Monthly Archives: November 2006

Government Spending Via a Credit Card Due from our Future Generations

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Italian Minister of Economy & Finance Tommaso Padoa-Schioppa [120K PDF]:

I now come to the last and conclusive theme of my argument. Controlling expenditure always has to balance technical arguments and constraints, with the legitimate and competing claims (often drawing on very different ideological Weltanschauungen) on the resources managed, directly and indirectly, through the political processes. Balancing the two elements is a difficult exercise, as I experience on a daily basis.
Political economists have blamed the difficulty on the fact that the time-horizon of a typical political cycle is shorter than the one relevant on average for the society as a whole, in turn leading the legislature to attribute a smaller weight to the long-run implications of public expenditure policies than it would be socially desirable. Empirical evidence shows that discretionary public expenditure tends to rise before the elections irrespective of the political orientation of the incumbent government, and also in spite of the weak evidence of a relation between the size of pre-election spending and the election outcomes. The politicians’ short horizons and the long lag between reforms and their beneficial effects gives rise to a pervasive tension in expenditure control.
For Faust, the lure of Mephistopheles’ services is greatly enhanced by the fact that the price – albeit a terrible one – is to be paid later. For politicians, the lure of the support obtained through public expenditure is similarly enhanced by the fact that public debt will be paid (o reneged) by next generations, often well after the end of one’s political career. As to myself, having inherited a public debt larger than GDP, and having committed myself and my government to comply with sound fiscal principles, I scarcely can afford even to contemplate the possibility of accepting Mephistopheles’ services.

Fascinating and powerful!

Ingredients of a 2007 Grand Bargain on Social Security?

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The Economist:

So Washington is full of rumours that 2007 will bring a Grand Bargain on social security reform (see Mark Thoma’s take here and Vox Baby here). The Bush team’s plan is to sound sufficiently conciliatory and open-minded that it becomes impossible for the Democrats not to sit down and talk. That strategy just might succeed. Stonewalling is a plausible political tactic when you are in opposition (though still shamefully shortsighted). It doesn’t work so well if you are actually in charge on Capitol Hill, particularly when you announce that retirement security is one of your top legislative priorities.

Reduced Fed Transparency: Inflation on the Way?

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Barry Ritholtz:

Last year, we lamented the passing of M3 reporting. This broadest of money supply measures had shown a discomforting increase in liquidity, far greater than what M2 was revealing.

At the time of the M3 announcement, we suspected the Fed was attempting to cover their tracks, disguising an ongoing increase in money supply and an unstated “easing” in Fed bias. Since that time, we have learned: the Treasury Department was also adding liquidity — a duty they have assumed, in part, in addition to the same performed by the Fed. Indeed, based on the credit growth data Doug Noland published last month (October Credit Review), it appears that the Fed has – despite increasing interest rates – actually eased over the last two years.

Becker & Posner on Milton Friedman

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The Becker – Posner Blog:

Milton Friedman died this past week. He was the most influential economist of the 20th century when one combines his contributions to both economic science and to public policy. I knew him for many decades starting first when I was a graduate student at Chicago, and then as a colleague, mentor, and very close friend.

I will not dwell here on what a remarkable colleague he was. However, I do want to describe my first exposure to him as a teacher since he enormously changed my approach to economics, and to life itself. After my first class with him a half-century ago, I recognized that I was fortunate to have an extraordinary economist as a teacher. During that class he asked a question, and I shot up my hand and was called on to provide an answer. I still remember what he said, “That is no answer, for you are only restating the question in other words.” I sat down humiliated, but I knew he was right. I decided on my way home after a very stimulating class that despite all the economics I had studied at Princeton, and the two economics articles I was in the process of publishing, I had to relearn economics from the ground up. I sat at Friedman’s feet for the next six years– three as an Assistant Professor at Chicago– learning economics from a fresh perspective. It was the most exciting intellectual period of my life. Further reflections on Friedman as a teacher can be found in my essay on him in the collection edited by Edward Shils, Remembering the University of Chicago: Teachers, Scientists, and Scholars, 1991, University of Chicago Press.

Feingold on the Long War

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Wisconsin Senator Russ Feingold addressed the Madison Civics Club yesterday. His speech addressed the Long War. Adam Malecek was there:

Feingold said that Africa also presents a number of critical issues related to terrorism, and that it is a growing haven for many terrorist operatives. He noted that terrorists blew up American embassies in Africa, not in Afghanistan or Iraq, and that the culprits went to South Africa to hide.

He said even though he was well-educated and studied abroad, at 39 years old he didn’t know anything about Africa — and he was on the Foreign Relations committee.

“And I spent 15 years since learning about (Africa). But I offer that as a commentary on how prepared this country was on 9/11,” he said.

Feingold pointed out the fact that the northern part of Africa is only about 20 miles from the Middle East.

“But we don’t think of them that way. We think of them as separate,” he said, adding that the United States needs to work on determining the complicated interrelationships between various nations and terrorist groups.

Useful sites on the Long War:

Andy Hall has more as does Douglas Schuette.

A New Take on Net Neutrality

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RampRate:

The debate over net neutrality1 has often focused on video as the dominant medium that made the prioritization of packets either crucial or harmful. However, video is not the offering that will suffer the most if net neutrality becomes a wistful memory. Rather, the users that are likely to be most materially disadvantaged are those that utilize the Net for interactive communications – particularly voice over IP (VOIP) and online gaming. Of these two finalists for the dubious title of “innovation most likely to be stifled to the detriment of everyone by loss of net neutrality,” gaming is by far the more irreplaceable and senseless loss.

Unlike video and voice, ISPs are unlikely to have or be able to obtain a viable material stake in the gaming business and have no replacement for the service. As a result, consumers stand not only to lose their choice of the source of this product, but the very value of the gaming service itself.

Yahoo’s Peanut Butter Manifesto

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Henry Blodget:

It will be interesting to see how Terry Semel reacts to Brad Garlinghouse’s “peanut butter manifesto,” which was essentially open letter accusing Terry of incompetence. Garlinghouse took pains to note that Yahoo’s problems come “straight from the top.” He also obviously either leaked the memo himself or knew that it would be leaked (little difference). Regardless of what happens, Yahoo shareholders should thank him.