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]]> A Rationale http://www.brentwheeler.com/index.php?itemid=223 Mon, 8 Mar 2010 09:18:00 +1300 http://www.brentwheeler.com/index.php?itemid=819
By Mark W. Hendrickson


Most Americans don't believe that the way for Washington to address its gargantuan debt is to increase deficit spending and go deeper into debt.

Nobel laureates Joseph Stiglitz and Paul Krugman disagree. Stiglitz, for example, in an interview televised on Feb. 17, denigrated "deficit fetishism" and assured listeners that more "stimulus" spending now would augment American prosperity, both short-term and long-term.

There are several major defects in Professor Stiglitz' analysis.

1) Thralldom to the Keynesian macro-economic paradigm.

The Stiglitz/Krugman perspective is thoroughly Keynesian. They attribute today's economic sluggishness to insufficient aggregate demand; hence, government must compensate for this deficiency via increased deficit spending to stimulate the economy. The Keynesian diagnosis is spurious.

Sound economic analysis looks at the demand for specific goods and services, not at statistical abstracts like "aggregate demand." Falling demand for particular economic goods indicates that fewer people still value or want them anymore at that price.

In a free market, consumers communicate to producers through price signals whether to produce more or less. This generates the ongoing, healthy process Schumpeter dubbed "creative destruction," whereby new entrepreneurs supplying higher-valued goods supplant those supplying lower-valued goods.

Government policies, both monetary and fiscal, distort price signals, thereby stimulating overproduction of lower-valued goods while shifting inputs away from the production of higher-valued goods (destruction without Schumpeter's creative component). Government stimulus spending, by prolonging and propping up unwanted, uneconomic production, is inherently counterproductive, delaying the necessary realignment of misallocated resources to the rational (i.e., wealth-creating instead of wealth-extinguishing) production that produces an economic recovery.

2) Blindness to history.

The Keynesians' faith in deficit spending as the key to economic recovery represents a triumph of hope over experience.

Exhibit A: The massive deficit spending of Franklin Roosevelt in the 1930s didn't stop the Great Depression. In fact, despite FDR spending more money in his first five years in office than all 31 prior presidents combined, his Secretary of the Treasury Henry Morgenthau stated in 1939 that "[w]e are spending more than we have ever spent before and it does not work. ... I say after eight [sic] years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!"

Exhibit B: The massive deficit spending of Japan's government over the past two decades has led to protracted economic sluggishness. Japan still limps along, but now the nation suffers from the largest debt-to-GDP ratio of the developed world at almost 200%.

Exhibit C: Last year's so-called stimulus plan has produced the same results as FDR's stimulus-stagnant employment and mushrooming debt.

The Keynesian economists have a huge blind spot when it comes to history. That is because they tend to view economic history as divided into two eras: the years since the Keynesian revelation (Dec., 1935, when the master, John Maynard Keynes, enlightened the world with his General Theory of Employment, Interest, and Money, and pre-1935 when all was supposedly darkness. They seem oblivious to the historical fact that, before Hoover and Roosevelt, Uncle Sam didn't ramp up spending during recessions /depressions, and those downturns were of shorter duration.

The most instructive example is the Depression of 1920-21, which featured the most rapid fall in production, employment and GDP in our history. Rather than trying to stimulate the economy, Presidents Harding and Coolidge slashed government spending in half. Markets made the necessary adjustments, the depression lasted for approximately a year, and employment and production made rapid, robust recoveries.

3) An enormous faith in government competence.

In his Feb. 17 interview, Stiglitz asserted, "All we need to make sure that our long-run national debt is lower" is for government to increase spending on investments that would produce an "easy ... 5 or 6%" return.

This is a breathtakingly glib assertion. If making profits of 5% or 6% is so easy, why are so many experienced businesspersons and entrepreneurs losing money these days? Stiglitz's comment reminds me of the facile assumption made by Vladimir Lenin, the first leader of the Soviet Union, that running businesses was a piece of cake. After he assigned the management of state-owned enterprises to political allies and then saw how quickly production declined, Lenin humbly conceded that managing enterprises efficiently is much harder than it looks.

The Keynesian faith in government macroeconomic planning is eerily similar to socialists' master plans. Both involve centralized decision-making by political elites. Both regard markets as inherently defective and unreliable, so government must intervene. Thus, Stiglitz apparently believes that federal bureaucrats or Obama-appointed czars can make profits where private firms cannot. He also overlooks an inconvenient fact of life: Government programs (notoriously inefficient to begin with) operate outside the profit-and-loss marketplace, so there is no way to measure profitability and prove Stiglitz' claim of 5%-6% returns.

4) Dangerous assumptions about the capital markets.

"Run up more debt," the Keynesians urge, apparently regarding the world's capital markets as a bottomless well.

Besides the trillion and a half dollars that Uncle Sam will need to borrow to finance this year's expenditures, European countries will require more than $2 trillion. Japan's budget calls for a record-high debt issuance of 44.3 trillion yen. According to Forbes.com Senior Editor Daniel Fisher, "National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average of mature economies over the preceding five years." Asian countries may be booming, but they can't produce enough capital for both themselves and all the first world's needs.

Furthermore, there are limits to how much debt a country's government can incur. The Greenspan-Guidotti rule (formulated in 1999 by Alan Greenspan and Pablo Guidotti) states that a government needs liquid reserves sufficient to cover 100% of its short-term external debt. If a country lacks such reserves, foreign creditors will realize that the debtor government is essentially broke. In consequence, the country's currency will plunge on foreign exchange markets, triggering massive upheavals throughout the economy.

As reckoned by investment analyst Porter Stansberry, the U.S. government has approximately $500 billion of ready reserves, comprised of foreign currencies, gold, and oil. It also has current-year funding needs of over $4 trillion ($1.5 trillion budget deficit, $2 trillion of Treasury bills coming due in fiscal year 2010, and at least another trillion dollars of longer-term debt instruments maturing). That would imply a crackup this year. Perhaps, if existing creditors roll over their Treasury holdings and banks continue to borrow dirt-cheap from the Fed and purchase Treasury debt instead of making business loans, the day of reckoning can be delayed. Clearly, though, Uncle Sam is perilously close to insolvency and a consequent inflationary monetization of the debt by the Fed, to be followed by a massive depreciation, if not total destruction, of the paper dollar and concomitant economic and social disruptions.

For all of the above reasons, the Stiglitz-Krugman-Keynesian pleas for more stimulus and more deficits are reckless and irresponsible. Stimulus plans haven't worked, won't work, and we can't afford them. We are already in great economic danger from deficit spending. A policy to plunge us even deeper into the debt abyss is kamikaze economics. We should take a pass on that course of action.

Mark Hendrickson teaches economics at Grove City College and is Fellow for Economic and Social Policy at the Center for Vision & Values.

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]]> Policy http://www.brentwheeler.com/index.php?itemid=819 Mon, 8 Mar 2010 09:17:54 +1300 http://www.brentwheeler.com/index.php?itemid=818
By Charles Munger (in Slate Magazine)

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."
The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.

Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.

In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.

The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.

As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.

A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country's GDP per person.
Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil. But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.

Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity.

But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."

The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."

Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.

And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.

How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.

Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.

The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.

The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.
Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.

Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.

As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.
]]> Policy http://www.brentwheeler.com/index.php?itemid=818 Tue, 23 Feb 2010 22:31:29 +1300 http://www.brentwheeler.com/index.php?itemid=812
Bernanke and the Beast

By N. GREGORY MANKIW
Published: January 16, 2010
IS galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple.

Let’s start with first principles. One basic lesson of economics is that prices rise when the government creates an excessive amount of money. In other words, inflation occurs when too much money is chasing too few goods.

A second lesson is that governments resort to rapid monetary growth because they face fiscal problems. When government spending exceeds tax collection, policy makers sometimes turn to their central banks, which essentially print money to cover the budget shortfall.

Those two lessons go a long way toward explaining history’s hyperinflations, like those experienced by Germany in the 1920s or by Zimbabwe recently. Is the United States about to go down this route?

To be sure, we have large budget deficits and ample money growth. The federal government’s budget deficit was $390 billion in the first quarter of fiscal 2010, or about 11 percent of gross domestic product. Such a large deficit was unimaginable just a few years ago.

The Federal Reserve has also been rapidly creating money. The monetary base — meaning currency plus bank reserves — is the money-supply measure that the Fed controls most directly. That figure has more than doubled over the last two years.

Yet, despite having the two classic ingredients for high inflation, the United States has experienced only benign price increases. Over the last year, the core Consumer Price Index, excluding food and energy, has risen by less than 2 percent. And long-term interest rates remain relatively low, suggesting that the bond market isn’t terribly worried about inflation. What gives?

Part of the answer is that while we have large budget deficits and rapid money growth, one isn’t causing the other. Ben S. Bernanke, the Fed chairman, has been printing money not to finance President Obama’s spending but to rescue the financial system and prop up a weak economy.

Moreover, banks have been happy to hold much of that new money as excess reserves. In normal times when the Fed expands the monetary base, banks lend that money, and other money-supply measures grow in parallel. But these are not normal times. With banks content holding idle cash, the broad measure called M2 (including currency and deposits in checking and savings accounts) has grown in the last two years at an annual rate of only 6 percent.

As the economy recovers, banks may start lending out some of their hoards of reserves. That could lead to faster growth in broader money-supply measures and, eventually, to substantial inflation. But the Fed has the tools it needs to prevent that outcome.

For one, it can sell the large portfolio of mortgage-backed securities and other assets it has accumulated over the last couple of years. When the private purchasers of those assets paid up, they would drain reserves from the banking system.

And as a result of legislative changes in October 2008, the Fed has a new tool: it can pay interest on reserves. With short-term interest rates currently near zero, this tool has been largely irrelevant. But as the economy recovers and interest rates rise, the Fed can increase the interest rate it pays banks to hold reserves as well. Higher interest on reserves would discourage bank lending and prevent the huge expansion in the monetary base from becoming inflationary.

But will Mr. Bernanke and his colleagues make enough use of these instruments when needed? Most likely they will, but there are still several reasons for doubt.

First, a little bit of inflation might not be so bad. Mr. Bernanke and company could decide that letting prices rise and thereby reducing the real cost of borrowing might help stimulate a moribund economy. The trick is getting enough inflation to help the economy recover without losing control of the process. Fine-tuning is hard to do.

Second, the Fed could easily overestimate the economy’s potential growth. In light of the large fiscal imbalance over which Mr. Obama is presiding, it’s a good bet he will end up raising taxes for most Americans in coming years. Higher tax rates mean reduced work incentives and lower potential output. If the Fed fails to account for this change, it could try to promote more growth than the economy can sustain, causing inflation to rise.

Finally, even if the Fed is committed to low inflation and recognizes the challenges ahead, politics could constrain its policy choices. Raising interest rates to deal with impending inflationary pressures is never popular, and after the recent financial crisis, Mr. Bernanke cannot draw on a boundless reservoir of good will. As the economy recovers, responding quickly and fully to inflation threats may prove hard in the face of public opposition.

Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era.

N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President George W. Bush.]]> Policy http://www.brentwheeler.com/index.php?itemid=812 Tue, 19 Jan 2010 21:09:58 +1300 http://www.brentwheeler.com/index.php?itemid=806 Michelle MacPhearson - super entrepreneur in the social media marketing area. This entry concerns outsourcing and describes how one service works. It's a great commentary on how things are changing.... (this posting does not represent an endorsement or otherwise - have not used the service yet).

"Odesk

Odesk is a marketplace where people from all over the world list their skills and resumes and folks like you can hire them. You’ll can negotiate pay, search contractors, list jobs you have available, etc. Good for both short term and long term work.

What I really like about Odesk is that they ask all contractors to install a little piece of software on their coputers that takes screenshots of what they’re doing at random intervals. You then get access to those screenshots. You can quickly see if they’re actually working on your project, and you can see that they’re doing it correctly. I’ve found Odesk workers to be pleasant and motivated, and I think the screenshots that are taken keep them on task. Odesk folks have consistently performed tasks very quickly. It’s the first place I stop when I need a new contractor, and I think you’ll enjoy the service as much as I do."]]> Everyday Economics http://www.brentwheeler.com/index.php?itemid=806 Sat, 9 Jan 2010 22:21:13 +1300 http://www.brentwheeler.com/index.php?itemid=802
December 29, 2009

Ronald Coase In the theory of externalities—that is, costs imposed involuntarily on others—there have been exactly two great ideas. The first, forever associated with the name of Arthur Cecil Pigou (writing about 1920) is that things tend to go badly when people can escape the costs of their own behavior. Factories pollute too much because someone other than the factory owner has to breathe the polluted air. Nineteenth century trains threw off sparks that tended to ignite the crops on neighboring farms, and the railroads ran too many of those trains because the crops belonged to someone else. Farmers keep too many unfenced rabbits when they don’t care about the lettuce farmer next door.

Pigou’s solution—and it’s often a good one—is to make sure that people do feel the costs of their actions, via taxes, fines, or liability rules that allow the victims to sue for damages. Do a dollar’s worth of damage, and you’re charged a dollar.

Pigou endorsed this policy not because it seems fair, though it does seem fair to many, but because it yields, under what he believed to be very general conditions, the optimal amounts of damage. We don’t want too much pollution, but we don’t want too little, either, given that pollution is a necessary by-product of a lot of stuff we enjoy. Pigou offered a proof—now standard fare in all the textbooks—that his policies lead to the perfect compromises, in a sense that can be made precise.

The second great idea about externalities sprang full-blown from the mind of a law professor and subsequent Nobel prize winner named Ronald Coase, who stunned the profession in 1960 by pointing out that Pigou’s argument runs both ways. If you breathe the pollution from my factory, I’m imposing a cost on you—but at the same time, you’re imposing a cost on me. After all, if you lived somewhere else, you wouldn’t be complaining about the smoke and I wouldn’t be getting punished for it.

This insight—so simple once stated, but thoroughly astonishing to the economists of 1960 (I’ve heard tales of this astonishment from several of the participants in Coase’s historic seminar)—means that in a case of externalities, pure theory can never tell you who should bear the costs; you’ve got to look at the specifics of the case. Take those spark-throwing railroad trains. Pigou says: There are too many fires because the railroads don’t care; let’s make them reimburse the farmers for all the crop destruction, and then they’ll care. Coase says: Wait a minute. Often, farmers can prevent fires at very low cost by not planting quite so close to the tracks. True, the railroads don’t currently care about the crop damage. But if you reimburse the farmers, then the farmers won’t care, and you’ll get too many crops planted too close to the tracks. The best way to prevent fires might (or might not) be to grant the railroads complete legal immunity.

And as for that rabbit farmer—the one who lives next to the lettuce farmer and lets his rabbits run wild—Pigou would have insisted that the rabbit farmer cover the damages. Coase is more evenhanded. There are a lot of ways for the rabbit farmer to solve this problem: Put the rabbits in cages, or file their teeth down, or raise a different breed of rabbit, or move away, or switch to keeping geckos. There are also a lot of ways for the lettuce farmer to solve this problem: Fence the lettuce, or spray it with rabbit repellent, or move away, or switch to growing barley. If the rabbit farmer is immune from lawsuits, he’ll have no incentive to implement his solutions. But if the lettuce farmer is routinely reimbursed for lost lettuce, then he’ll have no incentive to implement his solutions. Which outcome is worse? That depends on whose solutions are better. Pure theory can’t answer that question.

How did Pigou—and every other economist in the world—manage to miss this point until Coase came along? According to Coase, it’s because they were obsessed with the faulty notion of “fault”—the idea that if there’s a problem, it must be someone’s fault, and we should begin by identifying that someone. But in the rabbit/lettuce example, who’s really at fault? It’s true that if there were no rabbits, the lettuce wouldn’t get eaten. But it’s equally true that if there were no lettuce the lettuce wouldn’t get eaten. The problem is that rabbit farmers should not be next to lettuce farmers, and when you put it that way, you’re forced to recognize the fundamental symmetry of the situtation.

What, then, should courts and legislators do? Coase had a lot to say about this also, beginning with the observation that it’s sometimes a really really good idea to encourage antagonists to talk to each other. From this beginning sprang the entire intellectual framework usually called Law and Economics.

Coase’s Nobel Prize winning paper is surely one of the landmark papers of 20th century economics. It’s also entirely non-technical (which is fine), and (in my opinion) ridiculously verbose (which is annoying). It’s littered with numerical examples intended to illustrate several different but related points, but the points and the examples are so jumbled together that it’s often difficult to tell what point is being illustrated. I frequently assign my students the task of distilling all of the main ideas into two or three pages, and they frequently succeed.

But pioneering work is rarely presented cleanly, and Coase is a true pioneer. Today is his 99th birthday, and a day to celebrate. ]]> Law and Economics http://www.brentwheeler.com/index.php?itemid=802 Wed, 30 Dec 2009 20:59:31 +1300 http://www.brentwheeler.com/index.php?itemid=800 paper examining "movements" analogous to the current climate change movement, the authors show the common traits of 26 other like movements. They also identify key areas where the process and advocacy of such movements depart from rationality and science. A final para identifies individuals who have move from one movement to another - as each has been shown to involve false claims and more juicy pol8itical targets have beckonned.

Here is the abstract.

We summarize evidence showing that the global warming alarm movement has more of the character of a political movement than that of a scientific controversy. We then make forecasts of the effects and outcomes of this movement using a structured analysis of analogous situations—a method that has been shown to produce accurate forecasts for conflict situations. This paper summarizes the current status of this “structured analogies project.”

We searched the literature and asked diverse experts to identify phenomena that could be characterized as alarms warning of future disasters that were endorsed by scientists, politicians, and the media, and that were accompanied by calls for strong action. The search yielded 71 possible analogies. We examined objective accounts to screen the possible analogies and found
that 26 met all criteria. We coded each for forecasting procedures used, the accuracy of the forecasts, the types of actions called for, and the effects of actions implemented.

Our preliminary findings are that analogous alarms were presented as “scientific,” but none were based on scientific forecasting procedures. Every alarming forecast proved to be false; the predicted adverse effects either did not occur or were minor. Costly government policies remained in place long after the predicted disasters failed to materialize. The government policies failed to prevent ill effects.

The findings appear to be insensitive to which analogies are included. The structured analogies approach suggests that the current global warming alarm is simply the latest example of a common social phenomenon: an alarm based on unscientific forecasts of a calamity. We
conclude that the global warming alarm will fade, but not before much additional harm is done by governments and individuals making inferior decisions on the basis of unscientific forecasts.]]> Climate change http://www.brentwheeler.com/index.php?itemid=800 Mon, 21 Dec 2009 08:49:13 +1300 http://www.brentwheeler.com/index.php?itemid=798
From WSJ (Dec 4)....

"Surely there must have been serious men and women in the hard sciences who at some point worried that their colleagues in the global warming movement were putting at risk the credibility of everyone in science. The nature of that risk has been twofold: First, that the claims of the climate scientists might buckle beneath the weight of their breathtaking complexity. Second, that the crudeness of modern politics, once in motion, would trample the traditions and culture of science to achieve its own policy goals. With the scandal at the East Anglia Climate Research Unit, both have happened at once.

I don't think most scientists appreciate what has hit them. This isn't only about the credibility of global warming. For years, global warming and its advocates have been the public face of hard science. Most people could not name three other subjects they would associate with the work of serious scientists. This was it. The public was told repeatedly that something called "the scientific community" had affirmed the science beneath this inquiry.
Global warming enlisted the collective reputation of science. Because "science" said so, all the world was about to undertake a vast reordering of human behavior at almost unimaginable financial cost. Not every day does the work of scientists lead to galactic events simply called Kyoto or Copenhagen. At least not since the Manhattan Project.

What is happening at East Anglia is an epochal event. As the hard sciences—physics, biology, chemistry, electrical engineering—came to dominate intellectual life in the last century, some academics in the humanities devised the theory of postmodernism, which liberated them from their colleagues in the sciences. Postmodernism, a self-consciously "unprovable" theory, replaced formal structures with subjectivity. With the revelations of East Anglia, this slippery and variable intellectual world has crossed into the hard sciences.

This has harsh implications for the credibility of science generally. Hard science, alongside medicine, was one of the few things left accorded automatic stature and respect by most untrained lay persons. But the average person reading accounts of the East Anglia emails will conclude that hard science has become just another faction, as politicized and "messy" as, say, gender studies.

The East Anglians' mistreatment of scientists who challenged global warming's claims—plotting to shut them up and shut down their ability to publish—evokes the attempt to silence Galileo. The exchanges between Penn State's Michael Mann and East Anglia CRU director Phil Jones sound like Father Firenzuola, the Commissary-General of the Inquisition.

For three centuries Galileo has symbolized dissent in science. In our time, most scientists outside this circle have kept silent as their climatologist fellows, helped by the cardinals of the press, mocked and ostracized scientists who questioned this grand theory of global doom.

Beneath this dispute is a relatively new, very postmodern environmental idea known as "the precautionary principle." As defined by one official version: "When an activity raises threats of harm to the environment or human health, precautionary measures should be taken even if some cause and effect relationships are not fully established scientifically." The global-warming establishment says we know "enough" to impose new rules on the world's use of carbon fuels. The dissenters say this demotes science's traditional standards of evidence.

The U.S. Environmental Protection Agency's dramatic Endangerment Finding in April that greenhouse gas emissions qualify as an air pollutant—with implications for a vast new regulatory regime—used what the agency called a precautionary approach. The EPA admitted "varying degrees of uncertainty across many of these scientific issues." Again, this puts hard science in the new position of saying, close enough is good enough. One hopes civil engineers never build bridges under this theory.

If the new ethos is that "close-enough" science is now sufficient to achieve political goals, serious scientists should be under no illusion that politicians will press-gang them into service for future agendas. Everyone working in science, no matter their politics, has an stake in cleaning up the mess revealed by the East Anglia emails. Science is on the credibility bubble. If it pops, centuries of what we understand to be the role of science go with it.

Write to henninger@wsj.com
]]> Climate change http://www.brentwheeler.com/index.php?itemid=798 Mon, 7 Dec 2009 09:56:37 +1300 http://www.brentwheeler.com/index.php?itemid=797
“We don’t really trade silver…we don’t trade the S&P…we trade the differences. We really are risk managers. We take on risks, try to exploit them and we leave when they turn against us. That is what we get paid for. Basically we are in the risk transfer business. We take on what people want to sell, sell what people want to buy and hope to make a profit. The reason why one goes to a portfolio is because there are real limits to perfect knowledge. I’ll give you an example. Say you knew which commodity, stock or currency would appreciate the most in the following year, and you knew exactly what its price would be. We did this experiment looking backwards in fact in our database. The question of when you take a position is how are you going to trade the line…how much of a position are you going to leverage. Now, if you have perfect knowledge, would you leverage 5 to 1, would you leverage 10 to 1, 2 to 1? Well it turns out that if you leverage more than 3 to 1 that you are a loser. Because we found that if you did 3 to 1 you would have, even with perfect knowledge, you could go down a third. So that, the only perfect knowledge you could have, would be if you knew every wiggle on the line. Then you would know exactly how much to leverage. But you don’t.”]]> Market Processes http://www.brentwheeler.com/index.php?itemid=797 Mon, 23 Nov 2009 13:36:31 +1300 http://www.brentwheeler.com/index.php?itemid=795 this paper from Harvard. The significance of the conclusions - while perhaps suspected and in some ways obvious - are difficult to over state.

"We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions."]]> Policy http://www.brentwheeler.com/index.php?itemid=795 Sun, 22 Nov 2009 13:49:54 +1300