EclectEcon

More on Ban the Penny

I have been urging the Cdn gubmnt to stop minting pennies for a long time. When former student, Scoop, saw this, he quickly penned the following press release:

UWO prof supports campaign to scrap the penny

31 March 2008



University of Western Ontario Economics Professor John Palmer today threw his support behind Winnipeg MP Pat Martin's Private Member's Bill to scrap the penny.



"We need to scrap the penny – it doesn't even have value as scrap metal. The simple fact is that prices and incomes are somewhere between 20 and 100 times what they were a century ago, and there is no reason to keep meaningless little coins like the penny and even the nickel around -- they won't buy much, if anything, anyway," Palmer said. "With so few of them used in transactions, and a copper and zinc mines' worth of pennies sitting stagnant in jars, it's time to relegate the penny to its proper place – the history books next to half-penny and the farthing. With the reality of today's economy, the dime is the new penny."



Palmer has been campaigning to get rid of the penny for over two decades. If the penny and the nickel were scrapped, he said it would be easy enough to round prices to the nearest decimal point – or dime.



"The minting of pennies and nickels takes up valuable resources – and mining and smelting of the metals, not to mention the greenhouse gas emissions generated creating and transporting these useless coins, are a burden on the environment," Palmer said. "I am pleased MP Martin has joined the ban the penny campaign – and I hope that all Canadian MPs will see the wisdom of his useful bill to scrap a useless coin."

The Toronto Blue Jays

My prediction, which will probably lose me several friends, is that the Trono (pronounced Trah-nah) Blue Jays will win 79 games this season. Here's hoping that's just pessimism on my part.

Tyr - the God of Anti-Economists

Harry Truman is reputed to have once said,

Somebody bring me a one-handed economist! I'm tired of hearing, "On the one hand this, on the other hand that..."

Tyr was a one-handed Norse god,

The t-rune ... is named after Tyr, and was identified with this god., the reconstructed Proto-Germanic name is Tîwaz. The rune is sometimes also referred to as Teiwaz, or spelling variants.

Judging from the rune portrayed in Wikipedia, one wonders if that's all Tyr was missing:

Virgins, Suicide Bombers

You know those virgins allegedly waiting for the suicide bombers? Here they are in a Google video.

Islamic Terrorists in Canada

From the Trono Star (h/t to BenS):

Person 3: "What happens, what happens at the Parliament?"

Person 1: "We go and kill everybody."

Person 3: "And then what?"

Informant: "And then read about it ..."

Person 1: "We get victory."

Informant: "And take, uh, Paul, um, what's his name ____. Paul loser."

Person 1: "Paul Martin."

Person 3: "Yeah."

Person 1: "Nah, I wish he had won guy."

Informant: "What you . . . what you talkin' about?"

Person 1: "Now it's the other guy, Harper."

Externalities: An Overview

BenS recently asked me about the term "externalities". Here is my reply:

Externalities are the effects imposed on others but not taken into account by the person engaging in some action. The best examples are (1) pollution, a negative externality and (2) personal flower gardens at the front of a house, a positive externality.



In the case of negative externalities, people do too much of whatever it is because they don't consider all the costs they are inflicting on others. In the case of positive externalities, people do too little of whatever it is because they don't consider all the benefits conferred upon others.



A standard policy prescription is to tax activities that generate negative externalities (hence the support by many economists for raising gasoline taxes even higher) and to subsidize activities that generate positive externalities.



Some (many?) people refer to externalities as "market failures", which they are, relative to some idealized and impossible norm. These same people then illogically conclude that "therefore" it follows the gubmnt should intervene in the marketplace (a la the tax/subsidy schemes or other options). Of course such illogic fails to consider the flipside of the problem: gubmnt failure, wherein politicians and bureaucrats create more inefficiencies than they solve.



Applying these prescriptions to ethanol would mean we'd tax the snot out of that junk.



If (a very big if) CO2 emissions cause global warming, then taxing carbon-based fuels might be an appropriate solution. But this type of tax/subsidy scheme might be less efficient than just building dikes and levies. I.e., the tax/subsidy solutions which are standard (first suggested by Pigou, and hence called Pigou or Pigouvian taxes) are not always the best option because they don't consider other possibilities. Ronald Coase first pointed this out in a famous article in 1960, but it was so obtuse that many people have struggled to grasp this point.

Fitna, the Movie

Geert Wilders' film Fitna, a critical examination of Islamism and the Quran, is now available on the internet (e.g. see here). For reviews, see this by Eugene Volokh or this from Reuters.



Update: For more, see this, especially see the statment from LiveLeak, which is hosting the video, and see Update III:

I just watched Geert Wilders’ film, Fitna, The Movie. My initial reaction is a yawn. No surprise, of course. ...



Anyone who has seen terrorist propaganda films is familiar with most of the scenes and most of the disgusting conflations of the Quran with acts of violence, murder, kidnapping and anti-semitism. Such behavior has been condemned resoundingly among Muslims. Those that use the Quran for illegitimate and criminal ends should be punished by the fullest extent of the law.



What I’m really wondering: is Wilders’ protesting against Islam or the monopoly extremists already have over grainy, low-budget, youtube videos? The only difference I see is that Wilders plays the best of Western classical music — an insult to the legacy of Tchaikovsky — than death chants.

Good Looks and Universities: Is there a Selection Bias?

Yesterday, Craig Newmark linked to this article which rates the attractiveness of the women on various university campuses and then ranks the universities from 1 - 50.



As I scanned through the article to which he linked (yes, scanned; I'm old enough that there's no point in lingering), it struck me that the top 10 list includes only southern schools. Further, the schools ranked 11th - 20th are all from the south or from the west coast.



Where, I wondered, are the schools from the Midwest ranked? And sure enough, there were several in the list from 21st - 30th.



Why might the Big Ten and similar schools be ranked so low? To say there are fewer or less attractive women in such schools is not an adequate answer; the question is, if so, why?



Is there a selection bias in the admissions policies of southern schools (submit a photo with your application)?



Is it possible that women who are very attractive prefer warmer climates to show off their attractiveness, whereas those less well-endowed(?) are happy to attend universities where the weather mandates covering up more [with the attendant "I don't much care anymore" attitude by young males when the warm weather finally arrives]? If so, what will be the impact of global warming on these rankings in the future?



Is it possible that the selection bias arises because the women in the Midwest are every bit as attractive as elsewhere but there are fewer photos of them from which to judge because there is less warm weather in the Midwest? [an informal poll of colleagues tells me there's much more cleavage seen at schools in warmer climates, so this possibility has some merit]



Is it possible that the women in the Midwest and North are every bit as attractive, potentially, as the women of the South and West, but they choose to invest less in the raw materials of looks and more in the raw materials of other forms of human capital? If so, why?



Is it possible that there is an inverse correlation between female attractiveness and female intelligence and that the schools in the Midwest are better schools, attracting (!) smarter but less attractive women? and related,



Is it possible that northern men care less about superficial beauty, preferring the inner depths of knowledge and personality [yeah, sure], and hence the women respond to those incentives accordingly?



Or is it possible that southern men care more about superficial beauty, ...?



Or do Northern and Midwestern schools for some other reason attract women who, by the standards of the piece to which Craig Newmark linked, are less attractive?



How would Canadian universities come out in this ranking? Are the most beautiful women more likely to attend schools on the west coast? Rumour has it that Country Club U [aka UWO] in Ontario would do very well in this ranking, though.



Addendum: A radio commentator I happened to hear last evening was very confident that many of the photos accompanying the original article were of models wearing clothing with the school logos. If so, that raises other possibilities, such as:



Are administrators of southern and western schools able to hire better-looking models? If so, why? Is it because better-looking models prefer to live in the south or west coast? And, again, if so, why them and not the less attractive models?

Global Warming and Climate Change:The Skeptics Continue to Gain Strength

It is amazing/revealing that so many scientists who once accepted the claims that human discharge of C02 into the atmosphere is causing global warming have changed their minds. From the Adam Smith Blog,

A new 'Manhattan Declaration on Climate Change' was initiated stating "that carbon dioxide (CO2) is not a pollutant but rather a necessity for all life." Senator Inhofe’s register, put together by the USA Senate's Environment and Public Works Committee, already contains more than 500 scientists who previously endorsed the IPCC views but have meanwhile changed their mind. The sceptics have reached a consensus on four key points:



1) The Earth is currently well within natural climate variability. 2) Almost all climate fear is generated by unproven computer model predictions. 3) An abundance of peer-reviewed studies continue to debunk rising CO2 fears and, 4) "Consensus" has been manufactured for political, not scientific purposes.



Contrary to expectations the media coverage was excellent – that’s the new momentum.

And let me add that even if those who disagree with the skeptics are correct, it might be cheaper and more efficient to deal with the effects of global warming rather than try to stop it.

Should We Really Call It a Recession if We're Moving toward a New LR Equilibrium?

Every time I look at the data, it seems pretty clear to me that if aggregate demand is pushed upward, then in the short run the economy will experience reduced unemployment rates and (often with a lag) higher rates of inflation. During such a period, the unemployment rate drops below the natural unemployment rate (or the NAIRU), and that seems pretty much like what the North American economies were experiencing during the past few years. We had unemployment rates lower than we had seen for the past 25-30 years. These numbers make it seem that our economies had been pumped up by the spending supported with loose credit conditions.



We learned in the late 70s and 80s that we cannot sustain these low unemployment rates by continuing to inflate aggregate demand. Eventually the unemployment rates rise back toward their natural rates. This process of having our unemployment rates rise as we slide along the short-run Phillips Curve is not the same thing as an inadequate-aggregate-demand-induced recession; rather, it is a reversion to long-run equilibrium. Furthermore, any attempts to head off this reversion to the long-run are likely to be highly inflationary. Both the Fed and the Bank of Canada will have to be very careful not to over-inflate our economies in a futile attempt to reduce or hold unemployment below the natural rates.



Making things worse, it is likely that the long-run vertical Phillips Curve is shifting to the right (increasing the natural unemployment rate), at least temporarily, as the economies suffer some short-run aggregate supply shocks:

1. The liquidity crisis is not just affecting aggregate demand; it is accompanied by a decline in the production of financial intermediation, a supply effect (cf Tyler Cowen, with thanks to Gabriel Mihalache).
2. Rapid growth in the developing economies has led to a tremendous increase in their demand for commodities. This, in turn, means the prices of these goods are higher for North Americans, which has the same effect as any other supply shock in the economy [h/t to BrianF for this one].

Both of these supply shocks will tend to raise the unemployment rate, at least temporarily (for several years?) above what would otherwise be the natural unemployment rate. And the sad thing is that the central banks will try to deal with them by increasing aggregate demand, but their doing so will not help the unemployment picture much, but will put more upward pressure on the rate of inflation.

Open Message to Geert Wilders: I'll do it.

From Reuters:

AMSTERDAM, March 23 (Reuters) - A U.S.-based web service, which Islam critic and Dutch right-wing lawmaker Geert Wilders planned to use to show his film critical of the Koran, said on Saturday that it had inactivated the site due to complaints.



"This site has been suspended while Network Solutions is investigating whether the site's content is in violation of the Network Solutions Acceptable Use Policy," the company said on the site www.fitnathemovie.com.



Wilders, who has given few details about his 15-minute film, has said he plans to release 'Fitna' on the Internet before the end of the month after Dutch broadcasters declined to show it. Fitna is a Koranic term sometimes translated as "strife". ...



The film is not so much about Muslims as about the Koran, Wilders wrote in a commentary in Dutch daily De Volkskrant on Saturday. He said Fitna was a last warning for the West.



Wilders had previously warned of a "tsunami of Islamisation" in a country home to almost one million Muslims.

I expect there are other, bigger, faster sites willing to host his film, but if not, let me know and I'll figure out a way to do it on one of the sites I use.

The Loonie: Is Canada So Heavily Tied to the US Economy?

Last week I pondered the extent to which the Canadian dollar (aka the "Loonie") is a petro-currency and wondered why the US price of a Canuck buck wasn't rising along with the US price of oil.



By the end of the week, the US price of oil had dropped considerably, and the US price of a Cdn$ had dropped by approximately the same percentage, suggesting that perhaps the linkage between the value of a Canadian dollar and the price of oil was stronger than it had seemed for several months. And last Friday I received this from RGE Monitor in its daily report:

Canada: Recoupling?



With 75% of its exports bound for the U.S. (whose economic outlook was revised downward by the OECD), Canada seems hard pressed to avoid the effects of the likely U.S. recession. So far, though, terms of trade gains from a strong loonie have boosted domestic demand and offset rising credit costs, and the export and manufacturing slump. But its vulnerabilities have led the Bank of Canada to cut aggressively (100bps since December), even if less so than the Fed. With Canada one of few countries where inflation – even of food – is slowing, it may continue to ease policy rates in the hopes of cushioning the economy. Take a look at: “Canada Decoupled or Not? External Weakness To Infect Domestic Demand” and “Canadian Credit Market Infected By Global Crunch”

Poverty: A State of Rest

How much thought and study does it take to understand the causes of poverty?



Not much, according to The Adam Smith Blog:

There are no causes of poverty. It is the rest state, that which happens when you don't do anything. If you want to experience poverty, just do nothing and it will come. To ask what causes poverty is like asking what causes cold in the universe; it is the absence of energy. Similarly poverty is the absence of wealth. ...



The unusual condition is wealth. This is what changes things. We should ask what are the causes of wealth and try to recreate and reproduce them. When you ask the wrong question, "What causes poverty," you end up with wrong answers. People fall into the trap of thinking that the wealth of some causes the poverty in others, as if there were a fixed amount of wealth in the world and that rich people had seized too large a share of it.



... Instead of trying to take wealth away from rich people and redistribute it, we should be seeking to implement the conditions in which as many people as possible can join in the wealth-creating process for themselves.



Poor countries will not become wealthier because we give them some of our riches. They will climb out of poverty the same way we did, by producing and selling goods and services and by creating wealth in the process.

Israel and Hamas

From Bruce Smith, quoted by the Israpundit:

Criticism leveled at Israel for her response to terrorist attacks by Hamas in the Gaza says more about those who criticize Israel than it does about the legality of the reprisals.

Given the restraint shown by Israel so often when under attack, we should be praising the Israeli gubmnt, not condemning it.

An Economics (and Sports) in-joke

Alex, a student in my Economics of Sports course, sent me this logo, which would be perfect for an economics department hockey team sweater. Maybe for a physics or math department, too.

Playwright David Mamet: a former brain-dead liberal

Back in the days when I thought I might be able to do some acting (how disillusioned we all can be sometimes), I read some plays by David Mamet. I didn't much like them, even though he was revered by many as a great playwright. But, WOW, look at what he has written recently about his transformation (h/t to Salim Mansur, but others have already blogged about this, too):

What about the role of government? Well, in the abstract, coming from my time and background, I thought it was a rather good thing, but tallying up the ledger in those things which affect me and in those things I observe, I am hard-pressed to see an instance where the intervention of the government led to much beyond sorrow.



... I began reading not only the economics of Thomas Sowell (our greatest contemporary philosopher) but Milton Friedman, Paul Johnson, and Shelby Steele, and a host of conservative writers, and found that I agreed with them: a free-market understanding of the world meshes more perfectly with my experience than that idealistic vision I called liberalism.

When utopian schemes fail, we are left to choose from among the feasible alternatives. Within that choice set, once we rid ourselves of our pollyanna-isms, less gubmnt intervention looks pretty good.



I see Mamet mispelled "gubmnt".

Profound Global Ramifications

Yesterday, the Boston Red Sox voted unanimously not to go to Japan for their opening game against Oakland unless the coaches, trainers, assistants, etc. would be paid what MLB originally promised them. From ESPN [note: the dispute was resolved by mid-afternoon, about an hour after the Red Sox refused to take the field for an exhibition game against the Blue Jays],

"We had an agreement," Curt Schilling, one of a handful of Red Sox players who talked with Major League Baseball on ground rules for the trip, told ESPN's Claire Smith.



"Some of the promises have already been taken away, now this," Schilling said. "As far as the players are concerned, [withholding the coaches' bonuses] can't happen."



''When we voted to go to Japan, that was not a unanimous vote,'' Lowell told the Globe, "but we did what our team wanted us to do for Major League Baseball. They promised us the moon and the stars, and then when we committed, they started pulling back. It's not just the coaches, it's the staff, the trainers, a lot of people are affected by this.

From what the players were saying, it sounded as if MLB was going to be in breach of its contract with the team players and staff. But the MLB breach would have been with the staff and assistants, not with the players, and so I wonder whether the players' refusing to go would have put them in breach. More likely, the trainers and assistants would be viewed as essential complements for the players, and if they had not gone on the trip (because of the breach), then likely the players could also have refused to go.



But do you really think the refusal to go to Japan would have had "profound global ramifications"? Ordinarily, I think Jayson Stark [sidebar column here] has a lot of valuable insight, and I enjoy reading his columns, but this is a bit over the edge:

I have no doubt that these guys completely understand the profound global ramifications of this trip. Nobody needs to explain to them that this isn't just another road series on their pocket schedules. This is an event of major significance for the sport, for the franchise and for the nation they're about to visit.

It is probably obvious, but I decided to blog this after the Red Sox refused to play the Blue Jays but before the resolution, and especially after I read Stark's column, which I found amusing (though clearly prescient).

Stratfor's Retrospective on the Middle East

Thanks to AlanP, I have started receiving some of the Stratfor Intelligence reports. They provide intriguing perspectives on international strategic planning that would otherwise never have occurred to me. This one, in particular, is worth reading [There are many links in the original that did not copy]:

Five years have now passed since the U.S. invasion of Iraq. Vice President Dick Cheney, in Iraq with Sen. John McCain — the presumptive Republican nominee for president — summarized the five years by saying, “If you reflect back on those five years, it’s been a difficult, challenging, but nonetheless successful endeavor. We’ve come a long way in five years, and it’s been well worth the effort.” Democratic presidential aspirant Sen. Hillary Clinton called the war a failure.



It is the role of political leaders to make such declarations, not ours. Nevertheless, after five years, it is a moment to reflect less on where we are and more on where we are going. As we have argued in the past, the actual distinctions between McCain’s position at one end (reduce forces in Iraq only as conditions permit) and Barack Obama’s position (reduce them over 16 months unless al Qaeda is shown to be in Iraq) are in practice much less distinct than either believes. Rhetoric aside — and this is a political season — there is in fact a general, but hardly universal, belief that goes as follows: The invasion of Iraq probably was a mistake, and certainly its execution was disastrous. But a unilateral and precipitous withdrawal by the United States at this point would not be in anyone’s interest. The debate is over whether the invasion was a mistake in the first place, while the divisions over ongoing policy are much less real than apparent.



Stratfor tries not to get involved in this sort of debate. Our role is to try to predict what nations and leaders will do, and to explain their reasoning and the forces that impel them to behave as they do. Many times, this analysis gets confused with advocacy. But our goal actually is to try to understand what is happening, why it is happening and what will happen next. We note the consensus. We neither approve nor disapprove of it as a company. As individuals, we all have opinions. Opinions are cheap and everyone gets to have one for free. But we ask that our staff check them — along with their personal ideologies — at the door. Our opinions focus not on what ought to happen, but rather on what we think will happen — and here we are passionate.



Public Justifications and Private Motivations

We have lived with the Iraq war for more than five years. It was our view in early 2002 that a U.S. invasion of Iraq was inevitable. We did not believe the invasion had anything to do with weapons of mass destruction (WMD) — which with others we believed were under development in Iraq. The motivation for the war, as we wrote, had to do with forcing Saudi Arabia to become more cooperative in the fight against al Qaeda by demonstrating that the United States actually was prepared to go to extreme measures. The United States invaded to change the psychology of the region, which had a low regard for American power. It also invaded to occupy the most strategic country in the Middle East, one that bordered seven other key countries.

Our view was that the Bush administration would go to war in Iraq not because it saw it as a great idea, but because its options were to go on the defensive against al Qaeda and wait for the next attack or take the best of a bad lot of offensive actions. The second option consisted of trying to create what we called the “coalition of the coerced,” Islamic countries prepared to cooperate in the covert war against al Qaeda. Fighting in Afghanistan was merely a holding action that alone would solve nothing. So lacking good options, the administration chose the best of a bad lot.

The administration certainly lied about its reasons for going into Iraq. But then FDR certainly lied about planning for involvement in World War II, John Kennedy lied about whether he had traded missiles in Turkey for missiles in Cuba and so on. Leaders cannot conduct foreign policy without deception, and frequently the people they deceive are their own publics. This is simply the way things are.



We believed at the time of the invasion that it might prove to be much more difficult and dangerous than proponents expected. Our concern was not about a guerrilla war. Instead, it was about how Saddam Hussein would make a stand in Baghdad, a city of 5 million, forcing the United States into a Stalingrad-style urban meat grinder. That didn’t happen. We underestimated Iraqi thinking. Knowing they could not fight a conventional war against the Americans, they opted instead to decline conventional combat and move to guerrilla warfare instead. We did not expect that.



A Bigger Challenge Than Expected

That this was planned is obvious to us. On April 13, 2003, we noted what appeared to be an organized resistance group carrying out bombings. Organizing such attacks so quickly indicated to us that the operations were planned. Explosives and weapons had been hidden, command and control established, attacks and publicity coordinated. These things don’t just happen. Soon after the war, we recognized that the Sunnis in fact had planned a protracted war — just not a conventional one.



Our focus then turned to Washington. Washington had come into the war with a clear expectation that the destruction of the Iraqi army would give the United States a clean slate on which to redraw Iraqi society. Before the war was fought, comparisons were being drawn with the occupation of Japan. The beginnings of the guerrilla operation did not fit into these expectations, so U.S. Defense Secretary Donald Rumsfeld dismissed the guerrillas as merely the remnants of the Iraqi army — criminals and “dead-enders” — in their last throes. We noted the gap between Washington’s perception of Iraq and what we thought was actually going on.



A perfect storm arose in this gulf. First, no WMD were found. We were as surprised by this as anybody. But for us, this was an intellectual exercise; for the administration, it meant the justification for the war — albeit not the real motive — was very publicly negated. Then, resistance in Iraq to the United States increased after the U.S. president declared final victory. And finally, attempts at redrawing Iraqi society as a symbol of American power in the Islamic world came apart, a combination of the guerrilla war and lack of preparation plus purging the Baathists. In sum, reshaping a society proved more daunting than expected just as the administration’s credibility cracked over the WMD issue.



A More Complex Game

By 2004, the United States had entered a new phase. Rather than simply allowing the Shia to create a national government, the United States began playing a complex and not always clear game of trying to bring the Sunnis into the political process while simultaneously waging war against them. The Iranians used their influence among the Shia to further destabilize the U.S. position. Having encouraged the United States to depose its enemy, Saddam Hussein, Tehran now wanted Washington to leave and allow Iran to dominate Iraq.



The United States couldn’t leave Iraq but had no strategy for staying. Stratfor’s view from 2004 was that the military option in Iraq had failed. The United States did not have the force to impose its will on the various parties in Iraq. The only solution was a political accommodation with Iran. We noted a range of conversations with Iran, but also noted that the Iranians were not convinced that they had to deal with the Americans. Given the military circumstance, the Americans would leave anyway and Iran would inherit Iraq.



Stratfor became more and more pessimistic about the American position in 2006, believing that no military solution was possible, and that a political solution — particularly following the Democratic victory in 2006 congressional elections — would further convince the Iranians to be intransigent. The deal that we had seen emerging over the summer of 2006 after the killing of Abu Musab al-Zarqawi, the head of al Qaeda in Iraq, was collapsing.



The Surge

We were taken by surprise by U.S. President George W. Bush’s response to the elections. Rather than beginning a withdrawal, he initiated the surge. While the number of troops committed to Iraq was relatively small, and its military impact minimal, the psychological shock was enormous. The Iranian assumption about the withdrawal of U.S. forces collapsed, forcing Tehran to reconsider its position. An essential part of the surge — not fully visible at the beginning — was that it was more a political plan than a military one. While increased operations took place, the Americans reached out to the Sunni leadership, splitting them off from foreign jihadists and strengthening them against the Shia.



Coupled with increasingly bellicose threats against Iran, this created a sense of increasing concern in Tehran. The Iranians responded by taking Muqtada al-Sadr to Iran and fragmenting his army. This led to a dramatic decline in the civil war between Shia and Sunni and in turn led to the current decline in violence.



The war — or at least Stratfor’s view of it — thus went through four phases:

• Winter 2002-March 2003: The period that began with the run-up to invasion, in which the administration chose the best of a bad set of choices and then became overly optimistic about the war’s outcome.

• April 2003-Summer 2003: The period in which the insurgency developed and the administration failed to respond.

• Fall 2003-late 2006: The period in which the United States fought a multisided war with insufficient forces and a parallel political process that didn’t match the reality on the ground.

• Late 2006 to the present: The period known as the surge, in which military operations and political processes were aligned, leading to a working alliance with the Sunnis and the fragmentation of the Shia. This period included the Iranians restraining their Shiite supporters and the United States removing the threat of war against Iran through the National Intelligence Estimate.



The key moment in the war occurred between May 2003 and July 2003. This consisted of the U.S. failure to recognize that an insurgency in the Sunni community had begun and its delay in developing a rapid and effective response, creating the third phase — namely, the long, grueling period in which combat operations were launched, casualties were incurred and imposed, but the ability to move toward a resolution was completely absent. It is unclear whether a more prompt response by the Bush administration during the second period could have avoided the third period, but the second period certainly was the only point during which the war could have been brought under control.



The operation carried out under Gen. David Petraeus, combining military and political processes, has been a surprise, at least to us. Meanwhile, the U.S. rapprochement with the Sunnis that began quietly in Anbar province spiraled into something far more effective than we had imagined. It has been much more successful than we had imagined in part because we did not believe Washington was prepared for such a systematic and complex operation that was primarily political in nature. It is also unclear if the operation will succeed. Its future still depends on the actions of the Iraqi Shia, and these actions in turn depend on Iran.



The Endgame

We have been focused on the U.S.-Iranian talks for quite awhile. We continue to believe this is a critical piece in any endgame. The United States is now providing an alternative scenario designed to be utterly frightening to the Iranians. They are arming and training the Iranians’ mortal enemies: the Sunnis who led the war against Iran from 1980 to 1988. That rearming is getting very serious indeed. Sunni units outside the aegis of the Iraqi military are now some of the most heavily armed Iraqis in Anbar, thanks to the Sunni relationship with U.S. forces there. It should be remembered that the Sunnis ruled Iraq because the Iraqi Shia were fragmented, fighting among themselves and therefore weak. That underlying reality remains true. A cohesive Sunni community armed and backed by the American s will be a formidable force. That threat is the best way to bring the Iranians to the table.



The irony is that the war is now focused on empowering the very people the war was fought against: the Iraqi Sunnis. In a sense, it is at least a partial return to the status quo ante bellum. In that sense, one could argue the war was a massive mistake. At the same time, we constantly return to this question: We know what everyone would not have done in 2003; we are curious about what everyone would have done then. Afghanistan was an illusory option. The real choices were to try to block al Qaeda defensively or to coerce Islamic intelligence services to provide the United States with needed intelligence. By appearing to be a dangerous and uncontrolled power rampaging in the most strategic country in the region, the United States reshaped the political decisions countries like Saudi Arabia were making.



This all came at a price that few of us would have imagined five years ago. Cheney is saying it was worth it. Clinton is saying it was not. Stratfor’s view is that what happened had to happen given the lack of choices. But Rumsfeld’s unwillingness to recognize that a guerrilla war had broken out and provide more and appropriate forces to wage that war did not have to happen. There alone we think history might have changed. Perhaps.



Please feel free to distribute this Intelligence Report to friends or repost to your Web site linking to www.stratfor.com

Obama's Race Speech

For the most part, Rondi Adamson liked it:

He is an amazing speaker, no matter the topic, and it was a beautiful speech.

I thought the speech was maybe a bit long — he could have left out the part where he read from his own book, I suspect. And frankly, if I were his grandmother I doubt I'd like having him say bad things about me. But surely he got her permission, first? (Is she alive?) I find it odd, as well, that he would compare Wright's insane comments — expressed to a crowd — with the concerns of an elderly lady — expressed to family members.

Still, I like any man who quotes William Faulkner — and he used one of my favourite Faulkner quotes.

I am, however, left with one worried thought: I had liked Obama because, unlike Jesse Jackson or Al Sharpton, he didn't make his candidacy about race. He made it about stuff like taxes, health care, foreign policy. Now, sadly, it appears to be about race. I hope it doesn't stay that way. One lives in hope.

Kip Esquire has a different take on it:

I fail to understand why people are so orgasmic over it:



--I agree with Jeremiah Wright, except when I disagree with him.



--I look up to him, except when I condemn him.



--I'm proud of my membership in his church, except when I'm ashamed of it.



--I transcend race-based politics, except when race matters.



--Oh, and more government is always the answer to every problem, especially the problems created by government in the first place.



Did I miss anything?

Why Hasn't the Canuck Buck Appreciated More Than It Has?

For the past several years, the Canadian dollar had been appreciating in value relative to the US dollar --- until last September (2007). Since then, the US dollar price of a Loonie has been fluctuating around $1.00 or so.



Meanwhile the prices of gold, oil, and other commodities have continued their rise, and these are things which Canada has a comparative advantage in producing. One might expect that as the prices of these resources rise, people wanting to buy them would also bid up the price of the Canadian Loonie. That doesn't seem to have happened, though, for the past 6 months or so, at least not noticeably (There are movements, sometimes large, each day in exchange rates; I am referring here to the lack of a general trend upward — See this site for Bank of Canada data, especially Tables I1 and I2.) In fact, the Euro price of a Cdn $ has fallen, not risen, on average over the past six months, the opposite of what one might expect if, in fact, the Canuck Buck is a petro currency.



So what is happening with the Canadian dollar? Why has its value not been rising relative to the Greenback or the Euro?



My first guess was that the Bank of Canada is stockpiling US dollars, but if they are, the accumulation does not show up in their US dollar reserve numbers which have remained roughly constant since last September. I looked at these numbers because I had wondered whether, in an attempt to cushion the blow of a rising Loonie, the Bank of Canada was engaging in a seriously dirty float, buying US dollars to help hold down the US price of a Canadian dollar. But the data do not seem to bear that out.



Another possibility is that the US Fed is selling Cdn dollars to help support the US dollar to cushion its fall. I haven't checked to see if that is what is happening.



So here is the question:

1. If the value of a US dollar is plummeting on the world markets, and
2. If the demand for the Canadian dollar is rising due to rising commodity prices, then
3. Why hasn't the Canadian dollar risen more against the US dollar (especially during the last six months; also, why has it fallen against the Euro?

Do these trends mean the rest of the world has high inflationary expectations for Canada?



Or do these trends mean that the rest of the world expects interest rate differentials (with respect to Canada) to narrow in the future?



What is going on?



Addendum #1: Earlier this month, Stephen Gordon suggested that the halt in the rise of the Cdn $ is possibly due to the negative balance in Canada's current account, that the drop in exports and rise in imports more than offset the tendency for the Canuck Buck to be a petro currency.



Addendum #2: It also appears that the US current account has moved to a much smaller deficit than it had had earlier. These two addenda combined suggest that the premise of this entire posting is less strong than I expected: maybe the Canadian dollar is less of petro currency than I had originally thought it to be.



Backpatting Digression: For a fun look at some forecasts about what would happen to the US dollar check out this earlier piece, written over two years ago, in which I disagreed with some highly paid analysts.

York University (another comment)

From a student in the LLB/MBA programme at York University:

As a proud near-graduate of two York schools (both of which try with all their might to divorce themselves from the York campus), I whole heartedly agree with your sentiments [see this]. As an over-educated, mostly drunk Australian I also endorse phonetic spelling.



The general opinion of York graduates here is that the university was set up as a place for [parents] to park their children and show progression and "made in Canada" success stories (ie I came from nothing, and now my daughter has a university degree). This is regardless of the fact that their proud offspring is now waiting tables at Kelsey's.



I would make one correction to your assertions about Osgoode, though. While the staff generally has a far-left mind set, I would say that almost half of the student body leans more to the right. Osgoode is producing many of the better corporate lawyers in both Canada and is making significant inroads to the New York market. The LLB/MBA group is almost unanimous in being small c conservative, and the majority of them are going to New York, either in corporate law, or corporate finance. I would hesitate to paint the Osgoode students with the same brush as the staff. The most popular upper year classes are generally corporate in nature, and are often taught by adjunct profs, rather than tenured profs.

Is It Speculation When the Fed Moves Against the Market?

Arnold Kling has an insightful posting in which he refers to the US Fed as a "speculator of last resort":

Maybe what the Fed is doing will let a few firms keep their kimonos on [i.e. keep masking the amount of risk in their portfolios]. Meanwhile, though, everyone else in the policy world is trying to keep people in homes that they should not have bought in the first place. I think as long as they keep that up, nobody is going to be able to trust what's under other folks' kimonos.



What we need is for houses to be tradable again, which means that they are occupied by people who can afford them. When houses are trading, then mortgages will be trading. When mortgages are trading, the rest of the financial market will settle down. But the harder the policy wonks work at bailing out the housing market, the longer it will take for that market to straighten out, and the more leaks are going to develop elsewhere in the financial system.

I guess we can think of the Fed's behaviour as "leaning against the wind" or "spitting into the wind", as I wrote last week. Arnold Kling's addition (besides his clarity) is to point out that the Fed is, in essence, speculating. The speculation is that by intervening in the markets, the Fed can halt a downturn in economic activity without creating a serious moral hazard problem on the part of investors, inducing them to take more future risks, expecting the Fed to bail them out if they fail. Them (the investors) and house buyers.



So referring to the Fed as "speculator of last resort" means the Fed provides some insurance against detrimental risk while, at the same time, allowing risk-takers to reap the benefits of beneficial (or upside) risk. The result is that people will have an incentive take too much risk over time and will expect to be held less accountable for the downside risks.



I realize it's an election year, but I had hoped the US Fed and other central banks were more independent from political influences than this.

More on Spider Stalemate

Matt Braskey recently wrote to me about the solitaire game, Spider, about which I blogged a couple of years ago. I wrote, in part,

... [W]hat happens in Spider solitaire when you run out of cards in the piles across the top and the game won't let you deal any new cards because each column or slot must have at least one card in it [?]

Matt wrote,

I encountered the spider stalemate that you wrote about in your

blog about two years ago. Your blog seems to be one of the only

places that detail it. What an interesting scenario!

He also sent this screen shot, which (after you click on it) is much clearer than the one I posted back then.



As I wrote back then, this doesn't seem as if it should be called a loss. Rather, it seems like a stalemate to me.



However, once you know this is how the game works, if you want to win, you must avoid running out of cards this way.

"Enough Is Enough"

The speech by Geert Wilders to Holland's Parliament. A very strong statement condemning the Islamification of Europe.

Meeting Bloggers

A recent e-mail exchange with Phil Miller led me to wonder, how many bloggers have you actually met... in person?



If you are a blogger, let's narrow the field: how many people have you met since you started blogging who were also bloggers when you met them and are still active bloggers? That list is pretty small for me:

1. Phil Miller
2. King Banaian
3. Rondi Adamson
4. Alan Adamson
5. John Lott
6. Mike Moffatt

I also met Tyler Cowen just before I started blogging, and I often see Brian Ferguson (who appears to no longer be blogging despite continued invitations to join me at EclectEcon)

Classic Comment

On libertarians, control freaks, and politicians (i.e. Spitzer, in case you couldn't guess) [source]:

Once again, we see that a vehemently authoritarian moralizer is secretly a libertarian, at least in regards to his own rights.



It’s always other people’s freedom that needs to be curtailed.

link via Tim Worstall.

Happy Birthday to Mike Moffatt

According to Facebook, tomorrow (March 14, 2008) is Mike's 29th birthday. Send him lots of sweets and high-calorie, non-wheat products. If you're going to his bash/party at Ben Thanh restaurant, be sure to ply him with highly caloric items.



Come to think of it, don't do those things. What would be better for me and the Vanastra Curling Club would be if Mike loses a couple of tonnes of weight and works out a bunch to gain tonnes of muscle mass this month and then can't reach his goal in April because the marginal physical product (body mass reduction) of additional dieting and working out would be so terribly low. It's fine with us if he does well this month; it's next month we get the big pay-off if he doesn't meet his goal.



So write to him and wish him a happy birthday.... and help him meet his goal this month!

Is the Fed Leaning Against the Wind?or is it spitting into the wind?

According to Felix Salmon and Tyler Cowen, it is possible that the US Fed is trying to create a whole bunch of liquidity because of all the uncertainty in the financial markets. From Tyler,

Let's say the new common knowledge is "this asset class isn't as liquid as we used to think." Ideally price should fall but how much? If selling is only scattered the market never learns the shape or exact location of the new demand curve. Furthermore the selling you observe only tells you "how good is the market at responding to this knowledge shock" and not "what was the initial liquidity downgrading in the first place." Convergence, today, appears to be problematic.

Felix Salmon adds,

If the problem is that there are too few fools in the market, it might make perfect sense for the Fed to step in as a fool of last resort. With any luck, once the Fed starts acting foolishly, other market participants will follow suit.

This description of what the Fed might be doing sounds similar to the old interventionist, Keynesian view that a proper role for monetary policy is to lean against the wind by doing things that increase aggregate demand when it is slipping or reduce aggregate demand when the economy is overheating.



The trouble with this role for the Fed is that it is terribly short-run and myopic. The Fed creates liquidity because markets don't clear? Markets don't clear???



That is highly questionable at best. What is happening is that people who are trying to sell financial assets are finding it hard to sell the assets at prices they would like to receive because of buyer uncertainty... that much sounds quite plausible. But the Fed policy isn't really leaning against the wind; rather, it is bailing out investors who took some risk and don't want to accept the consequences of that risk [in this case, the risk is that we might want our money and try to sell an asset into a very thin market, thus receiving a very low price relative to our original expectations].



I just don't see why this is a "good thing" for the Fed to do. It seems more reasonable to me to ask investors to accept the consequences of the risk they take on. Otherwise they have an incentive to take on even more risk in the future, with the expectation the Fed will bail them out. In addition, the extra liquidity could easily lead to additional inflationary pressures in the near future.



This doesn't sound like "leaning against the wind" to me. It sounds more like spitting into the wind.



Totally unwarranted digression: Speaking of saliva, can someone get high off it?

What Is Artistic Freedom?

Mike, from The London Fog, makes a nice distinction:

Not being given free government money to inflict your artistic vision on the rest of us is completely different from being threatened by the police for inflicting that vision.

He then adds the following quote,

It's easy to be brave when criticizing Bush; the silence of the arts community about human rights commission censorship suggests the only thing they're really idealistic about is free money.

Minor note: I see he mispelled "gubmnt".

Political Correctness and the Speech Police

I expect that by making some negative comments about York University in my classes and on my exams, I have offended some people. I suppose that by writing "gubmnt" instead of "government" in my classes I have offended some people.



I sure hope I don't get dragged before the Human Rights Commissions for having done these things. Here's the background.



In my teaching, I often refer to York University in very negative terms. For the most part, students love it because York is a rival for both Guelph, where I am visiting this year, and UWO, where I am employed on a permanent basis.



As an example, when I am teaching about the minimum wage, I say,

Let's consider the market for unskilled labour

and while I'm saying that, I'm writing across the top of a supply and demand graph "York Graduates." And whenever I want to point out that some people might not behave as if they are rational maximizers (or might do dumb things in general), I say "York Graduates" or something like that.



York University does, indeed, have a reputation of being a commuter campus with many students who are less serious than many students at other universities. That said, their bizskool is pretty darned good. Their lawskool, however, has a reputation for being pretty left-wing and interventionist. Also, their campus is by far the ugliest in Canada and one of the ugliest in the universe.



As for my use of "gubmnt", I don't know when I started writing that in my notes and on the overheads (and exams). I suspect it started a couple of decades ago, under the influence of a former colleague who loved watching The Dukes of Hazard on television.



Two days ago, I received the following message from a student:

Dear Professor Palmer,



I am a student in your...Economics class ....

I am stating a concern about your midterms, most specifically your second midterm.



I found that your midterm was incredibly disrespectful. The two occurrences I am talking about are: question 3 when you made a reference to York University* and question 4 when you spelt ‘government’ as ‘gubment’.



Firstly, York is an honoured university in our province’s capital and I believe that students, faculty and graduates should be respected in the way that they deserve. Secondly, I have no idea what was being implied when ‘gubment’ was written down but I believe that the government of this country should be respected as well.



I noticed these on your first midterm as well as in class. I believe in freedom of speech but I also believe that there is a time and a place. The University of Guelph is a professional institution and is seen in a professional way.



Thank you very much,

Oops. If the criticism/concerns had stuck to my getting cheap laughs at someone else's expense, I could understand that; I don't normally think humour that puts down other people is all that funny. But this type of criticism is utter nonsense.



York is hardly an "honoured university"; it is at best a middling university in this province, and whether it is located in the province's capital is irrelevant. So what if it is located on the northern edge of Trono? I wonder if making York students the butts of my derogatory remarks makes them feel bad. I wonder if this is case warranting a complaint to the human rights commission.



As for my use of "gubmnt", regular readers of this blog will recall the many times I have praised the current Cdn gubmt for its position on Israel, Durban, Kyoto, Afghanistan, etc. But whether I write gubmnt or govt or gubment doesn't matter. To me it's just an amusing take-off on The Dukes.



I know my spelling sometimes bothers some people. They are not amused by "bizskool" or "eagre" or "Trono" or "gubmnt". But these quirks that amuse me hardly merit this type of reaction or concern.



What matters to me is that this student pulled out claptrap cliches and political correctness to question what I said and wrote.



*The question referred to was this (note that the answers were to be completed on Scantron sheets that have only choices a through e):

3. An appropriate question to ask someone who argues that moving toward free trade should occur only if the losers are compensated by the gainers is

a). How would you compensate the losers without creating incentives that would distort people’s incentives?

b). Would you be willing to compensate those who will lose if we do not move toward freer trade?

c). How do you propose to carry out this scheme?

d). How would you tax the gainers without creating deadweight losses due to the taxes?

e). All of the above would be appropriate.

f). What year did you graduate from York?

Also, the instructions for the exam included this admonition:

4. Calculators are not allowed. Also, no hats, no cell phones, no dictionaries, no talking, no beer, no wine, no illicit recreational drugs, and no extra paper.

I guess that would also be viewed as inappropriate by some people.