For all the talk about scandals in Washington, the news that caught my eye was the differing treatment accorded the latest benchmark in the global warming debate. Atmospheric carbon dioxide reached 400 parts per million earlier this month, as measured by two monitors installed in Mauna Loa, Hawaii, in the middle of the Pacific Ocean.

On the eve of the announcement, the editorial page of _The Wall Street Journal_ featured an op-ed, “In Defense of Carbon Dioxide.” An atomic physicist, William Happer, of Princeton University, and a geologist-turned-astronaut, Harrison Schmitt (who also served a term as US senator from New Mexico), argued that the chemical compound had been “demonized.” In fact, they said, increasing carbon dioxide was a boon.

Higher atmospheric levels had “little correlation with global temperature,” the authors wrote, and none with more extreme weather. Instead more carbon dioxide would benefit humankind by increasing agricultural productivity, according to Happer and Schmitt. Commercial nursery operators routinely increase carbon dioxide levels in their greenhouses to 1,000 ppm, they added, to force the growth of plants. Indeed, the 400 ppm threshold was low by the standards of geological and plant evolutionary history: levels had been as high as 3,000 ppm or more 65 million years ago.

The next day _The New York Times_ led the paper with the news that the “long-feared” 400 ppm threshold had been crossed. (_The Financial Times_ ran the story on page one, too: “CO2 at highest level for millions of years.”)  _NYT_ reporter Justin Gillis wrote that by studying air bubbles trapped in Antarctic ice, scientists had concluded that for 800,000 years atmospheric carbon dioxide levels had fluctuated in a narrow band, from 180 ppm in the ice Ages to 280 ppm during the warm periods in between.  He quoted Ralph Keeling, who developed the first atmospheric-gases monitoring station in Hawaii, in 1958, on the significance of the news: “It means we are quickly losing the possibility of keeping the climate below what people thought were possibly tolerable thresholds.”

The six-paragraph _WSJ_ account that day, on page A4, was as uninflected as the _Times_ story was pointed. The average concentration of carbon dioxide before the Industrial Revolution of the nineteenth century was about 280 ppm, reporter Peter Landers noted; levels had been rising without interruption for the half-century since careful measurements began. President Obama’s efforts to restrict greenhouse gas emissions of new coal-fired power plants had run into legal opposition, he wrote. Republican lawmakers had warned that efforts to curb emissions “could harm the economic recovery.”

A few days later, the _WSJ_ editorial page ran a letter from two Pennsylvania State University professors pointing out that at the time when carbon dioxide levels were at 3000 ppm 65 million years ago, there were no polar ice caps and more than 20 percent of present-day land area was submerged.

_That_, I thought, was a three-way difference of opinion about correlation vs. causation which was worth following. (The long-time independence of the _WSJ_’s generally perpendicular news columns from the paper’s famously conservative editorial page has appeared  to be continuing under the newspaper’s new owner, Rupert Murdoch.)

In contrast, the recent austerity/stimulus controversy, at least in the United States, has been trivial – Benghazi for progressives. It rests on the proposition, advanced by a handful of professional economists, that technocracy should somehow trump politics. Maybe in climate science; but not in economics – not any time soon, anyway, not in the United States.   (Europe is another matter:  see Martin Wolf of the _Financial Times_ for the details.)

The sequester may be affecting the recovery, but the growth rate is not what the battle is about. The underlying controversy here has to do with narrative:  how the years since 1932 are to be understood. That was the US election that rejected the Republicans’ handling of the economy and led to the creation of a mixed economy. Franklin Roosevelt’s presidency also constituted something of an overture to the civil rights revolution of the twentieth century (the emancipation of women was already underway) though the movement accelerated only after the election of Harry Truman in 1948.

In one view (that of President Obama, for example, and other centrists), the election of Ronald Reagan in 1980 was a salubrious event, a substantial technical correction that needed to be made.  In another view (that of historian Angus Burgin, author of The Great Persuasion: Reinventing Free Markets Since the Depression, for instance, and other progressives), it was a cunning theft. In still another view (that of most of today’s Republican leadership), it was a historic turning point, an opportunity to return to an era of simpler, less intrusive government, that has somehow been delayed for twenty years by the Democrats.

That’s the import of the IRS scandal, whatever it turns out to be. For the second time since Bill Clinton was elected in 1992, the Republicans, having failed to defeat a Democratic candidate at the polls, are determined across the board to stall his agenda in Congress and cripple him in his second term.  Let the rest be damned, they say, including climate change, until they have regained the initiative. Conservative leaders don’t see climate change as a problem. It seems fair to say that the Democrats, having succeeded in the same tactic (for good and sufficient reason) with Richard Nixon, tried again with Reagan and failed, but with very different results, since both Clinton and Obama made substantial compromises with the GOP agenda in order to get elected.

Neither its promise to repeal the Affordable Care Act, nor the tactic of fierce Congressional tight-fistedness after the 2010 elections, succeeded in electing a Republican president.  Now conservative GOP leadership is hoping to make something of various low-grade scandals. It won’t work until compromises with the Democrats’ long-term agenda are made.

That’s why differences of opinion in conservative ranks over the significance of carbon dioxide emissions are so interesting. _Economic Principals_ noted last month that two distinguished GOP sachems, men who command wide respect on both sides of the aisle – former Secretary of State George Shultz and Nobel Laureate Gary Becker – had advocated, also in the editorial pages of the _WSJ_, a revenue-neutral carbon tax designed to slow carbon dioxide emissions.

This schism in Republican ranks, between cautious conservatives and the go-for-broke variety, provides the best clue to the future.  Elections and economic growth will resolve the budget squabbles.  But nature itself  will settle the question of climate change, perhaps sooner than we think. Maybe it will turn out that there is nothing to worry about, as the leaders of the Congressional wing of the GOP seem to think. But I doubt it.

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Enthusiasm for budget-balancing swept Europe in 2010 in the wake of the financial crisis, just as the Tea Party movement was taking root in the United States.  (See this four-minute history of the American events to refresh your memory.) The difference is that, in Europe, “expansionary austerity” was taking hold at the highest levels of government. In the United States, it did not.

In April of that year, Harvard University professor Alberto Alesina told European Union finance ministers in Madrid that “large, credible, and decisive spending cuts” often had been followed by growth since 1980, working their magic mainly by altering expectations. In May, 43-year-old David Cameron, campaigning on an austerity platform, became the first coalition prime minister in Great Britain since World War II – and the youngest PM in almost 200 years. In June, G-20 presidents and prime ministers meeting in Toronto promised to halve their budget deficits by 2013. In _Bloomberg BusinessWeek_, economics editor Peter Coy wrote that it was “Alesina’s hour.”

The US midterm elections followed in November. Six Democratic senators and sixty-three representatives were defeated, many of them by Tea Party candidates.  But President Barack Obama dug in.  There followed a long summer in 2011 during which Republicans repeatedly threatened to default on Treasury debt if their demands for budget cuts weren’t met. Obama subsequently won a handy re-election victory in 2012. He then embraced making permanent the provisional Bush tax cuts of ten years before (excepting those on the highest earners), in the name of providing additional necessary stimulus to the still-struggling economy

Now the funny thing is that the most successful episode of “expansionary austerity” to be found anywhere in recent history occurred in the United States, in the early 1990s, in the years after Bill Clinton defeated George H.W. Bush.  Conventional wisdom among pundits friendly to the Democrats was that considerable stimulus spending was needed to revive an economy laid low by interest rate hikes tax increases after the first US war in the Persian Gulf.

But Federal Reserve chairman Alan Greenspan, at lunch with the newly elected Clinton, advocated a highly public measure of belt-tightening instead. “Credible action to reduce the federal deficit would force long-term interest rates to drop as markets slowly moved away from the expectation of inevitable inflation,” he told the president-elect, according to Bob Woodward in Maestro: Greenspan's Fed and the American Boom, spurring a round of mortgage borrowing and consumer spending.  Deficit reduction would boost employment instead of adding to the jobless rolls. Clinton’s economic team urged much the same; the president took the risky step: and things worked out more or less exactly as expected.

But all kinds of differences existed between the US economy in the early ’90s and European and US economies in 2010, beginning with the fact that in ’10 both were still suffering from the worst contraction since the 1930s, whereas in 1993 they were on the verge of an tidal wave of high-tech investment and productivity growth, not to mention the appreciation of the dollar 1995-2002 and low oil prices, at least until 1999. One thing that wasn’t different was that in 2010 US policy-making was once again partly in the hands of the man who had helped execute the policy in 1993.  Then it was Deputy Assistant Treasury Secretary Lawrence Summers who elicited the views from Wall Street bond traders that permitted his bosses, Treasury Secretary Lloyd Bentsen and National Economic Council director Robert Rubin, to design the package of budget cuts that touched off a virtuous circle that lasted for most of a decade. In 2009 it was again Summers who, as director of the NEC, made the case for stimulus that kept the US from slipping deeper into recession.

The US succeeded in staving off the budget cutters and so seems to have entered the early stages of an expansion. But Europe took the bait, and is now stumbling along.  (See this assessment by Anis Chowdhury, of the University of Western Sydney, Australia, part of a VoxEU Debate last year, for an illuminating examination of the European experiment.)  The seventeen countries of the Eurozone that share a common currency have one set of well-publicized problems:  the Euro is in danger of coming apart.  Now the UK may hold a referendum in the next year or two on the possibility of pulling out of the 27-member European Community altogether.

One moral of the story is that it matters which Harvard economist you take your guidance from. Carmen Reinhart, of Harvard’s Kennedy School of Government, and Kenneth Rogoff, of its Economics Department, also entered the austerity debate in early 2010, when they ventured that there may be a limit of around 90 percent in the ratio of public debt to GDP after which the likelihood of financial crisis increases.  Tea Party deficits hawks, including Rep Paul Ryan (R-Wis.) quickly took the warning to heart.  But there’s a world of difference between warning that such vulnerabilities exist and counseling quick action in hopes they will diminish.  “Expansionary austerity” is real enough.  As is so often the case, it’s a matter of timing and degree.

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The list of genuine heroes of the financial crisis of 2007-08 is a short one, as opposed to the roll of pretenders, which is as long as my arm. High on the former are Carmen Reinhart, of Harvard’s Kennedy School of Government, and Kenneth Rogoff, of the university’s economics department. The recent controversy about an error in their arithmetic has kicked up a cloud of dust, but, when that dust has settled, will have done little to damage their standing.

Their best-selling book, _This Time Is Different: Eight Centuries of Financial Folly_, which appeared in September 2009, was a triumph, but it was a publishing triumph, a compendium of previous excursions on their data base, assembled in a hurry, and wrapped around a brilliant diagnosis of what was about to happen next. The apex of Reinhart’s and Rogoff’s professional reputation consists of three technical papers  since 2009, each illuminating some previously unnoticed fundamental aspect of the crisis.

The first of these, “The Aftermath of Financial Crises”  (locked up tight from non-paying eyes by the _American Economic Review_), was written at the height of the maelstrom in the autumn of 2008 and presented at the American Economic Association meetings in San Francisco in January 2009 (it appeared substantially intact as chapter fourteen in _This Time Is Different_). It warned that, because the previous autumn had seen a systemic banking crisis, the resulting recession would be much deeper and the recovery slower than had previously been expected – a prediction thoroughly on the mark.

The second paper, "Growth in a Time of Debt," whose conclusions had been hinted at in chapter seventeen of their book, was presented at the AEA meetings in Atlanta in January 2010.  It contained the finding for which they have been criticized, the proposition that for most countries  there exists a threshold – around 90 percent of GDP – at which external indebtedness impinges on prospects for future growth. They subsequently elaborated on their argument, with Vincent Reinhart, in "Public Debt Overhangs: Advanced-Economy Episodes since 1800,"  in the _Journal of Economic Perspectives_.

The third, "The Liquidation of Government Debt,"  by Reinhart and graduate student M. Belen Sbrancia, of the University of Maryland, circulating as a working paper but not yet published, makes the point that there is more than one way to fleece a sheep, sometimes in such a way that the creature only notices when a chill is in the air.  Previously Reinhart and Rogoff had examined more extreme forms of working down debt: explicit defaults, restructurings and hyperinflations. The new paper, in familiar Reinhart style, surveys various episodes in which the more subtle forms of non-transparent taxation known as “financial repression” were employed to reduce the burden of massive public debt, mainly at the expense of savers, especially in the years after World War II.

In an op-ed in the _Financial Times_ last week, "Austerity Is Not the Only Answer to a Debt Problem," Reinhart and Rogoff argued that various policy alternatives exist to tight-fisted austerity and free-wheeling spending in a time of historically high debt.. Keynes himself, they argued, had identified several in his hastily written and thoroughly neglected 1940 book, How to Pay for the War.  (You can read their op-ed for free, but minimal registration is required.) Moreover, they reminded readers, deliberately engendering a certain amount of inflation in order to ease debt burdens remains a possibility– Rogoff himself has advocated an inflation target of 4-6 percent for a few years as a relatively equitable way of dealing with the problem.

It is true that in the second paper they made what econometrician James Hamilton, of the University of California at San Diego, calls “a numbskull error” in creating a spreadsheet, omitting the first five countries in the alphabet from a set of cells with which they calculated an average. (Including them would have changed the value of the average only a few tenths of one percent, Hamilton says).

It is true, too, that Reinhart and Rogoff chose to emphasize a mean (an average) instead of the median (the middle value) when combining various observations in one of three data sets they examined. (Again, it didn’t alter the fundamental conclusion -- that higher levels of debt are associated with slower growth, especially, according to the authors, after debt reaches 90 percent of GDP.)

If you are mainly interested in the argument between Reinhart and Rogoff and the University of Massachusetts at Amherst team that last month criticized them, read Hamilton’s lucid evaluation of the controversy (and the Amherst team’s reply.) Pay special attention to the chart. Check out the entry on The Contributions of Reinhart and Rogoff. Peruse the comment sections. See why Hamilton’s Econbrowser is among the most widely followed of all economics blogs.

If you are following the debate about the relationship between debt and global growth, stay tuned.  That the workout is turning in the direction of financial repression was clearly to be seen last week in "There Will Be Haircuts," a commentary by global asset manager PIMCO’s bond-buyer-in-chief, William Gross, who oversees $1.9 trillion in other people’s money. The aftermath of the financial crisis of 2007-08 still has a long way to go.

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For three years as a young man, I worked for a business magazine in New York.  _Fortune_, _Business Week_, _Barron’s_ were fast cutters in relation to the mighty vessel that was _The Wall Street Journal_, but none in those days sailed closer to the wind than _Forbes_ (the present-day iteration bears almost no resemblance to it). _Forbes_ was good because it had a great editor, James W. Michaels. Its annual “Yardsticks” issue was a pretty good statistical map of US industry, but the magazine’s real franchise consisted of what Michaels called “company stories,” sharp (sometimes glib) analyses of what organizational economists now call persistent performance differences (PPDs) among seemingly similar enterprises (SSEs).  And therein lies a story.

_Forbes_ editors, like those in other news organizations, organized themselves hierarchically around their sources and sounding boards. One of my friends talked to Bruce Henderson of the Boston Consulting Group and George Kozmetsky, a Teledyne founder and dean of the University of Texas College of Business Administration. Another was in touch with entrepreneur Craig McCaw and maverick economist Reuven Brenner. The senior editors kept tabs on investor relations managers of such companies as US Steel, General Electric and IBM. Editor Michaels himself spoke regularly with the likes of management guru Peter Drucker, Corning chief executive officer Amory Houghton, and John Loeb, of Loeb, Rhoades, a Wall Street grandee. Below decks, I read Alfred Chandler, the historian of big business, and Daniel Bell, the sociologist author of _The Coming of Post Industrial Society_, but my interest was turning to economics.

I might have saved myself and readers a certain amount of time, and, perhaps, money, too, had I been reading James March instead.

Or so I thought as I attended a program earlier this month celebrating the fiftieth anniversary of the publication of _A Behavioral Theory of the Firm_, by March and Richard Cyert. The meeting, at Stanford University, where March is an emeritus professor, was organized by the National Bureau of Economic Research. An earlier celebration of March, in Italy, in 2002, was published as a special issue of the journal _Industrial and Corporate Change_. Cyert was 77 when he died, in 1998.

The corporate landscape today is, of course, all but unrecognizable compared to what it was when March and Cyert wrote in 1963.  The outlines of any number of vivid company stories loomed as I listened to the panels and papers at the conference. In fact, a bountiful new field of organizational economics has grown up in the nexus of the interest in organizations that March shared with Kenneth Arrow, Ronald Coase, Oliver Williamson, Herbert Simon and Sidney Winter.

That field was an empty lot when March started, not long after finishing his PhD, at Yale. _A Behavioral Theory of the Firm_ was a broadside aimed at standard textbook economics, especially the branch of it known as the theory of the firm.  The book begins,

The “firm” of the theory of the firm has few of the characteristics that we have come to identify with actual business firms. It has no complex organization, no problems of control, no standard operating procedures, no budget, no controller, no aspiring “middle management.”

Fifty years later, illuminating theories of all those topics, and more, are on display in a newly-published _Handbook of Organizational Economics_, edited by Robert Gibbons, of the Sloan School of Management of the Massachusetts Institute of Technology, and John Roberts, of Stanford University. There you can learn about complementarity in organizations (for example, GE’s decision a hundred years ago to produce a wide array of projects based on its electric motors); about transaction costs and property rights; and about what managers do (hint: they pursue PPD in SSEs). It’s not bedtime reading, but then what handbook is? It is, however, a study guide for graduate students looking for problems to understand – problem that are routinely solved in practice within firms, between them, beyond their boundaries.  It is a prospectus, too, for a sub-discipline that is only now beginning to place its specialists in university departments.

To judge from the papers at the NBER session, organizational economists do what consultants did, but they do it much more carefully, mapping their theories into all the rest of economics with much greater concern for precision.  Is there a practical value in their work? It wouldn’t be the first time that technical economics turned out to have engineering applications. Maybe that’s why former Citicorp chief executive John Reed sat in the back of the room with March throughout the day. (Reed chairs the sixty-member Corporation that governs MIT.)

So far, as someone said, the clearest sign that organizational economics is being put into practice is the growing adoption of a “balanced scorecard” approach to corporate accounting, a means of shaping strategy devised by Robert Kaplan, of the Harvard Business School. Like March, Kaplan is a product of the extraordinary intellectual efflorescence that took place in the 1950s and 1960s at Carnegie Institute of Technology, in Pittsburgh (today Carnegie Mellon University). Franco Modigliani, Merton Miller, Herbert Simon, Robert Lucas, and Edward Prescott, and Finn Kydland all began work there, much of it having to do with human cognition, for which they were later recognized with Nobel prizes. March left Pittsburgh to become founding dean of the social sciences at the new Irvine campus of the University of California, in 1965, and, since 1970, has been a professor at Stanford.

All these technical developments still require translation of the new learning about how PPDs arise among SSEs into the demotic speech (winners and losers) that we call “news.” I have no idea who among the next generation of newspaper and magazine journalists and popular academic writers will undertake the task, though I have confidence it will be undertaken, and before long. (See The Org: The  Underlying Logic of the Office, by Ray Fisman and Tim Sullivan, for beginniners.)  Much work remains to be done before we will have come to grips with all the restructuring, out-sourcing, just-in-time inventorying, yield managing, incentivizing and other personnel policies that have become standard in recent years.  .

March himself requires little translation, however, because he has quietly done a good deal of it himself. In addition to the steady stream of books, articles and projects he had produced over the years (including, most recently with Mie Augier, The Roots, Rituals and Rhetorics of Change: North American Business Schools Since World War II), he has written and appeared in two pretty good instructional films (_Passion and Discipline: Don Quixote’s Lessons for Leadership_, and _Heroes and History: The Lessons for Leadership from Tolstoy’s War and Peace_), and published nine volumes of poems as well, all of them dedicated to his wife of sixty years.  From “Wisconsin Rules,” a representative sample, of a piece with everything else, (with thanks to Josef Chytry):

_Where I come from,_

_A man doesn’t say what he wants,_

_Every moment of the day,_

_And sometimes less at night_

_Even in a whisper. We walk_

_A comfortable path of convention,_

_Keeping our ambitions hidden,_

_Mostly, not especially because_

_We want to fool anyone, but because_

_Lives are better when dressed_

_In the fabric of silence._

For more lives in the workplace, stay tuned to organizational economics.

For a slightly different take on the role of the supposed limits to sovereign debt in the austerity debate, come back here next week.

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In the aftermath of a very long week in Massachusetts, two things about the response to the Boston Marathon bombing seem clear.

One is that command and control of the investigation was a mess. Rival federal agencies and police that couldn’t agree among themselves on Wednesday long enough to call a press conference overreacted Friday by shutting down some and eventually all of the city – then failed to find the fugitive. Political leadership, Gov. Deval Patrick in particular, seemed to simply stand aside. (Boston Mayor Tom Menino was sidelined with a broken leg.) With not much more than a shrug at the end of the day, the authorities ended their ill-considered “lockdown” Friday evening, fifteen hours after it began.

Ten minutes later, having been given official permission to go outdoors, a Watertown homeowner spotted tell-tale signs of the fugitive’s presence in a tarp-covered boat in his back yard. Journalist Jane Jacobs noted fifty years ago that populous streets are safe streets. Next time the police should rely much more on citizens’ eyeballs than their top-down expert systems.

The other interesting thing is that public radio beat the newspapers.  WBUR, Boston University’s National Public Radio affiliate, has been beefing up its news operations for years, adding reporters and editors to its staff, opinion pages and cultural coverage to its website. I listened to its coverage Friday for sixteen hours. Much of it was vamping, of course, boring repetition while waiting for some new scrap of news to arrive.

But whether it was talk-show host Robin Young recalling fugitive Dzhokhar Tsarnaev’s charm at the prom party for her nephew she hosted two years before; or the reporter who, as the police closed in, congratulated a nine-year-old on his perspicacity, only to be told that kid next door had a police scanner: WBUR’s coverage had a distinctive hometown flavor and energy that made it possible to form judgments about events throughout the day.

As a former newspaperman I had high hopes for the Saturday editions.  But neither _The Boston Globe_ nor _The Boston Herald_ paper had anyone to compete with the authoritative Saturday morning commentary of WBUR’s veteran process reporter David Boeri. The news business is in flux, more than ever before. Newspapers still come out every day; they are just beginning to go to work on the many aspects of the story that need straightening out.

But Friday the Boston papers would have done well to assign someone to listen to and write about their competition.

.                     xxxx

One way to understand the politics of the last couple of hundred years is as a running argument among those who emphasize self-reliance and others who stress social causation by distant forces of individual ills. In that view, Margaret Thatcher was about as dry as leaders of industrial democracies have ever come.

Yet even in her most infamous declaration of principles – “And, you know, there is no such thing as society” – she made a little room for fellow-feeling, at the level of the family.

I think we've been through a period where too many people have been given to understand that if they have a problem, it's the government's job to cope with it. “I have a problem, I'll get a grant.”  “I'm homeless, the government must house me.” They're casting their problem on society. And, you know, there is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people, and people must look to themselves first. It's our duty to look after ourselves and then, also to look after our neighbor. People have got the entitlements too much in mind, without the obligations. There's no such thing as entitlement, unless someone has first met an obligation.

Almost everyone understands that innumerable collectivities, organized and unorganized, exist in the world between families and the sum of all such associations that we routinely describe as “society.” Mrs. Thatcher herself had a special fondness for the sort of agglomeration known as the nation-state – at least her own.

It seems to me that anyone who knows anything about the United Kingdom will acknowledge that Mrs. Thatcher’s leadership improved matters considerably in what in the 1970s had become a largely dysfunctional state.

It was her inability to reckon any better than she did with the duality of human existence that made her such a divisive leader. Ronald Reagan was more at home with the contradiction between citizen and self.

.                       xxxx

What about in the dispute that erupted last week between three economists at the University of Massachusetts at Amherst and the Harvard team of Carmen Reinhart and Kenneth Rogoff?

It’s too complicated and too little ventilated for this week – the subject for another day.

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The Republican Party seems mired in nostalgia. Calvin Coolidge one week, eulogies for Margaret Thatcher the next. Take a closer look, though, and you’ll find powerful forces of regeneration hard at work within the party. As is often the case, the harbingers of change are to be found in California.

Some of this takes place in the broad theater of persuasion. Last week former Gov. Arnold Schwarzenegger hosted a forum at the University of Southern California, where a draft of the third National Climate Assessment Report was discussed. The draft report, by a panel of sixty experts, sees California bearing the brunt of a higher volume of heat waves, heavy downpours, floods and droughts that are already affecting the American people, and which are likely to increase. (A 90-day comment period ended last week; after further revision and review, eventually the report will be submitted to the government..) “The first step for policymakers — and for ordinary citizens too — is to understand the situation we face,” the two-term Republican governor wrote in an op-ed article in the _Los Angeles Times_.  He lectured the forum audience:

If we are smart, we listen to our doctors, and if we are stupid, we ignore our doctors and it takes a heart attack to realize that we should listen. The National Climate Assessment Report is our physical and these scientists can give us a prescription for what we need to do to improve our climate. It is our duty to listen to them and encourage action — action all over the country.

More telling was the op-ed article tucked away in _The Wall Street Journal_ last week in which former Secretary of State George Shultz and Nobel Laureate Gary Becker, of the University of Chicago, proposed to replace the bewildering  patchwork of existing energy taxes and subsidies (think ethanol!) that has grown up over the years with a single carbon tax levied on all forms of energy, with the idea of “leveling the playing field” among fuels of all sorts, by charging for the amount of atmospheric carbon they emit.

Instead of putting a huge new source of funds at the government’s disposal, however, Shultz and Becker say that the measure should be “revenue neutral,” meaning that whatever sums are realized beyond what the government currently nets should be paid into an account held separate from all the rest, and earmarked to be returned to individual taxpayers.  The aim would be to curb greenhouse gas emissions, nothing more.

To that end, they recommend that a tax be levied close to the point of production (rather than tacked on to gasoline prices and energy bills, as is the case today), and collected by an existing government agency, either the Internal Revenue Service or the Social Security Administration.  If the IRS did the collecting, say Shultz and Becker, an annual distribution – a “carbon tax dividend” -- might be paid annually from the fund to every taxpayer and recipient of an Earned Income Tax Credit. Were the SSA the agent, the distribution would go on the same basis to everyone paying into or receiving benefits from the system.

There is no shock –the idea of a tax on carbon that has been gaining momentum in Washington for years. The conservative American Enterprise Institute has been quietly studying the idea for years. After the election, the AEI finally went public in November when it partnered with the Climate and Energy Project at the Brookings Institution, the International Monetary Fund, and Resources for the Future to host a day-long series of discussions. A lucid short report on what went on that day is here.

The difficulties of designing a carbon tax are considerable but not insurmountable. Taxation is an intrinsically messy business. In fact, British Columbia has been experimenting with just such an approach as that proposed by Shultz and Becker  for five years, having started at a relatively low level and increasing by steps to an indicated target, giving producers and consumers alike opportunity to adjust to the system. Once established, Shultz and Becker say, the tax could be raised if greenhouse warming exceeded expectations, or lowered if it did not.

The real problem has to do with how the issue is to be framed.  Many factions, conservative and liberal alike, see carbon taxation as a means to the end of dealing with US budget problems – as a new source of revenues, perhaps antecedent to a value-added tax, designed to replace the century-old system of income taxation with a broad tax on consumption. Others think that any new tax instrument should be confined to dealing with the problem of atmospheric carbon emissions.

The news last week was interesting because it set in opposition more starkly than ever before the broad coalitions vying for control of the Republican Party. George Shultz, 92, and Becker, 82, are at the very pinnacle of the GOP Establishment. In addition to being Secretary of State under Reagan, Shultz served as Treasury Secretary, Labor Secretary and Director of the Office of Management and Budget in the Nixon administration. Becker is the inheritor of Milton Friedman’s mantle as the foremost expositor of market economics. Behind them stands an extensive Hoover Institution task force.  Arrayed against them are the many voices associated with the GOP’s Tea Party wing – populists who believe the identity of the Republican Party depends crucially on its opposition to taxes of any sort.

One anvil on which these issues will be hammered out is the editorial page of the _WSJ_, where Shultz and Becker’s plan appeared last week to a portentous silence that won’t last very long. That influential forum has been dominated for years by Tea Party tax-cutters and climate-change skeptics. Will it change over time? We’ll see. A major battle for the soul of the Republican Party began last week.

.                           xxx

Raj Chetty, of Harvard University, was awarded the John Bates Clark Medal last week by the American Economic Association. The prize is given annually to an economist judged to have made a durable contribution to economics before the age of forty.

Chetty was cited for having developed a variety of ingenious methods for sifting data to measure behavioral responses of various sorts, especially to tax law changes – “arguably the best applied microeconomist of his generation,” according to the committee’s report.

Named Distinguished Fellows of the AEA were Harold Demsetz, of the University of California, Los Angeles; Stanley Fischer, of the Bank of Israel; Jerry Hausman, of the Massachusetts Institute of Technology; and Paul Joskow, of the Massachusetts Institute of Technology and the Alfred P. Sloan Foundation.

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The Federal Reserve Board celebrates in December the hundredth anniversary of its founding. That means Americans will be going to school on books about central banking for a while longer.  Thanks to the financial crisis of 2007-9, a larger niche is being carved in the civics curriculum for the government agency that oversees the intersection of the nation’s systems of money and finance.

It’s a good thing, too, for in the immediate aftermath of the financial crisis, Congress took the first steps toward creating a second, similarly elaborate regulatory system – this one intended to oversee the nation’s enormous system of medical care. Once again, a hundred years is not too soon to expect to get this one right. So the more you know about oversight of the banking system, the better you’ll understand the problems of taming the tendencies to overprovision of medical care.

The first book about the Fed’s role in the 2007-08 crisis remains, in many ways, the best. In Fed We Trust: Ben Bernanke's War on the Great Panic (2009, Crown). by David Wessel, of _The Wall Street Journal_, got the story right, did it quickly, and placed it in the proper context, even if he overstated matters slightly. In establishing the Fed, in 1913, Wessel wrote,“Congress had created what would become a fourth branch of government, nearly equal in power in a crisis to the executive, legislative and judicial branches. Decades would be required for the Fed to grow into its skin, he noted, “but by the end of the twentieth century, it would have almost unchallenged power over its domain, the US economy.”  The key words there are “in a crisis.” Even then, the Fed remains, like the military, an agency of the federal government, not an autonomous branch.

Meanwhile, most new books about the Fed that come along add something worthwhile to our understanding. Take these three recently published ones, and a helpful fourth book whose relevance has been overlooked.

The Alchemists: Three Central Bankers and a World on Fire (Penguin, 2013), by Neil Irwin, of _The Washington Post_, continues the story of the crisis to the present day.  The _WSJ_’s Wessel was a veteran Washington economics columnist when the crisis began (and had the advantage of the paper’s superb staff behind him as well).  Irwin started covering the Federal Reserve beat for the _Post_ in August 2007. So his book has the virtue of a fresh eye. You go along with him as he learns. The advent of central banking in seventeenth-century Sweden gets a chapter (a somewhat confusing one, in which Jimmy Stewart, from _It’s a Wonderful Life_, makes a guest appearance to explain fractional banking). A second chapter recalls the history of the Bank of England and Walter Bagehot’s classic work on money markets, _Lombard Street_. A third chapter describes the events leading up to the founding of the Fed in 1913; a fourth, the Weimar inflation of the 1920s and US and European central bankers’ failures in the early 1930s; a fifth, the post-World War II inflation and Paul Volcker’s role in ending it; a sixth, the birth of the European Monetary Union; and a seventh, the lost decade of Japan.  Then comes a brisk narration of the crisis itself.  At that point Irwin has become become comfortable with the story; and the second half of the book, which concerns the aftermath of the American crisis and the European second wave, adds a new and permanent angle to the story:  its international dimension.  Alchemy is a lousy metaphor for what central bankers do; but Irwin is a very capable reporter and the mostly successful collaboration among Fed chairman Ben Bernanke, Bank of England Governor Mervyn King and European Central Bank President Jean Claude Trichet is an important part of the  story.

When the Music Stopped:  The Finacial Crisis, the Response, and the Work Ahead (Penguin, 2013), by Alan Blinder, of Princeton University, seeks to provide “a truly comprehensive and coherent narrative” of how the crisis happened and a guide to what remains to be done. Blinder, a member of the Council of Economic Advisers and vice chairman of the Fed during Bill Clinton’s first term as president, isn’t exactly a disinterested observer. But his chapters on decision-making during the crisis are as lucid and fair-minded as anything I’ve yet read about what happened; after all, Blinder sat in those seats. But his list of the “malevolent seven” causes of the crisis doesn’t seem especially penetrating (housing and bond bubbles, excessive leverage, lax regulation, disgraceful mortgage-lending practices, crazy-quilt financial innovation, abysmal rating-agency performance, and perverse banking-compensation schemes). I would have thought the Mayday deregulation of Wall Street in 1975, the entry of China into the world trading system after 1980, and European integration after 1992 were much more fundamental factors. And on one point, Blinder is downright infuriating:  he thinks Obama should have “trumpeted a consistent… message from the get-go” as to “how we got into this mess.” But the fact is that Obama didn’t understand the nature of the panic at the time, nor did his chief economist Lawrence Summers, nor, for that matter, did Blinder himself. (If you doubt this, have a look at what Blinder was writing at the time – or have a look at his 1996 Robbins Lectures, Central Banking in Theory and Practice, which does mention central banks’ responsibilities as lenders of last resort.)  Instead, even now, the job of explaining the peculiar nature of the crisis has fallen to one of Blinder’s longtime fellow Princeton professors, Ben S. Bernanke by name.

The Federal Reserve and the Financial Crisis (Princeton, 2013), by Bernanke, is a slightly cleaned-up version of four unusual lectures the chairman of the Fed gave at George Washington University, in March 2012, with the aim of giving an overall account of what happened, and why, and what he thought was likely to happen next. As coauthor of a best-selling introductory economics text (with Robert Frank, of Cornell University), Bernanke is a well-qualified expositor. He is also one of the leading economic historians of his generation. Mostly, though, he is the man who, with the help of his many counselors, led the way out of the fog. It figures that he would produce the clearest version of the story, and so he has.  Like Irwin and Blinder, he makes use of _It’s a Wonderful Life_ to illustrate what a bank run is like.  Unlike them, he elaborates:

The crisis of 2008-2009 was a classic financial panic but in a different institutional setting: not in a bank setting but in a broader financial market setting. As house prices fell in 2006 and 2007… it was increasingly evident that more and more [subprime borrowers] were going to be delinquent or default, and that was going to impose losses in the financial firms, the investment vehicles they had created, and also on credit insurers like AIG.  Unfortunately the securities were extremely complex, and financial firms’ monitoring of their own risks was not sufficiently strong.  The problem was not just the losses. If you put together all the subprime mortgages in the United States and assumed they were all worthless, the total losses to the financial system would be about equivalent to one bad day in the stock market. The problem was that they were distributed through different securities and [to] different place and nobody really knew where they were and who was going to bear the losses. So that created a lot of uncertainty in the financial markets.

As a result, wherever you had short-term funding, whether commercial paper or other types of short-term funding, the lenders refused to lend. We had all kinds of funding that was not deposit-insured; it was so-called wholesale funding, which came from investors and other financial firms. Whenever there was doubt about a firm, as in a standard bank run, the investors, the lenders, and the counterparties would pull back their money quickly for the same reason that depositors would pull their money out of a bank that was thought to be having trouble.  So there was a whole series of runs, which generated huge pressures on key financial firms as they lost their funding and were forced to sell their assets quickly, and many important financial markets were badly disrupted. During the Depression, thousands of banks failed, but almost all of them, at least in the United States, were small banks (some larger banks failed in Europe).  The difference in 2008 was, in addition to the many small banks that failed, there were also intense pressures on quite a few of the largest financial institutions in the United States.

You won’t find a better description of the 2008 panic than that. And the rest of the book is equally clear.  Bernanke explains how the principle associated with Walter Bagehot – that the best way to quell a panic is by lending freely, at a penalty rate, against good collateral, to firms suffering from a loss of funding – enabled the Fed and its European counterparts to halt the potential meltdown, and in the end at little ultimate cost to taxpayers, or to the central banks themselves. But the lesson of the 1930s, he says, is that much work remains to be done, in terms of providing accommodative monetary policy.  So if you are still interested in working through the details of what happened and why, then Bernanke’s lectures are definitely the right place to start. Neither Irwin nor Blinder cites them.

But if you’re mainly interested in the long arc of the story of the Fed – in the way its machinations affected your family, from your great-grandparents to the outlook for the lives of your children – and if you like a good political thriller, then you might consider When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy (Princeton, 2007), by William Silber, of New York University. Silber relates how William Gibbs McAdoo, Treasury Secretary to President Woodrow Wilson (and chairman of the Fed while the agency was opening its doors), managed to shut down trading on the New York Stock Exchange for four months following the outbreak of World War I in Europe to prevent a panic among European investors who were eager to sell US securities in order to demand gold with which to fight the war. The panic subsided, the bond-trading resumed in November (stocks a month later) and in November 1914, the discount at which the dollar had previously traded in global currency markets disappeared. Within months, says Silber, the US would replace the United Kingdom as the world’s preeminent financial power, thanks to McAdoo’s determination to maintain the integrity of the nation’s banking system.  It was the first decisive victory of the Fed; and while that may have set the institution up to fail in the 1930s, the story demonstrates how long the shadows cast by events can be.

Thus _When Washington Shut Down Wall Street_ is not a bad meditation for those interested mainly in the future of health care legislation. The Affordable Care Act of 2012 was just the beginning.  Legislators hoping to rein in soaring health costs and provide decent health care to all American citizens should take a leaf from the 62nd Congress that created the Fed. Those highly practical reformers recognized that central bankers would have to be insulated to some degree from political pressure, so they created a seven-member Board of Governors.  They understood, too, that in order to command widespread support, the system would have to be highly decentralized, so they created a dozen regional federal reserve banks, each with strong links to local banking establishments.  Decades were required to work out relationships within the system, between New York and Washington in particular; still longer to develop the will to exercise the power to achieve what until recently was described, without irony, as the Great Moderation. (That adventure is the subject of Silber’s newly-published biography of Paul Volcker.) But the moral of the story is that, in the Panic of 2008, the Fed succeeded in maintaining the stability of the global financial system. A workable solution for one thorny problem suggests a blueprint for dealing with another.

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Last week I sowed a certain amount of confusion in describing some thirty granite inscriptions that decorate the walls of the US Courthouse in Boston as tending to support the extension of equal protection under the law to matters of sexual preference and gender orientation.

Better to say, as did the late Anthony Lewis, in his introduction to a pamphlet describing the installation, that the quotations symbolize “a democratic conversation in which all those encountering these inscriptions are invited to participate… about what the law can and should do in a free society.”  See for yourself here,

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You could fault me, I suppose, for having spent the week thinking about marriage, and, by extension, about families. Listening to the justices of the Supreme Court turning over the possibility of extending to same-sex couples the right to enter into the kind of matrimonial contracts devised over the centuries to serve men and women was as interesting as anything I had done in month.

It made me think of the granite panels that decorate the outside wall of Boston’s beautiful Federal courthouse – extracts from cases heard by Boston judges, at intervals over more than a century, on which  basic rights of citizenship were extended to one group after another – poor as well as rich, foreign-born as well as native, those who must rely on others as well as those who make judgments for themselves, black as well as white, female as well as male.

Tendentious?  Perhaps a little.  Read this elegant pamphlet describing  the installation, with its preface by the late Anthony Lewis (who died only last week) and decide for yourself. When I stopped by the courthouse  this week to refresh my recollection, I found the logic of the inscriptions difficult to follow from memory. With the pamphlet's commentary. by US District Court Judge Douglas P. Woodlock (who chose the quotations), I was moved all over again. (Updated 1 April 2013.)

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In a A Letter to Paul Wolfowitz, in the current _Harper’s Magazine_, historian Andrew Bacevich, of Boston University, untangles the roots of the Bush administration’s decision to invade Iraq and urges Wolfowitz, former deputy Secretary of Defense, to write a memoir. It is an extraordinary speculation on the real aims of the war, more compelling than any other I have read.

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The Yrjö Jahnsson Award is the European equivalent of the John Bates Clark Medal, awarded every two years since 1993 to one or two economists under 45 judged to have made significant contributions. Helene Rey, of the London Business School, and Thomas Piketty, of the Paris School of Economics shared it last week.  Rey is the first woman to be cited.

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You may have guessed – an overly ambitious column fell through.  That’s all I’ve got this week!

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Like many others in the commentary business, I went back last week and read what I was writing around the time of the US invasion of Iraq. I was not very happy at what I found. In The Risk-Taker, on March 16, I was a reluctant endorser of what I understood to be the Bush Administration’s aims for the war, though by the end of the year, in Texas against the World, I had, like many others, turned around.

Reading over my clips from 2003 I noticed an aspect of things that warrants more attention. I know how I was forming my views that year, and it wasn’t by listening to the White House or, for that matter, to its Secretary of State Colin Powell.  It was mainly from the newspapers that I read.

For instance, the very possibility of the war, as I understood it – its plausibility, if not the precise justification with which it was launched – was to be found in the alarm and confusion engendered by the 9/1l attacks. Yale historian John Lewis Gaddis had made this case all but inarguable as early as 2002, in a series of lectures that were later published as _Surprise, Security, and the American Experience_.

But last week the editors of _The Wall Street Journal_ editorial page were asserting just the opposite.  In Iraq in Retrospect, their anniversary reflection, they wrote:  “Whatever else might be said about the US invasion of Iraq, which began ten years ago, its origins, motives, and justifications did not lie in the Administration of George W. Bush.”

There’s a potent clue in that nonsense.

To understand, you must remember what an utterly local and personal story were the 9/11 attacks in Manhattan. _The Wall Street Journal_, the nation’s second biggest newspaper, was forced to evacuate its home office across the street from the World Trade Center that morning. Its news staff set up shop in New Jersey, and began the epic task of continuing to put the paper out with no diminution of quality. The editorial page went right back to work, too, and, over the course of the next eighteen months, steadily built the case for war.

I say this based on recollection. I didn’t have time to consult the archives last week (which are still mainly microfiln), but I was reading the paper carefully in those days. My curiosity piqued, I looked elsewhere for corroboration. But Frank Rich, in The Greatest Story Ever Sold: The Decline and Fall of Truth in Bush's America (Penguin, 2006), barely mentions the paper.  Nor does Jacob Heilbrunn have much to say about its views in They Knew They Were Right: The Rise of the Neocons (Doubleday, 2008). The authors concerned themselves singled-mindedly with untangling the motives (Heilbrunn) and methods (Rich) of various factions within the administration

Did they ignore the _WSJ_ because the views of its edit page were unimportant?  Hardly!  Over thirty years, editor Robert Bartley built his fief into the single most powerful venue in the print media, championing supply-side economics in the 1980s and the Whitewater investigations in the  ’90s, before stepping down in 2002 to write a column. (He was replaced by Paul Gigot.) More likely neither author saw any point in taking on the _WSJ_ edit page’s role, Rich because he doesn’t read it, Heilbrunn because he does.

Equally interesting in September 2001 was what was going on uptown, at _The New York Times_. A new executive editor, Howell Raines, had just taken charge, determined to distinguish himself from his predecessor, Joseph Lelyveld, by "trigger[ing] news" instead of merely reporting it when it happened.  The day of the highjackings he leapt into action. The _Times_ staff won seven Pulitzer Prizes the next spring, including four for 9/11 coverage, as opposed to just one for the _WSJ_.

That was just the beginning of the Raines era. Aggressive reporting, especially by Judith Miller, helped set the stage for the war. As _Times_ public editor Daniel Okrent later wrote, “To anyone who read the paper between September 2002 and June 2003, the impression that Saddam Hussein possessed, or was acquiring, a frightening arsenal of W.M.D. seemed unmistakable.”  Nor was Miller the only _Times_ reporter whose stories proved useful in making the case for going to war.  Once again, I had no opportunity to leaf through the archives last week, but I have vivid memories of stories from Baghdad by John Burns, a great reporter by any measure, making the case for Saddam Hussein’s depravity. And the _Times’_ early coverage of the invasion itself was like something out of Scoop. (The paper quickly righted itself as the invasion progressed.)

Looking back on those days, it seems to me that belly-bumping between Howell Raines and the _WSJ_ played a large part in overriding what otherwise might have been the instinctive caution of an institution with memories of how it had led the way into Vietnam. As head of the _Times_ editorial page, Raines had dueled for eight years with Bartley, directly and daily, over such superheated stories as the Clinton impeachment and the strange case of Wen Ho Lee. With Raines suddenly in command of 1,400 journalists instead of 14 editorial writers, the competition continued. The _Times_ got its Pulitzer Prizes in 2002, but the _WSJ_ got the war that it wanted the following year.

As it happened, Raines quit the _Times_ under pressure from his boss in May 2003, just as the Iraq invasion was turning into an occupation. The proximate cause was concern about the fabulist Jayson Blair, who had risen rapidly under Raines, although the Miller stories probably had something as well to do with the staff resentment that forced the issue. I wrote about the matter twice at the time. In The Name of the Moose I speculated on the motives that led Arthur O. Sulzberger Jr. to appoint Raines, presumably with the idea of outstripping the _WSJ _’s reputation as the nation’s opinion-maker-in-chief. “Plenty of straight journalism appears in the _Times_ every day,” I wrote. “But ‘edge’ and ‘attitude,’ those signature concepts of the ’90s, slowly have been gaining the upper hand.”

A few weeks later, in Why It Matters, I offered a cautionary tale to illustrate the potential for disaster when a destabilizing personality assumes a leading role in a rapidly changing industry -- the story of the disaster that followed after Walter Connolly took charge of the Bank of New England in 1988 and touched off a lending war with the Bank of Boston. Then I was more concerned about Sulzberger’s penchant for taking big bets in favor of pixels at the expense of newsprint (in those days he was talking about getting out of paper products altogether). Looking back, the story of the disaster that befell Boston banking serves equally well to illustrate the dangers of swaggering competitive journalism in the run-up to war. Sulzberger was a longtime friend of reporter Miller. She subsequently left the paper in disgrace.

Bob Bartley died in December 2003. _Times_ publisher Sulzberger was subsequently restrained from excess by a further series of unforced errors.  In 2007 the Bancroft family sold the _WSJ_ to Rupert Murdoch. Peter Kann, the wise old Vietnam hand who had overseen the paper, including its editorial page, for twenty years, had stepped aside a few months earlier.

And _The Washington Post_? The enthusiasm of its editorial page for the war has been widely noted, but I don’t have a clue where it was coming from.  Maybe it was as simple as the fact that Washington was attacked, too.  Some think the _Post_ played a more influential role in than either of the other papers. I doubt it, but then I don’t live in the District.  In an editorial last week, the _Post_ was unrepentant: "For the first time in decades, contemporary Iraq poses no threat to its neighbors, and parts of the country are flourishing. But violence continues, the central government appears to be crumbling, and the United States, by failing to live up to its promises of partnership, is tipping the country toward deeper trouble."

What’s wanted, eventually, is a close consideration of the dynamic among the _Times_, the _WSJ_ and the _WPost_ in those years, apart from the vision of their role as a passive sounding board upon which various factions of the Bush Administration played out a dangerous fable. This is most definitely not the sort of thing that a public editor does, even when there is a public editor to act as after-the-fact conscience. (The _Post_ recently eliminated its in-house critic’s position.) Memoirs, oral history, close textual analysis, scholarship will all play a part.  An analysis of the role the newspapers played in fomenting the war won’t be forthcoming anytime soon.

But this much is clear already. Once Raines was out, the delirium that had troubled the _Times_ subsided, and the paper contributed its share of splendid reporting from Iraq over the next ten years.  Executive editor Bill Keller led the reformation, but in a sense it was the sober journalistic culture of the _Times_ staff that saved the paper from its ambitious bosses, much as the culture of the _WSJ_ has kept its news pages pretty much straight down to the present day. Only the editorial page of the _WSJ_  remains on its forty-year toot. And with columnist Peggy Noonan’s clarion dissent yesterday, even that fortress of certitude is finally under assault from within.

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Economic Principals is not writing this week, having been laid low by a flu virus (despite  inoculation).

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