Most of Nato’s members, including a newly exhausted Britain, blithely undershoot the group’s defence spending target of 2 per cent of gross domestic product. Nato’s founding purpose was to “keep the Russians out, the Americans in, and Germany down”, as the quip went. Only the German rationale has changed. In terms of foreign policy, however, Germany prefers to keep itself down. In spite of Russia’s annexation of Crimea last year, its defence budget is just 1.2 per cent of GDP.

It is possible that events will take a happier course. Greece may turn things around. Russia might decide to pull back from its incursions into central Europe. Should things continue to slide, however, America’s voice will need to become louder. Richard Nixon once warned of the US turning into a “pitiful, helpless, giant”.

In few places do his words fit better than in Europe today. In the past the US was indispensable. Today it is too easy to ignore.

That is from Edward G. Luce at the FT.

That is the topic of a new Mercatus study by Eileen Norcross.  The five in best shape?:

Alaska, North Dakota, South Dakota, Nebraska, and Florida.

The five in the worst shape are:

Illinois, New Jersey, Massachusetts, Connecticut, and New York

Tuesday assorted links

by on July 7, 2015 at 11:54 am in Uncategorized | Permalink

1. Citing benefits doesn’t really address the wage stagnation puzzle.

2. Do cortisol and testosterone destabilize markets?

3. Why are so many people so averse to GMOs?

4. Daron Acemoglu on effective altruism.

5. Amartya Sen was trending on Twitter; please don’t think I understand or endorse any of those links, which mostly concern Indian higher education.

6. An interesting, Buiter-led proposal to bail out Greek banks but not the Greek state; maybe impossible to pull off but worthy of consideration.  And the Calomiris forced redenomination proposal.

Federal Judge Alex Kozinski (9th circuit) has written a scathing indictment of the US justice system. Kozinski starts out discussing a number of myths such as that eyewitness testimony or forensic evidence is highly reliable. Business Insider gives a quick rundown of this part of the paper but they clearly didn’t read very far because the incendiary material comes later.

Kozinski, writing in part based on his personal experience as a judge, says that prosecutors are too often running roughshod over justice:

…there are disturbing indications that a non-trivial number of prosecutors—and sometimes entire prosecutorial offices— engage in misconduct that seriously undermines the fairness of criminal trials. The misconduct ranges from misleading the jury, to outright lying in court and tacitly acquiescing or actively participating in the presentation of false evidence by police.

Discussing the Ted Stevens case he writes

Did Justice Department lawyers rend their garments and place ashes on their head to mourn this violation of their most fundamental duty of candor and fairness? No way, no how. Instead, the government argued strenuously that its ill-gotten conviction should stand because boys will be boys and the evidence wasn’t material to the case anyway.

…Instead of contrition, what we have seen is Justice Department officials of the highest rank suffering torn glenoid labrums from furiously patting themselves on the back for having “done the right thing.”

Under Imbler v. Pachtman prosecutors have absolute immunity from damages liability from misconduct committed in the course of their work. Kozinski is outraged:

Under Imbler, prosecutors cannot be held liable, no matter how badly they misbehave, for actions such as withholding exculpatory evidence, introducing fabricated evidence, knowingly presenting perjured testimony and bringing charges for which there is no credible evidence. All are immune from liability. A defense lawyer who did any such things (or their equivalents) would soon find himself disbarred and playing house with Bubba. The Imbler majority seemed reassured by the possibility that rogue prosecutors will be subject to other constraints.

…This argument was dubious in 1976 and is absurd today. Who exactly is going to prosecute prosecutors? Despite numerous cases where prosecutors have committed willful misconduct, costing innocent defendants decades of their lives, I am aware of only two who have been criminally prosecuted for it; they spent a total of six days behind bars.

…What kind of signal does this send to young prosecutors who are out to make a name for themselves? I think it signals that they can be as reckless and self-serving as they want, and if they get caught, nothing bad will happen to them. Imbler and Van de Kamp should be overruled. It makes no sense to give police, who often have to act in high pressure situations where their lives may be in danger, only qualified immunity while giving prosecutors absolute immunity. It is a disparity that can only be explained by the fact that prosecutors and judges are all part of the legal profession and it’s natural enough to empathize with people who are just like you. If the Supreme Court won’t overrule Imbler and Van de Kamp, Congress is free to do it by amending 42 U.S.C. § 1983.

Read the whole thing, there is a lot more.

What I’ve been reading, and viewing

by on July 7, 2015 at 1:37 am in Books, Film | Permalink

1. Stephen Witt, How Music Got Free: The End of an Industry, the Turn of the Century, and the Patient Zero of Piracy.  Most of all, Learned how much hard work and ingenuity was behind the MP3 standard, in any case a good and useful book.

2. P.W. Singer and August Cole, Ghost Fleet: A Novel of the Next World War.  More of a speculative exercise than a traditional novel — what if the Chinese could beat the Americans? — but still a fun read and a book that people are talking about at high levels.

3. Vendela Vida, The Diver’s Clothes Lie Empty: A Novel.  To the point and lots of fun.  A recently divorced woman travels to Morocco and surprises start to happen.  Occupies that intriguing space between “not deep” but also “not superficial.”

4. Elena Ferrante, My Brilliant Friend.  This writer has been called a “female Neapolitan Knausgaard,” arguably a deliberate oxymoron.  It took me my second read through to “get it,” which I suppose means I am not the natural target audience.  But I am very glad I gave it that second read, and this is in fact the female Neapolitan Knausgaard, in four volumes by the way.

5. Red Army, a film documentary about the hockey team of the Soviet Red Army, its rise and fall.  Chock full of social science, I loved this movie, philosophical too, even though I am not especially interested in hockey.  One of my favorite documentaries.

Skywatchers hoping to see a shooting star may soon be able to order them on demand.

A group of Japanese scientists say they have a shooting-star secret formula — an undisclosed chemical mixture packed into tiny, inch-wide balls that the team hopes to eject from a satellite to create on-demand meteor showers, AFP reports.

A Japanese start-up company called ALE is partnering with researchers at multiple universities to create the artificial meteor showers, which will cost around $8,100 per meteor for buyers. The researchers said the manufactured meteors would be bright enough to be visible even in areas with light pollution, like Tokyo, assuming clear weather.

The story is here, from Sarah Lewin, and for the pointer I thank Michael Komaransky.

From the FT:

He was replaced by Euclid Tsakalotos, an Oxford-educated Marxist who is considered more pragmatic than the hardline Mr Varoufakis.

And this:

Mr Tsipras also persuaded other Greek political leaders, following seven hours of talks, to back a joint statement that Sunday’s rejection of bailout terms was not “a mandate of rupture” with the eurozone.

WWII Panther tank seized from pensioner’s cellar

It was to get the tank out of the cellar, so hard that modern tanks were needed.  Then there is this:

It seems the tank’s presence wasn’t much of a secret locally. Several German media reports mention that residents had seen the man driving it around town about 30 years ago. “He was chugging around in it during the snow catastrophe in 1978,” Mayor Alexander Orth was quoted as saying. But he later added: “I took this to be the eccentricity of an old man, but it looks like there’s more to it than that.”

He had an anti-aircraft gun stored away too.  For the pointer I thank Andrew Farrant.

Monday assorted links

by on July 6, 2015 at 12:12 pm in Uncategorized | Permalink

1. Trolls are no longer welcome in New Zealand.

2. Can a correlation between intelligence and prosociality explain the prevalence of left wing views in academia?  Not my view, but an interesting hypothesis.

3. Feuding ukelele bands battle it out in court.

4. Who owns your face?

5. Big health insurance rate increases are due for 2016.

6. Dune fifty years later.

7. Christopher Balding on Chinese market mania.

From his Facebook page:

So Greece said no to a plan that was no longer on the table. Paul Krugman and Jeffrey Sachs celebrate the decision. They hope to get a debt write-down for Greece. I honestly do not understand their position. To me, the Greek debt is pretty much irrelevant. The country is not paying a single euro in interest on its debt in net terms. It has been running primary deficits ( a shortage of revenues over spending excluding interest payments). Its debt is high but the interest rate is super-low, courtesy of European taxpayers.

If Greece writes down its debts, its banks will be bankrupted. The ECB will not be able to bail them out and the banking freeze will continue, accelerating the economic collapse. I don’t see how the banks can be bailed out in a week and I don’t see how the economy can avoid the catastrophe. Sachs in Project Syndicate says that Greece has the right to remain in the euro. I don’t know what that means in practical terms. The Greeks may be as euphoric with this “victory” as Europeans were in the summer of 1914.

By the way, here is Thomas Piketty on Germany.

One striking feature of the Thursday labor market report was the mix of declining unemployment — now down to 5.3 percent — and continuing sluggish wages, not to mention low rates of price inflation; read Neil Irwin.  Normally we would expect all the demands for those new hires to boost wages more.  What is going on?

I sometimes hear it argued that there is a good news aspect to this development, suggesting that the absence of wage pressures indicates there are many more people to be hired.  I wonder if this argument makes sense.  If we don’t observe a worker willing to take a job for current wages, how is that a cause for optimism about future reservation wages for those same workers?  I would think it implies some slight pessimism about whether those individuals will end up working again.  I’m not sure those workers are going to be worth so much more in the market anytime soon.

Just to jog your memory, the data do not indicate much of a stable Phillips curve.

Alternatively, you might think the employment of those remaining unemployed workers is constrained by demand side forces.  I find that unlikely at this late date in the recovery but even so, this demand side hypothesis also gives no particular reason for optimism, given a very conservative Fed.

Liquidity trap models do not explain why the rate of price inflation continues to be pretty much where the Fed wants it to be, and thus they also do not explain this constellation of market forces.  There is too much labor market recovery going on.

I find the most plausible explanation to be a version of The Great Reset.  A lot of workers have been revalued by the market downwards, but most incumbents are not taking pay cuts in real terms because they have insider power.  New hires, however, are not granted equally favorable terms.  If wages are steady as new hires pick up, this is in fact upward pressure relative to the counterfactual that otherwise those wages would be falling.  Flat wage are indeed what “things heated up” looks like, and it’s a good thing we had that gas price decline to bump real wages up just a bit.

On the whole, that’s not good news either.

And I do mean now.  With the primary surplus gone, this means further cuts in government spending.  Confiscation of bank deposits and banks flat out of cash.  Continuation of capital controls.  Difficulties in consummating international or even domestic transactions.  Problems in paying for fuel, seeds, fertilizer, and medicines.

Austerity now.

Here are some possible Greek plans, but everything remains up in the air.  If nothing else, I give them credit for their stones.  Let’s hope this works out in the longer run, it sure won’t over the course of the next year or two.

Wintergerst says introducing a new currency typically takes at least six months, and sometimes as long as two years. Artists must draw the notes, security experts then add anti-counterfeiting measures such as watermarks and special inks, and bank officials need to plan how much of each denomination is needed and get the money to banks.

“The most challenging thing was to establish efficient distribution and make sure the new currency was available everywhere,” said Boris Raguz, head of the Treasury Directory at Croatia’s central bank, who in 1993 oversaw the introduction of the country’s currency, the kuna, after the breakup of Yugoslavia.

That is from Matthew Campbell and Alex Webb.  Here is a declaration signed by 246 Greek professors — can you guess what it says?

Keep in mind that things can go badly under either a yes or no vote today.  (I am not even sure the referendum result will make such a difference, since it is all in the subsequent deal, or lack thereof, and the terms would be different anyway.)  Yet I do not think a hyperinflation is the likely result.

As things stand, Greece could run out of euros in well under a week.  That is a deflationary pressure.  To be sure, Greek companies are already starting to print up various kinds of scrip.  But those will be media of exchange priced in terms of euros, not new media of account.  The script will to some extent stabilize against deflationary pressures, by preventing a total economic collapse, but they won’t themselves cause hyperinflation.  If one company prints up too much scrip, the value of that brand will fall in terms of euros.  In contrast, a “domestic” medium of account is usually firmly entrenched in a classic hyperinflation.

Greece may eventually move away from the euro as a medium of account, but that likely would happen only once an alternative payment medium — perhaps the new drachma — is relatively stable in value.  Again, there is no expected hyperinflation.  Deposit confiscation will be required long before hyperinflation is an option, do note that is not exactly a reassuring thought.  In fact hyperinflation is too slow and inefficient a way to steal from the citizenry in this setting.

An interesting set of issues revolves around bill prepayment.  If you didn’t know, electronic transfers within the country are still allowed, so everyone is trying to prepay bills rather than receive a haircut on their deposits (see the link above).  Various events could speed up or slow down these pressures, for instance greater stability combined with outside aid could limit deposit confiscation risk and thus lower bank deposit velocity.  Alternatively, greater risk could cut either way.  It could lead to more prepayment and higher velocity, but it also could induce suppliers to take actions to make prepayment harder.  There are some complex options here, though still I don’t see them giving rise to a hyperinflation.  Again, the key point is that even under Grexit scenarios the euro remains a medium of account for a while still, and deflationary deposit confiscation will be needed before hyperinflation could extract enough seigniorage.

As Frances Coppola points out, Grexit is a process not an event and many of the early and indeed intermediate steps already are underway.

One of the most striking aspects of the Greek situation is just how much the Greek government has lost the public relations battle.  They have lost it among the social democracies, and they have lost it most of all with the other small countries in Europe.  They retain some sympathy in the American government, but we are not willing to put any money on the table and basically we want the European Union to clean up the problems for us.

If you look at the progressive economists, Stiglitz, Krugman, Piketty and Sachs all recommend a “no” vote on the referendum.  Though they would not frame it this way, they are advocating a kind of extra austerity for the purposes of a greater long-run good; Greece’s primary surplus vanished some time ago, so signaling a break with Europe will only make matters tougher.  You could call this “properly mood affiliated austerity,” cloaked by strange presumptions about bargaining, namely the view that a “no” vote will induce a more favorable offer.  It seems, with their on the ground understanding, most Greek economists are strongly in the “yes” camp.

The progressives do have some good points and I absolutely favor significant debt relief for Greece.  That said, the Greek government has handled the last few months so badly it really is incumbent on them to show they will do better.  I don’t see many signs in that direction, quite the contrary, and any reasonable democratic government will ask for Greek institutional progress before putting up much more in the way of money.  The entire handling of Greferendum should alert the progressives that they have been egging on the wrong horse; the heroic Hugo Dixon nails it.

I take the progressive “clustering out on a limb” here as a sign that, for better or worse, progressivism as an ideology has reached and indeed gone beyond its high water mark.  The progressives are siding with a corrupt, clientist state, which won’t cut its defense spending down to Nato norms, against some admittedly imperfect social democracies, thereby sustaining the meme of powerful aggressor vs. victim, Arnold Kling telephone.

Interfluidity has an interesting but quite wrong post on how to think about Greece.  International relations simply could not be run on the principles he advocates, most of all in conjunction with democratic nation states.  His weakest point becomes evident when he writes:

Among creditors, a big catchphrase now is “moral hazard”. We cannot be too kind to Greece, we cannot forgive their debt with few string attached, because what kind of precedent would that set? If bad borrowers, other sovereigns, got the idea that they can overborrow without consequence, if Spanish and Portuguese populists perceive perhaps a better deal is on offer, they might demand that. They might continue to borrow and expect forgiveness, and where would it end except for the bankruptcy of the good Europeans who actually produce and save?

The nerve. The fucking nerve. Lenders, having been made nearly whole on their ill-conceived, profit-motivated punts, now fear that if anybody is nice to somebody who doesn’t deserve it, where will it end? I’d resort to that cliché about chutspa, the kid who murders his parents then seeks leniency ‘cuz he’s an orphan. But it’s really too cute for the occasion.

That’s a non-answer, with anger filling in for the required substance as to why Germany and others should allow this.  “Your government is making things much worse.  If you want to borrow so much more from us, you have to play by the rules and also stop spitting in our face and calling us Nazis and terrorists while negotiating” is more relevant — and yes relevant is the right word here — than any point he makes.

A political program has to be something that voters could at least potentially believe, and international negotiations therefore cannot stray too far from common-sense morality, including when it comes to creditor-debtor relations.  That is the point which today’s progressive economists are running away from as fast as is humanly possible.  And for all the Buchanan-esque and public choice points about “rules of the game” this one about common sense morality unfortunately has ended up as the most important.

Look at this way: if you lost a public relations battle to Germany, you are probably doing something very badly wrong.