Author: Clive Crook

Is Apple (or some other tech company) about to repeat Apple’s great mistake? This is a question that keeps coming up. See Henry Blodget in January, for example. Just yesterday the idea had another outing in Apple’s Second Date with History in the WSJ.

Apple
almost went out of business 14 years ago, and many would have blamed
what seemed one of the seminal business blunders in history.

Bill
Gates was chatting with students at Stanford at the time and recalled
letters he’d written to Steve Jobs begging him to allow cloning of
Apple hardware. Had Mr. Jobs complied, Apple’s operating system might
have become the de facto universal standard, the one everybody wrote
software for–a role that fell to Windows instead… If you think
missing out on the riches that Microsoft created for its shareholders
was an error, Mr. Jobs erred.

Did he, though? In the spirit of Zhou Enlai, it might be too early to say. The WSJ published its piece yesterday, just as Apple’s market value surpassed Microsoft’s.

Microsoft
is a hugely powerful and profitable company in the tech world. Its
Windows software runs 9 out of every 10 computers, while more than 500
million people use its Office software to perform their daily tasks,
like writing letters or sending e-mail messages. These two franchises
account for the bulk of Microsoft’s annual revenue.

But Apple has the momentum. “Steve saw way early on, and way before
Microsoft, that hardware and software needed to be married into
something that did not require effort from the user,” said Scott G.
McNealy, the co-founder and longtime chief executive of Sun
Microsystems.

Apple looks expensive at its current price, and Microsoft cheap…but still.

A
couple of months ago I speculated that Apple had got the iPad wrong and
said it wasn’t for me. It arrived about a week ago and I’ll share my
impressions shortly. 

Apple – Microsoft – Steve Jobs – Bill Gates – IPad

Most of what you’ve read lately about the “crisis of economics” is rubbish. The Great Recession poses no challenge to the core ideas of modern macroeconomics. The notion that mainstream economics claimed that bubbles cannot happen, or deplored any and all financial regulation, or advocated laissez faire, or upheld any of the other shibboleths that the past two years have supposedly refuted, is ridiculous. Please note that critics of the policies that helped cause the recession almost invariably do so from within the prevailing paradigm–using lines of argument that were already well developed.

The nearest thing to an exception to this is central-bank independence. Here is an idea that was very widely accepted–not as a foundational principle of mainstream macroeconomics, obviously, but nonetheless as a clear-cut commandment. This principle has been cast aside–and rightly so–during the response to the emergency, first in the US and now in Europe. But the idea is so tenacious that nobody seems willing to admit it. Here, as my new column for the FT argues, is a big idea of orthodox economics that really does need to be re-examined.    

Standard and Poor’s downgraded Greece’s debt yesterday. This reflected–and added to–perceptions that Europe’s debt difficulties are worsening. Portugal, Spain and Ireland are now in deeper trouble as a result.

First, one notes that the European Union has made an unbelievable hash of managing this crisis, making the problem worse as much as helping to solve it.

The latest proposal, a 45 billion euro package by Europe and the I.M.F., has done little to calm the markets, and Germany’s statement this week that it must first see more deficit reduction from Greece before fulfilling its pledge has only increased concerns that Europe is not united behind Greece.

Kenneth Rogoff, a former economist for the I.M.F. who has studied sovereign defaults, calls the latest assistance package puzzling. “They put their wad on the table, but they could have gone further,” he said of the international plan. “I never thought Europe could take the lead on this.”

No indeed. But the role of the ratings agencies also needs to be looked at. Given the decisive part they played in the subprime mortgage debacle, how have they managed to escape reprisals from politicians and regulators? Now they are at it again, propagating a follow-on crisis in Europe. The question is not so much whether their new lower ratings on the PIGS’ debts are justified, but whether, supposing they are, their earlier high ratings of the same debt conveyed useful information in the first place–or actually did the opposite, providing false assurance to the markets. No information is better than bad information. Creating a regulatory requirement for action based on this bad information, which is current policy, is doubly perverse.

The FT’s Francesco Guerrera reports on Goldman’s defense against the SEC’s fraud charge. It was all a matter of buyer beware, says the bank in submissions to the regulator. And there was nothing underhand.

In Goldman’s view, it “defies credulity” that ACA, the independent manager of the CDO that also invested in the security, would have taken Paulson’s suggestions on the loans if it had any concerns…

“There was nothing unusual or remarkable about the transaction or the portfolio of assets it referenced,” Goldman writes. “There is no basis to suggest that the portfolio would have performed any differently or that the economic outcome for the participants would have changed in the least had Paulson’s role and interest been more transparent.”

Here are the documents in question.

Look out, Wall Street, the lawyers are coming, says Frank Partnoy in an excellent column. The implications of the case are far-reaching. Litigators can go where regulators fear to tread.

[T]he case demonstrates a more effective way to police bankers, because Wall Street cannot outrun a judge. That simple point has been part of Anglo-American common law jurisprudence for centuries. The US judge Oliver Wendell Holmes advised that the law was a prediction about what a judge would do. If bankers consider only whether they are complying with specific legal rules, they will create “alegal” transactions – deals that fit the letter of the law but violate its spirit. But they cannot be certain about how a judge might assess their conduct. That worry, not a rule, is what will make bankers tell clients about the presence of a fox.

So far as taxes and public spending are concerned, the US has been
singular in two respects. It has not provided a public guarantee of
health insurance, and it has not collected a value-added tax. This
pairing of exceptions is no coincidence. Now that the first has been
(mostly) legislated away, time may be running out on the second. With
recent celebrity endorsements from the likes of Paul Volcker and Alan
Greenspan, the idea of a VAT is gaining momentum, and opponents are
gearing up to oppose it.

This primer on VAT from Robert Carroll and Alan Viard (h/t Greg Mankiw)
is useful and even-handed. If you need to collect revenue, it says, a
VAT is a good way to do it. Once it’s there, on the other hand, you can
raise it rather too easily to collect even more. That is something for
conservatives to worry about. Liberals are more concerned about
regressivity. A VAT exempts new savings, so the rich pay
proportionately less. There are ways to mitigate that drawback,
according to the Tax Policy Center’s Eric Toder and Joseph Rosenberg.
Payroll taxes are more regressive than a VAT. Using a VAT in part to
substitute for payroll taxes could make the system as a whole more
progressive.

Another paper by the TPC asks whether the present income tax code is capable of bridging the fiscal gap
by itself. The answer is no, certainly not if tax increases were
confined to the highest-paid households, as Obama has promised.
Spending cuts and new revenue sources are going to be required.

Postponing the ruling on whether China is a “currency manipulator”, which had been due on April 15th, makes sense. China’s currency policy is misguided, and it does hurt the US. But a mechanical ratcheting up of pressure to deploy trade sanctions is unlikely to solve the problem. This path is also very risky–and not just so far as economic policy is concerned. In this new column for the Financial Times I argue for a safer and, I think, more productive approach.

Flights from London to DC via Frankfurt (don’t ask why, just learn from my mistake and never do it) put the recent Atlantic and New Yorker profiles of Tim Geithner in a good light. Longer than they needed to be, you say? I was wishing they were longer.

Josh Green was better on Geithner’s character, I thought, and John Cassidy more at home with the economics. Both pieces are well worth reading, regardless of your itinerary. But I have to say that neither really dispelled for me the big mystery about Geithner, which is the nature of his professional and intellectual relationship with Larry Summers.

When the appointments were first made, I foresaw trouble. Like many others, I assumed that Obama would have wished to make Summers Treasury Secretary, but recoiled at the difficulty of getting him confirmed. So Summers became chief economic adviser while his former subordinate Geithner (whose confirmation turned out to be no stroll in the park either) got Treasury.

A hazardous arrangement, I thought, though possibly workable, if Geithner was sufficiently self-effacing to accept the  de facto number two position. Summers, I reasoned, never would. But if Geithner decided he was going to be in charge, there would be a fight for influence, the economic message would be muddled, and the loser would have to go. Adding to the danger was the milling profusion of other top economic talent-Volcker, Orszag, Goolsbee, to name just three-in or around the White House.

This setting reminded me of the fight between Nigel Lawson, the
brains behind the Thatcher Revolution, and Alan Walters, Thatcher’s
favorite economist, in the late 1980s-a calamity I watched at close
quarters. Lawson was chancellor of the exchequer when Thatcher brought
Walters into 10 Downing St as her personal adviser. They disagreed
about monetary policy; after a period of friction Lawson decided he was
no longer trusted to do his job, and quit. You could plausibly argue
(and many did at the time) that this was the beginning of the end of
Thatcherism. Letting this happen-driving her most talented lieutenant
out of her government-was the biggest mistake she ever made.

Now,
Geithner and Summers appear to get along. But what I really want to
know is how they have managed it. My theory-that the secret of their
success, if they were going to have one, would be Geithner’s modesty-is
somewhat undermined by Josh’s piece. I find it frustrating that the
question is never really confronted head on, but the implication of the
piece is that Geithner (“confident and brash-almost unnervingly so”)
and Summers have disagreed on some big questions, and that Geithner has
prevailed every time. This, frankly, I find hard to believe. The force
of Summers’ intellect is such that he dominates a discussion even when
he just sits there brooding. And he knows it. Can he really have been
sidelined like this? By a former underling? If so, why is he still
there? I don’t feel I understand this mysterious and pivotal
relationship any better than I did 15,000 words ago.

I would
have liked to read much more, too, about the “Volcker rules” episode.
This again was most bizarre. There stood Geithner, Treasury secretary,
off to one side, while Volcker strode up to explain why the Treasury’s
proposals for financial regulatory reform had missed the point. My
instant reaction, much as I admire Volcker, was that his
proposals missed the point. Many of those who initially celebrated them
now seem to have come around to the same view. But here I’m talking not
about the substance, but about the personal chemistry.

Again, it
seemed to me at the time an instance of Geithner’s modesty that he was
willing to stand there and be upstaged by one of Obama’s other heavy
hitters. Without going into detail about how this initiative came to
be-details I will need, if I am to be convinced-Josh says this is not
how it was. Volcker’s rules were devised by Geithner.

After
the Massachusetts loss, Obama made a show of introducing additional
“tough” new rules, bringing back Volcker to lend him credibility and
endorse constraints on future bank growth and on banks’ ability to bet
on risky assets like hedge funds-an episode widely interpreted as a
rebuke to Geithner. For political purposes, it was. But in truth, the
new measures were relatively small ones rushed forward to appease a
hostile electorate. (And Obama had Geithner design them.)

Love
that parenthesis. This makes Geithner the master architect, acquiescing
in his own seeming rebuke “for political purposes”-as he designs a
phony policy, and pushes Volcker forward as public-relations dupe to
announce it.

Well, as they say, interesting if true.

Sooner or later the country will have to start discussing how to raise taxes–not by a little, but by a lot. Spending cuts will be needed too, of course, in Medicare, and in Social Security. But these cannot close the long-term fiscal gap by themselves. In this new column for National Journal, I spell out what it is going to take: some combination of a carbon tax, a broadening of the income-tax base, and a VAT. Yes, it’s unthinkable. Nonetheless, it’s coming.

My new column for the Financial Times also looks at fiscal policy, concentrating on the efficacy of the Recovery Act. It worked, I argue. We would have been much worse off without it. But it would have worked better if, among other things, a credible plan for long-term fiscal consolidation had been included up-front.

I am in Paris at the moment, attending a conference on innovative finance in development,
put together by the World Bank, AFD (the French development agency),
and the Gates Foundation. It is an interesting event. As well as panels
and workshops, there is a competition for promising financial innovations. The World Bank has a very good pamphlet, Innovative Finance for Development Solutions, if you want some background reading.

The
competition’s 20 finalists include all manner of ingenious schemes
designed by small NGOs, not-so-small development agencies, and
everything in between. “Mobile Authentication for Indo-Nepal
Remittance” (by Ekgaon Technologies and Nirdhan Utthan Bank), for
instance; “Natural Catastrophe Protection for the Rural Poor”
(Caribbean Risk Managers and Development Bank of Jamaica); “Proving the
Value of Mobile Money for Microfinance” (by the Grameen Foundation);
and so on.

I moderated a panel on the first morning. (I expect there will be
video later. I’ll put the link in this post when I have it.) The issue
that interested me most was the tension between all this pro-poor,
pro-development financial ingenuity and the now-prevailing orthodoxy
that financial innovation is essentially a scam perpetrated by Wall
Street and its offshoots on everybody else. In the US context even Paul
Volcker, as respected and mainstream an eminence as one could wish,
says he sees little evidence that financial innovation has brought
social gain.

The Economist just hosted an interesting debate on this between Joe Stiglitz and Ross Levine.
Nearly 60% of readers casting votes agreed with Stiglitz in opposing
the motion, “This house believes that financial innovation boosts
economic growth.” I’m with the minority in thinking that Levine made
the better case. As I mentioned the other day, Bob Litan
has done a good even-handed essay about the pros and cons of specific
financial innovations, instrument by instrument. Bob Shiller as always
is a font of wisdom on this subject: in The Subprime Solution and The New Financial Order he makes a persuasive case that we need new kinds of financial innovation-but in any event, more of it not less.

Pressed
for time, my panel did little more than raise the subject and
acknowledge the dangers. Browse through some of the schemes discussed
in the Bank’s pamphlet, or the competition finalists on the conference
website, and see if your suspicion of financial innovation is not
tempered a little.

This was the first time I’d been to Paris for
several years, so indulge me in some cultural observations. The city
seems to have been invaded by very large scooters-scooters which are to
ordinary scooters as Hummers are to ordinary SUVs. They are more akin
to small cars. In fact, some have two wheels at the front so that they
can stand unsupported. I like them. They are somewhat manly. I want one
of these hefty three-wheelers for driving round Washington.

Happily
some things never change. I will say this for the French. This is a
country that dares to soft-boil an egg. My breakfast this morning was
the best I have had since I last visited Paris. Grapefruit, eggs, pain
chocolat (half), and café au lait. Simple things, slightly reminiscent
of the equivalent US and UK products, but raised to the highest
standard of deliciousness. I could move to Paris for the breakfasts
alone.

On a terminological note, I see that in France one is not a moderator but an animateur. Tout à fait.

Robert Barro is unimpressed with the fiscal stimulus. He says an extra $600 billion of public spending at the cost of $900 billion in private spending was not a good deal.

The path of incremental government outlays over the five
years in billions of dollars is +300, +300, 0, 0, 0, which adds up to
+600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding
up to minus 300. GDP falls overall because the famous “balanced-budget
multiplier”–the response of GDP when government spending and taxes rise
together–is negative. This result accords with the familiar pattern
whereby countries with larger public sectors tend to grow slower over
the long term.

The projected effect on other parts of GDP (consumer expenditure,
private investment, net exports) is minus 180, minus 120, +60, minus
330, minus 330, which adds up to minus 900. Thus, viewed over five
years, the fiscal stimulus package is a way to get an extra $600
billion of public spending at the cost of $900 billion in private
expenditure. This is a bad deal.

See Gary Burtless’s response on National Journal’s economic experts blog.

I am puzzled by his Wall Street Journal analysis, which
seems to treat the stimulus package as though it consists solely of an
increase in government spending. In fact, at least 45% of the stimulus
in 2009 and 2010 consists of tax reductions rather than spending
increases. Moreover, as I have argued elsewhere, the part of the
stimulus package that has provided fiscal relief to state governments
has resulted in reductions in state taxes below where they would have
been without the stimulus Thus, more than half of the stimulus package
consists of tax reductions rather than government spending increases.
It is very hard for me to believe that these tax reductions have failed
to spur an increase in household consumption, contrary to Barro’s
apparent view that personal consumption has declined as a result of the
stimulus.

Obama’s task at the healthcare summit. Ben Smith, Politico. Too many audiences.

Rearranging the seats at the summit. Anne Kornblut, Washington Post. It’s a sensitive issue.

Where the public now stands on healthcare reform. Kaiser Family Foundation. The message is mixed.

Dealing with the banks. Peter Boone and Simon Johnson, TNR. The Volcker rule is beside the point. Pile on the capital requirements instead. Quite right.

I followed James Fallows’s advice and read the OPR report on John Yoo.
I agree with what I think is Jim’s main point–that parts of the
document force the reader to confront the disgusting reality of
“enhanced interrogation”, which is a salutary experience. But I can’t
say the report persuaded me that, as it asserts, Yoo knowingly misled the government about the law. I can’t say the report even tries to support that charge.

Yoo’s view that methods like waterboarding and prolonged sleep
deprivation are not “torture” so far as the law is concerned may be
incorrect, as many experts say, but it is nonetheless legally defensible,
and the report admits as much. Yoo seems to me consistent and sincere
in his belief. His view that under the circumstances pertaining after
9/11, the law imposed no significant restraints on presidential power
is even harder to defend–but again,
this appears to be his considered, conscientious view.

Jim Fallows advises readers also to look at the memo by David Margolis,
a respected career lawyer in the Justice Department, who overruled the
OPR findings. If you do read the OPR report you should indeed read
Margolis as well. The OPR report comes in for some serious criticism.
(See also these letters on an earlier draft from Michael Mukasey and Mark Filip, and Ronald Rotunda.) It is not an exemplary piece of work. The good faith of its authors, it seems to me, is called into question.

Margolis faults Yoo for poor judgment, saying he “consistently
took an expansive view of executive authority and narrowly construed
the torture statute while often failing to expose (much less refute)
countervailing arguments and overstating the certainty of [his]
conclusions”. At the same time, Margolis says, “But as all that
glitters is not gold, all flaws do not constitute professional
misconduct.” He quotes Jack Goldsmith, whose fine book on the Office of Legal Counsel and the war on terror I have previously recommended.

All
of these men wanted to push the law as far as it would allow. But none,
I believe, thought he was violating the law. John Yoo certainly didn’t.

Goldsmith
complains that the Bush administration worried too much about what was
legal and not enough about what was moral or wise. I think that is
correct, and it is why I question Jim’s assessment that Bush’s early
policies on interrogation were, among other things, “lawless”. They
were morally wrong and counter-productive, in my opinion. They were
based on poor legal advice too, according to the scholarly consensus. They were not lawless.

The
law itself was and is at fault. It is still not as clear as it
should be, and Congress has let that state of affairs persist. The
legal opinions and the policies have been changed, which is good, but
this important lesson has yet to be learned.

Being unwise or evil does not make an act illegal. The OLC’s job is to advise on the law, not say what is wise or moral. Sometimes, the
law is an ass. That is why you cannot leave policy-making to lawyers.