Steve Reads

I started off thinking that maybe this book’s title should be Gather Ye Data Where Ye May. It starts with a couple neat chapters where the authors try to measure various hidden variables — how much one company’s fortunes depend on connections to a dictator, say, or how much gets smuggled into a particular country. You can get a reasonable measure of smuggling by counting exports from one country and imports into another. The authorities only tax you on the way in, not on the way out, so you have every incentive to lie on the import forms and tell the truth about your exports. If 10,000 BMWs leave Hong Kong destined for China, and only 9,000 arrive in China having been shipped from Hong Kong, you can guess that about 1,000 BMWs were smuggled out of Hong Kong into China. Perhaps they were creatively relabeled ‘Hyundai,’ thereby carrying a much smaller tariff burden.

The authors dig a bit deeper into the numbers and point out a loophole that nations ought to fill if they want to modernize their system of duties: give similar products similar tariffs. One example here is amusing: a “boring/milling machine — numerically controlled” used to get a 10% tariff on its way into China, whereas a “boring/milling machine — other” got a 20% tariff. People have every incentive to claim that their boring/milling machine — other is actually a boring/milling machine — numerically controlled. The closer the products are in appearance, the easier it is for importers to pass off the one as the other and evade the higher tariff. (The authors give us a thought experiment, wherein chickens and turkeys come in for different tariffs. I only wish this were real. It would make me smile.)

Next the authors ask: is there any way to measure how corrupt a nation is? They find a smirk-worthy means of measurement: look at how often diplomats pay their parking tickets. Diplomats, you’ll remember from the Lethal Weapon movies, can wave diplomatic immunity around anything and magically get off scot-free. This includes parking violations. So find some place where a large number of diplomats congregate and see whether they pay their tickets even though they don’t have to. As it happens, the UN fits the bill: New York City keeps detailed records about which ambassadors received citations, which nations they represent, how much they were fined, and whether they paid the bill. From this, Fisman and Miguel get a rough measure of corruption, which they can try to connect to other measures like the World Bank’s.

Don’t think for a moment that I take this particularly seriously, by the way. The “parking metric” is a rough measure, at best, of what you’d do if you knew no one was looking. What’s vexing, then, is that the authors seem to take it quite seriously indeed. 40% further on in the book, we see Fisman and Miguel writing about Africa’s history of extractive industries feeding nothing back to their people, “To the extent that stealing parking spots in New York City really is correlated with stealing government funds, Chad is in for trouble.” This example just doesn’t do much at all of the heavy lifting that they expect it to. The authors seem surprised that other researchers could have accomplished much without parking data: “Even without hearing of the wanton parking habits of Chad’s diplomats, donor organizations were fully aware of the endemic corruption in Chad’s government …”.

So maybe, goes the implication, nations remain poor because their people are fundamentally corrupt. Or maybe not: the next chapter considers the possibility that domestic instability — civil wars, particularly — result from drought. That is: the rain stops falling, and the only available work is in a gang. Not a terribly controversial idea. The authors’ approach is novel: send in the peacekeepers when drought makes war look likely. Get a rapid-response team to stop wars before they start. There are unexpected curiosities here: during droughts, there’s more witch-burning, and the witches tend to be old women. The authors speculate that this might be the survival instinct disguised as superstition: old women consume more resources, so they have to be the first to go. The policy response they propose here is old-age pensions: turn the women into village assets, rather than liabilities.

We might label the connection among all of these “discovering the economic gangster in all of us”: under what circumstances would we become corrupt or join a militia or burn a “witch”? How bad would the world around us have to get? And how do we use this knowledge of human self-interest to prevent disaster? Economic Gangsters is a slight introduction to these questions, and didn’t really feel solid enough to justify the time. I suspect there’s a better book on the same topic out there.

Help me out here, people. I’ve seen Walras’ Law mentioned in a few places. It’s the theorem that if all markets but one are in equilibrium, then the last market is also in equilibrium. The Wikipedia entry says that this follows from the fact that excess demand and excess supply must both sum to zero. If that’s the case, then Walras’ Law follows trivially. What I don’t get is why total excess demand must sum to zero. Suppose there’s an insect that feeds on the roots of grapevines. Wine production drops, leading to unmet short-term demand. In the longer run prices rise, demand drops at the going price, and quantity demanded comes to meet quantity supplied. Awesome. But assuming no other commodities markets were affected by the insect, and assuming all other markets were in equilibrium, we now have one market with positive excess demand and n-1 others with zero excess demand.

What am I missing here?

P.S.: Question answered more or less instantaneously by email. The trick is that Walras’ Theorem requires the Walrasian auctioneer, whereby our mythical auctioneer equates supply and demand instantaneously. Since excess demand and excess supply vanish instantaneously, you can indeed always say that at any moment total excess demand must equal zero across all markets. … But come to think of it, the Walrasian auctioneer would make excess demand zero in every market, in which case Walras’ Theorem itself is unnecessary.

I clearly need to read Debreu’s Theory of Value already.

Begin navel-gazing…now.

People might get the impression that I am something of an overcritical curmudgeon in my reviewing. It’s true: I am. I feel like a few things need to be said here. These aren’t really in defense of myself, because I don’t think being critical needs a defense. Count them more as a description of the service I like to think I’m providing.

First of all, I would like it to be said of my reviews that they contain very few false positives: if I say something is good, you’ll think it’s good too. I may have a high rate of false negatives — you may like lots of things I dislike — but at least you’ll never read a book I like and find that you’ve wasted your time.

Secondly, the comparison shouldn’t be between a book and itself. It’s not a question of whether a book is nicely written, say. Lots of people can string together sentences. On the subject of nonfiction, the question, it seems to me, is whether you can get a better presentation of the same material, or of a superset of that material, from a different book. If so, there’s no reason to read the inferior book. The inferior book might be fine when judged against itself, but you’re here to learn and you have a finite life. You don’t have time for inferior books, and I’d feel bad sending you to them (about which: see the first point).

Finally, I take offense when a book or a person wastes my time. A few hundred pages take a few hours of my time. I have a queue of 527-odd books that I want to finish; a few hours spent on a subpar book is a few hours I can’t spend on a better book, a better movie, etc. That upsets me. I wouldn’t want to inflict that on you. See the first point.

So you may love books that I hate; if so, more power to you — the world needs more love. But I would never send a book to you unless I thought it was a great use of your life.

End navel-gazing.

Behavioral-economics books are thick on the ground nowadays. Violations of classical economic rationality are such a part of the mainstream that they’ve garnered a Nobel Prize and the ear of the president-elect. So it behooves the authors of such books to say something new and different. They can’t just tell us about the endowment effect and handing out mugs, or about making 401(k) enrollment the default. Lots of people have trod this ground, and I doubt that anyone’s going to do it better than Thaler and Sunstein did in Nudge, or than Kahneman and Tversky did in Choices, Values, and Frames.

Popularizers are always good, but again we have to compare any behavioral-economics popularizer to Nudge; it’s plenty popular, written with great energy, and moreover written by one of the great fathers of the field. One would be hard-pressed to find anyone more qualified to write such a book than Thaler.

Peter Ubel’s Free-Market Madness wants to go beyond the Nudge fellows, and I think that’s where it goes astray. The Nudge guys, you may remember, describe themselves as ‘libertarian paternalists’: they believe in the power of markets, but at the same time they realize that policymakers have to make choices about other people’s lives. I mean ‘policymaker’ broadly: when the HR administrator at your company decides whether to automatically enroll employees in the company’s 401(k), she’s making policy. Defaults matter very much. Almost none of Nudge is controversial, inasmuch as it just recommends flipping some defaults, but always allowing people the option of flipping back.

Professor Ubel is more controversial in Free-Market Madness. When people might systematically make bad choices about their own lives, he sees no problem in more-forcibly trying to sway them to the right side. Big Macs are bad for you? Tax them (similar to what New York’s governor is proposing, as it happens). Advertisers are peddling junk food to kids on Saturday-morning television shows? Stop them from doing it.

These policy ideas are shoved toward the end of Free-Market Madness; it really seems as though Professor Ubel was embarrassed to include them. Consequently, there’s no solid rationale for a lot of what he proposes. He arbitrarily tosses out the idea of a 10% tax on a certain extremely unhealthy burger, but where did that number come from? And wouldn’t it in fact be a regressive tax, as Marion Nestle noted in the context of New York’s proposed soda tax? Poor people eat worse than wealthy people; these taxes will harm them disproportionately.

These policies are disturbing for a couple reasons. First, Ubel hasn’t exhausted the libertarian-paternalist policies that are available to him: nowhere does he consider helping poor people eat better; he only considers taxing them. Second and more disturbingly, Ubel’s solution for failed regulation is more regulation. A nontrivial part of why this country’s food supply contains so much corn is that the annual farm bill encourages it. Farmers grow corn “fencerow to fencerow,” driving the price down; isn’t it perverse to then tax corn-syrup-based beverages to make Americans less fat? Note that Ubel’s examples of market failure are all focused on the United States. If he had stopped to ask why, say, the French aren’t as fat as we are, his book might have said less about the supposed biological bases of American obesity, and more about poor regulation. But this would have then deep-sixed his own proposed regulations.

Finally, you don’t need behavioral economics to understand why it makes sense to regulate food marketing. When you step into the grocery store, and your child tugs at your sleeve to insist that you buy the latest junk food he saw on TV, you know why marketing needs to be regulated. All the resources of some of the world’s largest corporations are amassed against you. It’s not a fair fight.

I know Ubel’s heart is in the right place; he’s a doctor, and he’s seen too many of his patients make poor decisions about their own lives. For all that, I can’t recommend that anyone read Free-Market Madness. If you’re interested in behavioral economics, your time is better spent with Thaler and Sunstein. If you’re interested in food marketing, and the industry’s fight against the “junk food” label, read Marion Nestle’s two essential books, Food Politics and What To Eat. For more about the regulation that got us into this pickle, read The Omnivore's Dilemma.

(Attention conservation notice: about 1,400 words on a book that you should read — not only because it’s a good story, but because it says a lot about the world we’re in now, eight years after it was written. On the basis of this book, I intend to snap up Lowenstein’s Origins of the Crash, about the dot-com bubble.)

This is one of that rare breed: educational nerd porn. It’s part of a select group of books that tell a compelling story while not shying away from technical details.

Long-Term Capital Management’s specialty was “arbitrage,” which generally means “trying to root out those places where you can get something for nothing.” The canonical example is a stock on two separate exchanges (London and New York, say) with two different prices. If this difference persisted, I could buy the stock in the cheaper city, sell it in the dearer city, and pocket the difference. Piles of money like this just won’t be left laying around for long. Hence the joke about the economist and his friend who find a $100 bill laying on the ground; as his friend reaches to pick it up, the economist exclaims, “Don’t! If that were real, someone would have already taken it.”

$100 bills aren’t laying around very often, but the occasional penny may be. Suppose a share of Microsoft is momentarily trading for $19.36 in New York and $19.35 in London. Buying in London and selling in New York nets me a penny, but what if I have a computer program at the ready to buy a million shares in London and sell in New York? I’ve just pocketed $10,000 for a few seconds’ labor; nice work if you can get it.

A cleverer piece of arbitrage, used to marvelous effect by Thaler, is the 3Com/Palm split. 3Com planned to separate its subsidiary’s stock into a separate issue; at first it would issue 5% of Palm’s shares, then a few months later issue the other 95%. When the 95% came, every 3Com investor would receive 1.5 shares of Palm. A rational market should, then, assign 3Com a value 1.5 times Palm’s price. This did not happen. An arbitrageur’s job is to make sure that it does.

This, and arbitrage of far deeper complexity, was Long-Term Capital Management’s job. It got its start in the world by employing, among others, two legendarily brilliant economists — Myron Scholes and Robert Merton — who granted it instant cachet. Investors ponied up tens of millions of dollars so that two of the men who invented options pricing could invest their money wisely in multiway trades of complex options.

The trick, at LTCM’s start, was to make arbitrage bets in pairs to minimize risk. Lowenstein gives a fascinating example of a security constructed entirely from mortgage interest payments (“IOs”), and another constructed entirely from principal payments (“POs”). When interest rates are falling, people refinance their mortgages, paying off more principal than they normally would; hence the price of IOs would tend to fall and POs would tend to rise. When interest rates are rising, the reverse happens.

To profit off the rise and fall of IOs, while not exposing yourself to too much risk, you want to choose another security that will rise when interest rates rise and fall when they fall. A natural choice is a Treasury. Buy an IO and sell a Treasury, and you have neatly hedged against the interest rate itself. The quantity you’re actually betting on, after deleting that interest-rate component, is the value of the IO. Long-Term believed that IOs were fetching too low a price, because investors were expecting another round of refinancing. Their hedging strategy allowed them to bet only on its price relative to its fundamental value, without getting involved in a bet on interest rates. They cleaned up.

In a market where all participants are acting rationally, Long-Term Capital Management has nothing to do. If everyone bets on the information available to him, and isn’t swayed by panicky crowds, then the price of a stock at any given moment reflects exactly what it’s worth, and the motion of that stock is literally random. We’ve seen examples where the market is clearly not rational — as, for instance, when it assigns a negative value to the part of 3Com stock that’s not tied up in Palm. As these irrationalities disappear, so does Long-Term’s business.

Which is exactly what happened as the years went by. Other hedge funds were doing the same work that Long-Term was doing: seeking and destroying financial irrationality. The profits from individual arbitrage trades were getting smaller for everyone involved. But Long-Term had to make a profit. Their answer: execute lots of trades. In our example above, they’d buy billions of shares of Microsoft stock in London and sell it in New York. And they’d use massive leverage to carry out the trades: buy shares using 50 times the capital they actually possessed.

They were bringing huge returns to their investors, so the money kept flowing in even as they had fewer and fewer places to put it. They started to get stupid: rather than carefully hedging one rising asset against another falling asset, they started taking one-sided trades. They started investing in fields where they had no expertise.

And finally, disastrously, the market behaved exactly as Long-Term’s models forecast that it wouldn’t. Arbitrage opportunities are supposed to disappear, which means that eventually the market will price 3Com and Palm correctly. Investors have every reason to believe that eventually one share of 3Com will be worth at least 1.5 shares of Palm; when that happens, those investors who held on to their 3Com shares will net a pretty penny.

But what if, instead, the market takes too long to “converge”? In the meantime, your lenders’ own weakening balance sheets have forced them to reduce their leverage. They clear debts off their books, and have to start calling in loans that they made to you. But the market hasn’t caught up with you yet. Your creditors are deleveraging exactly when you wish they wouldn’t. You keep hoping you can hold them off another few months until the market corrects itself, but before it does you go broke.

This is exactly what happened to Long-Term. In the space of 5 weeks, it blew through several billion dollars in capital, until eventually it had to be rescued by a consortium of banks brought together at the Federal Reserve Bank of New York. Long-Term is no more.

Lowenstein extracts a morality play from this, about the evils of following mathematical models of markets. Markets are unpredictable, says Lowenstein, and anyone who thinks the future will look like the past is a fool. He takes this as an article of faith, but there’s no good reason to believe him. The trouble at Long-Term wasn’t modeling; if I tell you “from my gut” that Amazon’s stock is certain to rise next year, that’s a “model” — an imprecise, probably unjustified model. If I predict Amazon’s stock-price movements on the basis of statistical patterns derived from data, that’s a better kind of model. If I build into my model the assumption that future stock-price movements will mimic those from the past, that may be a flawed assumption, but at least it’s available for criticism; my gut isn’t. Lowenstein makes a lot of fun of the eggheads, but he never explains what the alternative might be. If the alternative is old, grizzled bond traders with decades of experience, Lowenstein is then obliged to prove that their record is any better than that of the eggheads. This he does not do, and it’s doubtful that he could.

There seem to be two major problems with Long-Term’s models. First, they don’t account for a phenomenon known to economists and mathematicians since the 1960’s: stock-price motions have ‘heavy tails’. That is, there are more large swings in stock prices than the efficient market hypothesis can explain. (For that matter there’s a tension, which Lowenstein never fully resolves: the financiers can’t believe in the efficient market hypothesis with the one hand, and seek out arbitrage opportunities with the other.) Second, the models didn’t take enough of a global view: in the event of a panic, liquidity disappears and irrationalities persist. These call for better modeling; they don’t signal the folly of the whole enterprise, which Lowenstein implies.

It’s a captivating story, told intelligently and energetically. And unfortunately it couldn’t be more relevant today.

This book is compendious and at times dry but immensely illuminating. As I write this, the U.S. and the world are descending into what looks like a very ugly economic time; Manias, Panics, and Crashes will make you think it was written for this very crisis, when that’s sadly the point: the same story gets recapitulated over and over again, and no one seems to learn the lesson. The latest edition came out in 2005, well before the housing bubble popped but not too long after the dot-com bubble popped. As Paul Samuelson says on the cover, “Sometime in the next five years you may kick yourself for not reading and re-reading Kindleberger’s Manias, Panics, and Crashes.”

Kindleberger argues, apparently following Hyman Minsky, that the business cycle largely follows the credit cycle. This sounds incredibly obvious if one is sitting in the middle of the 2008 bubble, but let’s review the arc. First some external shock gives the economy a boost — say, the rise of the Internet in the mid- to late nineties. Money rushes to fund that boom. Banks and venture capitalists loosen their purse strings perhaps more than they should. The money from the boom spills over into other markets, like real estate. Asset prices keep climbing, and people believe that they’ll never come down. People buy securities with the expectation that they’ll be able to sell them off in a few months, and that there will be at least one idiot after them ready to buy up their asset when they’re ready to sell it. Any number of investment experts claim that we’ve overturned the law of gravity, and that the sky’s the limit.

And then some sort of pop happens. Maybe an Enron collapses when people notice that their numbers don’t make sense. Suddenly the banks that had lent them money on easy terms are taking a big hit and need to call in their loans. The customers holding those outstanding loans need to sell other assets in a hurry to make their payments. So they dump their real estate, say, at distressed prices. Property values decline. The various bubbles pop in tandem.

Now credit contracts, as banks only make loans to those they can really trust. When it gets really bad, no one trusts anyone else, and credit is entirely frozen.

Bubbles and their popping are contagious not only between classes of assets, but between nations. Kindleberger lays out any number of examples of this “contagion,” with the Japanese bubble in the 80’s and early 90’s being maybe the most fascinating. Tokyo real estate was famously overvalued: “the chatter … was that the market value of the land under the Imperial Palace was greater than the market value of all the real estate in California.” Japan was swimming in money. That money has to go somewhere, so among other places it went to Hawaii; Hawaii is to Japan, apparently, what Florida is to New York City. When the Japanese bubble burst, so did the Hawaiian economy. And so did the economies of Indonesia and Thailand. But again, money has to go somewhere, and it’s not going to stay in Asia when Asian economies tank. So it flowed to Mexico. All was well for Mexico until the Chiapas uprising and the assassination of Luis Donaldo Colosio Murrieta in 1994. On the money moved to the United States. And so on around the circle. One concern with the present crisis is that the whole world may have run out of places where the money can flow: we’re all getting hit simultaneously by the credit freeze.

Kindleberger goes through the standard litany of approaches to crises like this: a central bank, deposit protection, etc. These solutions all have a standard problem, namely moral hazard: if you know you’re going to get bailed out, you’ll be more likely to take risks. The challenge is always to provide a backstop so that the whole system doesn’t collapse, while not encouraging risky behavior. Depository banks get FDIC protection, but they all need to pay into the insurance fund. The story for investment banks doesn’t seem that different: if they’re going to be subject to bank runs like depository banks were, and if they leverage themselves as outlandishly as depository banks did, then they need to be regulated like depository banks are.

One important challenge is to provide this backstop internationally. If nations are increasingly interconnected, they need an increasingly interconnected response to economic crises. The International Monetary Fund and World Bank are supposed to handle this role, but everyone seems to be dissatisfied with them for reasons that I only dimly grasp.

In much of this, Kindleberger overlaps with books like Galbraith’s Money: Whence It Came, Where It Went and Eichengreen’s Globalizing Capital, but he’s carved out a nice niche for himself. Shorter Galbraith is “An introduction to money, with special emphasis on the American and British banking systems and a hat tip to Keynesian demand-side management because that’s what Galbraith’s hobbyhorse appears to be.” Shorter Eichengreen is “How it happened that the Western world got the gold standard, how we fell off that standard, and what happens now.” Shorter Kindleberger is “A compendium of crises, one after the other, from the 1600s to now, and how no one seems to learn a thing from any of them.”

Apart from policy prescriptions — “always provide a backstop, but periodically let a bank or two fail to encourage the others” — one of the things I take from Kindleberger is to put my money in some vehicle that yields a real annual return of 6%, then forget about it; I’m willing to make my way through bubbles getting comfortable while my friends get rich, if only so that I can remain comfortable while they get poor.

I confess up front that, despite the beauty and clarity of Keynes’s writing, I am going to need to reread The General Theory. There aren’t very many moving parts, but they are all aimed at professional economists who are assumed to know already how the parts fit. As I learn more of the underlying theory, I’ll return to the book and learn more of it. In the meanwhile, you can expect that this review will be even more sketchy than usual.

The General Theory is a rewrite from the ground up of much early-20th-century economics, and — in contravention of late-20th/early-21st-century economics — uses virtually no math. As Keynes puts it:

It is a great fault of symbolic pseudo-mathematical methods of formalising a system of economic analysis, such as we shall set down in section vi of this chapter, that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep ‘at the back of our heads’ the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials ‘at the back’ of several pages of algebra which assume that they all vanish. Too large a proportion of recent ‘mathematical’ economics are merely concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.

Keynes can say this because he is brilliant and doesn’t need the math. The rest of us could use a judiciously placed symbol or two. In any case, it works out splendidly: Keynes is a brilliant writer as well as a brilliant economist.

By now most people know the story of Keynesian macroeconomics, whether or not they know they know it. Government spending can help pull economies out of a recession. Governments provide this jumpstart because firms have formed pessimistic expectations about the future that prevent them from investing in new plant and equipment, and consumers aren’t consuming — instead they’re hoarding their cash. Since they expect that the future will be like the present, firms and individuals let money sit in the bank collecting interest rather than spending it. Now expectations become self-fulfilling: since no new plants have been built and the existing plants have been allowed to depreciate, the future really does look like the present. Government steps in and gets the money moving out of banks and into actual capital.

It seems as though Keynes believed that government would have to have a fairly continuous role in maintaining full employment well into the future, and not just in times of crisis. His reasoning, as well as I can put together the few moving parts, was as follows. The interest rate on loans, in the long run, has to track the marginal productivity of capital — that is, the rate of return one gets on the last dollar invested in capital. To see why this is so, imagine that the interest rate were higher than the m.p.c. Then the marginal investor wouldn’t invest any money at all in capital. If the interest rate were lower, by contrast, the marginal investor would borrow from the bank (at, say, 5%), invest in capital (at a 6% return, say), and reap endless profit.

So in the long run, the m.p.c. and the interest rate must be equal. Now add in the diminishing marginal productivity of capital. Economics is about diminishing marginal everything: each additional dollar that you earn brings you some joy, but somewhat less joy than the previous dollar did; each additional employee at your company is a little less productive than the last; and each machine that you add to your factory produces a bit less output per dollar than the previous machine did. Each of these requires some argument. Contrast, for instance, the capital-buying experiences of a Microsoft and of a small software company. Both need to buy a machine to box up and wrap software for delivery to customers, but presumably Microsoft’s can do the job much faster. As the company grew, it could graduate through more and more efficient, large-scale machines for accomplishing the same task. So certainly the marginal productivity of all capital needn’t be decreasing.

I can’t entirely conceptualize how we’d expect the m.p.c. to behave when we scale out to an entire economy, but that’s where Keynes is going with this assumption: the m.p.c. of society in general is decreasing over time. And since the interest rate must generally track the m.p.c., the interest rate will also continue decreasing. Which is where the heart of the General Theory comes in: interest rates will increasingly be an ineffective tool for managing the economy. The idea in a well-functioning economy is that you can raise the interest rate if you want to slow investment, and decrease it if you want to speed investment. But if the m.p.c. is getting smaller all the time, we have less wiggle room all the time; when interest rates stop working to guarantee full employment, government spending has to move in.

Keynes appears to have been wrong about the m.p.c.. He was writing at a time, pre-World War II, when the “heroic era” of British engineering seemed to have come to an end. As it turns out, though, productivity continues to grow at somewhere above 2% per worker-hour; stocks have returned 6% per year, and bonds are north of 3%. It’s not entirely clear that these track the m.p.c., but it’s not absurd to assume that they do, either. So there’s still room for monetary policy to do its work.

Keynes also wants the General Theory to have a bit of a psychological basis, but that doesn’t work quite as well. Keynes’s main psychological postulate, it seems to me, is that as people get wealthier, they save more. Consequently, as a society gets wealthier, government’s role of moving money from savings accounts into productive investment gets greater. Paradoxically, the wealthier a society gets, the greater this role becomes; poor societies spend so much of their income on subsistence that they don’t have to worry about money mouldering in the bank. Krugman, in the intro to this edition, tells us that Keynes’s psychology has proven not to be true, but doesn’t elaborate.

A word on that introduction, by the way: it’s the reason I spent probably $20 more than I needed to to pick up this edition. I am a Krugman fanboy. It was really quite silly of me to pick up an edition for its introduction, given that that introduction is freely available on the web. Nonetheless, I did. It’s quite a handsome edition, with the old typesetting and generous margins for notetaking. Sometimes you just have to make these sacrifices.

P.S.: I read Alvin Hansen’s Guide To Keynes along with the General Theory. I wouldn’t recommend it. If anything, I think Hansen makes Keynes less clear. There’s a forthcoming book entitled Understanding Keynes' General Theory, scheduled for release in February of 2009, which looks interesting in this vein; its author has, we’re told, “has been working on this book for the last twenty years.”

Suppose the government maintained a pension for every American. Not a transfer from current workers to current retirees, like Social Security, but a pension, with money invested in various securities. Set to one side the obvious and very serious questions about who would decide how the money gets invested. (Even if you propose some algorithm, like “always invest in an index fund distributed uniformly across all publicly traded stocks,” you still need to worry about some Congress somewhere down the road raiding the pension fund or tossing aside the algorithm. I’m aware of this.) Just suppose that there were a federal pension. Suppose it’s protected like any other pension (e.g., it’s governed by ERISA, which I hardly know anything about). Suppose there are massive penalties for withdrawal.

What macroeconomic consequences does this pension have? Does it stabilize the credit cycle at all? And what consequences does it have for the stock market? If it’s invested in an index fund, an offhand guess says “it has precisely zero effect”: a rising tide of money lifts all boats, and by exactly the same amount. I’m sure there are reasons why that’s wrong, but I’m curious.

Now then: is there any way to invest the money that actually stabilizes the stock market? For instance, suppose the stock market is in a year-or-more stretch of above-average real returns (where the average is 7%, give or take); could the government slow things down by shifting money into bonds or real estate?

Again offhand, it seems like the answer may be no: if the government’s investing according to a fixed algorithm, then everyone knows where their money will go; therefore any reasonably efficient market should already have factored those investments into its predictions of future price movements.

Just some thoughts. This is more of a placeholder for me to look for papers on this subject.

I hope people can pull back a little bit and look at the various crises we’ve experienced recently, to see that the big story — the big thing we ought to be fighting against — is fear, or what Jacob Hacker called The Great Risk Shift. A small selection:

• People’s 401(k)s have recently lost a large fraction of their value. If you’re near retirement, you’re living in fear.
• Enron encouraged its employees to invest a large fraction of their 401(k)s in Enron stock. When the company evaporated, so did their retirement savings. Had Enron instead given its employees pensions, this wouldn’t have happened; regulations set a cap on the fraction of a company’s own stock that can finance its pensions.
• A double-digit fraction of our countrymen have no health insurance. They are terrified that they might get sick, and more terrified that their children may get sick. A civilized society doesn’t leave a man in fear when his wife needs a C-section.

We need that social safety net. We need to rediscover what civilized society means. It means that we’re all watching out for each other, and that I pay a little bit to help my brethren sleep at night.

If you need a selfish justification for it, how about realizing that it could happen to you too? Your family has a history of diabetes — nothing you could control; you were born with this inheritance — so no private insurer will cover you (“pre-existing conditions”). So you’re terrified of leaving a job that you hate, because you know that you’ll never get insurance at your next company. Or even more abstractly: banks seize up from a financial catastrophe that we hardly understand (junk transmuted into AAA-rated securities by ratings agencies that make their money from the companies they’re supposed to be overseeing?), and now your auto-industry employer needs to fire you. There but for the grace of God and Citicorp go we.

This is madness. This is fear elevated to a high principle of libertarian fairness. A civilized society doesn’t act like this.

If President Obama is half the man I imagine him to be, he will help Americans fear less.

Ah, Boston Herald: I had forgotten your charms. When last we visited you, you had artfully renamed the red line the “perv line”. We hardly knew such class was possible.

Here we come to December of 2008. The T has been thriving for months, or at least it was back when gas was $4 a gallon. So what do they do? Destroy as much of their riders’ good will as possible, of course. They’re removing all seats from some red line cars, in an effort to ease congestion. The congestion happens because they don’t send enough cars through at rush hour. When they do send enough cars, those cars invariably come stacked: no cars for 10 minutes, followed by a burst of two or three. When trains are late — as they always are — we hear the disembodied computerized T Announcer Voice give us one of a few stock excuses: signal troubles, disabled train, unspecified “emergency.” We wait, then pack in like sardines. One of the few joys available at such times is that we can sit down and read a book.

Of course it was inevitable, then, that the T would remove that joy. Now we will all stand up during the red line’s creaking crawl from Downtown Crossing to Park Street: start, stop, start, stop. It was at least tolerable while we were seated: clench a few muscles and you avoid careening into your neighbor. Prepare the apologies and “you know how it is with the T” shrugs now, because you will soon need to deploy them. Often when the T is that packed at rush hour, there’s nowhere to stand that allows you to grab onto something; you just have to stand in surfer position (legs far apart with some vertical distance between them, the better to brace against two-dimensional motion) and hope that the train doesn’t jerk too hard.

So that’s where we stand now. Which brings us back to the Herald, which views this T drama and wonders aloud whether it will lead to more groping.

You stay classy, Boston Herald.

Among the many, many charms in this book is that it lives up to the standard that David Herbert Donald set for himself in his biography of Lincoln. This standard is one that, in turn, JFK had set for Donald and his historian brethren:

[Kennedy] voiced his deep dissatisfaction with the glib way the historians had rated some of his predecessors as “Below Average” and marked a few as “Failures.” Thinking, no doubt, of how his own administration would look in the backward glance of history, he resented the whole process. With real feeling he said, “No one has a right to grade a President — not even poor James Buchanan — who has not sat in his chair, examined the mail and information that came across his desk, and learned why he made his decisions.”

Donald takes this very much to heart in Lincoln; he always views the world from where Lincoln sat, and never allows himself to stray into what southerners or military men or anyone else might have known at a given moment. It’s a terrific organizing principle. It gives Lincoln the driving force of a novel, combined with the intimacy of a diary and — of course — the scholarship of a distinguished academic who has spent his life studying the Civil War.

The Politics Presidents Make is a source book for the sort of historian that JFK would have loved to groom. From President Adams through the first George Bush, Stephen Skowronek studies the problems that defined each president’s tenure, and finds himself deeply sympathetic to all of them. The trouble in John Quincy Adams’s presidential tenure, for instance, is that he was essentially trying to hold together the old patrician order that the founding fathers had established, while a new era of party-centered politics was on its way in. It took Andrew Jackson — the founder of the spoils system — to midwife the partisan revolution.

Or take Herbert Hoover, the classic (to modern eyes) failed president. First of all, Skowronek reminds us, Hoover tried a lot of things before collapsing into inaction in the midst of the Depression; Skowronek says that modern historians have raised some doubts that the New Deal was very new at all (though he doesn’t say this with much confidence). Hoover’s big problem, says Skowronek, was that he tried to hold together the strains of his ideology even as he systematically violated its tenets: he came in believing in an American System uniquely combining the free-enterprise system with a limited government, then expanded the government’s role little by little until his original beliefs were hardly recognizable. Yet he insisted that his policies weren’t the least bit innovative, and that they still conformed to the American System. As Skowronek puts it,

Hoover himself would never accept the notion that his actions were opening the door to the displacement of the old order and thus he could never link his initiatives with the promise of constructing a new one.

The grand arc connecting every president, says Skowronek, is the relation they bear to the existing order, and how durable that order is. A president like Hoover, who’s a defender of the existing vulnerable regime, is a “disjunctive” president. Hoover’s successor, there to overthrow the vulnerable regime, is a “reconstructive” president. After the reconstructive presidents, we typically get a line of “articulating” presidents; after Roosevelt, these are presidents like Eisenhower and Johnson who rule at a time when the electorate supports the given order; they innovate atop what they’re given. The president’s relation to the existing order forms the basis for essentially the entire book. (Those drawing a little matrix at home will have noticed something missing from the reconstructive/articulating/disjunctive division: those presidents who oppose an existing order that the electorate supports. These presidents are few, and include men like Richard Nixon. They are a hard lot to categorize; Skowronek sets them to one side near the start of the book, basically never to return to them.)

We proceed from Thomas Jefferson, the first reconstructive president (overthrowing the Federalists), all the way through to the most recent disjunctive president (Jimmy Carter), then to the latest reconstructive president (Ronald Reagan), and one articulating president (George Bush). Skowronek has released another edition that extends the story to Bill Clinton; I have to imagine that Clinton counts as an articulating president, largely taking the New Deal as given except for the bits that Reagan had made distasteful (like welfare).

Reagan is an interesting case, exemplifying the trend to which Skowronek draws our eye: the revolutions are getting smaller. Skowronek says it’s been this way almost from the start. Thomas Jefferson could basically reinvent the entire U.S. government. By the time we get to Andrew Jackson, he had banks to fight off. Lincoln had strong parties — the fruits of Jackson’s revolution — to contend with. The New Deal was a big deal, but now FDR had to appease labor unions and corporations before he could get anywhere. And when Reagan tried to kill the New Deal, he couldn’t slay the beast of Social Security. In fact he couldn’t even come close. To use the term that Skowronek attaches: the institutions have thickened. The more power centers there are, the harder it is to push any one of them.

Skowronek pulls off a really neat trick in The Politics Presidents Make: lay out a political theory while telling each president’s story grippingly. It’s the most condensed biography imaginable of the first 41 presidents. You hardly need to read it as a work of theory; Skowronek’s presidential typology works just as well as a narrative frame for 41 life stories.

Finally, it’s not a small virtue in The Politics Presidents Make that it is copiously footnoted. I circled 27 references that look like winners.

I’ve not felt this sort of intellectual exhiliration in a long while. The Politics Presidents Make is one of the best books I’ve read this year.

(Thanks to Jack Balkin for recommending Skowronek’s book on his blog.)