Tag: David Warsh

Must-Read: David Warsh: The Downside of Outrageous

Posted on by Brad DeLong

Must-Read: The always interesting and usually thoughtful David Warsh gets this one, I think, very right:

David Warsh: The Downside of Outrageous: “If there is one man beside Trump himself whose spirit will haunt the hall… Cleveland… it is Robert L. Bartley…

…as editor of the editorial page of The Wall Street Journal,  Bartley spearheaded the creation of the say-anything, stop-at-nothing rules that ultimately led to Trump’s success in gaining the Republican Party’s nomination…. After taking over the editorial page in 1972, he became the most influential administrator of the rules of American public debate in the last third of the twentieth century… began the populist revolt that has since found its apotheosis in Trump…. As a small-government libertarian, I never subscribed to the Journal edit page’s supply-side orthodoxy…. Reagan won the presidency in 1980, and Bartley won a Pulitzer Prize for editorial writing. The editorial page had become immensely powerful, and has remained so.  Bartley told an interviewer in 1981, about the time Wanniski was fired for train-station-electioneering for a supply-side insurgent candidate, ‘Jude had a tremendous influence over the tone and direction of the page. He taught me the power of the outrageous.’…

I can pinpoint the day the page lost me altogether. It was March 18, 1993, with a famous editorial, whose title, ‘No Guardrails,’ has since become a WSJ battle cry. A physician who performed abortions in Florida had been ambushed and killed by a protester in Florida. The editorialist, Daniel Henninger, wrote…. “The date when the U.S… began to tip off the emotional tracks… is August 1968…. The real blame here… falls on the intellectuals–university professors, politicians and journalistic commentators… [who] defended each succeeding act of defiance–against the war, against university presidents, against corporate practices, against behavior codes, against dress codes, against virtually all agents of established authority.” There was something downright creepy about that editorial…. From the short-lived administration of Gerald Ford to the zero-based budgeting and deregulation under Jimmy Carter, from disinflation under Paul Volcker to tax simplification and Social Security stabilization under Ronald Reagan, the signal events of those years constituted a retreat from the excesses of the Sixties….

By 2001, Bartley was ill. He stepped down…. The editorial page soon began a relentless campaign for the invasion of Afghanistan and Iraq. Bartley died in December 2003, a week after receiving the Presidential Medal of Freedom…. Is it fair to blame the chaos surrounding this year’s Republican nomination on Bob Bartley?… I think so. No one in my lifetime systematically removed more of those guardrails, the norms governing good-faith political and economic discourse, than he. Trump is the downside of forty years of WSJ ed page comment too often just like his: outrageous, sulfurous, and, all too often, half-baked.  Bartley is dead; long live Bartley…. James and Lachlan [Murdoch] have their work cut out for them. Sometime in the next few years they must replace [Bartley’s protege Paul] Gigot, 61, with an editor capable of restoring credible focus…

Must-read: David Warsh: “Whose ‘Rules?'”

Posted on by Brad DeLong

David Warsh (1998): Whose `Rules?’: “For the last year, hardly a week has passed without…

…some bright new book fetching up on my desk promising to explain some aspect of the business dynamics of the new age of information…. In all this stack of books on managing knowledge, intellectual capital, the ecology of information and the like, the single volume most worth reading — and, for many persons having, for it bears consulting again and again — is ‘Information Rules.’…

Shapiro and Varian are professors at the University of California at Berkeley. Shapiro served for a time in Washington, D.C., as deputy assistant attorney general for economics. Varian is dean of Berkeley’s School of Information Management and Systems, an expert on Internet economics and the author of a leading microeconomics text as well.

As they increasingly were drawn into the policy battles of the information age, Shapiro and Varian heard the constant refrain from entrepreneurs, consultants, and journalists: the old rules had been broken; a new set of principles was required to guide business strategy and public policy.

They write in their introduction:

But wait, we said. Have you read the literature on differential pricing, bundling, signalling, licensing, lock-in, or network economics? Have you studied the history of the telephone system or the battles between IBM and the Justice Department?

Our claim: You don’t need a brand-new economics. You just need to see the really cool stuff, the material they didn’t get to when you studied economics.’

And so they wrote their book.

The battle over incompatible standards, for example, is as old as North vs. South in railroad track gauges; between Edison and Westinghouse in electricity. True, the old story had been given some new twists, by Sony vs. Matsushita in videotape players, or 3Com vs. Rockwell and Lucent in modems. The jury is still out on DVD and Divx (both of which play CDs). But same as it ever was, standards wars may end in truce, as with modems; in duopoly, as with video games; or in annihilation of one of the parties, as with videotape players.

The keys to the analysis of networks are the twin concepts of positive feedback and network externalities, the authors say. Neither one is a recent arrival. Network externalities — when the value of a product to one user depends on how many other users there are — have long been recognized as keys to transportation and communications industries.

For example, a handful of telephones will have only limited value. Then positive feedback sets in: as the installed base of telephones grows, more and more users find it worthwhile to tap into the network. Eventually growth levels off, but only after a successful technology has taken over the market. Railroads, highways, electricity grids, television, e-mail: all obey the same basic principles.

‘Information Rules’ has something to say about nearly every aspect of today’s business terrain; it is hard to exaggerate how pervasive is the logic of positive feedback. Among the most interesting chapters are those on recognizing and managing ‘lock-in,’ the widespread situation in which choices today are hemmed in by selections made in the past. The cost of abandoning your Toyota for a Ford may not be great, but just try switching from a Macintosh to a Windows PC.

Savvy marketers, moreover, are trying to raise the switching costs to their customer base, and not just through tricks of engineering, training, and design. Frequent-flier miles are an especially successful device for increasing lock-in, a subtle form of volume discount. Consumer loyalty programs are proliferating everyday as computation power creates ‘synthetic frictions,’ little barriers designed to influence your choice. Those supermarket cards, for example, that gain you sale prices, in return for the windfall of information about your tastes that store owners receive, are a prime example.

The overriding virtue of ‘Information Rules’ is that it is clearly written but deeply grounded in a sense-making discipline that has evolved over a couple hundred years. If you want to know more about the whys and wherefores of ‘Goldilocks’ pricing — if your market doesn’t segment naturally, choose three versions, just like Goldilocks — you are referred to a paper by Itamar Simonson and Amos Tversy (and to the three sizes of peanut butter in your supermarket!). Got a question about the virtues of standardization through committees vs. the market? See the recent work by Joe Farrell and Garth Saloner.

Economics isn’t perfect — far from it. But it has raced ahead in the last 25 years in topics of the greatest concern in industrial organization. This book is the best available introduction to the nuts and bolts of new learning.

Must-Read: Joseph E. Gagnon: Is QE Bad for Business Investment? No Way!

Posted on by Brad DeLong

Must-Read: Also Larry Summers.

The important thing here, I think, is to have Bernanke’s back. Bernanke is right: QE was worth trying ex ante, and ex post it looks as though it was worth doing–and I would say it was worth doing more of it than he did. If there are arguments that Bernanke’s QE policy is wrong, they need to be arguments–not mere expressive word-salad.

Spence and Warsh are attacking Bernanke’s monetary policy. Why? It’s not clear–they claim that business investment is low because Bernanke’s QE policies have retarded it. But they do not present anything that I would count as an argument or evidence to that effect. As I see it, they are supplying a demand coming from Republican political masters, who decided that since Obama renominated Bernanke the fact that Bernanke was a Republican following sensible Republican policies was neither here nor there: that they had to oppose him–DEBAUCHING THE CURRENCY!!

And Warsh and Spence are meeting that demand, and meeting it when a more sensible Republican Party–and more sensible Republican economists–would be taking victory laps on how the George W. Bush-appointed Republican Fed Chair Ben Bernanke produced the best recovery in the North Atlantic.

I don’t know why Warsh is in this business, lining up with the Randites against Bernanke, other than hoping for future high federal office. And I am with Krugman on Spence: I have no idea why Spence is lining up with Warsh here–he is very sharp, even if he did give me one of my two B+s ever. What’s the model?

Joseph E. Gagnon: Is QE Bad for Business Investment? No Way!: “There is no logical or factual basis for their claim…

…It is the reluctance of businesses and consumers to spend in the wake of a historic recession that is forcing the Fed and other central banks around the world to keep interest rates unusually low–not the other way around…. Economies in which central banks were most aggressive in conducting QE early in the recovery (the United Kingdom and the United States) have been growing more strongly than economies that were slow to adopt QE (the euro area and Japan). At the top of their piece, the authors pull a classic bait and switch, noting ‘gross private investment’ has grown slightly less than GDP since late 2007. Yet the shortfall in private investment derives entirely from housing. No one believes that Fed purchases of mortgage bonds tanked the housing market. The whole premise of the article, that business investment is excessively weak, is simply false….

But the piece also fails a basic test of common sense. Spence and Warsh posit that ‘QE has redirected capital from the real domestic economy to financial assets at home and abroad.’ This statement reveals a fundamental misunderstanding of what financial assets are. They are claims on real assets. It is not possible to redirect capital from financial assets to real assets, since the two always are matched perfectly. Equities and bonds are (financial) claims on the future earnings of (real) businesses. Spence and Warsh accept that QE raised the prices of equities and bonds. Yet they seem ignorant of the effect this has on incentives to invest…. True, some businesses have used rising profits to buy back their own stock. But that is a business prerogative that points to lackluster investment prospects and cannot be laid at the feet of easy Fed policy…. [If] QE has raised stock prices, it discourages businesses from buying back stock because it makes that stock more costly to buy…