Saturday, May 01, 2004


In the nineties, under Clinton, the left Keynsians and the right Keynsians – the liberals and the supply siders – staged a quiet revolution. They revolutionized the standard by which the CPI – the cost of living – was measured. No longer would inflation be considered, as it was by primitive man, an increase in price. Primitive man has a broken club, and he trades 5 clams for it. 3 months before, he traded 2 clams for it. Primitive man scatches his head and makes up a big word: inflation. Today’s economists have to sniff at such foolishness.

Why? Primitive man is forgetting that the shape of the club is getting more pleasing all the time! Yes, one must calculate the relationship between price and quality. As Bill Fleckenstein at MSNBC puts it:

“… you buy a PC with twice as much power, so the government concludes that you really paid only half as much money for it. Hedonics is also the government's way of taking quality improvements and converting them into price declines when calculating the CPI. Sure, that brand-new Chevy you just bought cost 40% more than it used to, but it's a 40%-better car for a variety of reasons. So, the government says, the price didn't really go up. (I have oversimplified these examples, but you get the point.)”

The liberals liked this because, in the 90s, they certainly didn’t want the Fed raising the interest rate. If they were going to have to bite the bullet and balance the budget, they at least wanted an easy money policy. Similarly, the conservatives just loved the idea of not having to pay cost of living clauses in entitlements, balancing the budget on the backs of the increased quality of the goods that the retired and the sick could buy with their reduced money. Economists liked it because it applied the rules of the neo-classical model of marginal utility that they all think founds their discipline as a science.
So the righteous circle – or circle jerk – was formed.

The result is that we are now living in a disconnect between reality and government statistics – and not for the first time. We all know that the stage has been set, with our current administration’s gross overspending, the slipping dollar in an economy that bears a 400 billion dollar yearly trade deficit, and the easy money policy of the Fed, for seventies style inflation. That is, inflation that is not driven by labor costs, but by the sinking costs of money. Yet, according to the statistics, it hasn’t arrived.
That is, according to the reconfigured statistics.

Meanwhile, the great concord of the Clinton era is starting to slip. Because the government can just about make inflation disappear at the drop of a qualitative change, it turns out that there is a lack of at least one external control on federal spending. Moreover, there eventually comes a point when reality kicks in. When consumers are paying higher prices while their economic gurus are claiming that, in actuality, these prices are an illusion, the consumers are eventually going to revolt. In a move that particularly appeals to economists, since it involves three plus variable equations that can only be done by econometricians, even when quality can’t be appealed to, you can appeal to the quality chain. The price of baseballs is going up? But isn’t this a perfect opportunity to switch to tennis balls, the prices of which aren’t going up? And so there is no inflation in the ball market, really. Or so our inflation fighting pals in the Gov. are are determined that we think. They are, in fact, about to bust the back of medical costs by waving just such magic procedures over them, and showing that medical costs are actually at a standstill.

There is a small problem with this: Americans are not inclined, generally, to contemplate appearance and reality while shelling out their money for more expensive stuff. They have a problem with the three variable plus equations. Linear, narrow minded folk, they think the cost of living is about the cost of living. They aren’t with the program.

Gold bugs, who go at economics with sawed off shot guns and usually skew to the right, are pretty incensed, right now, about the CPI shenanigans. This analysis of the CPI is provided by prominent Gold Bug, John Hathaway, at Tocqueville investments, contains three fascinating grafs about the CPI:

“Several years ago, the very important housing component of the CPI was increasing at an annual rate of 4%. Today, that number is 2.2% and heading lower. Housing is weighted at 40.85% of the total CPI. How is it falling when house prices are rising? Simple. The BLI calculates this important component on the basis of “imputed rent” rather than the capital cost of buying a new home. Imputed rent synthesizes the cost of home ownership into a rental factor putting all citizens, both renters and homeowners, on the same footing. The BLS gathers the information for imputed rent, or the “Owners’ Equivalent Rent Index” by asking “each homeowner (surveyed) for their estimate of the house’s implicit rent and what the occupants would get for their rent …. if the owner did rent their home.” (US Department of Labor Program Highlight-Fact Sheet No. BLS 96-5.)

It should be noted that in light of the Federal Reserve’s highly expansionary monetary policy, single-family owner-occupied housing has enjoyed an unprecedented new construction boom. Mr. Banerji observes that a felicitous (for the CPI) consequence of the single family housing boom has been a rise in vacancies and a decline in rental rates for apartment properties. Pressure on the rental market appears to go a long way towards explaining the mystifying decline in the housing component of the CPI. Could it be that the sagging apartment rental market also explains rising bond and equity markets?

There is still more to the tale. Gertrude Stein’s famous dictum: “Rose is a rose is a rose” speaks to the mutation of a word’s meaning over decades or centuries of usage. We can surmise that Big Brother is alive and well at the BLS where a computer is not a computer is not a computer. In other words, added features, memory capacity, and random bells and whistles are not captured in the straightforward list price of a computer. To expunge all continuity of meaning, the BLS brought forth “hedonics”, the science of measuring the value of a product or a service after allowing for qualitative improvements. A laptop with twice the memory as last year’s model sold at the same price this year is counted as a 50% price reduction. This sort of analysis was applied initially to computers and IT equipment. More recently, a broad range of consumer goods including electronics and automobiles has been subjected to hedonic measurement. Health care has been a particularly ill behaved sector of the CPI. Hospital services, nursing homes and adult day care, for example, increased 141.4% over the period 1990 to 2003, versus an average of 46% for all items measured. It should come as no surprise, then, that the Bureau of Economic Analysis is considering adjusting prices of medical services for quality changes (Grant’s Interest Rate Observer-1/30/04.)”

LI agrees with the anger of the gold people – in spite of their odd politics. In fact, we have been expecting inflation as the traditional accompaniment of war for some time now. In WWII, to pre-empt rising prices, FDR instituted rigid price controls and rationing. In the Greenspan era, however, inflation has been spun into nothingness, just as Hathaway describes. But you can only fool investors for so long with these kinds of tricks. Especially when Japan and China, with their trillion dollars of dollars, are going to be holding the bag as the real purchasing power of those dollars makes them worth less and less. For further righteous rightwinger anger at Greenspan, see links here and here.

A less biased account of hedonics, including abstruse equations that make LI’s eyes cross, has been put out by Charles Hulton, with the imprimatur of the NY branch of the Fed. One of Hulton’s examples of a qualitative change that the economists at the BEA take as a deflationary offset to a surface inflationary price change is this: the production of aircraft with a larger capacity to carry customers. It is here that economics becomes, as one hedonics critic puts it, poetry. Or more like the literary criticism of poetry. I have never encountered anyone who believes that the lessening of seat space on airplanes is a positive qualitative change. Yet a hedonics calculus could well posit that this is a positive change in quality – it leads to more customers being able to use airplanes – and thus should accrue some variable value that can be embedded in the equations to give us an inflation rate. As the Gold bugs constantly and correctly re-iterate, the bias in the BEA procedure is to posit qualitative changes as inevitably positive. That there is now a much longer wait at the airports then there was pre-9/11 simply doesn’t get into the BEA computer – but if some mechanical way was found to shorten airport wait time, that change would get into the BEA computer. It is a gamed system.

Most interesting part of Hulton’s article deals exactly with problems of the airplane seat kind: the problem of market power, of interpreting quality from the producer’s point of view as mapping non-controversially over the consumer’s point of view, and the problem of substitution. He quotes an interesting neo-Galbraithian guy named Pakes, who wants to include a variable for market power in the hedonic equations; that complexity – that is, non-linear shifts – should not be considered bad data, to be smoothed out to produce equilibriums, but should rather advance us to another level of equations to gain a finer grained matching to real markets. However, Pakes is not advocating getting rid of hedonics. By no means.

Hulton ends the paper with one of those irritating econometricians gestures, saying that the objection to hedonics is simply that it is new. This implies that the revolt against a method that stands in stark contrast to the whole purpose of figuring out a consumer price index is simply the result of superstition and inertia. This simply isn’t so – it is the result of objecting to the hijacking of a perfectly good index by methods that properly generate a whole other index – call it the Consumer Quality Price Index. Hulton's own superstitions, of course, remains consistent with the general bias of his discipline, the apologetic agenda for capitalism and an upper class p.o.v. that econometrics simply encodes.

Friday, April 30, 2004


Two things to read today.

One is Krugman’s editorial in the NYT. Krugman actually understands what a timeline is. Kerry apparently doesn’t – and don’t ask about the Bush hawks. To advocate one or another ‘fix’ in Iraq – for instance, internationalizing the conflict – at one time, and consider that one now has the answer to the ‘problem’ of Iraq, is to commit the central sin of central planning.

A year of mission accomplished has passed in Iraq. It has passed through Iraqi minds and bodies. And those minds and bodies live there. They can feel in their minds and bodies one thing: they aren’t items at the Pottery Barn. They aren’t broken. They aren’t bought. They aren’t ‘fixable.’ This arrogant and stupid rhetoric points to everything that is wrong with the occupation. Being humans, instead of figurines, events, over time, actually have acquired meaning for these people. Gosh. Hard as it is to believe that the Iraqis could be as fully human as Americans, some of them – I’ve heard on good authority – might even look at the carnage in Fallujah as less a lesson in the justice and goodheartedness of their liberators, and more as a reason for their liberators to go. Gosh. Vamoose. Figure out how to depart. They might even – like Americans, mourning the dead of 9/11 – think their dead are worth memorializing. They might even begin to suspect that one hundred fifty thousand people who do not speak their language, know nothing about their culture, and have only contempt for their humanity, don’t have their best interests at heart.

Second article to look at is in the WP.
Here’s an eyebrow raising graf in Josh White’s article:

“The surge in casualties in the past month has not changed the public's key judgments on Iraq, however. While Bush has clearly lost public support for his policies there, much of that erosion occurred before the current wave of violence. Bush's approval rating for dealing with the situation in Iraq stood at 45 percent in a Post-ABC News poll conducted two weeks ago, unchanged from mid-March but down from 55 percent in January. The president also has not suffered politically from the spiraling casualty count and continues to run even or slightly ahead of presumptive Democratic presidential nominee John F. Kerry in most polls.”

How’s that for saying, we don’t believe no stinkin’ CBS/NYT polls? Typical of the official newspaper of the hawks, too. Meanwhile, Powell has acknowledged a plunge in American support for the Iraq war. But Powell is as dust in the wind compared to the mighty AEI, a member of which White effusively quotes, as well as the usual retired general. No, no, no, no Iraqis – surely it is a waste of time to quote the Pottery Barn figures. As for antiwar people, are they American? Ditto for Dems from the Byrd side of the party. Quoting such just promotes treason.

Thursday, April 29, 2004


According to the media, in the build up to the war on Iraq, D.C. was a regular little hive of the best and the most hawkish, with every little cell planning – wrongly, as it turned out – for “post-conflict” Iraq. Powell’s minions in the press like to point fingers at Rumsfeld for the overwhelming failure to plan the occupation; Rumsfeld’s minions talk of Powell as a softy and – for his work for Dad Bush – pretty much a traitor. However, it wasn’t that the occupation wasn’t planned well – the problem was that it wasn’t imagined well. Or even at all. Its planners had not only never served in uniform – for all of their constant analogizing to Japan and Germany, they apparently never asked a WWII vet what it was really like.

If somebody in the Wolfowitz circle had put down Richard Perle’s latest scorcher in Foreign Policy and taken up Norman Lewis’ diary of serving as an Intelligence Officer in occupied Southern Italy, “Naples, ‘44”, here is what they would have found: looting is so bad that telephone and telegraph wires are constantly cut down for the money that scrap copper brings in, but nobody closes down the flea market where scrap copper is sold; the Germans leave behind mines that periodically destroy buildings, and saboteurs that plant bombs; gangs of traditional criminals – the Camorra and the Mafia – take over vast stretches of territory; vendettas are pursued through massive snitching; the friendliest people will betray you or your information for astonishing reasons; economic aid, which is promised, never comes through, leading to disgust with the occupiers; and everybody fucks constantly.

The latter might not be happening now in Iraq – alas, our journalists are much more hidebound about such things than the journalists of yore. But a little acquaintance with literature should surely have alerted even the most ideologically blinded soul about what lay ahead. Southern Italy was never held out as a showcase analogy by the Rumsfeld crowd – partly because the more pernicious effects of the occupation are still present. Not for Southern Italy the Werkschaftswunder. The mafia, which Mussolini – not one to countenance other centers of power – drove out, were deliberately reintroduced by the Americans. Vito Genovese, if you can believe it, was an “advisor’ to one of the chief American military men – shades of Chalabi!

Lewis is a great capturer of absurd and symbolic action. His account of trying to rescue a peddler caught with copper wire involves him in the Catch 22 of the insane American military bureaucracy. Here’s a bit I cannot resist. Lewis is in court. The judge is trying cases of pilfering. The defendant is a “typical Neapolitan sweat of the kind the pretends to be half-witted to be allowed to get away with his jokes.” The judge earnestly tries to understand what is happening in the court:

Judge: “Didn’t he just say something about the Americans? What did he say?”
Interpreter: ‘just a stupid remark, your honour. Nothing to do with the case.
Judge: Will you please leave it to me to decide what has to do with the case, and what has not. I insist on knowing what he said.
Interpreter: He said: “when the Germans were here, we ate once a day. Now the Americans have come, we eat once a week.”
Judge: Ask him if it means nothing to him that we have freed him and his kind from Fascism. How can he talk about us and the Germans in the same breath?”
The interpreter translated the judge’s remarks and the old man rolled up his eyes, let out a derisive gabble, and then went through the motions of displaying his sexual parts. A gale of laughter went up.
Judge: I’m losing all patience with him. What does he say now?
Interpreter; With respect, your honor, he says, Americans or Germans, it’s all the same to him. We’ve been screwed by both of them.
Judge: He’s off his head. Get him out of my sight. Case dismissed.”

The earnest indignation of that Judge has become the weather that hangs over the CPA – an unholy mixture of self-pity, imaginative blindness, and the absolute inability to imagine that one’s motives could ever be impugned. Americans I know are as funny as the Neapolitan clown – but I have also seen the humorless judge types. It is exactly how the upper level managers talk, exactly – that same unholy buncombe, that same shabby disguise of self-interest as team effort, that same feeling of the utter godliness of all of one’s motives, which God kindly proves by granting one loads of money.

One of the reason those New Deal occupations were more successful than this failed effort was that the men in charge had had enough of the self-righteousness cut out of them by the Depression that they could actually listen. No such luck with our contemporary crew, who have gorged like pigs on their own p.r.

Wednesday, April 28, 2004


A spate of stories in the media have been proclaiming the end of Chalabi – rather like chasing the Lord of Misrule from the scene at the end of a Tudor play. Shall we all get up and get married? Is there a God in Heaven? Certainly this would falsify parts of LI’s predictions about Iraq in the coming months, which we just prognostically emitted the other day. Were we so out of the loop?

While we believe that Chalabi himself is a stand-in for a policy default position of the hawks – that Iraq should be, in effect, an American colony – character does count. There is nobody around who has been groomed to quite such perfection as Chalabi – the man is from the Agency dream book of the 50s. A crook, an opportunist, a liar, and a blackmailer – you don’t get that Somoza combination at your nearest convenience food store. It is much harder to produce a tinhorn dictator than people think. So many of them think only of stealing the silverware. The real thing, the real defender of the Free World, thinks more ideologically, thinks further ahead, thinks of death squads, of selling off mineral rights, of establishing the family in all branches of industry and the state. With one nephew on the IGC with him, and one prosecuting Saddam Hussein, Chalabi has already shown his mettle. Are we going to throw our leading man away?

The Chalabi is done fad emerged from a Washington Post article last week. According to the article, Chalabi had offended Bush somehow, leading to consequences parallel only to those meted out by Louis XIV to his more rebellious nobles.

Here are the WP grafs that started the whole mini-juggernaut:

“At the top of the list of those likely to be jettisoned is Ahmed Chalabi, a Shiite politician who for years was a favorite of the Pentagon and the office of Vice President Cheney, and who was once expected to assume a powerful role after the ouster of Saddam Hussein, U.S. officials acknowledged.
Chalabi has increasingly alienated the Bush administration, including President Bush, in recent months, U.S. officials said. He generated anger in Washington yesterday when he said a new U.S. plan to allow some former officials of Hussein's ruling Baath Party and military to return to office is the equivalent of returning Nazis to power in Germany after World War II.”

Moreover, our man at the UN with the gluegun in his hand and Iraq in his sights, your friend and mine, a man who needs no introduction even though nobody knows just how the hell he got here, that’s right a round of applause for Mister Lakhdar Brahimi, is not, reportedly, too enthusiastic about Chalabi enthusiast. The NYT had a story this morning that congress might stop stuffing Chalabi’s pocket with the around 400,000 monthly supplement they pay him. Such degradation!
However, in this corner, we still don’t see it. Bush sometimes signals that he has regained his sanity. For instance, he came out foursquare for a Palestinian state. That would seem to be a shot at the Defense department crowd, where they like to say, with a smirk, the “so called occupied West Bank.” But the Cheney-Rumsfeld side is nothing if not persistent, and the recent concession about settlements in the West Bank is surely a stage on the way to an embrace of the Defense Department view. Similarly, that Chalabi has been attacked in the Post will surely be seen as a wound of honor.
But how will Chalabi counter-attack? We will be watching for his three press henchman, Hoagland, Hitchens, and Judy Miller, to do the initial work for him. His big threat is from the U.N. Thus, he has to use his little black bag of Saddam’s papers to reveal the corrupt dealings of the U.N. with the Meat Machine during the sanctions. Our bet is that this story will hit soon, and will spill over into whether we are going to allow a person that Chalabi calls, disdainfully, an “Arab nationalist,” to throw away one of our best and brightest. If, even now, Hitchens isn’t boiling up some screed about the perfidious U.N. and its sanction profiteering, LI will be surprised.
Whatever the weapon will be, however, I would not count a man out who is as adept at the fine arts of fraud and deceit as Chalabi.

Sunday, April 25, 2004


We went to see the Omar Faruk Tekbilek ensemble last night at the University of Texas.

Listening to Turkish music is one of those odd habits of our middle age. There is something about it that is very Paul Bowles-ish. Bowles’ typical Westerners, nervous, intellectual, self-absorbed, and (all unknown to themselves) wrapped in such layers of babyfat egotism that they are permanently distanced from experience, usually gain experience in a sudden and fatal shock, all at once. It comes out of nowhere. It leaps at them as they become curious – for these people are always curious. In fact, they have made a virtue out of curiosity. They come from a culture in which curiosity has merged with entertainment. And experience does come to them. It comes from a sandstone landscape for which they are absolutely unprepared. It comes from a kidnapping, it comes from the collapse of all of their presumptions. It comes as a great slap from some archaic strata of being that they are unaware of – think, in fact, to have overcome by succedaneum – since their ancestors, they imagine, overcame it. And are no longer worth thinking about, having completed their task. And then the experience is there. A smelly canvas sack, the cutting off of a tongue, a branding, a selling into slavery. For Bowles’ characters, history is everything that has been put between themselves and such fates – history is the progress that has made such fates unimaginable. Progress has made a world in which all contacts are, on principle, chosen.

This world is in direct opposition to the world of fate. LI has chosen the world of choice. We are liberals, here. But we have the dialectical longing for our opposite that always appears where liberalism appears. Turkish music is the very music of the world of fate. Listening to the Faruk (a man with an amazingly broad face that he shakes so, while singing, that it seems to have become permanently wrinkled in transverse bands, instead of the usual up and down direction of wrinkling ) play the zurna, a raucous pipe that emits a sound that both mocks yearning and evokes it, it is hard not to feel that the Western form of life – that swaddled, babyish life of the mouth and the dick and the screen entranced eye -- is going to disappear. The zurna, which is short, and has a blaring, flanged spout at the end of it, seems to come to life in Faruk’s hands – to be playing him, in fact. Yes, it was as if that slightly mocking sound, that stunted, blaring horn, was possessed of a spirit that in turn possessed the player. The zurna seems to be the master – and a vaguely devilish one.


  “In brief, cultural history only represents a surface strike against the insight [of historicism], but not that of dialectics. For it lack...