The Battle of the Horns of Hattin
July 1, 2007

July 4, 1187. Two knights stood on the ridge watching the rising sun glint off Lake Tiberias. They were hopelessly trapped, the treacherous old rogue, Raynald de Chatillon and his foolish young protégé, Guy de Lusignan, King of Jerusalem. Below, between them and the water, lay the fortress of Tiberias and the army of Saladin. Behind them lay agonizing miles of dry stony hills, across which they and their army had stumbled the previous day, harassed by Muslim skirmishers. They had run out of water; men and horses were dropping from heat and exhaustion.

The Franks and Normans of the First Crusade had established Jerusalem and three other Crusader kingdoms in 1099. Since then, the Outremer, as it was known, had attracted all sorts of adventurers, especially lower-ranked nobility like Raynald and Guy. Raynald himself, by a series of marriages and alliances, had wound up as Lord of OutreJordain, controlling castles and trade routes to the southeast of the Dead Sea. He used this position to harass Muslim pilgrim caravans traveling down the Red Sea to Mecca. The summer before, Raynald had helped Guy usurp the throne from a more legitimate claimant. Unsure of himself, Guy spoiled for a decisive battle with the Crusader nemesis, Saladin.

Saladin had his own problems. Born in Tikrit north of Baghdad, he was a Kurdish general serving Nur-ad-din, Sultan of Aleppo and unifier of Muslim Syria. Saladin captured Egypt from the Shiite Fatimid rulers and made himself vizier in 1169. After his boss died in 1174, Saladin marched north, seized his empire and for good measure, married his widow. As a Sunni loyal to the Abbasid Caliph in Baghdad, Saladin became a target for the Assassins, Shiite fanatics-the twelfth-century equivalent of suicide bombers. One of them dropped on him from a tree as he rode underneath. As a Kurd, Saladin could not count on the loyalty of his Turkish and Arabic subordinates. And then there was Raynald, who looted neighbors, violated treaties, and enjoyed tossing victims from the walls of his castle at Kerak. Provoked, Saladin declared jihad on the Crusader kingdoms, promising to behead Raynald if he ever caught him. Given his shaky position, Saladin desperately needed a decisive victory over the Crusaders.

The Crusaders, led by Count Raymond III of Tripoli, relied on heavily fortified castles, and avoided direct confrontation with Saladin, effectively practicing a policy of containment. But on July 2, 1187, Saladin besieged the town of Tiberias. Over Raymond's objections, Guy and Raynald set out with some 1200 knights and 15,000 foot soldiers on a supposed shortcut over the hills, hoping to surprise Saladin. That's how they found themselves on the Horns of Hattin, a pair of hills with a ravine between-and no choice but to ride down into Saladin's waiting army.

It was a massacre. While Raymond and a few of his knights broke through, most were killed. Guy and Raynald were captured and brought before Saladin. Saladin handed a goblet of water to Guy, a token of hospitality that meant his life would be spared. Guy drank part and handed the rest to Raynald. See, said Saladin, I have not offered him water myself. Then he whacked off Raynald's head before the trembling Guy.

Within three months, Saladin captured Jerusalem and its territories except for the fortified northernmost port of Tyre, controlled by Guy's rival for the throne, Conrad de Montferrat.

The fall of Jerusalem set off the Third Crusade, led by King Richard Lionheart of England, and King Philip II of France, who hated each other. Richard lingered in Sicily, stopped to capture Cyprus from the Byzantines, and didn't make it to the Levant until 1191. Meanwhile, Saladin released his secret weapon: Guy. Guy promptly besieged the port of Acre, south of Tyre. While Phillip supported Conrad at Tyre, Richard supported Guy--splitting the Crusaders. Richard captured Acre and fought Saladin to a stalemate; in 1192 they signed a treaty in which Saladin kept Jerusalem but allowed pilgrim access. Before returning to England, Richard sold Cyprus to Guy as a consolation prize.

Horns of Hattin established Saladin as the greatest of all Muslim warrior heroes. And it set the pattern of jihad to recover Muslim lands from foreign infidels.

How Doctors Think, by Jerome Groopman M.D.
May 17, 2007

Two years ago, an urgent call from my father: My mother, then 84, was ill. Gray skin, sunken eyes, confused. At the hospital, her blood tests showed abnormally high levels of calcium. She had calcium poisoning. Calcium poisoning? Six weeks prior, it turned out, the family doctor had instructed her to start taking calcium tablets and drinking three glasses of milk a day. Unknown to him, she was nibbling Tums all day for heartburn; little rolls of Tums nestled in every drawer in the house.

Jerome Groopman might better have titled How Doctors Think, "How Doctors Screw Up." Despite those professional white coats, doctors make the same kinds of cognitive errors as the rest of us. To begin with, they stereotype patients from first impressions. Groopman cites a case of a fortyish forest ranger with chest pains, who looked so fit and healthy that the examining doctor dismissed the possibility of an impending heart attack. Doctors apply rules of thumb: old women lose bone density, so my mother's doctor ordered calcium. Doctors jump to conclusions based on their particular specialties or their recent experience. Groopman himself saw six different doctors for a wrist injury and got four different diagnoses. Doctors pay closer attention to patients they like than to those they don't--especially those with apparent psychosomatic disorders. Groopman presents a young woman who nearly died after a whole series of doctors dismissed her complaints of intestinal pain, and attributed her weight loss to anorexia.

Groopman takes a dim view of pharmaceutical industry sales tactics, notably the strategy of turning the natural aging process into a disease. Drug companies learn from pharmacies exactly how much of their products each doctor prescribes, enabling them to reward big prescribers. Groopman describes an industry rep harassing a top endocrinologist who refuses to prescribe his brand of testosterone. "You will write three prescriptions this month." But many doctors yield to incentives or pressure, which they also feel from their patients--inspired by advertising. A recent report in the New England Journal of Medicine found that 94% of the 1,662 physicians surveyed had accepted gifts or money from pharmaceutical or medical device manufacturers. Over three quarters had accepted meals or samples; 35% had accepted reimbursements for attending drug company "educational" conferences--usually held at resorts. (WSJ 4/26/07.)

My parents each take over a dozen different pills a day. Sometimes I help them fill their weekly dispensers: the ones for getting up, for breakfast, for dinner, for bedtime. Tiny white pills, fat grey pills, clear golden capsules, skinny red lozenges, thick purple lozenges, round yellow tablets, cream octagonal tablets and flat pink tablets shaped like little shields. Names to conjure by: Zocor, Spironoloactone, Lisinopril, Lasix, Paroxetine, Protonix, Fossamax, Ecotrin, and Ambien. The doc once prescribed testosterone for my father; fortunately he had the good sense to Google it and learn it would aggravate his prostate.

Groopman admonishes doctors to look out for cognitive traps, and even more important, listen carefully and respectfully to patients. He advises us, the patients, to ask questions, do our own research and don't hesitate to consult other doctors.

After my mother's bout of calcium poisoning, I checked her medications on the web, and then with my own doctor. Half were inappropriate and possibly harmful, especially since she has borderline kidney failure. I wrote her doctor a polite letter, questioning the meds. I also suggested he might refer her to a kidney specialist. A scribbled note came back: the medications were "necessary" and he would refer her "only if she requests it." Of course my parents wouldn't dream of asking tough questions or requesting a referral--that would be rude.

Mice
April 8, 2007

Some years back a neighbor caught a white mouse that had tunneled into a bag of Purina Dog Chow. Perhaps he was an escaped snake lunch. We put him in a 20-gallon terrarium and called him Manny--for Manhattan Mouse, because he was always busy. All day he zipped around, moving his nest and seed stash from one corner to another, climbing his branches, running in his wheel. Or he sat upright nibbling corn kernels, oblivious to Edgar and Emily staring round-eyed, inches away behind the glass. We put his picture on our New Year's card, contemplating three red grapes. The day he died, a two-year-old hunchbacked geezer, he raced all morning in his wheel before turning up his little pink toes.

It once amused me when, every six months or so, Edgar or Emily caught a wild mouse that foolishly slipped through the floor next to the radiators. But in the last months we've been invaded. All the neighbors complain; the super runs around stuffing steel wool into cracks and laying out glue traps. But they keep coming, relentless gray-brown legions. They leave trails of droppings on kitchen counters. They shred newspapers and gnaw electric cords. Edgar and Emily spend their days patrolling the cracks through which manna squeezes from below. I feel overwhelmed. How did more primitive societies cope?

The first true human tools were not rocks--sea otters crack shells with rocks; chimps crack nuts. The first human tools were skin bags or slings to carry the rocks. Also to collect food like roots and nuts, or small game like turtles and lizards. And especially, to carry infants, freeing their mothers' hands. The first hunter-gatherers set out from Africa schlepping their gear in bags.

A bag is great for transporting stuff, but not for storage. Agriculture and higher civilization awaited the invention of mouse-proof containers. Neolithic settlements like Jericho on the West Bank, or Catal Hoyuk in Turkey, date back as far as 8000 BC. They used lined storage pits and mud brick silos. Between 6000 to 4000 BC crude hand-formed pottery appears in the Middle East; wheel-thrown pottery around 4000 BC. There follows an explosion of Bronze Age trade from the eastern Mediterranean to India and beyond, much of it carried by water in giant sealed storage jars. The jars, known as pithoi, typically held grains, wine, and olive oil. Smaller jars held luxury unguents and opium paste. (Pottery may have appeared even earlier in China and Japan; it appears in the Americas sometime before 2000 BC.)

What luxury to live in a place and age where most of us needn't worry about mice devouring our food! Yet they keep coming. There was a growing sour smell in the kitchen. I dreamt of nosing Polonius behind the arras. In the morning, I unscrew the base plate from the dish washer, lie flat on the floor with a flashlight and a Chinese bamboo backscratcher, and rake out a very dead mouse. Squeak softly and carry a big stink. Meanwhile--eeeee--Edgar has nailed another one. I chase him under the piano. Crack, crunch, smack smack. In the end there's a little glob of mousie guts. And a tail.

Stumbling on Happiness by Daniel Gilbert
March 18, 2007

My mother is eighty-six. Other than needing a walker, she's in good shape. Two months ago my father fell, confining him to bed on the top floor of their three-story townhouse. With my encouragement, my parents put a deposit on an apartment in Grand Oaks, a posh "assisted living" complex for well-to-do Washingtonians. But as the move approaches, my mother grows increasingly miserable, convinced she will be wretched in the new place.

Daniel Gilbert begins Stumbling on Happiness with the question: Given how much energy and thought we put into ensuring the happiness of our future selves, how come we do such a lousy job? From this he jumps into a vastly entertaining review of what psychologists have learned in recent years about how the human mind functions.

Basically, we live an illusion. Our brain weaves from scraps and hints what seems a seamless fabric of "reality," past, present and future.

We don't remember past events as they actually happened. Rather, our brain effortlessly reconstructs the past from a few salient details, filling in the rest with, often, what should have happened, or what happened on another occasion, or what's happening now. That's what makes eyewitness testimony so notoriously unreliable. That's why some people distinctly remember encounters with space aliens. That's why we consider land the best investment for the long run.

In the present, context "frames" our opinions and choices. Pollsters know that people will volunteer very different opinions depending on the phrasing and order of the questions. We set a much higher value on something if we already own it, than if we had to buy it. After spending forty years grousing over the drawbacks of her house, my mother weeps at the prospect of giving it up. In his famous One Hundred Years of Land Values in Chicago, Homer Hoyt documented how, after a bubble bursts, owners' tenacious grip on overvalued property gums up real estate markets and slows recovery.

We fabricate images of our future from whole cloth, unconsciously extrapolating from the present. We all know we shouldn't shop while hungry, lest we load up on chips and chocolates. But that applies to serious decisions, about marriage, careers and investments. Seventy years ago, J. M. Keynes proposed that "animal spirits" drive business investments more than rational calculations of profit. Today, the thriving field of behavioral economics confirms his hypothesis. Forget "rational expectations" and the "efficient-market hypothesis." Now we have Robert Shiller's "irrational exuberance" and the rediscovery of "value investing" as practiced most famously by Warren Buffett.

Gilbert asks, how can we gain perspective on our future selves in order to make better decisions? Simple, in theory. Instead of just imagining ourselves in a future situation, we should consult people currently in that situation (or contemporary records of people who were in that situation). Yet usually we don't. Why not? Alas, Gilbert says, we each consider ourselves unique. We can't believe others might think or feel like us.

I try to reason with my mother about moving to Grand Oaks. "In the new place Daddy can get help without having aides watching TV all day in the next room. He won't be trapped on the top floor. You can play bridge with friends every day, see a movie, listen to a live concert, get your hair done--just by wheeling down a corridor. You'll have restaurant meals instead of TV dinners." Brick wall. "I need time," she moans. "I'm just not ready to go live with a bunch of old fuddy-duddies!"

So, following Gilbert's theory, I ask her to seek advice from current Grand Oaks residents. "Call up your friend Peta and ask her to invite you to meet with her and her friends. You can find out firsthand how they like the place." "Oh no," she says. "I don't need to do that. I know what they'd say. They'd all say it's great here--you'll love it. But that's just because they're stuck and making the best of a bad deal."

Last week my parents decided to stay in their townhouse.

The Drug War Comes Home
February 21, 2007

My father is 96. A month ago, he shuffled around the house, up and down the stairs, quite well by himself. Then, as he puts it, "I fell on my arse!" Oops! Compression fracture of the spine. Treatment: pain killers and bed rest. But, if he is ever to walk again, he must get up regularly, and spend two or three hours a day sitting in a chair. The doc prescribes hydrocodone--acetaminophen (Tylenol) with a touch of codeine. That doesn't begin to control the pain if he sits or stands. "At my age," says my father, "I don't need to suffer." So he lies there on his back, reading or playing games on his laptop.

Over three thousand years ago traders in the ancient Near East shipped opium packed in little jugs shaped like poppy capsules, with painted diagonal stripes to represent the slashes for collecting the resin. Opiates, including derivatives like codeine, morphine, heroin, methadone and oxycodone, are still the safest and most effective pain-killers known. People can use them for life with no more serious side effects than constipation. Yes, an overdose can kill you. But guess what? Two or three times the maximum daily dose of acetaminophen in hydrocodone can fatally damage your liver. And yes, opiates are addictive--for some people. So is alcohol--for some people.

The United States controls "drugs of abuse" with a ferocity rare in other western nations. The policy started with the 1914 Harrison Act, directed at Chinese opium-smokers. But the drug war as we know it began under Richard Nixon, and metastasized under Ronald Reagan. It's what sociologists like to call a "moral panic"--a fear that undesirable groups somewhere are engaging in immoral behavior, and--BOO!--they might corrupt your children. For Nixon it was blacks, hippies and war protesters. For Reagan it was welfare queens and crack addicts.

Some moral panics die out, like the one about gambling. Remember Guys and Dolls? That was before states hit the lottery jackpot. But the drug war fills too many political needs. Because drug possession or sale is a victimless crime, it permits selective prosecution. Even though whites and blacks use illegal drugs at about the same rates, blacks are arrested, prosecuted and jailed at many times the rate of whites. Southern states don't allow ex-felons to vote. As a result, in 2000, disenfranchisement of blacks in Florida gave the presidency to George W. Bush. Now the drug war has come back to bite him in Afghanistan, where black market opium funds the resurgent Taliban and Al Qaeda.

At home, the Drug Enforcement Administration keeps doctors under surveillance lest they over-prescribe strong opiates (Percocet, OxyContin) or worse, prescribe them to addicts. Pain specialists have been prosecuted, lost their licenses and even been imprisoned for careless prescribing. Doctors run scared. So if you have an elderly patient with a fracture--well, not a priority for pain treatment. (Yet all the DEA's watchfulness didn't stop Rush Limbaugh from filling multiple phony prescriptions.)

My father has set himself up with everything in reach of his hospital bed--laptop, printer, telephone, files--an office on wheels. Time to go now. He's ready for his favorite diversion: clobbering me and my sister at internet Scrabble!

Death and Hyperinflation in Zimbabwe
February 2, 2007

After Robert Mugabe drove her and other white Zimbabweans from their farms, Cathy Buckle refused to leave the country of her birth. She writes a weekly column documenting the disintegration of Zimbabwe: the mass starvation in the original breadbasket of Africa; the arbitrary arrests and killings; the collapse of public services; and the regime's ludicrous propaganda. Often she depicts the effects of hyperinflation. Cathy's columns remind us how much we take for granted in a modern economy. Here's a recent column, from http://africantears.netfirms.com/thisweek.shtml.

Saturday 20 January 2007

Dear Family and Friends,

This week the world watched how bad behaviour on a reality TV programme in the UK became international headlines. Diplomatically described as "alleged racist bullying" by women celebrities on a Big Brother TV series, the story ran as top world news for four days. People held protests and burnt banners in India, the British Prime Minister had to answer questions in the House of Commons and viewers of the TV programme increased from 1,7 to almost 6 million people in four days.

In Zimbabwe, while this was happening, reality was also on display; not on TV with histrionics, not with make up and nail varnish, but just the grim, grinding reality of everyday events that the world seems to have turned its back on.

Long before dawn I received a phone call with the news that an elderly man had died. For the family the pain and grief of the loss was almost immediately swamped with the horrific reality attached to dying in Zimbabwe in January 2007. Doctors have been on strike for over a month and hospital mortuaries are overflowing. The body of the deceased had to be moved, immediately. Petrol has increased in price from 2900 zim dollars a litre on Monday to 3400 dollars a litre by Friday. It was going to cost a whole month's pension for the new widow to have her late husbands body moved the few kilometres to the funeral home.

None of the man's family are left in Zimbabwe. The request was made for a cremation so that the ashes could be later given to the family. Cremations are undertaken in Harare but there is no gas in the country for the ovens. It may be three weeks, at the very least, before a cremation could be done. For each single day that the body was kept at the funeral home the widow would be charged half of her entire monthly pension.

A wood fuelled cremation could be done but only in Mutare, a town 180 kilometres away. The funeral home wanted 700 000 dollars to transport the body - the same as two and half years of the woman's pension. The quoted cost for the cremation, including the transport, was the same as five years of the widow's pension.

A simple burial in a local cemetery in the least expensive coffin now costs 400 000 dollars. This is the same as six months salary for one of the doctors presently on strike.

Young and old, professionals and workers - we are all alike in this horrible reality of Zimbabwe - we cannot afford to live or to die here.

This is reality in Zimbabwe. Not reality TV, not a game show, just grim, sickening reality. We are a country that needs and deserves the world's attention. Is anyone watching?

Until next week, thanks for reading, love cathy.

The Minimum Wage and the IRS
January 16, 2007

On January 10, the House voted overwhelmingly to raise the federal minimum wage from $5.15 an hour to $7.25, the increase to be phased in over the next two years. The Senate has yet to vote on the issue.

On January 12, the New York Times published a story by David Cay Johnston that begins, "Top officials at the Internal Revenue Service are pushing agents to prematurely close audits of big companies with agreements to have them pay only a fraction of the additional taxes that could be collected, according to dozens of I.R.S. employees who say that the policy is costing the government billions of dollars a year."

Raise the minimum wage or subvert taxes for the rich. Question: which policy bears more on inequality?

Proponents assert that the minimum wage increase will bring justice to "the people who empty the bedpans, change the bed linens, sweep the floors and do the hardest work of America." Opponents point out that small businesses employ most of the lowest wage workers. A wage increase, they say, will penalize small business owners and increase unemployment of young and low-skill workers. President Bush has made signing an increase conditional on tax breaks for small business.

Opponents' logic is sound. They might even be right about consequences were the increase large enough to bring the minimum wage up to something like a "living wage" of $12 an hour. There's no evidence that the federal minimum wage has ever affected employment, even at its 1968 peak of $1.58--$7.71 in 2006 equivalent dollars, as computed by Economic Policy Institute economists. Opponents also might be right if the minimum wage were easily enforceable. In reality, small businesses often pay their workers off the books, or report fewer hours than actually worked.

A minimum wage increase will indeed help some workers, especially in operations large enough to make enforcement feasible. It will set a norm for higher pay as small businesses grapple with the tradeoff between pay rates and employee turnover. But for all the hoopla, a minimum wage increase won't seriously dent inequality.

The same folks who shed crocodile tears for small business in fact know that enforcement is half the game. It's not just crippled enforcement of corporate income tax. I recently chatted with a very frustrated IRS estate tax examiner: same story. And Interior officials have admitted making "mistakes" in drafting offshore oil leases, letting oil companies escape billions in royalties. From the Environmental Protection Agency to the Food and Drug Administration, senior officials reinterpret or ignore laws to favor friends at the top.

Unlike the minimum wage, gifts to the top tier do directly affect inequality. The costs--higher taxes, poorer services, and disincentives to hire or invest--must come at someone's expense--in fact at the expense of lower and middle income families, and small to medium businesses. Even the upper middle class increasingly faces the alternative minimum tax, which has become essential to plug the gaping tax gap at the top.

Newly-empowered Democrats face a task more daunting and important than raising the minimum wage. Not only must they undo overt legislation favoring the elite, they must expose and address the thousand administrative subversions of laws protecting ordinary citizens.

When Affirmative Action was White by Ira Katznelson
December 18, 2006

Economic historians often refer to the period from World War II to the mid 1970's as the "Great Compression." During that period, US inequality plunged to its lowest level ever, before reversing. In an earlier Econamici, "The Wedge," I attributed this plunge to an unprecedented set of redistributive policies: In 1935, Social Security began providing pensions--at first, necessarily, entirely to people who had not paid into the system. During the war, the military provided technical training for millions of men and women otherwise lacking the opportunity. For the poorest, it provided crash literacy programs. After the war, Congress enacted generous GI benefits, including college, health care, and loans to purchase homes or start businesses.

Expenditures on these programs took a huge fraction of GDP compared to social spending today. Marginal tax rates during WW II were 94%. By 1948, a staggering 15% of the federal budget was devoted to the GI bill.

But, according to historian Ira Katznelson, these and related programs were quite deliberately designed to exclude blacks. So much so, that during the same period of the Great Compression, inequality between blacks and whites increased substantially.

Why and how did these historic national redistributive programs exclude blacks?

Why is easy. These programs, initiated by the Democratic Party, required the cooperation of southern Democratic legislators. These men, although eager to bring federal funds to the poor and backward South, nonetheless saw a threat to the southern "way of life," which depended on cheap black labor. As a South Carolina Senator proclaimed in response to proposed fair labor standards legislation: "Any man on this floor who has sense enough to read the English language knows that the main object of this bill is, by human legislation, to overcome the great gift of God to the South."

How was more subtle. Southern legislators employed two key strategies: classification of beneficiaries and local administration.

Before World War II, most southern blacks worked on farms or as maids. So, at the insistence of Southern legislators, the original 1935 Social Security legislation excluded farm and domestic labor. The effect was to exclude 65 percent of blacks nationally, and 70 to 80 percent in the South. Not until 1954, under a Republican administration, was Social Security extended to all workers. Unemployment and workmen's compensation insurance likewise originally excluded domestic and farm workers.

During World War II, the US military remained segregated. Facilities for black recruits, mostly in the South, provided limited and inferior training compared to white facilities. Black servicemen complained they were being employed as servants and ditch diggers. Black men were almost entirely excluded from training as pilots, as black women were excluded from training as nurses.

After World War II, Southern legislators insisted that local agencies administer the distribution of GI benefits. Southern administrators steered returning black soldiers to inferior segregated colleges or to outright fraudulent job training programs. Southern bankers processed GI mortgage loan applications, "redlining" black neighborhoods--charging higher rates or refusing loans altogether. Veterans' hospitals remained segregated until 1948.

In these and many other ways, federal programs boosted millions of poor whites into the home-owning middle class, leaving blacks further behind. According to Katznelson, the Democratic Party made a "Faustian bargain" with its southern members: abandoning core values of equity to gain generous benefits for the white working class majority.

Today, whites often resent "affirmative action" for blacks. The link appears too weak between blacks in general and remote slavery or past discrimination.

But consider: during World War II, Japanese Americans were rounded up and sent to desert internment camps; as direct victims of bad public policy they eventually did receive (miserly) compensation. Likewise, the Democratic Party's "bargain" created identifiable victims. Many are still alive. Their families today still lack the assets, education and financial security of equivalent whites.

Katznelson proposes that were it recast as a response to "white affirmative action," black affirmative action would gain greater legitimacy and sympathy.

The Plague before Thanksgiving
November 19, 2006

I remember, in the fourth grade, snipping colored feathers from construction paper to make my Indian bonnet. That was for the annual First Thanksgiving pageant. Dressed up as Indians and Pilgrims, we paraded around a table loaded with pies and a paper-maché turkey. We recited how the Pilgrims had landed at Plymouth Rock in 1620. And how after a year of hardship, helped by an English-speaking Indian named Squanto, they celebrated a harvest and invited the Indians to dinner. Then we held hands and sang, "We gather together to ask the Lord's blessing."

What's wrong with this picture?

In the year 1000, Leif Ericson landed in what was probably Newfoundland. The Norse made several attempts to settle, but attacks by the native "Skraelings" eventually forced them to give up.

Apart from the Norse, the Pilgrims weren't the first European settlers on the North American continent. A Spanish colony with African slaves settled in South Carolina in 1526; the slaves revolted, killed their masters and fled to join the Indians. By 1600, there were scattered Spanish colonies in Florida and across the southwest. The first British colony, set up at Jamestown Virginia in 1607, disintegrated due to poor leadership and conflict with Indians.

People don't usually give up their land willingly. Masses of Chinese peasants today risk their lives to protest confiscation of their land for development. Throughout history, any war you can name, even if ostensibly about religion, boils down to a fight over resources and territory. So why did the Pilgrims face no opposition?

Something terrible happened between Jamestown and Plymouth Rock.

The New England Indians had lived in settled farming communities with populations probably in the millions. They planted corn, beans and squash on garden mounds--an agriculture no less sophisticated than that of contemporary Europeans. Meanwhile, for decades before 1620, British ships had fished for cod off New England, going ashore for water, wood, and sometimes Indian slaves. (That's how Squanto learned English.) Perhaps due to this contact, a plague--of a type still in dispute--spread through the native populations. In 1347, the Black Death had killed one quarter to a third the European population; in 1617-1618, the Indian Plague wiped out over 90 percent of the New England population.

Back in England, King James I gave thanks to "Almighty God in his great goodness and bounty towards us" for sending "this wonderful plague among the salvages [sic]." The Pilgrims, planning their journey, took note. They may even have selected their destination knowing they would find abandoned fields, ready for cultivation. Even so, they had to depend on the few remaining Indians to train them in agriculture, hunting and fishing.

As more settlers joined the Massachusetts Bay Colony, smallpox decimated the last Indian populations. In 1634 Governor John Winthrop wrote to a friend in England, "But for the natives in these parts, God has so pursued them, as for 300 miles space the greatest part of them are swept away by the smallpox which still continues among them. So as God hath thereby cleared our title to this place, those who remain in these parts, being in all not 50, have put themselves under our protection…"

The plague story is detailed James Loewen's Lies My Teacher Told Me, debunking the feel-good myths purveyed by high school American history textbooks. According to Loewen, "These epidemics probably constituted the most important geopolitical event of the early seventeenth century. Their net result was that the British, for their first fifty years in New England, would face no real Indian challenge."

In the preceding century, plagues of Old World disease had enabled a handful of Spanish conquistadors to capture the Aztec and Inca empires. So devastating were these epidemics that the Caribbean sugar planters ran out of native slaves, forcing them to import Africans. In the southern British colonies, cotton planters followed suit. But the stony terrain of the northern colonies, including what became Canada, was better suited to small wheat farms than to plantations. It may be that the democratic beginnings we celebrate at Thanksgiving became possible precisely because white settlers had no need to control a subordinate native population.

Benefits of Military Spending
November 12, 2006

As Kevin Phillips recorded in Wealth and Democracy (2002), war has created the opportunity for many great fortunes. Thus the frenzied looting--and disregard for the lives of both US soldiers and corporate employees--displayed in Robert Greenwald's new film Iraq for Sale: The War Profiteers. One small example: drivers shuttle empty mail trucks up and down dangerous roads--while the contractor is paid by the trip. With Democrats in control, we'll surely be hearing of more and worse.

But, how did we get here? It's hardly news that powerful nations meddle in the affairs of weaker ones, to the benefit of both their own nationals, and of cooperative local clients. In Imperialism (1902), John A. Hobson blamed such activity on the capitalist drive for markets. Other critics have been content to chalk foreign adventuring up to "greed."

Mason Gaffney offers a more sophisticated and chilling dynamic. In 1972, during the Vietnam war, he presented a conference paper on "Benefits of Military Spending," --which the editor deemed "too controversial" to publish.

Gaffney starts with the cooperative locals, or "caciques." Among other benefits, caciques gain protection of US military and relief from expense of self-defense. In 1972, a notable example was Vietnamese President Nguyen Van Thieu; a more recent cacique was Saddam Hussein--until he overstepped his bounds in Kuwait. Today there's Nursultan A. Nazarbayev, corrupt and brutal president of oil-rich Kazakhstan, recently in the US to visit with Papa and Junior Bush.

What do caciques do for friendly US corporations? No, they don't give them markets, or minerals per se. They give contracts. Contracts of course include oil exploration rights, water supply projects, pipeline rights of way, fishing rights, prime locations for processing plants... The easiest to give are those that needn't be taken from anyone--such as the telecommunications franchise Chile gave ITT before Salvador Allende was elected.

Here's part one of Gaffney's dynamic: a contract with "a shaky sheik" isn't worth much more than the paper it's written on. Until, that is, the contracting corporation hollers "property rights" and the US cavalry or navy races to the rescue. Or that's the way it used to be; we've grown a little more subtle. All of a sudden, that contract is gold, an entitlement to a growing stream of "economic rent." Among many examples, Gaffney cites Aramco. Organized in 1933 with a capital of $100,000, in 1947 it was worth, $250 million--an appreciation of $2500 percent over 14 years. By the time the Saudis demanded a share in 1972, it was worth billions.

And now part two of the dynamic: A cartel can greatly enhance the value of stock in oil or other international resource companies. Thus OPEC and its cooperating multinationals restrict supply to keep up prices. That means, especially with a widely-distributed resource like oil, oil companies (or nations) must grab up potential new sources of supply before someone else gets them. And in turn, that means companies must aggressively seek contracts in turbulent corners of the world like western Sudan and the jungles of Colombia--potentially dragging the US into further conflicts.

Well, don't US citizens, as citizens, get something out of this--a secure if over-priced oil supply, for example? Or military jobs? Doesn't military spending at least perk up the economy? Remember the textbook macroeconomic formula: Y = C + I + G? More G (government spending) means more Y (national income). In reality, the contribution of G to national income depends on how it's spent (and how it's financed). An investment in gaining and holding onto overseas contracts yields a very low and drawn-out return, creating relatively little net income and employment. And it comes at the expense of high-return investments, notably in the health, education and genuine security of US citizens.

The End of Iraq: How American Incompetence Created a War without End, by Peter Galbraith
October 18, 2006

From the day the war in Iraq became imaginable, my husband and I have not missed a peace march. Nonetheless, as the slaughter continues, I have worried about how the US can extricate itself. Ambassador Peter Galbraith's book is reassuring, if that's the right word, that a prompt withdrawal really can't make matters worse.

Galbraith has been accused of advocating the partitioning of Iraq--in the face of long-term U.S. insistence on a unified Iraq. Not so, he says. The Iraqis have already partitioned themselves--on paper and on the ground. On paper, the new constitution creates a federation of provinces--a federation so loose that it leaves the central government only a handful of exclusive functions, notably, foreign affairs, defense policy, monetary and fiscal policy, and managing the flows of the Tigris and Euphrates. On the ground, there's Kurdistan in the north, Shiites in the south, and Sunnis in the central western triangle.

There's a long history here, which the Bush Administration has totally disregarded. The British created Iraq itself after World War I, by combining three mutually-hostile provinces of the former Ottoman Empire. They put the relatively more educated Sunni minority in charge, and even appointed a foreign Sunni Arab as king, Feisal I, in 1921. In 1958, the military overthrew the monarchy. Saddam Hussein's Ba'ath party seized power in 1968; he made himself president in 1979. In 1980, he picked a border war with Iran; when the war went badly, the US helped him target Iranian troops--with poison gas. In 1988, after the war was settled along the original borders, Saddam proceeded to poison and bulldoze Kurdish villages in the north, and then to invade Kuwait.

Following the Kuwait war, Saddam brutally reasserted control in the north and in the south. Galbraith himself campaigned actively to have the US impose the northern no-fly zone that then allowed Kurdistan to become a de facto independent state in 1991. When the US invaded in 2003, deposed Saddam, abolished the Ba'ath Party, and dissolved the Sunni-dominated army, it unstuck the glue that held Iraq together. As Galbraith puts it, Humpty Dumpty fell from the wall. The Shiite clerics returned from exile in Iran, turning southern Iraq into a collection of theocracies allied to Iran. Only the Sunnis, occupying an oil-less territory, still seek a unified Iraq.

Galbraith supported the invasion of Iraq. However, as an active observer and advisor in the post-invasion negotiations between the various groups, he quickly ran afoul of the "arrogance, ignorance and political cowardice" of the Bush Administration. He recites one mind-boggling incident after another. For example, at the start of the war, Bush knew nothing of the implacable religious hostility between Sunnis and Shiites, each of whom regard the others as apostates. Or, to administer billions in reconstruction funds, the Pentagon hired a group of 20-somethings whose only qualification proved to be that they had posted their resumes to the Heritage Foundation website!

How does Galbraith see the present situation? Much of Iraq is actually fairly stable and peaceful--completely so in Kurdistan. However, horrendous "ethnic cleansing" goes on in border areas, as populations relocate to ethnically pure communities. Baghdad is "the most dangerous city in the world." The now Shiite-dominated army and police cannot solve the problem--they ARE the problem. The US army cannot and will not act as police; there is no other capable entity in the wings (like NATO in former Yugoslavia). The US should leave, retaining only a strike force in friendly Kurdistan, in case Al Qaida attempts to establish training camps in the Sunni triangle.

Iraq is a tragedy, made inevitable by British colonial manipulation, but worse by US bungling.

From 1979 to 1993 Peter Galbraith was senior advisor to the Senate Committee on Foreign Relations. From 1993 to 1998, he served as first Ambassador to Croatia, where he helped broker the peace process. He is currently a fellow at the Center for Arms Control and Non-Proliferation.

Where Did The Wealth of Nations Come From?
September 30, 2006
Where Did The Wealth of Nations Come From?

Adam Smith (1723-1790) published The Wealth of Nations in 1776, also the year of the American Revolution. Both the Wealth of Nations and the Declaration of Independence sprang from a context, the so-called "Enlightenment."

The Enlightenment in turn has a history, traced in the lectures of Alan Charles Kors, on "The Birth of the Modern Mind: The Intellectual History of the 17th and 18th Centuries," available from The Teaching Company (www.teach12.com).

The story begins in the early 17th century with politician and philosopher Sir Francis Bacon, (1561-1626). Born to a noble family, Bacon rose in the court of Queen Elizabeth and then James I, eventually becoming Lord Chancellor--before being dismissed for taking bribes. Bacon was educated in the mode of thinking that dominated European schools and universities: "Aristotelian scholasticism," a blend of Greek philosophy and Christian theology. Under scholasticism, knowledge derived first from the writings of prior authorities, second by logical arguments from these authorities, and finally--simply as a means of illustration--experience. Bacon rebelled against scholasticism. Instead of deduction from authority, he argued in his most famous book, The New Organon, we should derive knowledge by induction from observation of the real world. Knowledge should be cumulative, testable and useful in improving the well-being of mankind.

Francis Bacon wasn't the first to propose something like the "scientific method." So did his unrelated forbear Roger Bacon (c. 1214-1294), who lectured on Aristotle at Oxford. But times had changed. The printing press, invented in 1440 by Gutenberg in Germany, fostered much broader literacy. The Reformation had swept northern Europe including England, where it was imposed by Elizabeth's daddy, Henry the Eighth. So while Roger Bacon died in obscurity, Francis Bacon inspired an enthusiastic following. In 1660, his disciples founded the British Royal Society, whose Annals became the most prestigious place to publish not only scientific research but improvements in technology.

Meanwhile, the Roman Catholic Church had unwittingly painted itself into a corner by endorsing Ptolemaic astronomy, in which the sun and planets revolved around the earth. Not because the earth was the most important, but because it was the most imperfect, and therefore furthest from the realm of God in the perfect heavens. Understandably, scholars like Kepler (1571-1630) and Galileo (1564-1642) trained their eyes and their improving instruments on the heavens, observing and measuring the motions. They reached a startling conclusion: not only did the earth and planets revolve around the sun, but they moved according to precise laws that could be represented mathematically!

The dam broke in 1687 when Newton (1643-1727) published (in Latin) his Mathematical Principles of Natural Philosophy, unifying the laws of physics on the earth with the laws of motion of the planets. A tidal wave of scientific discovery and new technology burst over the ever more literate public of western Europe, challenging the established church and engendering the Deistic faith of Thomas Jefferson and others-the idea that God's work is manifest in nature.

Now imagine Adam Smith growing up in Scotland in the mind-blowing excitement of that era, teaching at the University of Glasgow and writing his first bestseller, The Theory of Moral Sentiments. He spent 1763-66 in France visiting with the leaders of the French Enlightenment, men such as Voltaire, Rousseau, Turgot, Helvetius and D'Alembert, and discussing laissez-faire with the Physiocrats Quesnay and Dupont de Nemours. Back in Scotland, his close friend was the radical moral philosopher, David Hume. Small wonder The Wealth of Nations reflects the Enlightenment outlook: keen and fresh observation, followed by analysis without overemphasis on consistency; compassion for humanity; and always, skepticism and wit. Smith can write, on the one hand,

The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education.

and on the other hand, (GM and HP are you listening?)

The directors of [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

Today, alas, much of mainstream economics seems to have retreated to scholasticism, abandoning observation, deriving ever more elaborate and obscure formulations from received wisdom.

School Choice: A Lesson from New Zealand
September 6, 2006

I have long supported school choice--confined to public schools. My son attended primary and middle school in District Three on the Upper West Side of Manhattan. District schools are subdivided into small units, each with its own program and principal, competing to attract students from all of Manhattan. At IS 44 on west 77th Street, my son's Science School was one of eight middle schools in the same building. Other schools included a theater school, a bilingual school and a school for children with disabilities. The schools shared sports and extracurricular activities--notably an award-winning choir, in which my son sang. Every morning city school buses brought children from both ends of Manhattan; some traveling over an hour. Although the neighborhood is mainly white, at least two thirds of the students were Black or Hispanic. Despite large class sizes, teaching was excellent. Parents were enthusiastic and involved. I myself accompanied the choir on tour; my husband helped with the annual Science Fair, other parents helped with painting and repairs, and managed the Sunday flea market on the playground.

Despite the success of District 3, and of similar experiments in Manhattan Districts 2 and 4, the experiment never spread to the whole of the New York School System. I attributed this failure to entrenched bureaucracies in other districts, and hoped the City would eventually impose choice on them. I was wrong.

Advocates for choice claim benefits not only for those children who actually transfer to new schools, public or private, but for those who don't. Competition, they say, will force sclerotic public schools to improve their performance. The same logic supports the movement for charter schools, which allow greater flexibility of curriculum within public school systems. However, studies of pilot choice and charter schools have begun to trickle in. While long-time advocates (like Caroline Hoxby) claim success, most studies show that, all else being equal, choice and charter schools on average contribute little to student performance.

Meanwhile, in 1992, in a fit of free-market enthusiasm, New Zealand implemented a top to bottom choice system within the public schools. Schools are ranked into 10 levels, based on socio-economic and ethnic composition of the students. Lower ranked schools, with proportionally more disadvantaged students, notably native Maoris, qualify for additional aid. The high-ranked schools are oversubscribed, and as a result need not compete for students. The lower-ranked schools do compete. With what consequences?

Education researchers Helen Ladd and Edward Fiske, who studied New Zealand schools in 2000, found that the most able students benefited, including upwardly-mobile students from poor backgrounds. However the competition for students seriously hurt teacher morale in lower ranked schools. Essentially, the top schools drain the rest of the system of the best students, the best teachers, the most energetic principals, and the most motivated parents. Moreover, the very fact that students can easily switch schools (except for getting into the top schools), makes the parents less committed to any particular school. Ladd and Fiske conclude that the New Zealand school system is polarizing and undemocratic.

I still, hesitantly, support choice within public schools. How can I say that my son's poor but ambitious classmates shouldn't have had the opportunity to attend a good school? Or that parents shouldn't have some choice of schools to fit their children's needs and interests? But it's a "fallacy of composition" to claim that because choice can improve a few schools it can save a whole system. Choice doesn't create a free lunch, removing the need for more resources and higher pay for teachers. Absent strong countervailing policies, choice simply makes public schools better reflect an unequal society. If we want the undeniable benefits of choice, we must fight all that much harder against the tax and other polices that rig the economy to benefit a wealthy elite.

The Ladd_Fiske article on New Zealand is available at http://www.pubpol.duke.edu/people/faculty/ladd/SAN01-16.pdf

The White Man's Burden
August 9, 2006
by William Easterly

"Who got the most standby [credit]s from the IMF over the last half century? The answer is Haiti, with twenty-two. And not just Haiti, but the Duvalier family (Papa Doc and Baby Doc), under whom Haiti got twenty of the twenty-two standbys from 1957 to 1986."

"The politics were bad, but the Duvaliers made up for it with even worse economics. The income of the average Haitian was lower at the end of the Duvalier era than at the beginning…" p 147

In his well-written, passionate and witty new book, The White Man's Burden (from the Kipling poem), development economist William Easterly explains "Why the West's efforts to aid the Rest have done so much ill and so little good":

First, third-world poverty does not arise from lack of capital, or incapacity of local populations. It arises from bad government, or more colorfully, government by "gangsters," "warlords" and "kleptocrats." Often, that bad government is a colonial legacy. The wealthy French slave colony of Saint-Domingue, now Haiti, ended in the rebellion of 1791-1804--leaving perpetual war between former slaves and a mulatto elite. Colonials drew arbitrary straight lines on a map--creating national boundaries that put together slave raiders and their victims, like the Northern and Southern Sudanese, or separated coherent groups like the Kurds. Then, as a strategy for control, the colonials pitted groups against each other, such as Tutsis versus Hutus.

Second there is the utopian arrogance of "Planners" as Easterly labels them: academics like Jeffrey Sachs of Columbia, or officials and staff of the IMF, the World Bank, the UN, or Western governments. Planners create grandiose programs, eg. to "end poverty," without investigating conditions on the ground or obtaining advice, requests, or feedback from intended beneficiaries. Then, they provide the assistance to and through those same bad governments--which they may try to "reform" by imposing complex conditions and detailed reporting. When the assistance doesn't produce results, the conditions aren't met and the reports don't arrive--the Planners claim "progress" and continue the program.

Joseph Stiglitz and others criticize the International Monetary Fund and the World Bank for imposing cruel conditions on third-world beneficiaries. There are widespread calls for third-world debt relief. Easterly goes further: Much lending is worse than wasted. Not only does it fail to reach the poor, but it helps bad rulers retain power, repeatedly bailing out the likes of the Duvaliers and Mobutu.

Aid also reflects Planners' economic and ideological priorities, not those of recipients. (Surprise!) It's not just aid in the form of subsidized cotton exports or engineering contracts with multinational corporations. Easterly fulminates at AIDS assistance directed to treatment instead of prevention. Resources to treat one HIV-infected individual could avert thousands of infections if spent on condoms or on inexpensive medicine to stop virus transmission from mothers to newborns.

Throughout the book, Easterly highlights successful small projects of enterprising locals, whom he calls "Searchers." Unlike Planners, Searchers carefully check out their "customers" and experiment with ways to deliver what the customers want. Successful outside aid is aid that supports such narrow local initiatives, primarily in health and education, where success can be measured. In Bangladesh, the "People's Clinic" trains teenage girls as bicycle paramedics. In Ethiopia, a British NGO enables Ethiopians to pipe clean water to poor villages. Born poor in Ghana, Patrick Awuah had the luck to win a scholarship to Swarthmore, where he studied engineering and economics, and the further luck to become a Microsoft millionaire. He returned to Ghana to found a private university, providing free tuition to poor students.

As for you and me, Easterly recommends a website, www.globalgiving.com. Here, Searchers can post their projects, and we can browse for projects by type and area of the world, and read about other contributors' experience with particular projects. I just contributed to a Lebanon relief fund.

Along with Helping Others Help Themselves by David Ellerman (which I discussed a few months back) The White Man's Burden belongs on the reading list of courses on third world economics or politics.

The Wedge
July 9, 2006

"As Workers' Pensions Wither, Those for Executives Flourish; Companies Run Up Big IOUs, Mostly Obscured, to Grant Bosses a Lucrative Benefit; The Billion-Dollar Liability." The June 23 Wall Street Journal headline tells the story: GM and other big corporations cut pensions for the rank-and-file--complaining all the while of "legacy costs"--while they pad executive packages.

Meanwhile, the Economic Policy Institute reported last week that executive compensation in 2005 has risen to 821 times that of lowest paid workers-up from 649 times in 1999, and 51 times in 1965.

Louis Uchitelle's new book, The Disposable American: Layoffs and Their Consequences, details the human cost. Corporations can't easily cut pay; instead, they lay off thousands of workers at a time. If need be, they hire replacements at much lower pay. The laid-off workers, even those with high education and skills, rarely find jobs at anything close to former rates. Suffering from depression and loss of confidence, they struggle to hang onto homes and family.

Uchitelle and others blame international trade for skewing the wage structure. After all how can American workers compete with low-wage Indian or Chinese or Mexican workers? Trade, free trade at least, produces gains on both sides. (I distinguish free trade from theft, as when multinationals rip off the natural resources of third world countries.) Even if textile and electronics workers lose jobs to China, American workers overall should gain from lower prices of imports--freeing them to spend more on new goods and services--and creating new jobs. Why should gains from trade mostly benefit the Waltons?

I think the focus on trade diverts attention from structure, structure determined by history and policy. Individual states and regions differ markedly in both the level and trends in inequality. Southern states, which began with slave plantations, have remained less equal than Northern states, which began with small farms. While overall US wage inequality has increased during the last thirty years, several states have grown more equal. Clearly international trade can't explain such anomalies.

Here's my hypothesis: US inequality last peaked in 1929, at levels we are now again approaching. Then the Depression shrank robber baron fortunes. It collapsed land values, so small farmers could afford land again. In 1935, it brought Social Security. We fought World War II with marginal income tax rates of 94%, and technical training for millions of men and women otherwise lacking the opportunity. VA mortgages and health care followed the war, as did disability insurance, and in 1965, Medicare and Medicaid. The Depression and WW II also inspired the ethos that we were all in this together.

In the 1970's US inequality reached a historic low, and began to reverse. The Federal Income tax became less and less progressive; loopholes ate away income taxes for major corporations. At the state level, property taxes--which are essentially wealth taxes--gave way to sales and income taxes. Spending on prisons grew at the expense of schools and health care. Labor unions declined. A briefly egalitarian society morphed back into one rigged for a wealthy elite.

In the 1870's, Henry George observed growing wealth and poverty in New York City: "It is as though an immense wedge were being forced, not underneath society, but through society. Those who are above the point of separation are elevated, but those who are below are crushed down." (Progress and Poverty, 1879). Today as then, our own policy drives the wedge, not outsiders bearing cheap tee shirts and screwdrivers.

Economan Captures the Knowledge Economy
June 13, 2006
Review of David Warsh's Knowledge and the Wealth of Nations

David Warsh's engaging new book Knowledge and the Wealth of Nations tells two stories. One story, beginning with Adam Smith, covers the history of thought about the relationship of economic growth and economies of scale. Warsh finds in Smith a contradiction between the huge technical economies of the pin factory, which should create monopolies, and growth driven by competition between many firms. From Allyn Young forward, he sketches the lives and ideas of major 20th century economists who addressed or neglected Smith's puzzle, while building the mathematized economics of today. The players include George Akerlof, Kenneth Arrow, Robert Barro, Edward Chamberlin, Paul David, Gerard Debreu, Milton Friedman, John Maynard Keynes, Paul Krugman, Robert Lucas, William Nordhaus, Paul Romer, Paul Samuelson, Robert Solow, Joseph Stiglitz, John Von Neumann, and many more.

The other story details Paul Romer's struggle to develop a new mathematical growth model that would solve Smith's puzzle, culminating in "Endogenous Technological Change" in 1990. This model challenges the now classic 1956 model of Robert Solow, by explaining innovation rather that treating it as manna from heaven.

I found the book at least as interesting for its depiction of elite academic economists as for its account of growth theory.

Warsh views his economists as "a cat looking at kings." They are "the best and the brightest." In 1985 "[a]t the age of forty-eight, Robert Lucas has become the most influential economics theorist in the world…" Or, "At age forty-nine, [John] Taylor is on his way to becoming one of the fathers of the profession…" These economen -- for they are all men -- sally forth like heroes on the Trojan battlefield. Only it's the "Saltwater" (Cambridge MA and allies) heroes versus the "Freshwater" (Chicago) heroes. Sometimes they collaborate; sometimes they go mano a mano against a single opponent--as does Romer against Solow.

Hovering over the scene like Athena and Hera are two women, neither of them accorded Warsh's usual encomia. They are Joan Robinson, originator (with Edward Chamberlin) of the idea of "monopolistic competition," and Jane Jacobs. Jacobs, known for her keen observations on the economy of cities, was not even an economist, let alone a mathematical economist.

I confess to skepticism. I find no contradiction in Adam Smith. I have difficulty with modern macroeconomics, which disregards factor proportions and prices, as well as distribution. I cannot swallow growth theory--especially the aggregate production function into which Romer incorporates knowledge acquisition. Warsh's heroes battle for honor and glory--the admiration of colleagues, publications in top journals, prestigious professorships, the Clark Medal, the Nobel Prize. And they experience the sheer joy of solving puzzles. But, has their new mathematical arsenal enabled them to capture a better understanding of the economy, as Warsh assumes?

Surprisingly and annoyingly, Knowledge and the Wealth of Nations lacks citations and bibliography, though at least it has an index.

David Warsh edits www.economicprincipals.com, a weekly subscription column on the doings of the profession.

The Mother of all Bungles in Iraq
June 6, 2006

Introductory Economics Lesson One: Price controls can backfire. Exhibit A: New York City rent control. Landlords neglect repairs, and harass poor tenants into leaving. Meanwhile, well-to-do renters pay thousands of dollars in "key money" to owners or supers to obtain choice apartments.

Exhibit B: Iraqi oil price control. Remember when the Provisional Authority took over in Iraq under the direction of Paul Bremer? In its eagerness to impose free markets, the Authority privatized most public enterprises, throwing thousands out of work. Yet when it came to oil, astoundingly, it retained Saddam Hussein's policy of paying subsidies to hold prices well below market!

In "Attacks on Iraq Oil Industry Aid Vast Smuggling Scheme," (Sunday, June 4) The New York Times reports the predictable result:

"Once thought to be only a tool for insurgents to undermine the government, the pipeline attacks have evolved into a lucrative moneymaking scheme for insurgents and enterprising criminal gangs alike. Ali Al Alak, the inspector general for the Oil Ministry, said the attacks are now orchestrated by both groups to force the government to import and distribute as much fuel as possible using thousands of tanker trucks."

"In turn, the insurgents and criminal gangs -- distinguishing among them has become increasingly problematic -- have transformed the trucking trade into a potent tool for smuggling."

"In many cases documented by Mr. Alak and other Iraqi officials, truckers, often collaborating with smuggling gangs, pay bribes or use forged papers to inflate the value of their load, tamper with their fuel meters, or simply turn their loads over to the gangs."

"As a result, as much as 30 percent of imported gasoline is promptly stolen and resold abroad by smugglers, according to American and Iraqi officials. The shortfall is part of what forces Iraqi families to spend more on fuel from the black market, where it is far more expensive than from legal outlets."

"Oil Ministry data suggest that the total [cost] was $2.5 billion to $4 billion in 2005, said Yahia Said, a research fellow at the London School of Economics and director of the Iraq Revenue Watch at the Open Society Institute, a policy foundation."

"Even at the low end, that would mean smuggling costs account for almost 10 percent of Iraq's gross domestic product, $29.3 billion in 2005." (www.nytimes.com
/2006/06/04/world/middleeast/04smuggle.html)

One assumes the Authority feared repercussions--either rioting by ordinary Iraqis accustomed to low gas prices (after waiting in line for three days), or sabotage by the vast network of local officials and tribal chiefs dependent on oil smuggling.

A recent deal with the International Monetary Fund to forgive Iraq's debts includes a provision to end the Saddam-era oil subsidies. But the new Iraqi government, even more than the Provisional Authority, may fear public response--not to mention resistance of corrupt politicians.

There could have been--and could still be--an alternative: Issue coupons to Iraqi families in the amount of the average per-family subsidy, and let oil prices rise to market. In effect, give the subsidy to Iraqi families instead of to smugglers.

Meanwhile, financed by US taxpayers, insurgents and criminals continue the slaughter.

Tax Cuts for the Rich Hurt the Economy
May 13, 2006

Congress just donated another $70 billion in investment tax cuts to rich taxpayers. Last month, David Cay Johnston of the New York Times summed up the debate: (Big Gain for Rich Seen in Tax Cuts for Investments)

"Stephen J. Entin, president of the Institute for Research on the Economics of Taxation, a Washington organization, and other supporters of the cuts said they did not go far enough because the more money the wealthiest had to invest, the more would go to investments that produce jobs. For investment income, Mr. Entin said, "the proper tax rate would be zero."

Opponents say the cuts are too generous to those who already have plenty. Representative Charles B. Rangel of New York, the senior Democrat on the House Ways and Means Committee, said after seeing the new figures that "these tax cuts are beyond irresponsible" when "we're in a war; we haven't fixed Social Security or Medicare; we've got record deficits.""

Republicans promise growth and jobs; Democrats just grumble. Yet in fact, the Republican claim depends on two false assumptions: first that the tax cuts will improve incentives to invest and create jobs, and second that tax cuts should go to the rich because the rich save and invest more.

Incentives.

If we cut taxes for the rich, either A) we raise other taxes or B) we increase debt or C) we cut spending. A), B) and C) have incentive effects too; we must consider net incentives.

A tax cut for the rich has minimal incentive effect. That's because much income at the top is "passive." Corporate shareowners can't increase their capital gains if tax rates fall--though they may change their tax accounting.

What about incentive effects of A), B) and C)? A) At the Federal level, an increase in other taxes means higher payroll and income taxes. These taxes drive a "wedge" between employers and employees, penalizing job creation. B) An increase in debt eventually drives up interest rates, to the benefit of capital-owners--major corporations and wealthy individuals--and the detriment of capital-borrowers--small businesses and poorer individuals. Small businesses provide far more employment per dollar of assets than do large businesses. C) As for cutting spending, a cut in military and other pork would surely goose the economy, but that's not what Republicans have in mind. Cutting spending on health and education and pensions reduces middle and lower income citizens' ability and willingness to build the economy by working and investing.

Net effect: cutting taxes on the wealthy reduces incentives for investing and creating jobs.

Savings and Investment.

The rich supposedly save and invest a higher share of income, so that a transfer of income from poor to rich should increase net saving and investment in the economy. Now unquestionably the rich save and invest proportionally more through the markets, that is, by purchasing financial instruments like stocks and bonds and money market funds. These days, they're lucky to earn 3 to 7% on such investments.

But people also "self" save and invest. A young person goes to school, effectively saving the income he or she could have earned in order to invest it in learning valuable skills. The immigrant shopkeeper works day and night, living on crumbs, to grow her little venture. She's building "sweat equity." So are the customers of Home Depot. Since we can't easily measure "self" saving and investment we can't be sure that the rich truly save and invest a higher share.

However--and here's the key point--poorer people get a higher return on their investment! That may seem surprising, given that they can't afford fancy investment advisors. But "self" investments like an education, or a small shop, or a do-it-yourself bathroom renovation, can yield very high returns--precisely because poorer investors find capital scarce and expensive. "Human capital" guru Gary Becker once estimated the return on a college education at 11% to 13%. Estimates of return on high school education run around 18%; over 40% for an 8th grade education. The investments of the shopkeeper and the bathroom renovator must at least repay the 20% interest on a credit card.

So, does poorer people's higher return on investment outweigh a (possibly) lower savings rate? Absolutely. Fifty years ago, Asian "tigers" like South Korea and Taiwan were poor, very unequal, war-damaged agrarian economies. But unlike poor, unequal, backward countries in Latin America, the "tigers" redistributed land to the peasants, and invested massively in public health and education. Overnight they created a middle class, and set off rapid economic growth. Throughout the world, countries with a large middle class grow faster than very unequal countries.

A Message:

Tax cuts for the rich neither improve incentives nor increase saving and investment--quite the opposite. Our hard-working heavy-investing middle class built this country. We can have fair tax policies that also create jobs and growth.

Wealth of Nations, Wolf on Jacobs, Krugman on Warsh
May 7, 2006

Martin Wolf of the Financial Times, calls Jane Jacobs, who died last week, "a self-educated intellectual of astonishing originality." He devotes most of his article, "National wealth on city life's coat tails" (5/2/06) to a review of one of his and my favorite books, Jacob's 1984 Cities and the Wealth of Nations -- which he sees as a direct challenge to Adam Smith's Wealth of Nations.

Jacobs, like Smith, rarely lets theory trump observation. And what a different world she observes from that of conventional economics! Economic growth happens, not at the national level, but in cities. "According to Jacobs, cities grow through explosive import-replacement. These new products then become their exports, which finance more imports. The expansion that derives from city import-replacement generates five sources of growth: enlarged markets for imports; increased numbers and kinds of jobs; increased transplants of city work into non-urban locations; new uses for technology, particularly to increase rural production and productivity; and growth of city-owned capital for investment in the city and elsewhere."

Cities have largely stumped economic model-builders: what to do with economies of scale in infrastructure, economies of cooperation and communication, positive externalities of ideas and energy? Which brings me to David Warsh's new book, Knowledge and the Wealth of Nations, reviewed by Paul Krugman in the Sunday New York Times: "The Pin Factory Mystery" (5/7/06) .

As Krugman relates, Warsh addresses a contradiction in Adam Smith: In the first pages of the Wealth of Nations, Smith celebrates the pin factory, where division of labor and economies of scale allow ten workers to make thousands of times more pins a day than they could working separately. Smith goes on to celebrate the market, which allows the same division of labor and economies of scale to proceed on a grand scale, engaging thousands of enterprises in the production of a single good.

The contradiction? It takes many competitors to make markets function. Yet if firms face increasing returns to scale, they will consolidate into monopolies. So to maintain a theory of competitive markets, model-builders have felt forced to assume that firms face diminishing returns to scale--banishing the pin factory to "an 'underground river' in economic thought."

In Warsh's account, recent developments in growth theory have resolved the contradiction. Krugman writes, "Economists had finally found ways to talk about the Pin Factory with the rigor needed to make it respectable. One after another, fields from industrial organization to international trade to economic development and urban economics were transformed."

I am only slightly familiar with this literature. However, I long ago resolved the contradiction, at least to my own satisfaction, in models for my dissertation: I assumed that diseconomies of scale in supervision ultimately overpower technological economies of scale, setting limits on firm size. I look forward to Warsh's book.

Bubble, CPI and CEO Bonuses
April 30, 2006

Mike Hudson has scored the cover story in the May Harper's: "The New Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse." Our hapless middle class real estate speculators, or innocent homebuyers, pursue the dream of "economic freedom," taking on ever greater debt to snap up appreciating real estate. But eventually, when appreciation reverses while interest rates rise, they will wind up in turn pursued by the dragon of "negative equity."

To put off the dragon, new Fed Chair Ben Bernanke hints at easing the upward ratcheting of the Fed Funds rate. After all Consumer Price Index increases are only running around 3.5%. So what's to worry?

The US Bureau of Labor Statistics constructs general, regional and specialized consumer price indices by pricing typical "market baskets" of goods in different regions of the US. As Mason Gaffney has pointed out, the BLS biases these "market baskets" downward by omitting the price of housing-substituting a "rental" estimate. www.masongaffney.org/essays/ Denying_Inflation--Who_Why_and_How_12_2005.pdf.

But it's worse than that. According to Ricardo Reis of Princeton, the "market basket" method itself is outdated and misleading. It does not allow for substitution: the fact that if the price of one good rises consumers will switch to another; and if they expect a price to rise or fall, they will accelerate or postpone purchases. Reis constructs a "dynamic price index," or DPI. The DPI is forward-looking. It answers the question: "by what percent must my net worth change so that I will be just as well off next year as I am today?" The most important influences are housing and bond prices. While the DPI roughly tracked the CPI over the last thirty years, in recent years it has sharply diverged. In the four years to 2004, the DPI rose an annual average of 7.4%, while the CPI rose only 2.3%. See www.princeton.edu/~rreis/papers.html#DPI.

Note that over a 10 year period, an annual percentage increase of 2.3% comes to about 26%. An annual percentage increase of 7.4% comes to about 104%. President Bush may have failed to "privatize" Social Security, but the BLS statisticians quietly gnaw it away in the background.

Meanwhile, in "A new gilded age," Martin Wolf of the Financial Times reports recent research on growing concentration of income and wealth. Curiously, "the share of non-wage income in the incomes of the top 1 per cent of income recipients has also been falling. In 2001, it was 50 per cent, down from 61 per cent in 1966. For the top 0.1 per cent, it fell from 72 per cent of incomes to 60 per cent." http://news.ft.com/cms/s/ 76def9b0-d481-11da-a357-0000779e2340.html.

Has the property share of top incomes truly fallen? Or has property income merely ducked out of sight in tax loopholes and unrealized capital gains? And should the obscene pay packages of top CEO's really be counted as labor income, or as income from control of property?

Of course following 1929 they all collapsed together: house prices, CPI and CEO bonuses.

Helping People Help Themselves
April 4, 2006

David Ellerman's new book, Helping People Help Themselves: From the World Bank to an Alternative Philosophy of Development Assistance, (forward by Albert O. Hirschman) is finally out in affordable paperback. Yay!

"The best kind of help to others, whenever possible, is indirect, and consists in such modifications of the conditions of life, of the general level of subsistence, as enables them independently to help themselves."

Ellerman begins with this quote from John Dewey. A former economist at the World Bank himself, and assistant to Joseph Stiglitz, he nonetheless devotes most of his book not to the bank, but to the theory of helping. Here's how he frames the problem:

There is a "helper" and a "doer," who may be a parent and child, a teacher and student, a supervisor and employee, or a development "expert" and a third-world government. As we all know in the first three cases, if the helper tries to impose answers on the doer-child, student or employee-the effort will backfire. Carrots will produce superficial compliance and passivity; sticks will produce overt or covert resistance. In neither case will the doer learn or take initiative.

Ellerman organizes the wisdom of key thinkers like Albert Hirschman, Paolo Freire and Carl Rogers into five recommendations for successful help, "two Don'ts" and "three Dos."

1. First don't: Don't override self-help capacity with social-engineering.

2. Second don't: Don't undercut self-help capacity with benevolent aid.

3. First do: Start from where the doers are.

4. Second do: See the world through the doers' eyes.

5. Third do: Respect the autonomy of the doers.

This all seems pretty simple, almost obvious. Yet it is fiendishly difficult to carry out, and for large organizations like the World Bank, impossible. For the Bank necessarily relies on carrots and sticks, that is, it lends money and expects "results." Bank projects inevitably do more harm than good-even with enlightened and well-intentioned leaders like former World Bank President, James Wolfensohn. Ellerman describes the preposterous privatization-by-voucher imposed on Russia that sent its economy into a tailspin, at the same time that China was taking off by careful local experimentation.

I was struck, as I read the book, by how much that's going wrong around us results from failure to follow the dos and don'ts. Rumsfeld, intent on slimming down the bloated military, sent insufficient and ill-equipped troops to Iraq. Then, as detailed by Naomi Klein in Harper's, Bremer set out to "privatize" the Iraqi economy by fiat, creating massive unemployment. (www.harpers.org/BaghdadYearZero.html.) And at home, there's "No Child Left Behind," a program of testing guaranteed to demoralize teachers and to kill children's interest in learning.

Next on my reading list is William Easterly's new book, The White Man's Burden Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good. This book promises more detail on how official aid has gone wrong, and on how small-scale, networked, bottom-up projects can and do succeed.

Is Racism Increasing?
Saturday, March 25, 2006

Katrina revealed a black population marooned in third-world poverty, lacking work, education and health care. My niece volunteers in a clinic in New Orleans Algiers district, which didn't flood. She cares for adults, chronically ill with diabetes, high blood pressure, heart disease, or emphysema-who have never previously seen a doctor. (See www.commongroundrelief.org.)

Last week the New York Times reported:

"The share of young black men [ages 22-30] without jobs has climbed relentlessly, with only a slight pause during the economic peak of the late 1990's. In 2000, 65 percent of black male high school dropouts in their 20's were jobless - that is, unable to find work, not seeking it or incarcerated. By 2004, the share had grown to 72 percent, compared with 34 percent of white and 19 percent of Hispanic dropouts. Even when high school graduates were included, half of black men in their 20's were jobless in 2004, up from 46 percent in 2000.

"Incarceration rates climbed in the 1990's and reached historic highs in the past few years. In 1995, 16 percent of black men in their 20's who did not attend college were in jail or prison; by 2004, 21 percent were incarcerated. By their mid-30's, 6 in 10 black men who had dropped out of school had spent time in prison.

"In the inner cities, more than half of all black men do not finish high school." (NYT 2006/03/20, "Plight Deepens for Black Men, Studies Warn," by Erik Ekholm.)

The US has the developed world's highest incarceration rate. We sentence men (and women) to ever longer terms, for offenses like drug possession that would not merit prison or even arrest in other western societies. Arrest, prosecution and sentencing are racially biased. In many states by law or practice, ex-felons cannot vote. (See www.sentencingproject.org.) States increasingly impose court costs on ex-convicts. In consequence, some defendants may plead guilty just to avoid debt, and parolees may be reincarcerated for falling behind on payments. (NYT 2006/02/23, "Debt to Society Is Least of Costs for Ex-Convicts," by Adam Liptak)

Meanwhile, Jonathan Kozol has just published The Shame of the Nation: The Restoration of Apartheid Schooling in America. "It's not simply that segregation has returned with a vengeance to public education; it's worse than it's been at any time since 1968." (Interview in Extra! March/April 2006, www.fair.org).

Increasing Racism? Or maybe a consequence of growing inequality of wealth and income-driven by a system of taxes, subsidies and regulation that directs resources to the top. The system varies from state to state; it's no coincidence that the black poverty trap of New Orleans lies in Louisiana, which vies with Mississippi for most unequal state.

Growing inequality drives growing housing segregation by wealth and class, followed by growing psychological segregation. It reduces empathy between classes. It makes it easier for officials to withdraw services from poorer neighborhoods, and easier for employers to hire their own kind. It leaves the cities' young black men isolated and bitter.

To fight racism, we must also challenge the rigged system that has now pushed wealth inequality back up to levels last seen in 1929.

Coming in May from United for a Fair Economy, www.faireconomy.org, The Color of Wealth: The Story Behind the U.S. Racial Wealth Divide.

Gangsta-nomics at Harvard
Sunday, March 12, 2006

"Just as opening the St. Lawrence River to the Great Lakes produced both great economic benefits (the North American Midwest could export grains, iron ore, machinery to the world on ocean-going ships) and some undesirable side effects as well (the introduction into the lake system of lamprey eels and zebra mussels), so sending a team of Harvard University experts to advise the Russian government of Boris Yeltsin in the 1990s improved markets in the former Soviet republic, but at the cost of importing to Harvard certain unattractive Russian folkways..." writes David Warsh in the March 5 newsletter at economicprincipals.com

Warsh refers to "How Harvard Lost Russia," a real-life high finance crime thriller by David McClintick in the January 13 issue of Institutional Investor, attached. In brief, Harvard economics professor Andrei Shleifer, his associate and their wives engaged in egregious self-dealing while advising Russians under a US AID contract. "In August, after years of litigation, Harvard, Shleifer and others agreed to pay at least $31 million to settle a lawsuit brought by the U.S. government. Harvard had been charged with breach of contract, Shleifer and an associate, Jonathan Hay, with conspiracy to defraud the U.S. government. Shleifer remains a faculty member in good standing. Colleagues say that is because he is a close longtime friend and collaborator of [Larry] Summers."

As Warsh notes, "The Marketplace of Perceptions" by Craig Lambert in the latest issue of Harvard Magazine celebrates--with no hint of irony--Shleifer and Summers' genius in applying behavioral economics to the markets. It's a good article; finally the economics profession is catching up with those of us who long ago concluded that the species homo economicus does not include landowners.

According to Warsh, McClintick's article has produced an explosion of outrage at Harvard, with accusations of anti-Semitism, notably from Shleifer's student, urban economist Edward Glaeser. Glaeser is subject of an adulatory piece, "Home Economics," in last week's Sunday March 5 New York Times Magazine. Glaeser comes down hard on zoning and other regulations for messing up urban land markets, but the review gives no hint that he has ever considered the effect of tax and subsidy policies. He has advocated abandoning New Orleans; he has also discovered why everyone doesn't immediately leave declining areas like Detroit: housing is durable!

Two other worthwhile articles in the same Sunday issue: "Amsterdam House: This Very Very Old House" by Russell Shorto, on the long run Herrengracht house price index, based on 400 year old houses on Amsterdam's fashionable "Gentlemen's Canal." The index, cited by Robert Shiller, suggests that house prices are also subject to "irrational exuberance" and in the long run must fall. Then there's "Tax Break: Who Needs the Mortgage Interest Deduction," how the mortgage interest deduction dramatically favors the wealthy, by Roger Lowenstein. (He's the author of the all-time best financial thriller, When Genius Failed, the story of Long Term Capital Management.)

Meanwhile, Jeffrey Saks, Shleifer's boss during the Russian shenanigans, has decamped to Columbia. In "Investing in Development: Here We Go Again!", David Ellerman writes, "One of the world's most gifted self-publicists, Jeffrey Sachs, has yet again burst into the public spotlight with a blitz of reports, books, and articles (including a Time magazine cover story) resulting from his role as the director of the UN's Millennium Project..." Continued in attachment, published in NORRAG News.

Ellerman, a former World Bank economist, himself has a new book out on development: Helping People Help Themselves: From the World Bank to an Alternative Philosophy of Development Assistance (Evolving Values for a Capitalist World), forward by Albert O Hirschman. Now in paperback, $24.95 on Amazon.

Thanks to David Ellerman and Mason Gaffney for the Harvard gossip.

AGS