[T]here is no simple or known relationship between environmental changes and changes in economic analysis.  During the Industrial Revolution, economists adopted the law of diminishing returns but ignored the most sustained and widespread growth of output that the world had yet observed.  The vast governmental income redistribution programs of the last hundred years have only recently attracted the attention of economic theorists.  The scholars who create economic theory do not read the newspapers regularly or carefully during working hours.

The issue with this book is that the record is locked. What this means is that either Encounter or the publisher has made a sticky change at the accounts to one or more of the data pieces for the book. It is therefore difficult to get other changes to override the sticky change.

What does this mean for the information at online accounts? Unfortunately, the best thing to do in this case is wait. The changes will take place, but it will take some time.

I have started referring to it as "the book that Amazon does not want you to read."

Don't be surprised if my mood is more sour than usual.

No, the government didn't actually increase taxes; it just raised the withholding. They'll give any extra funds back to taxpayers in April, and presumably fewer people will have to write checks to the government on April 15th.

This is a terrible idea on many levels. First of all, the government should not be taking forcible loans from its citizens...

At some point, borrowing in the market becomes prohibitively costly. California's extra tax witholding is just a preview. My guess is that some time in the next decade, "unthinkable" steps will be taken to keep the U.S. government in business. Extra tax witholding will seem fair and painless by comparison.

On the other hand, the charts include comparisons between reimbursement rates of private plans and reimbursement rates from Medicare, with staggering results that cannot be attributed to currency conversion issues. For example, according to the trade association's charts, an MRI scan typically is reimbursed for $1200 by a private plan, but Medicare pays only $500.

Even more intriguing, the physician fee for a routine baby delivery is $2384 for the typical private plan, but the cost is only $1601 for a patient on Medicare. For C-sections, the costs are $2618 and $1812, respectively.

If these data are correct, then health care would be a lot cheaper if all of us were on Medicare. Also, women would be better off waiting until age 65 to have babies.

I, feel the same comfort from a pack of informavores rummaging together through the ever-growing pile of information while the analog generation still feels towards an edited newspaper or the neatly packaged one-hour nightly news show...

Every moment of our day revolves around the idea of telling stories. So why should a select group of people in the world be the only ones with a soapbox or the keys to the printing press to tell their stories? Let everyone share their information, build their communities, and contribute to the conversation.

a bull flattening bias of the Treasury curve, with longer-dated rates falling toward the near-zero Fed policy rate, can be viewed as a consensus view that the level of the output/unemployment gap plumbed during the recession is so great that disinflationary forces in goods and services prices, and perhaps even more important, wages, will be in train, even if growth surprises on the upside.

So here is what the financial markets are thinking vs. what I am thinking:

Markets: With so much unemployment and excess capacity, we cannot possibly have inflation.

Kling: Do you not remember the 1970's? Furthermore, you may be over-estimating the excess capacity. An excess capacity to sell houses and trade securitized debt may not help absorb demand in other sectors.

Markets: The Fed has no plan to raise interest rates. Therefore, interest rates cannot rise.

Kling: The Fed merely determines the composition of government debt. The amount of government debt is determined by fiscal policy, which the Fed does not control. At some point, the huge supply of government debt has to matter. If the public loses its appetite for government bonds, then the only way the Fed can absorb the supply is to print gobs and gobs of money. Prices will rise, and bond-holders will suffer a partial default in terms of purchasing power. Even if the Fed is relatively passive, I think that the high-inflation scenario is plausible.

Markets: I can hold bonds for now. If inflation threatens to come back, I will see it in plenty of time to get out.

Kling: That is how bubbles work. Everyone thinks that they have more protection from the bubble than they really have. Personally, in spite of the inflation bets in my portfolio, my big worry is that I do not have protection from the political risk and financial chaos that could come from a sovereign debt crisis.

The answer is probably Carmen Reinhart, of the University of Maryland, when measured by citation counts, the yardstick commonly used to gauge professional fame.

2. The New York Times asks four economists if the stimulus worked. In case you're interested in arguing from authority, the only genuine macroeconomist in the bunch is Mark Thoma.

My answer would have been "I don't know." This paper explains how I lost my macro religion.

It would appear that the great claim to fame of the stimulus is that it kept state and local governments from having to reduce spending. If you combine that with wage stickiness at the state and local level (that is, if you believe that they would cut jobs rather than cut pay for government workers), then the stimulus saved jobs. From a Recalculation perspective, one might ask whether those are the jobs that you would want to save.

The latest example of my shameful indulgence is The Greatest Trade Ever, by Gregory Zuckerman. As with Andrew Ross Sorkin's Too Big to Fail, I could not put it down. Even though, as with Sorkin, there is essentially no economic analysis.

Zuckerman's writing has less sizzle and pop than Sorkin's. In fact, I have this fantasy that Sorkin wrote Too Big to Fail in one continuous manic Kerouacian burst of intensity.

But Zuckerman has something that Sorkin does not have--a portrait of Outsiders, a handful of contrarians, mostly hedge fund traders, who bet against Wall Street right before the housing bubble burst. Zuckerman's tale is not one of Insiders trying to merge banks and shore up the faltering giants. It is about Outsiders who set out to make a killing, and they did.

In Sorkin's book, we see Geithner and Paulson going all-out to protect their Insider siblings, raising taxpayer money to pay their gambling debts. Ben Bernanke's role is to help by promulgating the narrative that this is a Grave Situation that requires Major Efforts to Save the System.

For now, Bernanke's narrative reigns in the media. However, if history has any justice, that narrative will be replaced by one in which last year's episode is viewed less as a financial crisis and more as a crisis in Insiders' status, brought on by their own reckless stupidity.

Zuckerman informs us that John Paulson is capable of taking subways and buses. It is almost as if Paulson is determined to differentiate himself from Chauffered America.

Paulson and his friends needed three things: insight, timing, and a trading vehicle. The insight was relatively simple--all they had to do was see that house prices had shot past fundamental values and that any drop in house prices would lead to widespread mortgage defaults. One of my friends saw it, and he made money shorting New Century Financial, a subprime mortgage lender that went bankrupt.

The timing issue comes from the fact that if you are too early, you get wiped out by the last wave of euphoria. That is where the trading vehicle came in. The Outsiders discovered credit default swaps on mortgage securities and on mortgage security tracking indexes. Credit default swaps behave like out-of-the-money put options. If the market rises against you, you can stay solvent a lot longer buying out-of-the-money puts than you can taking a straight short position. Because credit default swaps were esoteric and generally not available to individuals, the Outsiders had an advantage over people like my friend--they could take larger positions at less risk.

As those credit default swaps began to pay off, the Outsiders started asking themselves, "who has been selling us these things?" That is when they figured out that major financial firms would be the next to fall. So they rolled their bets over into bets against AIG, Freddie, Fannie, Bear, Lehman, and so forth.

What Zuckerman enables you to see is the anxiety of someone betting against a bubble when the bubble is still inflating. How long can you hold out? How do you deal with doubt coming from your friends, relatives, and investors? How do you handle your own self-doubt? Above all, how do you deal with the contemptuous laughter of the Insiders? You can see why it takes an Outsider to make this sort of bet and to stick with it. It is, as the saying goes, so much easier to fail conventionally than to succeed unconventionally.

As I was reading, I started to think about my own views that the U.S. is headed toward a sovereign debt crisis. This is clearly an Outsider view. The market for U.S. Treasuries suggests that investors are quite sanguine about those investments. My own portfolio is (for me) precariously skewed toward investments that will pay off under a scenario in which inflation soars.

It was comforting, then, to reach the last page of Zuckerman's book.

"With all this spending, we're going to have massive inflation," [John] Paulson told Hoine, arguing that almost every major currency was at risk, other than the Chinese yuan. "What's the only asset that will hold value? It's got to be gold."

Paulson never had even dabbled in gold, and had no currency experts on his team. Some of his investors were skeptical of his argument, noting a burst of inflation was unlikely with unemployment high, wages stagnant, and businesses running at a fraction of their potential capacity. Other said too many other investors already had flocked to gold...

...but he paid the critics little heed...Betting against the dollar would be his new trade.

Perseus Distribution, a member of The Perseus Books Group, and Encounter Books announced...that they have entered into a multi-year sales and distribution agreement. The agreement will go into effect on August 1, 2009.

I am still expecting that Amazon will get books at some point, hopefully soon. Even so, you still may not be able to order it. Neither Nick nor I nor any reviewers have seen copies. Let's just say that as launching a book goes, the process is turning out to be, er, unusual.

In contrast to the analysis of Lehman skeptics such as John Taylor (2008, 2009) and John Cochrane and Luigi Zingales (2009), the evidence we present supports the view of many practitioners that the decision not to rescue Lehman represented an immediate and massive shock to the financial system that was larger by an order of magnitude than anything seen over nearly two decades.

Sterling also produces evidence that the index of financial conditions is predictive of economic activity, which would show a connection between Wall Street and Main Street.

If you look at Sterling's analysis of how the market reacts to policy, it seems to me that general policy moves, such as providing protection for money market fund deposits, have more positive effect than bailouts. It would be interesting to go back and look at the Bear, Stearns bailout or the AIG bailout and see if they produced any positive result before arguing that a bailout of Lehman would have been a good idea.

Title: What Health Economists Know that Obama Doesn't Want You to Know.

Details here.

2. Changing your mind could mean loss of group identity. I suppose I could use the unkindest cut example. But let me stick with economic beliefs. If your think of yourself as belonging to a group of conservative Republicans, you probably are going to resist any analysis that promotes Keynesian economics.

On political issues, the cost of dogmatic beliefs is small. First of all, your beliefs have almost no chance of affecting policies, much less affecting your personal well-being. Hence Bryan's rational irrationality for voters.

Second, in the realm of public policy, there is always evidence that supports either side. As my father would have put it, it's the First Iron Law of Social Science: sometimes it's this way, and sometimes it's that way.

There are dozens of factors involved in the financial crisis. By focusing on the factors that involve private sector misconduct and market failures, you can build a case for enhanced government power. By focusing on factors that involve policy errors and bad incentives created by regulation, you can build the opposite case.

On political issues, I think that it is harder to change the mind of someone who is highly educated than someone who is not. The highly-educated person is more likely to have his sense of status and identity tied up in his political beliefs. He is more likely to have a made a larger investment in finding facts and theories that confirm his beliefs. See Jeffrey Friedman on "ideological elites."

I am still staggered by Mark Thoma's remarks about potential Democratic support for vouchers. Yes, there are pro-voucher Democrats. And there are pro-choice Republicans. But if you are prepared to believe that the Democratic Party is anything other than anti-voucher or that the Republican Party is anything other than anti-abortion, I have to think that you are suffering from some sort of defense mechanism for avoiding cognitive dissonance. That is, you have the problem that "I like my party. I believe in policy X. My party opposes policy X." You need a strategy to resolve the dissonance, and one strategy is to pretend that your party is not really hostile to party X.

In politics, love is blind, in the sense that you tend to filter out negative information about your preferred candidates and parties. The more highly educated you are, the more powerful are your filters.

In theory, higher education teaches "critical thinking," the scientific method, and the need for an open mind. In practice, this is not so simple.

What about instances in which people's minds have changed? Here are some:

1. Economists have changed their minds on the main sources of economic growth. They used to focus entirely on capital accumulation. Now they look at the intangible factors that Nick Schulz and I describe in our forthcoming book. Some of this change of mind even can be attributed to an econometric result--Robert Solow's finding of the "residual" in an equation that used capital to explain economic result. I would say, in retrospect, that this sort of equation by itself would not have persuaded anyone strongly committed to the view that capital accumulation explains growth. This may be a case where no one's status was really threatened by the finding, and eventually other economists developed status by confirming and Solow's the finding. Is this an example of academics changing their minds and, if so, what accounts for it?

2. Policy makers changed their minds about treating inflation as a problem of controlling the "wage-price" spiral. It is now viewed as a monetary phenomenon. Evidently, the notion that wage and price controls damaged the economy has sunk in. That is quite remarkable, when you consider all of the policies that I think have damaged the economy where the fact has not sunk in--housing policy, for example. Wage and price controls seem to me to be an exception. What accounts for it?

Economists should listen more to techies on what techs will be feasible at what costs, but techies should also listen more to economists on the social implications of tech costs. Alas, just as economists prefer to rely on their intuitive folk tech forecasts, techies prefer to rely instead on their intuitive folk economics.

I try to stay away from arguing from authority. When I cite economic theory as an authority, it is not with a view toward saying "Shut up and listen to economists." It is instead with a view of trying to explain why the economic theory is convincing.

My views on artificial intelligence have been shaped by reading books on it. Here I wrote after reading Jeff Hawkins' On Intelligence in 2004. Later, in 2005 I looked at Ray Kurzweil's predictions, and I found a pattern of errors.

There are some engineers who say, "Of course someday we can reverse-engineer the human brain." That is a non-falsifiable statement. We could go 1000 years without reverse-engineering the brain, and somebody could still be saying that we can do it. If engineers are willing to set milestones for the reverse engineering problem and put money on when we reach those milestones, I probably will be willing to bet against them. Even though I do not qualify as an authority.