that 1994 was a pretty good time to buy stocks.

Let me add that the Morningstar Valuation Graph suggests stocks are currently the cheapest they've been since 2002. Buy low, sell high, as the saying goes.

The New Yorker: Speculators not causing high oil prices

The New Yorker defends financial speculators from politicians' attacks, saying they are not responsible for the high price of oil:

When bad things happen, it’s always nice to have a scapegoat. So, with Americans furious about soaring oil prices, Congress has gone in search of someone to blame. There are a number of usual suspects to choose from, depending on your politics—OPEC, greedy oil companies, lily-livered environmentalists opposed to oil drilling—but now Congress has seized on another set of villains: commodity speculators. ...

Congress is not, though, just attacking illegal market manipulation; it’s also taking aim at perfectly legal speculation, namely the buying and selling of futures contracts, which are effectively bets that oil prices will go up (or down). Futures contracts can be used by oil sellers (like OPEC) or oil buyers (like the airlines) to hedge their risks by agreeing to sell or buy oil in the future at a set price. Speculators, by contrast, mostly use futures contracts to gamble on oil prices, and have no interest in buying or selling real barrels of oil. These gambles can be tremendously lucrative, but they don’t directly determine the real (or “spot”) price of oil. That’s set by the people who are buying and selling actual barrels of petroleum. Although speculators could directly distort oil prices by turning their futures contracts into oil and then taking it off the market to drive up prices, a look at oil inventories shows no sign that this is happening.

If speculators aren’t at fault, why have oil prices spiked so high? Fundamental reasons aren’t hard to find. Between 2000 and 2007, world demand for petroleum rose by nearly nine million barrels a day, but OPEC has been consistently unable, or unwilling, to significantly increase supply, and production by non-OPEC members has risen by just four million barrels a day. The prospect of military action against Iran, which would disrupt global supply, seems greater than it did a few years ago. And the plunging value of the dollar has meant that the cost of oil has jumped more in the U.S. in the past year than it has in countries with healthier currencies. ...

But there’s also something else at work, which the oil guru Daniel Yergin calls a “shortage psychology.” The price of oil—more than that of many other commodities—isn’t based solely on current supply and demand. It’s also based on people’s expectations about future supply and demand, because those expectations determine whether it makes sense for oil producers to sell their oil now or leave it in the ground and sell it later. ...

The difficulty for Congress, of course, is that none of the problems that have driven up the price of oil lend themselves to a quick fix, and most, like the boom in global demand and the inaccessibility of certain oil fields, aren’t under our control at all. That’s what makes speculators a perfect target: by going after them, Congress can demonstrate to voters that it understands their pain, and at the same time avoid doing anything that might require real sacrifice from Americans.

Hat tip to Greg Mankiw.

Americans ignorant of basic economics

The Adam Smith Institute Blog is justifiably worried about the public's ignorance of basic economic principles:

Only one third of Americans believe free-trade agreements are good for the economy, the lowest figure in the developed world. On the other hand, a famous study in 1992 ... found that 93% of economists support free trade. Why is there such a discrepancy, not just in America, but worldwide?

Economics, in general, is not exactly intuitive. Most people don’t naturally come to the same conclusions that Ricardo and Smith came to without instruction and explanation. It is much easier to comprehend, "We should have tariffs because if we don’t, people will buy sugar from Jamaica instead of America. Plus — it could be contaminated since it comes from a developing nation."

The problem is that most people never really learn economics. Some high schools offer one course as an elective class, but most students go through high school knowing nothing of supply and demand and absolutely nothing of comparative advantage. In university, students generally only take economics if it is a required course — meaning many students graduate college without ever studying economics — even those who aspire to be high school teachers. If high schools did start to offer economics, who would be qualified to teach it?

The general lack of understanding carries grave implications. If voters oppose free-trade agreements, then politicians will certainly pander to fill their need. The doors open wide for demagoguery —meaning free-trade advocates are portrayed as insensitive and greedy.

Unfortunately, most people "learn" about the economy from watching the news, but since most journalists have little understanding of basic econ, it's like the blind leading the blind. College economics professors end up playing the role of Yoda, saying "You must unlearn what you have learned."

IndyMac Bancorp collapses. Seized by regulators.

CNN Money reports that federal regulators have just taken over troubled mortgage lender IndyMac Bancorp.

In what could turn out to be the most expensive bank failure ever, troubled mortgage lender IndyMac Bank was taken over by federal regulators on Friday.

The operations of the Pasadena, Calif.-based bank - once one of the nation's largest home lenders - were shut down at 3 p.m. by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp.

According to the FDIC, 10,000 IndyMac customers could lose as much as $500 million in uninsured deposits. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.

"It's possible this will be the most costly bank failure in history, but it's too soon to say," FDIC Chairman Sheila Bair said in a conference call late Friday night. The failure could also affect premiums paid by all banks for deposit insurance, she added.

IndyMac, with assets of $32.01 billion and deposits of $19.06 billion, is the fifth bank to fail this year.

It appears that CNN Money may not be adjusting for inflation when they call this the "most expensive bank failure ever." If I'm correct on that, then it's misleading reporting.

Ridiculous airport security

From Schneier on Security:

"You ain't takin' this through," she says. "No knives. You can't bring a knife through here."

It takes a moment for me to realize that she's serious. "I'm ... but ... it's ..."

"Sorry." She throws it into a bin and starts to walk away.

"Wait a minute," I say. "That's airline silverware."

"Don't matter what it is. You can't bring knives through here."

"Ma'am, that's an airline knife. It's the knife they give you on the plane."

Grim Reaper stalks Fannie and Freddie

The stock market appears to be on deathwatch.

Fannie Mae and Freddie Mac shares fell again on Friday — and the broader stock market followed suit — as concern mounted that the government will be forced to take over the beleaguered mortgage finance companies, which some investors fear are at risk of default.

Less than an hour after the markets opened, Henry Paulson, the Treasury secretary, said a government bailout was not an immediate possibility.

"Our primary focus is supporting Fannie Mae and Freddie Mac in their current form," Paulson said in a statement. "We are maintaining a dialogue with regulators and with the companies."

The companies currently operate with an implicit, but not assured, government guarantee.

The remarks did not appear to placate investors, who accelerated the sell-off that began at the market's open. Investors were running scared across the board, sending the Dow Jones industrial average down 244 points and the Standard & Poor's 500-stock index down 2.2 percent in midday trading. ...

Freddie Mac stock has lost nearly 70 percent of its value in the last week alone. Fannie Mae shares have fallen 55 percent during that period. Both companies' shares are trading at their lowest levels in nearly two decades.

Gentrification of inner-city neighborhoods not harmful to the poor

Time reports that, despite the conventional wisdom, gentrification of inner-city neighborhoods does not hurt the poor.

People tend to think gentrification goes like this: rich, educated white people move into a low-income minority neighborhood and drive out its original residents, who can no longer afford to live there. As it turns out, that's not typically true.

A new study by researchers at the University of Colorado at Boulder, University of Pittsburgh and Duke University, examined Census data from more than 15,000 neighborhoods across the U.S. in 1990 and 2000, and found that low-income non-white households did not disproportionately leave gentrifying areas. In fact, researchers found that at least one group of residents, high school–educated blacks, were actually more likely to remain in gentrifying neighborhoods than in similar neighborhoods that didn't gentrify — even increasing as a fraction of the neighborhood population, and seeing larger-than-expected gains in income.

Those findings may seem counterintuitive, given that the term "gentrification," particularly in cities like New York and San Francisco, has become synonymous with soaring rents, wealthier neighbors and the dislocation of low-income residents. But overall, the new study suggests, the popular notion of the yuppie invasion is exaggerated. "We're not saying there aren't communities where displacement isn't happening," says Randall Walsh, an associate professor of economics at the University of Pittsburgh and one of the study's authors. "But in general, across all neighborhoods in the urbanized parts of the U.S., it looks like gentrification is a pretty good thing."

The researchers found, for example, that income gains in gentrifying neighborhoods — usually defined as low-income urban areas that undergo rises in income and housing prices — were more widely dispersed than one might expect. Though college-educated whites accounted for 20% of the total income gain in gentrifying neighborhoods, black householders with high school degrees contributed even more: 33% of the neighborhood's total rise. In other words, a broad demographic of people in the neighborhood benefited financially. According to the study's findings, only one group — black residents who never finished high school — saw their income grow at a slower rate than predicted. But the study also suggests that these residents weren't moving out of their neighborhoods at a disproportionately higher rate than from similar neighborhoods that didn't gentrify.

EFF plans to take domestic spying battle to the next level

This is from an Electronic Frontier Foundation email I recently received in my in-box:

Dear Friend of Freedom,

In a move that I can only describe as cowardice, Congress just passed legislation meant to immunize telephone companies for their illegal, disloyal, and irresponsible behavior. EFF has been fighting against telecom immunity, and we need your help to bring the fight to the next level:

http://secure.eff.org/wiretapping

Two and a half years ago, EFF sued AT&T on behalf of its customers, seeking to hold the telecom giant responsible for its craven complicity in the White House's illegal warrantless wiretapping program.

Since then, the phone companies and their allies in Washington have spent tens of millions of dollars lobbying Congress to grant them retroactive immunity. They ran ridiculous fear-mongering attack ads against any politician who dared to oppose them. President Bush threatened to veto any bill that allowed EFF's lawsuit to continue.

Yesterday, Congress completely capitulated to the President's threats and voted to let the telecoms off the hook. If the telecoms are not held accountable, the administration will remain unchecked in its warrantless wiretapping of innocent Americans. This must stop!

We need your help to take the fight to the next level. We're going to challenge Congress's unconstitutional grant of immunity in our case against AT&T. We're going to fight for a congressional repeal of immunity in the next Congress. And we're going to file a new lawsuit against the government, challenging its warrantless surveillance practices, past, present and future.

Now, more than ever, we need your support!

http://secure.eff.org/wiretapping

The fight for civil liberties would never have come this far without your help. We can't give up now. Help EFF today!

More on why speculators aren't causing rising oil prices

More from economist Paul Krugman on why speculators aren't causing rising oil prices. Joe Lieberman, my good friend, are you listening?

First of all, I don’t have a political dog in this fight. I’m happy to believe that crazy speculation distorts markets. And I do think it’s likely that oil prices will come down, for a while, once consumers have a chance to respond more fully to high prices by changing their driving habits, switching to smaller cars, etc..

But the mysticism over how speculation is supposed to drive prices drives me crazy, professionally.

So here’s my latest attempt to talk it through.

Imagine that Joe Shmoe and Harriet Who, neither of whom has any direct involvement in the production of oil, make a bet: Joe says oil is going to $150, Harriet says it won’t. What direct effect does this have on the spot price of oil — the actual price people pay to have a barrel of black gunk delivered?

The answer, surely, is none. Who cares what bets people not involved in buying or selling the stuff make? And if there are 10 million Joe Shmoes, it still doesn’t make any difference.

Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that’s true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.

Any effect on the spot market has to be indirect: someone who actually has oil to sell decides to sell a futures contract to Joe Shmoe, and holds oil off the market so he can honor that contract when it comes due; this is worth doing if the futures price is sufficiently above the current price to more than make up for the storage and interest costs.

As I’ve tried to point out, there just isn’t any evidence from the inventory data that this is happening.

And here’s one more fact: by and large, futures prices over the period of the big price runup have been slightly below spot prices. The figure below shows monthly data from the EIA; as the spot price shot up, the futures price (that’s contract 4, the furthest out) actually lagged a bit behind. In other words, there hasn’t been any incentive to hoard.

Senate Democrats sacrifice our liberties

From The Register:

The Senate today passed the revised Foreign Intelligence Surveillance Act (FISA), offering blanket immunity to the telecoms giants for whatever spying activities they conspired in, smothering ongoing litigation against the companies and for all intents and purposes burying forever whatever unconstitutional surveillance activities the Cheney administration embraced.

The bill, in fact, expands authority for unsupervised domestic surveillance while offering somewhat expanded protection for Americans living abroad. The oversight role of the FISA court itself is diminished, inasmuch as the bill requires markedly less specificity for obtaining a FISA surveillance warrant than is currently required.

Although the new bill does not quite permit blanket wiretaps, it does give authority to the Director of National Intelligence or the Attorney General to authorize surveillance on individuals or those connected to them without designating exactly what they're hunting. The court merely signs off on this type of surveillance in a kind of procedural flourish – as long as sufficient "minimization" procedures are in place to avoid accidental surveillance of Americans. You can expect the National Security Agency (NSA) or the Department of Justice (DOJ) to push the envelope.

Federal Reserve president Lacker says inflation is unacceptably high

As reported by CNBC:

Recent inflation figures are "unacceptably high" and the Federal Reserve should focus on combating that rather than on stimulating the economy, Richmond Federal Reserve President Jeffrey Lacker said Tuesday.

The risks of a sharp economic slowdown have "diminished substantially," which enables the Fed to consider other challenges, such as rising prices, Lacker said. The central bank can help ease inflation by raising a benchmark short-term interest rate. ...

While the economy "is growing at only a tepid pace overall," Lacker said that economic data released in the last few months has "not yet shown the sharp, widespread reversals that define a recession."

Cap and trade, energy prices, and the environment

This comes from an interview about the economy in Fortune.

Fortune: You've been an enthusiastic supporter of climate-change legislation that would have the effect of essentially putting a penalty price on the use of fossil fuel in order to encourage clean energy. Should consumers and businesses be prepared to pay higher prices for electricity and gasoline? Is that pain inevitably in our future?

McCain: I have a fundamental difference with the opponents of cap and trade. History shows me that every time there's been technological advances, it has been beneficial to the economy and the American people. Every time we invent a quicker, a more advanced technology chip, then it's been an increase in productivity of economic benefit. I believe that green technologies — whether it be nuclear power, whether it be wind, solar or tide — can be beneficial to our economy and increase productivity, and improve the lives of American citizens in every aspect. And I'm sorry for the long answer. But the fundamental philosophical difference I have with the opponents of cap and trade is that they believe it will require greater sacrifice on the part of American citizens. I think innovation and advanced technology is beneficial to the lives of American citizens and to our economy. And I know that there's strong disagreement with that.

Barack Obama also supports cap and trade.

Why speculators are not to blame for high oil prices

This was a follow up by Princeton economist Paul Krugman to his original oil non-bubble article.

If the price is above the level at which the demand from end-users is equal to production, there’s an excess supply — and that supply has to be going into inventories. End of story. If oil isn’t building up in inventories, there can’t be a bubble in the spot price.

Now it’s true that oil supply responds very little to price, and that empirical estimates of the short-run price elasticity of demand, like this one, suggest that it’s low — say -.06. But even so, the math of a sustained, large bubble quickly becomes daunting. Say the demand elasticity is -.06, and that you believe that the current price is 40% above the level at which end-use demand equals supply. Then you have to believe that 2 million barrels a day is disappearing into secret hoards somewhere — secret, because it’s not showing up in the OECD inventory data. That’s a lot of oil. And bear in mind that people have been claiming that there’s an oil bubble for years.

You liar, Krugman! We all know Big Oil is hiding it with the UFOs in Area 51.

Japan: The model of energy efficiency

The International Herald Tribune reports that Japan is a model of efficient energy use:

Now, with oil prices hitting dizzying levels and the world struggling to deal with global warming, Japan hopes to use its conservation record to assume a rare leadership role on a pressing global issue. It will showcase its efforts to export its conservation ethic - and its expensive power-saving technology - at the summit meeting of the Group of 8 industrial leaders that Japan is playing host to, starting Monday.

"Superior technology and a national spirit of avoiding waste give Japan the world's most energy-efficient structure," Prime Minister Yasuo Fukuda said in a recent speech outlining his agenda for the summit meeting. Japan, he said, "wants to contribute to the world." ...

Japan, by many measures, is the most energy-frugal country among the world's developed nations. After the energy crises of the 1970s, the country forced itself to conserve with government-mandated energy-efficiency targets and steep taxes on petroleum. Energy experts also credit a national consensus on the need to consume less.

It is also the only industrial country that sustained government investment in energy research even after oil prices fell.

"Japan taught itself decades ago how to compete with gasoline at $4 per gallon," said Hisakazu Tsujimoto of the Energy Conservation Center, a government research institute that promotes energy efficiency. "It will fare better than other countries in the new era of high energy costs."

According to the International Energy Agency, based in Paris, Japan consumed half as much energy per dollar worth of economic activity as the European Union or the United States, and one-eighth as much as China and India in 2005. While the country is known for its green products like hybrid cars, most of its efficiency gains have come in less eye-catching areas, for example, by cutting energy use in manufacturing.

Corporate Japan has managed to keep its overall annual energy consumption unchanged at the equivalent of about 200 million tons of oil since the early 1970s, according to Economy Ministry data. It was able to maintain that level even during the country's boom years of the 1970s and 1980s, as the economy doubled, when adjusted for inflation, to $5 trillion.

Gorbachev: Will the U.S. be an empire or a democracy?

Former Soviet Union leader Mikhail Gorbachev, winner of the 1990 Nobel Peace Prize, asks the U.S. presidential candidates to think about whether the United States will be an empire or a democracy.

The present administration, particularly during George W. Bush's first presidential term, was bent on trying to solve many foreign policy issues primarily by military means, through threats and pressure. The big question today is whether the presidential nominees will propose a different approach to the world's most urgent problems.

I am extremely alarmed by the increasing tendency to militarize policymaking and thinking. The fact is that the military option has again and again led to a dead end.

One doesn't have to go very far to find an alternative. Take the recent developments on nonproliferation issues, where the focus has been on two countries - North Korea and Iran.

After several years of saber-rattling, the United States finally got around to serious talks with the North Koreans, involving South Korea and other neighboring countries. And though it took time to achieve results, the dismantling of the North Korean nuclear program has now begun.

It's true that nuclear issues in Iran encompass some unique features and may be more difficult to solve. But clearly threats and delusions of "regime change" are not the way to do it.

We have to look even deeper for a solution. "Horizontal" proliferation will only get worse unless we solve the "vertical" problem, i.e. the continued existence of huge arsenals of sophisticated nuclear weapons held by major powers, particularly the United States and Russia.

In recent months there seems to have been a conceptual breakthrough on this issue, with influential Americans calling for revitalizing efforts aimed at the eventual elimination of nuclear weapons. Both John McCain and Barack Obama have now endorsed that goal....

Today the United States produces about half of the world's military hardware and has over 700 military bases, from Europe to the most remote corners of the world. Those are just the officially recognized bases, with more being planned. It is as if the Cold War is still raging, as if the United States is surrounded by enemies who can only be fought with tanks, missiles and bombers. Historically, only empires had such an expansive approach to assuring their security.

So the candidates, and the next president, will have to decide and state clearly whether America wants to be an empire or a democracy, whether it seeks global dominance or international cooperation. They will have to choose, because this is an either-or proposition: The two things don't mix, like oil and water.

The National Mall in Washington, D.C. is in poor shape

CNN reports on the poor conditions of the National Mall in Washington, D.C., home to the Washington Monument and the Lincoln Memorial.

This gathering place known as America's "front yard" stretches from the Capitol to the Potomac River and is home to the Jefferson and Lincoln memorials and Washington Monument, but it's starting to look like "an old rundown, worn-out mall that looks like it was abandoned 30 years ago," says Judy Feldman of the National Coalition to Save Our Mall.

People are part of the problem. The National Mall has more visitors each year than Yosemite, Yellowstone and the Grand Canyon parks combined, according to the National Park Service.

"If you had 25 million people coming through your front yard, it might not look so nice either," said Bill Line of the park service.

The mall has an annual budget of about $31 million. But its backlogged maintenance needs are estimated at more than eight times that amount -- $258 million.

Among the most expensive projects include reinforcing a sinking seawall around the Jefferson Memorial and rehabilitating the World War I Memorial.

But there are other more pressing issues facing the National Mall, activists said.

"If you are in here and Johnny has to go to the potty you are in trouble ... there is no place to go," said Chip Akridge, who heads the Trust for the National Mall, which is raising private money to fix up the mall.

Restrooms, parking and transportation are all desperately needed, along with places to eat, activists said.

Akridge points to one snack tent, calling it Washington's "Tavern on the Green."

"This is America's front yard. You wouldn't have this in your front yard. ... No American wants it in this front yard," he said.

The flaws in blaming oil "speculators"

From CNBC, Vince Farrell defends commodity futures traders from the politicians' attacks:

I would like one of our fine, financially knowledgeable, market savvy politicians to define "oil speculator" for me. I know, there is no politician that fits the aforementioned description, but I would like someone to tell me who "they" are. I suppose Morgan Stanley would qualify since they are not in the oil business and trade oil futures.

So "they" are evil and to blame for the high price of oil. Except Morgan handles all the hedging business for United Airlines. The trades appear as Morgan trades but they are for an airline that critically needs to try to hedge its exposure to the volatile price of oil. Who gets outlawed?

Those being called "speculators" are players in the futures market. If they were to be the drivers of the price of oil, they would have to take possession of the commodity and hoard it. As it is they buy a piece of paper and for every buy decision there is going to have to eventually be a close out sell decision. They do not buy the physical product. When a "speculator" buys a futures contract, there has to be a seller and that's what free markets are all about.

Congress should know the price of oil has been driven primarily by the fact that more than 2 billion people in the Far East have been rushing into a more modern world and are demanding their share of the good life that is powered by oil. Demand is up, therefore the price is up. Also, since oil is priced in dollars, the precipitous decline in the value of the dollar due to the twin budget and trade deficits, has raised the price of oil. In 2002 one euro equaled one dollar. Today it costs about $1.55 to buy one euro. If the one-to-one ratio was still true, oil would be around $80.

Institutional investors that now consider commodities to be an asset class to invest in don't hoard the commodity and should have every right to be buying at the top of a bubble like they did in the internet boom. If investors like these were creating a bubble by buying futures contracts, how then to explain the soaring prices of potash and iron ore. These commodities don't have futures to trade!

But it's so easy to blame people, especially during an election year. Don't try to figure a solution. Just assign the blame and maybe get re-elected.

Farrell echoes the argument of Bush-bashing economist Paul Krugman. This is not a left–right issue. This is a fact vs. fiction issue.

Happy Independence Day! Could you pass the citizenship test?

Could you pass the U.S. citizenship test? I scored 100%. How well can you do?

Economists for Obama not so happy with Barack Obama

Don Pedro, the blogger at Economists for Obama, justifiably expresses his displeasure with Barack Obama regarding the proposed FISA legislation currently before Congress.

Obama's failure to oppose the warrantless wiretapping bill, critiqued in great detail by Glenn Greenwald (see his most recent post here) has given me some pause and made me think perhaps I should send my political contributions elsewhere. The immunity for lawbreaking telecoms is one of the events of the Bush years that has most angered me. The current FISA is perfectly capable of dealing with surveillance, and empowering the president to monitor my phone calls and e-mails is plainly a violation of the 4th Amendment:

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

Why, after voting against the Protect American Act and saying he would support any filibuster of immunity for lawbreaking telecoms, is Obama now saying he will vote for the new law? I don't understand.

Don Pedro is right. When companies willfully aid the government in violating the American people's Fourth Amendment rights, those companies should be held liable.

New Army report highlights early failures during Iraq War

The U.S. Army has released a new self-critical report on the failures in the early days of the Iraq War. From CNN:

The 720-page report compiled by the Combat Studies Institute at Fort Leavenworth, Kansas, details the effects of having too few coalition troops on the ground when the reality after the fall of Baghdad was "severely out of line" with the anticipated conditions.

Previous experience "should have indicated that many more troops would be needed for the post-Saddam era in Iraq," historians wrote in the report, "On Point II: Transition to a New Campaign."

"The coalition's inability to prevent looting, to secure Iraq's borders and to guard the vast number of munitions dumps in the early months after Saddam's overthrow are indicative of the shortage," the study found.

About 150,000 U.S. and allied troops were in Iraq after the invasion, at a time when war planners were assuming that Iraq's government would remain functional after Hussein's ouster and that there would be no mass insurgency.

"These factors were in line with prewar planning for a quick turnover of power to Iraqis and a quick withdrawal of U.S. forces, leaving Iraqis to determine their own political future—options that proved impossible to execute," the historians wrote in the report released over the weekend.

"We had the wrong assumptions, and therefore, we had the wrong plan to put into play," Gen. William Wallace, who commanded the Army's V Corps during the invasion, told the authors.

But some of the most critical decisions were made between May and August 2003, which some participants called a "window of opportunity that could have been exploited to produce the conditions for the quick creation of a new Iraq."

Among those decisions were the frequently criticized dissolution of the Iraqi army and the order that barred former members of Hussein's Baath Party from public life as well as the change in plan over the joint headquarters.

Commodities speculation: A comparison of oil with onions

Fortune Magazine compares oil and onions to show how commodities speculation is not responsible for volatile prices:

Before the U.S. Commodity Futures Trading Commission starts scrutinizing the role that speculators may have played in driving up fuel and food prices, investigators may want to take a look at price swings in a commodity not in today's news: onions.

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.

The volatility has been so extreme that the son of one of the original onion growers who lobbied Congress for the trading ban now thinks the onion market would operate more smoothly if a futures contract were in place.

In fact, the entire reason commodities speculation exists is to reduce volatility and allow farmers to guarantee the future price of their crops.