Monday, August 30, 2004

Reader Update: Unexpected Delays,

No big deal, just many minor delays adding up to a lot of time burned on other topics. Also reading these government methodological reports is always plodding progress. To say tedious is to put it mildly. This is perhaps why so few people notice these issues. They're buried underneath a mountain of bureaucratize.

Will try to get something out tonight or tomorrow. Thanks for your patience,


Friday, August 27, 2004

Another Busy Day, Posts Up Later,

I expect to have two more of my posts on GDP and Productivity up later tonight. Suffice it to say that I don't think that blaming it entirely on the market is an adequate explanation or exploration of the topic. Until then, got to get some work done and do some real life stuff. Come by and check out the stuff late tonight or tomorrow whenever you have time.

Until then, I hope everyone enjoys their Friday!


Thursday, August 26, 2004

Reader Update, Overview of Writing Series

Dear Readers,

I am working on a series of stories to follow up both the California angle, and to provide more hard evidence for the reporting I've done on GDP and productivity numbers, and to tie it all in to offshoring. I continue to welcome your comments, and furthermore I think that you will notice that your comments do drive my writing in that I attempt to address your questions and concerns collectively even if I do not always have time privately. Basically the story is that I will continue to present data taken from official releases and break down the numbers in papers that are overwhelming for the ideas that I am criticizing.

And no, I do not think that I have gone "too far". What I am reporting is simply quotes and data taken directly from official sources and in context. If their numbers and arguments do not make sense, and I am ready to share more specifics undermining their positions, then that is the way it should be. I am not "going too far" because there should be no "sacred cows".

If I am approaching things fairly, analyzing things honestly and truthfully, and using only facts then how can this be going "too far"?

I understand that this is may be upsetting for some people as it may seem to go against their intuitive ideas and direct experience. However I believe I can show mathematically how a person could see individual instances where technology made a work environment more productive, and because of a further unaccounted factor still fail to produce aggregate productivity or GDP increases (unless one uses accounting gimmicks, more to be shared).

This may seem counter-intuitive but in the days to come I will be analyzing several papers, all of which use official data and methodology and all of which are overwhelming for the positions I am criticizing, to show that my presentations and conclusions are in fact not only substantial but clearly refute counter-claims. However I cannot do it all today.

The reason why I can bring you this independent analysis is that no one is paying me to do this. That is because no one out there is interested in truly funding this kind of analysis. Both the neoliberal and the neoconservative economic paradigms, "New Economy" et al., stand to have fundamental political truths they hold dear to be undermined by what I am revealing. This means that it is intrinsically a difficult proposition to broach, despite that it explains the current economic situation of the United States and that I've been successfully using it to predict market movements when traditional and neo economic interpretations alike have failed.

So I must read the papers, crunch the numbers, and do the thinking and writing all on my own time and dime. There is one of me and many of them: them being the many think tanks, political scientists, analysts, and economists who have either bought into this personally or work for those who have a stake in the issue. Nonetheless I will perserve and I continue to emphasize that I am going to take a fact-based and steady approach to these issues, citing my sources and allowing everyone to see how I've come to the conclusions that I have.

I hope that this will dispense with the criticism that I have "gone too far." There is no position or theory ever too perfect that it should be exempted from examination based upon fact and reason as to evaluate its validity. For those who doubt simply because they cannot believe what we shall call a "mistake" on this scale could be committed, perpetuated, and bought into by so many people then I simply say I pray you keep an open mind and let me show you the evidence.

Because there's more from where the previous ones came from, and by no means have you seen the most ludricuous stuff yet.

I hope that this rather relentless stream of presentation of facts and cited sources will eventually wear down and convince even the most incredulous doubter that yes in fact the story is as I have painted it.

I would lastly note two things. As you all know, I have been highly critical of the Bush Administration. However the facts are that the vast majority of these methodological changes occurred under previous Administrations, and many of them under the neo-liberal economic consensus of the Clinton Administration. Therefore this series of writing is as close as it can be, truly apolitical. Secondly, I have never and do not to this day attempt to imply, construe, or implicate any form of deliberate conspiracy. I do assert that there is groupthink, academic wooliheadness, bad accounting, and an all too willing set of people who believe rather than reasonably come to their conclusions.

Therefore it is worse than a conspiracy, it is a religion. What I propose to deconstruct is nothing less than the "New Economy" paradigm itself. This will be difficult for people to accept, because it is a belief rather than an economy theory based upon facts and reason. This fundmamentally is why so few people have come to grasp it, because it is not a mere questioning of GDP, productivity, or true offshoring figures - it is a deconstruction of the entire worldview that they have become accustomed as a lens through which to see their entire lives.

I did not set out to accomplish such a grand denoument. I merely have been led here, one step at a time, following the trail of evidence. At every turn rather like my fictional role model, I have been eliminating the impossible and then am forced to turn to consider the remaining however improbable it may appear. I did not set out to question GDP numbers, and this entire exercise is scandalous to me, for above all numbers in the past personally I have vested the most personal trust and recommendation in GDP.

In the 90's you could have hardly found a person who bought into the "New Economy," paradigm more than the oldman. However the oldman has never been a "true believer". He just thought it was true.

However I absolute refuse to spare any proposition from full, fair, and thorough examination based upon facts and reason. Therefore as I kept on finding discrepencies I kept on following them up. And those discrepencies led me futher and further, until it all began unraveling.

I cannot state that this is the end that I sought, but I can state that as long as I remain independent and able I will follow it through to the end. Based upon my own history of beliefs, I would say that what I am proposing is impossible. Based upon my investigation, I would say that there is no other alternative that has not been counterfeited.

I hope as I continue my journey, unraveling the very basis of the economic world that we have come to know and accept as being both inevitable and universal, that you my readers will give me a fair chance to prove to you by fact and not fiction that what I am sharing is the only logical conclusion of such a close scrutiny of the best available information.

This is the best that I can offer, and humbly I hope that you will take up my offer.

Wednesday, August 25, 2004

Bogus GDP, Productivity, and Hedonics Part II

A few days ago, the oldman reported on the extraordinary finding that according to the Bureau of Economic Analysis that if you subtracted the final sales of computers from total GDP, then total GDP would actually increase. At least if you did it before 1997, because after 1997 if you subtracted the computer sales portion it would decrease.

Now there has been a lively discussion about the topic, where the oldman noted that according to the BEA methodolgical releases especially this "A Note on the Impact of Hedonics and Computers on Real GDP" that they came to this marvelous conclusion by assuming that the computing power stayed constant over time.

This was an extreme irony since it was previously that the oldman had written about Moore's law and about how it had made a mockery of notion of hedonic adjustments. At that time, the oldman had quoted The Economist giving this explaination of hedonic price adjustments.

In the same way, booming house prices hurt first-time buyers much more than those already on the property ladder. More troubling is the thought that official consumer-price indices might overstate or understate inflation across the board. One line of economic research over the past decade has focused on whether official indices overstate inflation. The consensus is that they do, by failing to adjust sufficiently for improvements in the quality of goods and services, or the availability of newer, more innovative ones. In other words, because a $500 television today is much better than a $500 set of a few years ago it is, in effect, cheaper. This means that inflation is actually lower, for all consumers, than a simple price index would suggest. [emphasis added]

Yet both the assumptions they make in order to correct for this, and the final result of said adjustment to the overal GDP figure comes out as clearly distorted. It just isn't realistic to think if you subtract off 5 billion in 1990 (in 2000-equivalent chain-weighted dollars) final computer sales from GDP you will add 127 billion to the overall GDP. I'm sorry but that's both physically impossible and mathematically nonsense.

Such nonsense can only come from a similarly non-sensical claim. To quote the unfortunate article, "A Note on the Impact of Hedonics and Computers
on Real GDP
" (PDF), that is directly on the BEA website:
What are hedonic price indexes?
Despite their unfortunate name, hedonic price indexes are simply statistical tools for developing standardized per unit prices for goods, such as computers, whose quality and characteristics are changing rapidly. Just as traditional price indexes measure the change in the price of strawberries by holding fixed the weight of the strawberries in a box rather than by the price per box, computers need to—at a minimum—be priced by holding fixed the computing power in the computer box. Traditional price indexes are well adapted to measuring the price of relatively standardized products, but they encounter problems—in terms of data requirements and methods—when the characteristics, market shares, and prices of a class of products are changing rapidly. Hedonic price indexes are one means of addressing these empirical and methodological problems. [emphasis added]

In other words, they ignore Moore's law. Just to make sure there is absolutely no misunderstanding, they later ramble on about:
Hedonic price indexes developed at BLS and elsewhere use a statistical model that employs a regression of the prices of a basket of goods on a set of qualities or characteristics of those goods. Using the statistical relationship between observed price changes and changes in the characteristics and qualities of the goods, a hedonic price index is then developed that measures relative price changes while holding quality and characteristics constant. Thus, the hedonic price index is doing the same thing statistically that a matched-model price index does through sample design.1 [emphasis added]

So what is the impact of these hedonic adjustments?
How widespread and important is the use of hedonic techniques?

The use of hedonic price indexes is increasing, and the components that are deflated by hedonic techniques account for 18 percent of GDP. For most of these components, the impact of using hedonic techniques is small because the matched models used earlier picked up most of the quality changes. For example, the introduction of hedonic price indexes by BLS slightly raised the rate of price increase for VCR’s and for rent but slightly lowered it for televisions.

The main area in which the use of hedonic price indexes has had a large impact is in computers and peripheral equipment, whose quality-adjusted prices have been falling at an average annual rate of about 24 percent in recent years. In 1998, the components for which hedonic price indexes were used contributed a negative 0.2 percentage point to the 1.3-percentage-point increase in the GDP price index; however, among these components, computers and peripheral equipment contributed a negative 0.4 percentage point and thus more than accounted for the negative contribution.

So what's the problem? According to them, prices are falling, right? Well it's sort of nasty. But they assume prices are falling, and therefore inflation is less. And also money that you spend on this stuff is less, because "you're getting more of it." I can't fully do justice to the description of what went on, so I'll just quote Buttonwood:
For all the talk about the miraculous “new economy” of the late 1990s, the truth is that American firms’ profitability was dismal, presumably because any company that did not squander squillions of dollars on technology and shifting out of businesses that actually made money was shunned by investors. By the fourth quarter of 2001, annualised profits had dropped to $324 billion. Big companies, of course, could disguise some of this with accounting practices that were as surreal as the level of the stockmarket.

In other words, hedonic adjustments masked wasted tech spending. How much? 24%. This masking effect apparently lowered costs in a stage magician's trick, therefore masking real labor inputs and outputs, distorting productivity. Does that sound implausible? What do BLS productivity statistics have to do with BEA hedonic tech adjustments? Read this little tract called the "The Effect of Outsourcing and Offshoring on BLS Productivity Measures"
The Effect of Outsourcing and Offshoring on BLS Productivity Measures
March 26, 2004

Recent discussions about the extent of outsourcing and offshoring in the American economy have raised questions about their possible impact on productivity measures. In order to understand the impact, it is necessary to understand the construction of productivity measures and to look at historical trends in the productivity series.

Around 1990, output per hour or labor productivity in the business sector began growing at a faster rate than had been seen in the previous 17 years. Given that productivity measures tend to grow faster during the early stages of economic recovery, the faster growth rate was not widely viewed as unusual at the time.

What was unusual was that the rate of productivity growth accelerated even further beginning around 1995 when normally it would be expected to slow as the recovery matured. While several explanations have been suggested, most economists believed that firms were finally able to harness the information technology revolution to introduce new methods of production, management controls, and services. This view, sometimes called the New Economy Paradigm, argued that a new permanently higher trend rate of productivity growth has occurred. Others cautioned that another explanation may hold or that the effect of information technology might not be permanent...

Business and Nonfarm Business Sector

The quarterly measures of labor productivity, defined as output per hour, for the business and nonfarm business sectors utilize an output measure that is derived from the National Income and Product Accounts produced by the Bureau of Economic Analysis (BEA). Output is measured as the delivery of value-added to final demand and so it does not include intermediate inputs. Imported finished goods and services to consumers reduce these output measures dollar for dollar.

The National Income and Product Accounts (NIPA) lead of course, leads us right back to the funny GDP figures at the BEA where we originally started.

II. Chain-weighting is not the culprit,

It is also not a savior. Accordin to the BEA "Note..." we know the following about chain-weighting: "When chain-type indexes are used, the goods with rapid growth tend to receive lower weights, and growth in real GDP is reduced.". However if we look at the table I reproduced from the GDP less final sales of computers data from the BEA, we could see that even with chain-weighting the numbers were distorted. The idea I've heard that "chain-weighting" will fix any problems is therefore easily shown as wrong.

III. So Where's the Beef?

As far as I can tell, it's because the government not content to having used hedonic adjustment in order to reduce price for the purposes of inflation, went back and used their hedonic estimate factor to multiply their estimate of business investment and output. Say what?!?!?! you ask?

Look here at this chart produced by Nathan Newman in "Is Growth Real?" series. The government estimates of business tech spending consistently deviates from the actual business dollars spent. Again the culprit is the "quality" or hedonic adjustments and again the suspect data comes from the BEA.

Over the latter half of the nineties, actual capital investment in information technology in real dollars stayed almost flat and declined in chain-weighted or CPI adjusted dollars. According to the government, using a reverse application of hedonic adjustments the private sector actually spent four times as much just from 1996 onwards as it actually did. A difference of a mere 209 billion dollars actually.

In other words, the government was not content to merely estimate that people were spending less by using hedonic adjustments, they went back and used those same figures to assume that there was more business activity, spending, and output going on then there actually was.

This would seem shocking. It can't be true, right? Well again, listen to the BEA "Note ..." itself which confirms that this interpretation is the exactly correct one.
Other factors
Although much attention has recently been focused on whether real GDP growth in the latter half of the 1990's has been overstated as a result of the use of hedonic-based price estimates for computers and peripherals and for computer software, there are other reasons to suspect that growth—especially that related to high-tech innovations—has been understated. First, a number of the industries that are heavy users of the new information technology, such as education and certain financial services, are deflated using cost-based indexes or by input and partial output extrapolators. As noted above, if nominal output is deflated by total cost indexes, there is roughly zero multifactor productivity growth, or if real output is extrapolated by labor inputs, there is no labor productivity growth (and if capital inputs grow faster than labor inputs, there is negative multifactor productivity growth). Recently, BEA replaced its input extrapolation for banking services with a new BLS banking services index; this replacement raised real GDP growth rates in recent years by an average of 0.05 percentage point. If similar indexes were introduced into the remaining 20 percent of GDP that is still estimated using cost and input-based indexes, real GDP growth might be revised up substantially.

In other words, if you take into account the actual as opposed to hedonically revised costs, the real number of dollars actually spent then there is "zero multifactor productivity growth" and if you take into account real labor inputs "there is no labor productivity growth" and if you take into account actual capital costs of information technology investments associated with Moore's law turnover and obsolesence issues "there is negative multifactor productivity growth".

That is straight from the horse's mouth. Don't believe me, believe them. Without this accounting gimmicry it's all been a lie. The Emperor has no clothes: caveat emptor.

Economy: Durable Goods Report Worse Than June,

Well it is, though you wouldn't know to hear it from the gushing spin put out by the economic journalists. Look at this story by CNN and you'll see my point.

July durable goods orders jump 1.7%

Larger-than-expected increase attributed to demand for passenger aircraft.
August 25, 2004: 8:40 AM EDT

WASHINGTON (Reuters) - Orders for U.S. durable goods -- items meant to last at least three years -- posted a larger-than-expected rise in July, boosted by an increase in demand for passenger aircraft, a government report Wednesday showed.

Orders gained 1.7 percent in July, their biggest monthly gain since March, said a Commerce Department report.

At this point the article might be considered honest journalism, except for the next upcoming paragraphs.
The July number was well above Wall Street expectations, which had been an estimated 1 percent gain.

The data is good news for the U.S. manufacturing sector, which has regained steam in recent months after being hit hard by the 2001 recession. From January 2001 through July, about 2.7 million U.S. factory jobs have been lost.

Recently, however, the job picture has stabilized and output, driven by a boom in worker productivity, has increased. The Federal Reserve said U.S. factories ran at their fastest operating rate -- 76.3 percent of full capacity -- in more than three years in July.

In the Commerce Department report, overall transportation-related orders rose 5.6 percent, as orders in the volatile civilian aircraft category more than doubled from June's tally, offsetting declines in demand for autos and military aircraft.

But other sectors also showed strength. Orders for primary metals were up 5.8 percent while orders for machinery grew 2.1 percent. Durables orders excluding defense-related goods were up 2.7 percent.

This is almost rah-rah-rahing. Nice how they can dig up numbers to confuse the issue. However briefly mentioned before all of this and also down at the very very bottom and almost uncommented upon are two simple facts that they also report.
Orders aside from transportation were up a smaller 0.1 percent. June durables orders were revised up, to a 1.1 percent advance from a previously reported 0.9 percent jump...

Orders for civilian capital goods aside from aircraft -- considered by some a gauge of business investment in new plants and equipment -- were up 0.6 percent after being up 1.4 percent in June.

So what's the real story? The real story is that business investment overall actually went down from June. The real story is that outside of transportation, the overall orders hardly budged at all - 0.1% by their recollection. And while I'm happy over Boeing's recent good fortune, even this article admits that airplane manufacturing has a "volatile civilian aircraft category". In other words, you can't depend on that kind of one-time goose in order to boost numbers up consistently in the long term. It's a more one shot deal, like the big boost in military aircraft orders that masked last month's dismal report.

Is the oldman being unduly pessimistic? Well let's look at other indicators in the economy. Let's look at new home sales.
Big drop in new home sales

Higher mortgage rates blamed for 6.4% fall; Northeast especially weak.
August 25, 2004: 10:24 AM EDT

WASHINGTON (Reuters) - New home sales fell more than expected in July to their lowest pace since December, as higher mortgage rates cooled the housing market, a government report showed Wednesday.

Sales of new homes tumbled 6.4 percent to a seasonally adjusted annual rate of 1,134,000 units last month from a downwardly revised 1,211,000 in June, the Commerce Department said. Analysts polled by Reuters were expecting sales to slow more gently to a 1.3 million clip from the originally reported 1.33 million unit pace.

Inventories of homes available for sale at the current sales pace ballooned to a 4.2 months' supply, the highest level since February 2003...

Sales of new homes plummeted 15.9 percent to 522,000 in the South, the region where most new homes are sold. Sales dipped 1.7 percent to 290,000 in the West, and collapsed by 23.5 percent in the Northeast to 62,000. Sales rocketed to a new high in the Midwest, rising 21.5 percent to 260,000.

Sales of already-owned homes also dipped last month, but still posted the third highest pace on record, the National Association of Realtors reported Tuesday.

In addition, it's not a fluke either. The pipeline of new mortgage applications has dropped as well.
Mortgage applications fall

Industry group said activity down 6.3% in latest week as 30-year rates edged higher.
August 25, 2004: 7:16 AM EDT

NEW YORK (Reuters) - New applications for U.S. home loans fell last week after a brief bounce, as 30-year mortgage interest rates edged up, an industry group said Wednesday.

The Mortgage Bankers Association said its seasonally adjusted market index, a measure of mortgage activity, declined for the week ended Aug. 20 by 6.3 percent to 646.3 from the previous week's 689.4.

The Washington trade group's purchase index, a gauge of new loan requests for home purchases, fell last week by 5 percent to 443.7 from 467.1 in the prior week.

Furthermore, foreclosures are up according to this CNN web-video.

Foreclosure pains
In some states, foreclosures are a bigger problem now than ever before. CNNfn's Ceci Rodgers reports from Indiana.

Furthermore, Buttonwood of The Economist has reported that Moody's debt rating service has lowered the average rating of US corporate debt to junkstatus.
The conventional view of corporate America is that it is in splendidly lean shape. Low interest rates and giddy profits have enabled firms to pay off debts and extend the maturity of those loans still outstanding, thus making them less vulnerable to rising interest rates. Indeed, the repair of their debt-heavy balance sheets was the main justification for the sharp contraction in the spreads of corporate bonds over Treasuries last year, and provided extra oomph to shares. Even though this process really only involved a transfer of debt from companies to individuals, who have borrowed mightily to spend and buy houses, even Buttonwood, ever the sceptic, was prepared to concede that it had taken place.

Too soon, perhaps—for evidence that corporate debt has fallen in the economy as a whole is scant. For one thing, you would have thought that companies paying off their debts at a rate of knots would have attracted a nod of approval from the credit-rating agencies. But the average rating of American firms from Moody’s, which crunched the numbers for The Economist, has actually fallen over the past three years, from the lowest investment-grade rating, Baa3, to Ba1, or junk. Small wonder, perhaps: CreditSights, an independent research firm, calculates that while companies have become a bit less leveraged recently, total debts for a sample of 175 firms are still almost 40% higher than they were in 1999. Measured as debt compared with market value, leverage has fallen. But this is almost entirely due to rising share prices, not falling debts.

There is, of course, no denying that companies have been raking it in lately. But if they haven’t been paying off debt or investing (and investment has been lacklustre), what has happened to that money? According to the NIPA figures, an astonishing 90% of it has been paid to shareholders. In an era of low interest rates, investors presumably want money up front.

But in the absence of investment and with balance sheets still heavy with debt, jam today does not necessarily mean jam tomorrow. [emphasis added]

In other words, American firms are highly over-leveraged as a group, and there are reasonable projections indicating that returns on equities will be substantially lower in the next quarter century than they have been in the last quarter century. Again, from The Economist.
His sobering forecast is based on two assumptions, both very reasonable. The first is that, because of lower inflation, company profits are unlikely to rise by more than 5% a year over the next decade, a bit slower than the average of 7% a year over the past 50 years. In the long run, profits tend to grow in line with GDP, and America's nominal GDP is thought likely to grow by around 5% a year over the next decade (3% real growth plus 2% inflation). Although profits have outpaced GDP over the past couple of years, this is unlikely to continue because pre-tax profit margins are nearly at their highest in 35 years. And since firms now operate in a world of greater competition, profit margins are, if anything, more likely to fall than to rise.

Mr Barnes's second assumption is that there is little scope for a sustained rise in the valuation of shares. The S&P 500 is currently trading at around 18 times historic operating profits. That is far below its ratio of almost 30 at the peak of the bubble, but still higher than its 50-year average of 15. Mr Barnes's “optimistic” scenario assumes that the p/e ratio stays flat over the next decade as a whole and the S&P 500 rises in line with profit growth of 5% a year. Adding in dividends, this would give an average annual return of 6.7%. That implies an average real return of only 4.7%, compared with almost 10% in the half century to 2000. However, history suggests that there is a risk that the p/e ratio could fall over the next decade. In an alternative scenario, Mr Barnes assumes that the p/e ratio reverts to its historic average of 15. If so, the annual return would be a measly 4.7%.

If we add on top of this, a story brought to us by Dan Drezner (proving that he is only soft in the head about subjects he wishes to be soft in the head about) a great deal of these companies have underfunded pension liabilities which there is every fear based upon history that they will attempt to unload on the Federal taxpayer.
The pension shortfall among U.S. companies may force the federal agency that insures retirement plans to seek a taxpayer bailout similar to the one during the savings and loan crisis, according to the Cato Institute, a policy research group.

The Pension Benefit Guaranty Corp. had a record deficit of $11.2 billion last year after taking over plans for 152 companies, including Bethlehem Steel Corp. and US Airways Group Inc.

Without changes to funding and premium rules, that deficit is likely to swell to $18 billion in the next 10 years and may reach more than $50 billion, said Richard A. Ippolito, who wrote the study for Cato, a policy research group, and is a former chief economist for the pension agency.

"If exposures create claims that reach catastrophic levels, taxpayers will be called upon to provide a bailout," Ippolito said...

Unfortunately, Congress has failed to adequately address the problems of the PBGC. In temporary legislation passed in April 2004, Congress reduced the required contributions companies must make to their defined-benefit pension plans by an estimated $80 billion over two years by changing the formula used to calculate pension liabilities. Congress also provided additional relief of approximately $1.6 billion to steel and airline companies with heavily underfunded pension plans.

Rather than place the PBGC on sounder financial footing, those measures will likely worsen the agency's financial condition.

In other words, the economic structure is rotten to the core. It's not just a matter of the corporate governance of a few "maverick" companies that were the worst perpetrators, but the entire economic infrastructure of the capital markets, corporations, and financial footing of this country is skating on rather thin ice. The big picture in every sense confirms the notion that we should disregard the one-time pops in the durable goods order, and focus in on the core trends which show a slowing economy. Other reports from parts of the economy show significant slowing and softening, and it should be remembered that $45 pb lsc oil only looks good now because recently we've all had a scare that it might break $50 pb lsc. Compared to a year ago, it's still a significant price rise and economic brake.

Yet Greenspan is waxing agnostic (Bloomberg) about the possibility of a housing bubble.
Greenspan Calls Data on Housing Bubble Inconclusive (Update1)
Aug. 24 (Bloomberg) -- Federal Reserve policy makers don't have the data to accurately tell whether U.S. home values are overheating, Fed Chairman Alan Greenspan said in a response to a lawmaker's questions about the potential for a housing bubble.

``House price increases have outstripped gains in income and rents in recent years,'' Greenspan wrote as a follow-up to his July 20 congressional testimony. While that ``raises the possibility that real estate prices, at least in some markets, could be out of alignment with the fundamentals,'' he added ``that conclusion cannot be reached with any confidence.''

This is Greenspeak for, 'yes of course it's a housing bubble you fools, but I can't say so because that would make it worse.' Worse, Greenspan is similarly spreading spin about the 'global economic recovery'.
Greenspan: Global recovery strengthening
Aug 25 08:59

US Federal Reserve chairman Alan Greenspan says global growth has picked up over the past year but some countries like Japan face a significant threat if oil prices remain high.

That's putting it mildly. Nothing Greenspan is saying is technically untrue. However he is attempting to imply that things are better than they are. A person reads this headline and comes off with the suggestion that Greenspan thinks things are getting better everywhere. What is about to happen is that there is about to be a aggregate demand crunch starting here in the USA that can not be ameliorated by moentary policy, and export-dependent and oil-import dependent nations like Japan and possibly China are about to have the equivalent of their quarterback sacked by a big ugly mean linebacker. They're going down, and hard.

If you simply pay attention to all the data, it's rather quite discouraging. Just not as discouraging enough to pop the bubble of sanitized and white-washed rhetorical creative interpretation confusing people about what are the facts of the situation. The facts of the situation is that there have been hard frosts and sometimes killing ones in Winnipeg and Minnesota, threatening or wiping out wheat and soybean crops, and that as far south as Salt Lake City, Utah there have been hail and freezing temperatures at night. In August. Yet you will rarely find these reported facts played up, on something other than background in national stories or in local farm community or rural newspapers.

Yet people keep on treating the food component of the CPI inflation as a "volatile" to be screened out, despite that commodity price futures are already rising.

Tuesday, August 24, 2004

Economics: Californian Future for America?

The CSM has an article superficially reviewing what market watchers are making of California from the outside. I, and several Californians that I know of, take issue with some of the assumptions made about what the new governor has done but that's not the point. There's an old saying, as California goes so does the rest of the union.

California is a trend setter. Here we see it doing the same. In its microcosm of culture, we can see what trends we should expect for the nation as a whole going forward. The conclusion? Rats leaving a sinking ship.

from the August 24, 2004 edition

California's fight to stop corporate flight
State has made strides in easing rules on business, but housing and other costs still bring moving vans.

By Daniel B. Wood | Staff writer of The Christian Science Monitor

LOS ANGELES – Lee Mason has seen the latest statistics telling her California is creeping slowly but surely out of recession. She's read the recent headlines about Gov. Arnold Schwarzenegger signing a budget with no new taxes and overhauling the state's costly workers' compensation system.
And she knows he has launched a national billboard drive to drum up business for the state from neighboring Nevada to Georgia, Illinois, and Texas. But none of that is helping right now for Ms. Mason, the vice president of Clarke Gear Co. - a 50-year old Los Angeles firm which makes gears for planes and rockets.

She says there are still so many other concerns (utility price hikes, soaring healthcare premiums, restrictive overtime policies, a new family-leave policy, and sky-high housing costs) that she is having to scramble to keep the company viable and competitive. Of late, that means shifting company quarters, after 50 years at the same location in North Hollywood, to cheaper facilities about 25 miles north. Cheaper for California that is. Her workers, she hopes, might find homes for under $400,000.

"We are starting to see the end of recession but are not yet seeing the big changes promised by [Governor] Schwarzenegger," says Mason. "It doesn't take a rocket scientist to figure out that if things don't get easier, more and more businesses will say enough is enough and move out of state altogether."

That kind of anxiety is being reported by scores of California firms, economists say. And how local businesses respond could shape population and economic patterns across the West for years to come. For now, the delay in California's economic reform is keeping the state's financial recovery behind that of its neighbors - Utah, Nevada, Arizona - and even helping to fuel their prosperity, as some Californians flee rising costs.

This is outsourcing. In fact in this case it's good and even inevitable. Offshoring proponents tend to confuse offshoring with this sort of phenomena. California is very expensive and overpopulated. The way that will be corrected eventually is that enough people and businesses will leave in order to raise the standards of living of nearby states and decrease California's costs. Offshoring proponents tend to conflate this with what is happening overseas.

They're dead wrong. What's the difference? Two things. First relative population comparisons: India and China are much much bigger than the United States. The second is that they do not share the same currency. That makes a huge difference.

Here in his "Jacobean Economics II" post, Ian Welsh details certain negative aspects of currency unions.
Economically active regions don’t have to correspond to countries. In fact they tend to correspond to metropolitan areas (not so much cities anymore). In Canada you would have an area around Montreal, the Golden Horseshoe centered on Toronto, the Lower Mainland (centered on Vancouver) and an area around Edmonton.

That’s really it. The problem is that those areas share one monetary policy and one currency. So, as Jacobs pointed out in “Dark Age Ahead”, in the early nineties you had Vancouver booming while the rest of the country was in recession – it was in an import replacement period. What should have been happening is that the Canadian dollar should have been rising. But since the other areas (especially the Toronto area) are much larger, the dollar was dropping instead.

That means that Vancouver was getting inappropriate feedback. More than that it was getting inappropriate feedback as well because the Bank of Canada was pursuing monetary policies suitable to an economy in recession – not one that was booming.

If we look back at the CSM article we have that exact same scenario here. The west is booming and interest rates are rising - except for California.
Still-booming Nevada is No. 1 in the United States in business growth, with 4.6 percent job growth over the past year; Arizona is at No. 4 with 2.5 percent growth; Utah is up 1.4 percent. California is up much less, at 0.6 percent, according to the Blue Chip Economic Forecast published by Arizona State University (ASU)...

Partly because of California's housing costs, higher taxes, more regulation, and higher utility rates, Arizona, Utah, and Nevada are all faring better than California from job growth to personal income. Because employment and the ability to spend are the springboard to all other aspects of economic well-being - generating the spending and tax revenue that get state economies moving - economists are touting the latest figures as evidence of how the West overall (excluding California) is doing better than the nation as a whole.

"People have never really stopped moving to Nevada and Arizona, so those states are chugging along," says Tracy Clark, spokesman for ASU's Economic Outlook Center, which publishes the Blue Chip forecast. "Population growth, some of it from California, continues to drive those numbers up," he says.

If the California numbers which occupy the cellar position of these four states are the bad news, the good news is that Moody's Investment Services recently raised the state's bond rating for the first time in four years - the first time that has ever happened before the state's annual budget was announced.

What this necessarily causes is a shift in growth - a shift from California to the other under-utilized portions of the West relative to California. Now many will argue that these areas shouldn't be used ecologically because of water resource concerns. I agree. However the problem there is regulation that doesn't put price inputs accurately reflecting true commodity scarcity into the marketplace. Given that we are not pricing water as expensively as it should be, to give a false political comfort to voters, then this sort of result is inevitable. It is not a problem of the economic process itself, but upon the political background it is dependent upon that is faulty.

Furthermore we shouldn't fear that other regions improve relative to California. Why? Demand for scarce commodities - living space, job, etc. - will decline in California and prices will become more reasonable. California's loss is the West's gain, and the whole benefits from more efficiently utilized capital and resources. Why? Because they share one currency.

The monetary feedback that Ian discusses works both ways. Yes right now on one end it's squeezing California, but as the other states prosper it will feed right back in. This is the good side of money and capital at work in the markets. This is why Keynes proposed something similar for the entire world. (Monibot)
While the UN is, in theory, reformable, the IMF and the World Bank are not. It’s not just that they are controlled by the rich world but operate in the poor world. They are also constitutionally obliged to place the entire burden of dealing with trade deficits and international debt on the deficit and debtor nations, which are least able to do anything about them. When they were established in 1944, a much better idea had already been proposed.

John Maynard Keynes had been working on his proposal for an International Clearing Union for 12 years. When he unveiled it in 1943, it was almost universally recognised as a work of genius. Not only had he solved the problem of debt and the balance of trade; he had also discovered a formula for global economic stability. The Clearing Union was a bank operating at the international level, in which nations held their trade accounts. They would be charged interest not only on their trade deficits, but also on their trade surpluses. Before the end of every year, therefore, when the interest payments fell due, they would have a powerful incentive to “clear” their accounts – in other words, to end up with neither a deficit nor a surplus. The only way in which surplus nations can clear their accounts is to change their terms of trade, so that they import more and export less. By getting rid of their surpluses, in other words, they also get rid of other nations’ deficits. As accumulated trade deficits are the major component of international debt, by preventing the accumulation of deficits you also prevent the accumulation of debt.

Keynes’s idea was blocked by the US government. Many economists warned at the time that the result would be a massive accumulation of unpayable debt on the part of the poor nations, and a corresponding increase in the powers of the rich nations. They have been vindicated.

The question of currency, international monetary policy, and current account balances are absolutely critical to the question of whether international capital flows are healthy. This is a question completely ignored by globalization proponents. They ignore every fact of understood economic history and theory regarding currency markets and capital flows, when they announce that systematically distorted currency relations and unsustainable trade imbalances be the foundation of their system.

In the case of California, California's loss becomes the West's gain and at some future point in time when a new equilibrium has been reached this will become California's gain as well. But precisely only because they have the same monetary policy. We can see in California in miniature the corporate flight that is aflicting America in general.
"California's business reforms are going far slower than people hoped in the first, great burst of optimism when Schwarzenegger took office," says Jack Kyser, president of the Los Angeles Economic Development Council.

A workers' compensation reform package passed several months ago only cut expensive premiums by half of what businesses had hoped for. Unemployment insurance premiums remain high. The country's first, family-leave program - allowing workers to take up to six weeks paid leave to care for newborns or ill relatives - is forcing employers to work around new patterns of employee absence.

"Legislators don't seem to get it that businesses have far more options now. They can open another factory in another state, send manufacturing offshore, go into the cash economy, or even go out of business," says Mr. Kyser. "How they deal with the reforms will have serious consequences on states around us for years."

Business raiders from Phoenix, Salt Lake City, and Las Vegas have been eager to welcome frustrated California businesses, and developers can barely suppress smiles over new home sales generated by newly arrived California families.

So the proponents of globalization hide behind a half-truth, which in this case is all lie. They claim that the process of corporate location is unstoppable. In a sense it is. However what they fail to mention that because of a distorted international currency and trade imbalance situation, a new sustainable equilibrium will never be reached. The normally healthy process of companies and individuals relocating to new locations never comes to an end. The bleeding never stops.

So Where Does America Go?

The most interesting thing to note about California is that even in a "healthy" job-loss situation, California has lost about 25% of its jobs from 1993 to 2001. This seems to be the future for America as well. As the oldman has explicated, simple population growth dynamics of an increase by 43% mostly by immigration, and a flat job number line created by exporting capital investment overseas dictates a per capita job opportunity decrease of 30.1%.

California with its high immigration and relatively high geographic fixed costs is merely showing in advance what will happen to the entire United States in the next few decades, if nothing differing from the past thirty years is done.

We see in California an overwhelmingly liberal state. There remain however a small fanatical core of radical Republicans who are absolutely opposed to tax increases. Despite the liberalism of most of the state's populace they seem all too unwilling to force their politicians to make hard choices. The politicians instead play games with fiscal policy trying to avoid making unpopular hard choices. (from the CSM arcticle)
Another recent major initiative by Schwarzenegger - a sweeping plan to revamp every corner of state government - is being seen as promising in the long run but without any short-term fixes.

"Arnold has prevented more hemorrhaging," says Joel Kotkin, senior economist at the Pepperdine Business School. "Had he not come in, the state would be in even worse shape. His influence for now is more about what he has prevented than what he has accomplished."

The Golden State isn't out of the woods yet, however. The state recently sought and won voter approval to borrow billions of dollars to avoid deep cuts in government services when it passed a $103 billion budget. And many analysts say the recovery has not hit the state evenly, with inland and southern regions doing far better than the north.

The area was hit hard by the bursting of the high-tech bubble and is still struggling from the loss of 25 percent of its jobs between 1993 to 2001. "The best way to describe California and much of the West is that the further from San Jose you are the better off you are," says Ed Leamer, economist with the UCLA Anderson Business Forecasting.

The most recent news out of California is how Arnold is signing big casino deals. These deals with the state getting a 25% cut won't help fix the budget problem, but they will assauge the populace. Bread and circuses afterall are the classic solution to economic unrest by the populace. In this case, we can see a fantasy get-rich-quick mentality that continues to support unsustainable tax policies and lack of fiscal discipline.

I'm sure Arnold would love to cut costs. However no one either trusts him enough to do so, or is willing to give up the social services spending that would be cut. There isn't a lot of fat left in California in most places. So Arnold will borrow, and he will cut flashy but ultimately meaningless deals to assure the populace he is doing something, and he will put off the day of reckoning for later.

Meanwhile medical health issues deteriorate, job opportunity deteriorates, etc. The only thing that will save California in the end is a new business inflow from the surrounding areas. That will take one to two decades to develop. The areas around California will become importers to Californian exports - fruit, vegatables, wine, garments, etc. - and this will stabilize California. It will also only happen because California belongs to the same monetary union.

The United States as a whole will not have such a luxury, because of our failure to confront the international monetary arrangements which mean that there will be no bottom to our slide. So long as we keep these unsustainable arrangements of debt, borrowing, bad fiscal policy, and systemic currency distortions we ensure that California is only the beginning of our future pain and not the full extent of its pain.

Monday, August 23, 2004

Economics: Less Computers, More GDP?

What is the oldman talking about? The oldman has been wiggling through the bowels of the BEA and BLS releases. He's found some interesting accounting "anomalies". There's no single smoking gun, but there are some pretty damning trails of evidence. How damning?

Well if you look at the BEA page publishing their data Prices and Output for Information and Communication Technologies there's a very odd anomaly. How odd? Before 1997 if you subtract the final sales of the computers for each year (measured in chained 2000 dollars) then GDP according them is bigger than if you don't subtract it.


Yes, you heard the oldman right. Apparently according to them, if you subtract the Final sales for computers in the country for each year, up to 1996, it actually increases the total GDP.

Don't believe me?

Check out the XLS file source (Excel) yourself.

I'll reproduce the relevant lines here myself:

[Billions of chained (2000) dollars; SAAR]

YearGDPGDP less salesDiffFinal Sales
1991 7100.57220.0+119.55.6

If you look at the two outer columns, which are just reproduced from the BEA table, then the chained GDP and Final Computer Sales figures make sense. Now the second column from the left, that's the one that doesn't make sense, and is also reproduced from the BEA. In 1990, if you can believe it, the GDP of this country was bigger without the input of the final computer sales. But it isn't some sort of one off screw up.

The numbers gradually improve up to 1997, when they cross over and start acting as one might expect. That less the total computer sales in this country, the GDP would be less. How much less? The oldman has calculated this number, simply by subtracting the second column from the first column of numbers. This is labeled as Diff, standing for the difference between the first two columns. As you can see, it doesn't correspond to the final sales number either.

Now in an ideal world, you could imagine the BEA simply intending to take the Final Sales column and subtracting it from the unmodified GDP column to produce the GDP less sales column. Except that something horrible happened along the way, like the person making this table got blind skunk drunk and put in the wrong numbers. I suppose that people could argue that this is what the BEA must have intended to do. Nothing else makes sense in a rational world. As it turns out however since he is cynical, the oldman has asked precisely the question what if it was intentional, and because of it has been reading the BEA methodology release. As it turns out it seems that such an assumption that this was a mistake would be itself mistaken.

As far as the oldman from reading their methodology release can tell, yes the numbers are intentional and are part of the BEA's hedonic and chain-weighting GDP calculation method. Further scariness ensues if you segue over to the BLS website and read their methodology release. Apparently according to them their productivity figures are calculated using output and input figures from the BEA. Yes, this includes apparently the screwed up computer technology sales adjustment to GDP figure that is noted above.

There is some sort of insane incestuous data fraudulence going around here. And it's all centered around how technology is accounted for in GDP and productivity. The oldman hasn't uncovered a smoking gun yet, but he's been reading some hair-raising methodological errors in their releases - including if you can believe it the assumption that year over year the computing power in desktop computers stays constant.

The oldman has written previously about Moore's law and how it makes a mockery of hedonic or "quality" adjustments. He didn't know just how true it was.

So it's all tangled up in some weird incestuous data feedback going around where the numbers just don't make any sense at all. Nice words. Final conclusions? GDP in 1990 without the computer industry was higher than it was with it.

Scary stuff. This is like people talking themselves into the proposition that jumping off the World's Trade Towers wouldn't hurt them. And no this isn't a spoof. In days to come the oldman will be tracking the trail of this fraudulent accounting. Anderson-Enron accounting couldn't be more screwy.

I would add as a final note that all of these apparently terminally screwed up numbers are behind the neoliberal consensus in the nineties that formed that we were achieving more prosperity because of higher productivity and GDP growth increases. Apparently, it was all a lie. Scary isn't it?

Reader Update: Now Returning To Your Regularly Scheduled Programming,

I've tested out the new improvements to the blog presentation and interface and they all seem to be working. The "Search this" function at the top will use a google Blogger search and the insite search engine by Free Search also works. In addition, I've defined the column widths in term of page percentages so the blog should project proportionally to all screens of viewers. Let me know if it doesn't. The site tracker function is fully working it seems, and I just have to finish by adding the Technocrati link.

The sidebar looks more aesthetically pleasing as organized now and I've updated the site html link for the new Needlenose group site listing. Let me know if you guys like the comments section or if you have any additional trouble viewing the webpage.

With that, we return you to your regularly scheduled programming. What's in the work are two upcoming topics. The first is of course the aforementioned California forecasting of US political economy trends. The short answer is it's "Horrible! Horrible! Just Ghastly!".

The second one is the next in my ongoing series about Inflation and Productivity. Apparently if you subtract the chain-weighted computer sales component in the GDP, the national GDP increases. Is the oldman kidding? No. He got the data straight off the BEA site. Sometimes the oldman wonders if anyone actually ever bothers to read these data releases. They read like a clown show. Anderson-Enron accounting was tighter than this.

But of course the conservative elites in this country don't bother to read anymore and the liberal ones don't read things that would discomfort them. Ontological deficit to the max!

Sunday, August 22, 2004

Reader Update: Site Maintenance,

I've updated the template, using one of the standard blogger templates. Their service has improved sufficiently for me to choose one of their stock templates. Spending a lot of time on design presentation isn't what I'm primarily trying to do on this blog. It's really about delivering content.

Nonetheless, an update seemed necesssary. I also intend to add back in site-meter functioning and add a blog search engine, since the number of posts is getting sufficiently high so that I'm forced to use google sometimes to sift through my own past posts to find them for references.

I've tested the new blogger commenting section and it seems more aesthetically pleasing than haloscan. I'm sorry about the lost comments from the past, but maybe we can just start over from scratch no? I think it will be worth it if the new comments capability has more than a 1000 word cutoff which some sincere posters seemed to find irksome.

I look forward to providing you new comments about various topics that we've been discussing in days to come.

CIA sanctions Sadr elimination, coordinating US military policy in Najaf

For now, I will just cynically note that the Najaf situation has once again in the fog of war disintegrated all hopes for an immediate resolution. The confrontation with Sadr has been progressing in waves of crisis, and every time it seems near resolution it seems that things fall apart.

I would comfort those who have been proven wrong about calling the moment of crisis easing, their mistake was simply failing to see the "invisible hand" of behind the scenes manipulation. Clearly some element with access to the political-military hierarchy is pushing this conflict. From the very beginning from the shutting down of Sadr's newspaper, to after that calmed down to the "accidental" attack on Sadr's house that reignited it, to the arrests of his henchmen, to the most recent series of quite serious (the oldman always takes precise dropped munitions and AC-130 aircraft seriously, and suggest you do too) attacks that occurred on the shrine while the world press was diverted by the National Assembly and the imminent possibility of a turn-over of the Shrine to Sistani.

Let me put it simply to all the naive waifs out there. The issue is not whether Sistani's men will take the keys or not with or without an inventory. It is simply impossible to withdraw from an entrenched position when you are surrounded and taking continuous fire. I call it the Alamo syndrome. Who knows how many of those guys actually wanted to retreat. However if you have no line of retreat, you can't.

Of course Sadr's milita could always vacate the shrine. In which case, the US military has already sent a clear signal that the moment they do so they will level the buildings the militia are in and slaughter them, and call it cleanup and pacification programs meant to secure the Old City and turn it back over to the city denizens. With no journalists there to witness it, such a mop-up act is probably been planned and greenlighted already.

In such a circumstance, all talk about the squabbles between Shiites over custodial issues as if a cleaning deposit was what was at stake is just more disinformation being disseminated outwards.

The crisis is not easing, simply because someone in the military chain of command does not wish to let Sadr's militia slink off and is poising themselves to wipe out Sadr's militia once and for all. This is not to paint Sadr as an innocent victim. He is a theocratic ignorant thug and a punk that is in my opinion no better than a jumped up gang-leader. However, the militia can not retreat in good order without being harried unless the US military is willing to pull back and not engage.

Continuing to engage and pressure them, is a military way of telling them that was soon as resistance collapses they will shoot them in the backs while they're running. US forces are undoubtedly poised to surge the moment that Sadr's mens' lines start going soft. Yet the Orwellian newspeak going around is that the US military is continuing to pressure Sadr's men in order to advance the negotiations. And journalists are actually repeating this lie.

Since when does it actually improve the chances of someone vacating a position, when you continue to shoot at them and bombard them and they know the moment they vacate the position you will obliterate them?

Not very good negotiating tactics, but an excellent way to sabotage negotiations in order for a peaceful transfer of ownership of the shrine.

Someone wants to kill Sadr and make it look like it's his fault. That's what's happening. That this disinformation is being conducted far more successfully than the past idiotic "five oclock follies" by Pentagon and Army spokesmen leads me to conclude that it is the CIA in charge, which would make sense since Allawi who is in their pocket and not the Pentagon's.

Friday, August 20, 2004

Ontological Deficit part IV: What Are The Journalists Smoking in Iraq?

Because whatever it is that is that strong, I want some of that. One report of the otherwise shamefully pathetic National Assembly you can tell is really searching for good news. They're really scraping the bottom of the barrell. How bad is it? Because the story leads that the good news is that they didn't all just kill each other. At least right away.

BAGHDAD - They yelled and cursed, waving their hands in angry gestures. Surrounded by heavily armed American troops, they were holed up for days, with Iraq’s future in the balance.

But no one got killed.

In scenes unimaginable under Saddam Hussein, and in sharp contrast to bloody battles in the holy city of Najaf, Iraqis this week formed the country’s first representative council in three decades.

The National Assembly, a 100-member body that will serve as the first measure of checks-and-balances in Iraq’s transition to democracy, will have the power to veto legislation by the country’s interim government serving until national elections in January. [emphasis added]

Why does the news reporter have to scrape the bottom of the barrel in order to grasp at straws (yes a mixed metaphor, I know)? Because politically the "National Assembly" was a disaster. What happened is that the situation was a mess. They had an open floor vote with people dropping their responses into open boxes in front of everyone, and assembly "representatives" not bothering to vote in order to que up for their $100 / day compensation payouts instead. That may seem cynical but why bother to vote when the delegates had already been decided upon in advance in behind the door haggling between the five major parties that already were the basis for the "interim government"?
BAGHDAD A political conference has selected a National Assembly, putting Iraq on the road to becoming a constitutional democracy in a jumbled process that never included a formal vote.

The political jockeying grew intense in its final hours on Wednesday, with some delegates climbing on a stage to protest what they said was a process monopolized by large political parties. In a final dramatic moment, some of the delegates withdrew their candidacies in protest. But they ultimately remained in the conference, giving the assembly legitimacy.

But most of the actual decision-making took place far from the cameras - in several rooms around the building, including one large one on the ground floor, delegates said. In those rooms, delegates from the major political and religious groups haggled over lists of names, trying to fulfill the assembly's task of putting forward 81 assembly members. (The final 19 spots had already been reserved for members of the former Governing Council set up by the U.S. occupation.)

The final revolt came less than an hour before the conference concluded at 9 p.m., when a delegate from a small party, Ismail Zayer, took the stage to say that his group had not had time to prepare and in protest was withdrawing the 81 names it had proposed. He accused the larger groups of sending about three dozen people to infiltrate his list and then withdraw at the last minute, so that he would not have time to redraw a proposal.

The final revolt came less than an hour before the conference concluded at 9 p.m., when a delegate from a small party, Ismail Zayer, took the stage to say that his group had not had time to prepare and in protest was withdrawing the 81 names it had proposed. He accused the larger groups of sending about three dozen people to infiltrate his list and then withdraw at the last minute, so that he would not have time to redraw a proposal.

"They had no shame," he said in an exasperated voice. Still, his group did not quit the conference, and the assembly - chosen by the large parties - was legitimate, according to the four judges.

Yes well if they had quit the conference, perhaps their compensation packages would have been withheld and for most of these people $400 American in Iraq is a lot of money for their families. In other words, they were bribed to give the process a veneer of legitimacy. As for the Iraqi "National Assembly" vetoing Allawi's proposals, the five parties that already comprise his backers in the interim government conspired behind closed doors and manipulated the process in order to completely scoop the slate. The chances of the National Assembly therefore providing an independent check on executive policies is ridiculous. It's like imagining a Duma packed with Putin supporters is an independent branch of government in Russia.

However this is the trend in the world, what we are making at home and what we've been exporting overseas recently: psuedo-democracies. In reality they're authoritarian oligarchies with manipulated ballot and political process results, but the underlying system is decidedly undemocratic. Yet this reporter calls the result hopeful?

The main idea of a National Assembly is to broaden the political support for the interim government by giving representation to political forces in Iraq other than those already hand-picked by us to be in power. This was manifestly not the case. The Iraqis being pragmatic decided not to complain about it. They could see the way the wind was blowing.

However their participation does not in any way mean acquiesence. Many of these tribal sheikhs are going to "support" the National Assembly publicly while privately either turning a blind eye or actively supporting the insurgency against Americans. If this conference was meant to bring security and order to Iraq in exchange for more inclusive political representation, then it completely failed.

Yet for the most part the Western coverage I've read is flattering. Ontological deficits indeed.

America itself therefore is rightly expected to be confused. The extent of how misleading all of this is, and how willing people are to believe it, can be measured by the shocking results of a new poll.
Fewer believe in weapons program, al-Qaida link
The Associated Press
Updated: 12:39 p.m. ET Aug. 20, 2004

WASHINGTON - Fifty-four percent of Americans surveyed in a poll released Friday continue to believe Iraq had weapons of mass destruction or a program to develop them before the United States invaded last year.

Evidence of such weapons has not been found.

Half believe Iraq was either closely linked with al-Qaida before the war (35 percent) or was directly involved in the Sept. 11, 2001, terrorist attacks on this country (15 percent).

The poll by the Program on International Policy Attitudes at the University of Maryland found the numbers on both questions have dropped in the face of evidence that both pre-war claims may have been false.

"Since the 9/11 Commission and the Senate Intelligence Committee reports, more Americans have doubts and support for the decision to go to war has eroded," PIPA director Steven Kull said in a statement accompanying the poll results.

President Bush consistently equates the war on terrorism with the war in Iraq, though he has replaced his claims that Iraq had weapons of mass destruction with claims that Iraq had the “capability” of building such weapons.

The title should have read "Despite Failure to Find Evidence For Iraqi WMD, Like Pink Unicorns, a Majority of the Public Still Believes,". How clueless can you get? Now there is no way to prove a negative. We cannot prove definitively that Saddam never did have nuclear WMD at the time of the invasion. However we can say that in retrospect, there is no good evidence or reason to believe that he did have any significant amounts of these.

Now forget for a moment about the run up to the war. I knew people of goodwill who earnestly believed that Saddam was dirty and had them. I didn't think that a careful look at the evidence supported that, but certainly it was one possible position with a viable argument for its validity. But what about afterwards? More than a year afterwards, in the clear hard cold light of day with 20/20 hindsight shouldn't we at least be able to admit the obvious?

That it was never likely that Saddam did have such weapons or a serious Alqueda link, and that we were mistaken if we thought so? As it turns out, the ontological deficit is so huge that over half of Americans still believe that despite 20/20 hindsight that the unsupportable is in fact fact.

Scary isn't it? When I talk about ontological deficit, what I'm talking about is that I'm starting to doubt if a great deal of people in the USA are sane including most of all the ones in power.

They can't count. They don't read. They seem incapable of learning from the most obvious clear cut cases of hindsight, which is supposed to be the ultimate arbiter of all mysteries. They just can't grasp or are unwilling to grasp reality.

We could blame it all on just the Republicans, but I intend by examining California and its budget mess to asset that this is a trend that infects even liberal America though perhaps to a lesser extent. When we ask, why don't people wake up to the facts and make necessary changes the answer has to be that they are so out of touch with reality through denial or ignorance they have no clue that change is even necessary.

Ontological Deficit part III: California Dreaming Brad?

Look, Brad Delong is a great guy. He's the kind of guy I'd risk my skin to save his neck without ever having met him. That's how great he has. And the oldman has a very high regard for his own skin.

But like the rest of America he has an ontological deficit. One thing he has going for him however is that unlike the conservative viewpoints I've detailed earlier, Brad Delong still has the ability to read. As a matter of fact, he's reading and discussing a review of a book called "Accelerando".

Accelerando is the story of three generations of a dysfunctional family living through the Singularity. What makes the novel unusual is not the size of the ship or the strange cocktails or even the sexual metaphors—a coital act culminates with the transfer of “source code”—but the fact that Stross is attempting to imagine the relatively near-term future. This is a strangely courageous act, because modern science fiction is facing a crisis of confidence. The recent crop of stories mostly take the form of fantasy (elves and wizards), alternate history (what if the Black Death had been deadlier?) and space operas about interstellar civilizations in the year 12,000 (which typically gloss over how those civilizations evolved from ours). Only a small cadre of technoprophets is attempting to extrapolate current trends and imagine what our world might look like in the next few decades. “We’re staring into a fogbank,” Stross says, “and we literally do not know where we’re going, only that we’re going there very fast.”...[emphasis added]

However, I've never been quite sure what the "Singularity" is supposed to be--or how we are going to get there. I look forward to a future of VR games, robot factories making stuff, and lots of people making a living helping the old get around and advising the young on how to play various status and mating games. I can see how Moore's Law and nanocomputation will solve the hardware problem of making machines-that-think possible. But I cannot see how we can solve the associated firmware and software problems.

Now Brad is not a futurist and neither do I expect him to be a physical scientist or even a good guide to literature. He is however an economist. I do expect him to understand basic facts about economics. I don't think this is too much to ask.

Now the most simple economy you can have is a generalized labor and no-surplus commodity economy. The next development is usually to specialize in the production of commodities. The third step is to produce goods from those commodities. Then when sufficient specialization and a surplus of basic commodities is achieved, you can start providing services. This is basic economic thinking.

All economies therefore evolve. You can have an agrarian economy. You then start producing food more effectively and efficiently. The manhours needed to produce a food surplus decline. Then some people start specializing in making goods and distributing them based on agrarian goods, or start specializing in mining or other basic commodities or making things from non-essential commodities like Iron, Gold, etc. After you industrialize, you can then start developing a surplus of manufactured goods by developing economies of scale. As the proportion of people needed for manufacturing drops as part of the population, people are then freed to specialize in services. And so on and so forth.

This is incredibly basic economic thinking. The whole process depends on two basic ideas. The first a tiered hierarchy of tradeable surpluses from basic commodities to exotic ones to manufactured goods to services, etc. The second is an expanding variety and quantity of specializations of occupational skills in the labor pool. Tradeable surpluses and the increase in the diversity and quantity of skilled specialized labor are the two fundamental building blocks of economic development.

Capital as it turns out is merely a means to an end, to achieve this goal, and societies can and have historically developed to a certain extent using only barter along these lines before needing capital.

So doesn't Brad understand that the future he envisions: "I look forward to a future of VR games, robot factories making stuff, and lots of people making a living helping the old get around and advising the young on how to play various status and mating games." is a future of ever increasing tiered surpluses of every imaginable tradable asset combined with extremely advanced occupational specialization? So the whole structure depends on a continuing and increasing per capita structural increase in surpluses in the social hiearchy of value that defines the infrastructure of the society.

Yet haven't we just gotten done talking about the inexorable logic of the exponential growth in demand to limited supply of basic commodities such as fossil fuel energies?

The future Brad envisions as we understand it cannot exist. Or rather it will only exist for a relative handful of people. There will always be Paris Hiltons, and there will always be those willing to swallow their pride to service the Paris Hiltons of the world. I do not judge them. I just call the big picture like I see it. Indeed most the visions fo the so-called writers of science fiction that they're peddling are not just naive like Brad but contemptible in their ignorance. The oldman is a die-hard science fiction fan. He is also a minor scientist.

These two facts about his upbringing lead him to look at the basic situation and say, that science fiction has little to offer if it attempts to imagine a hi-tech future where basic commodity per-capita bottleneck problems have already been solved. Because that's where the real nitty gritty of the science fiction writing of the next few decades lies. What kind of world is that? A dystopic world where a few percent of the world's population has access to advanced hi-tech robotics and computing technology, where most of the world's population is condemned to live in resource shortages exacerbated by the usage of technology and information to controll the masses and redirect a disproportionate share of resources to the elite.

How do I know this? This is the world that's already happening. That's the importance of the productivity issues I'm dealing with. Once those numbers are taken apart, then it will be obvious. It will be obvious that currently technology isn't really reducing workers through automation so much as empowering extended logistic management chains in order to outsource capital flight to lower labor and local rent locations.

There are in fact some science fiction writers who have already imagined such a world. William Gibson. Neal Stephenson of Quicksilver and who pegged globalization right on the head.
globalization had smeared things out into a worldwide layer of "what a Pakistani bricklayer would consider prosperity."

But if you have an ontological deficit you don't pay attention to things like this that disconfirm your viewpoint. Even if it's a view point such as that there are no major science fiction authors who have successfully imagined what the next few decades will look like. In the conservative version of ontological deficit, and we may suppose that modern conservatives have because of this a larger deficit, we see that they simply stop reading at all on the off chance that they might come across facts that falsify their world view.

In the liberal version of ontological deficit syndrome, the deficit isn't as egregious since they still know how to read apparently, but they just carefully limit their reading to viewpoints that fail to include falsifying information.

To show that this isn't a single isolated instance, the oldman intends to discuss the future and what it will look like from a liberal point of view but with the illusions stripped away. How will the oldman do this? Why he will examine some of the most liberal states in the union - New York and especially California. If we look at these and consider them places where we can spot trends for the future political environment of America as far as our ontological deficit is concerned, then we're all in a whole bigging heap of trouble.

Which is of course perhaps why there aren't a whole lot good science fiction stories out there adequately describing what the future is really like. Nobody is paying to be told their children will be whores or die for rich men's wars in order to avoid starvation. Furthermore, a look at history in general will immediately confirm how unremarkable such a transition would be. It's just exactly the kind of fucked up mess that humans typically find themselves in.

As Stirling of BOP-news has pointed out, many of the people in the media are paid to be professional imbeciles.
I'm sure Dahlia Lithwick is a very smart person. However, she's in a position from which few people escape looking like a smart person: that is, she's a professional imbecile. Her job is to explain to people who are very stupid why they shouldn't feel stupid. It's Friedman's job, too. It's also a job that belongs to lots of other people. Because stupid people don't like feeling stupid, they are willing to pay money not to feel stupid. Because there are millions of stupid people out there, that adds up to a lot of money. Hence, our top down media would be failing in their fiduciary responsibility if they did not employ people to tell stupid people that it is in insult to call them stupid. Demand, stupid people, finds supply, stupid columns.

This is of course why my readership will never be vast. First it requires people to read, and usually that's a death sentence right there. However it also has the second flaw that it always condemned sentimental and maudlin thinking, however emotionally appealing. Nobody likes a meanie. Thirdly, I like Dan and Brad a lot. I think it's fair to say without their blogs I wouldn't be blogging. However my third point is that I will never hesitate when it comes down to the wire to be viciously and savagely critical of even those who have supported me the most or whom I like a great deal.

Some have claimed that this is because the oldman is a heartless elitist murderous sob bastard who is completely ruthless. The oldman admits there is some justice to these claims. However the oldman also offers that he has never betrayed a trust or taken personal advantage of someone in a position of weakness. Call it pride or an old-fashioned sense of honor or the aristocratic genes twitching. It would be beneath me to do such things.

However I am toughest on those I like the most. And it's good for them. It's like bad-tasting medicine. If you're smart you'd sooner hear it from me, then get caught with your pants down when it counts.

Just call the oldman the boot camp drill sergeant of ontology and epistemology.

So I don't know if Brad is reading this, but my advice to him is stop acting like a starry-eyed comic-book adolescent fanboy and start acting like the world class economist that he is. One cold calculating minute of consideration by his brain should be enough to slice and dice this problem ten ways to sunday, and reveal to Brad the exact trajectory the world is about to take.

Which is to say somewhere between really not pretty and downright ugly.

Ontological Deficit: Part II When People Don't Read,

There has been some talk about the controversial NYT article about charter schools performing poorly.

In response, Dan Drezner, has posted some words.

One possibility is that -- contrary to the fears of skeptics -- it turns out that charter schools do not merely skim the public student body's cream of the crop. As Harvard researchers Will Howell, Paul Peterson, and Martin West point out in their Wall Street Journal op-ed: "These results could easily indicate nothing other than the simple fact that charter schools are typically asked to serve problematic students in low-performing districts with many poor, minority children."

Now my question is did Dan and these Harvard researchers actually bother to read the report or the article before shooting off their big fat mouths? I don't know. When I actually bothered to read the original article, I stumbled over this paragraph:
Because charter schools are concentrated in cities, often in poor neighborhoods, the researchers also compared urban charters to traditional schools in cities. They looked at low-income children in both settings, and broke down the results by race and ethnicity as well. In virtually all instances, the charter students did worse than their counterparts in regular public schools.

I used to complain about numerical literacy lacking the social elites of this country. Now I'm starting to question their basic literacy skills. Now I don't know in fact whether or not the NYT is an adequate or accurate representation of the original study. Nor do I know anything about the study or whether it was valid by scientific standards.

What I do know is that if you take on faith for a moment that the article is reasonably accurate, that this one paragraph completely shoots down almost all of the media responses Dan quotes about the subject. Now if it's not true, that's a different story. But the responses Dan quotes don't argue that this paragraph isn't true, it's as if they don't realize that the paragraph and the claims it makes exist as an argument to be rebutted period.

How else could you get disjointed quotes like: "Much of the previous research on charter schools, which operate free of most of the regulations governing neighborhood schools, suggests that charters tend to attract lower-performing students in the first place. These data only seem to support that." So what? According to the article, the researchers controlled for that. If you disagree that they did so correctly, that is one thing. To forward this counter-claim in the absence of a rebuttal of their methodology however stinks of mendacity.

Now my question is, did Dan and these Harvard researchers and the other media writers who he quotes as having blitzed the news with counter-claims, well did they actually bother to read the article, note that paragraph, and realize that in order to falsify the article's claims they had to show that paragraph as in fact not true?

If they didn't then that's a failure of literacy and logic. An ontological deficit made apparent by the elites of our nation not even able to read a few brief paragraphs before shooting off their mouths.

Did you think that the oldman was getting cute coining a term like ontological deficit? I'm not kidding. It's not just isolated to here either. The POTUS can't be bothered to read the title of his daily Presidential briefing - you know the one entitled "Bin Ladin Determined to Attack Inside United States". The Senators on the intelligence oversight committee can't be bothered to read the abstract summaries of the intelligence reports submitted to them. The intellectual elites can't be bothered to actually read a few brief paragraphs of summary text and respond to it logically before cavailing about defending their favorite pet ideas.

What is going on here? I call it the ontological deficit of America. I think it has serious and catastrophic consequences. To be even handed though, my next target will be a liberal economist whom otherwise I like very much.

Why The Oldman Doesn't Take Communion,

This is one of the reasons why the oldman doesn't take communion anymore.

BRIELLE, New Jersey (AP) -- An 8-year-old girl who suffers from a rare digestive disorder and cannot eat wheat has had her first Holy Communion declared invalid because the wafer contained no wheat, violating Roman Catholic doctrine.

Now, Haley Waldman's mother is pushing the Diocese of Trenton and the Vatican to make an exception, saying the girl's condition should not exclude her from the sacrament, which commemorates the Last Supper of Jesus Christ before his crucifixion. The mother believes a rice Communion wafer would suffice.

"It's just not a viable option. How does it corrupt the tradition of the Last Supper? It's just rice versus wheat," said Elizabeth Pelly-Waldman.

Church doctrine holds that Communion wafers, like the bread served at the Last Supper, must have at least some unleavened wheat. Church leaders are reluctant to change anything about the sacrament.

"This is not an issue to be determined at the diocesan or parish level, but has already been decided for the Roman Catholic Church throughout the world by Vatican authority," Trenton Bishop John M. Smith said in a statement last week.

Haley was diagnosed with celiac sprue disease when she was 5. The disorder occurs in people with a genetic intolerance of gluten, a food protein contained in wheat and other grains.

Well it's one of the reasons. One of the other reasons is that frankly the oldman has enough of this Opus Dei rubbish and if he ever saw the Pope would give him a good tongue lashing. Of course that would probably get me excommunicated. Except that the oldman doesn't particularly care. Frankly, the nuns they've put in charge of rites like baptism the oldman has it first hand have gotten positively shrill. Catholics in some sects are getting as fundie as the most rabid protestants.

But yes, the oldman was baptised into the Holy Roman Catholic Church as Augustine. Some of my very close friends have called me that in preference to my legal name. This is despite the fact that I truly disagree and in many senses actually dislike Augustine and his prose, but that's another story. Frankly, the man was in denial. He died just as literally the barbarians were at the gate, and his entire writing stinks of the denial prevelant in the empire about its fall.

Of course I also spent many of my formative years disagreeing with Calvanist doctrines of predestination as well. I tried to be good really, but the oldman was never one to swallow idiocy from any place much less the pulpit from a very early age.

But it's hard to explain this to someone who chirpily calls you Augustine as a sign of intimacy. So what the hell, I go with it. Sometimes perfection is the enemy of the good.

Which is one reason why the church's actions described above stink to high heaven. So what, she can't eat wheat - you're going what freaking deny her communion with the Son of God because of that?

Hmmm... let's see what did the good Lord have to say about that ...
"2He called a little child and had him stand among them. 3And he said: "I tell you the truth, unless you change and become like little children, you will never enter the kingdom of heaven. 4Therefore, whoever humbles himself like this child is the greatest in the kingdom of heaven.
5"And whoever welcomes a little child like this in my name welcomes me. 6But if anyone causes one of these little ones who believe in me to sin, it would be better for him to have a large millstone hung around his neck and to be drowned in the depths of the sea.
7"Woe to the world because of the things that cause people to sin!"

Ah well. This is why the oldman prefers atheism. Now if only God had never introduced himself to the oldman, then that would have been a perfect resolution to this philosophical conundrum. God? Yeah. Demanding bastard. Won't listen at all when you explain about the elegance of the concept of the demiurgic clock-maker deity that is completely impersonal and solves the problem of free will by not interefering with his creation. Turns out that God invented evil along with everything else, which does solve "the problem of evil" but only by standing up one's expectations on one's head completely and spinning it around and projectile vomiting pea soup.

It's like meeting a celebrity. You always think that you know better than the hype, but the reality is always more quenching than even cynicism can afford. Same thing with ultimate Creator types. Don't believe their press. But on the good side God actually makes sense if you meet it. Demanding like a celebrity though. The press is right about that, I'll give them.

That's the other reason why the oldman doesn't take communion. After you've met God religion is just so much less impressing. Is the oldman kidding? On the square compadres, I'm kidding on the square.