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Via Andrew Sullivan, Thomas Homer-Dixon:

Our global financial system has become so staggeringly complex and opaque that we've moved from a world of risk to a world of uncertainty. In a world of risk, we can judge dangers and opportunities by using the best evidence at hand to estimate the probability of a particular outcome. But in a world of uncertainty, we can't estimate probabilities, because we don't have any clear basis for making such a judgment. In fact, we might not even know what the possible outcomes are. Surprises keep coming out of the blue, because we're fundamentally ignorant of our own ignorance. We're surrounded by unknown unknowns.

To which Art Hutchinson replies:

It's tempting to think that all things are predictable given enough information, enough minds, enough time and enough computing power. It's just not true. (Which is not to say that some things are not predictable... and with incredible precision... a phenomenon that leads to overestimating the scope of problems and questions that lend themselves to such methods.)

...I liken Mr. Homer-Dixon's observations to those tragically massive car pile-ups that happen a few times of year in fog-prone areas like the Central Valley of California. Everyone is driving along at a reasonable speed, with reasonable spacing between vehicles. People are sipping coffee, tuning radios, maybe talking on cell phones. Slightly distracted, but mostly responsible. All is normal.

Then the first guy hits a fog bank and can't see squat. He taps his brakes. The second guy sees red lights and fog coming up fast and taps his brakes just a little bit harder, and so on. In just a few seconds, hundreds of cars end up in a tangled heap and people die. All because the guy in front was convinced by every one of his senses and not without justification based on experience that the visibility on the next 100 yards of road would be the same as on the last 100 yards of road.

This presents an enormous policy dilemma. On the one hand, as we are seeing in our newspapers every day, markets cannot function efficiently without information. Information asymmetries and imbalances are an important class of market failure that can often only be rectified by government regulation. And yet... without accurate information on the markets that are to be regulated, regulators cannot craft intelligent and efficient regulation. Incremental reform is usually the best approach in this sort of situation, but when you are in the midst of a crisis, incremental reform is often not an option.

If I were teaching Intro to Policy on my own this semester...

I haven't had any time to blog these past two days, but if I had, these would have been the stories I blogged about.

+ California kids should pay very close attention to this story. Never, ever underestimate the power of El Piolín.

+ The Kennedy endorsement was what made the El Piolin story possible. But its not the only impact of the endorsement.

+ Everyone is focused today on the fact that the US economy shed 17,000 jobs last month. That's big, but not nearly as big as this: Last year, the US economy fell nearly 1/2 million new jobs short of keeping up with the number needed to keep up with overall population growth.

+ Exxon, meanwhile, had a great year. A $40+ billion - that's with a b - profit for them. After taxes.

+ Credit where credit is due: David Broder called McCain's resurgence many many moons ago. Like so many others, I mocked him for this. He was right, I was wrong.

+ The surge is coming to an end as troops rotate home. Violence is on the rise, with several dramatic attacks in the last few days. Political reconciliation is spiraling backwards. Spencer Ackerman has all the depressing details.

+ Meanwhile, Afghanistan - the home of the people who attacked us on 9/11 - is gradually descending into chaos. McCain rails endlessly about "waving the white flag of surrender in Iraq," but he's silent about this. Remind me again why he is supposedly "right" about national security issues? [Ah - SecDef Gates explains. More violence means we're winning! I shit you not.]

+ Obama raised $32 million in January alone, and has already made major ad buys in post-Super Tuesday states. Meanwhile, he's within the margin of error in Gallup's national tracking poll.

+ Andrew Sullivan thinks (thought?) Ghandi's pacifism was "idiotic." Clearly he doesn't understand that for Ghandi, pacifism non-violent resistance was both a means and an end. [More here.]

+ If the president ignores 200+ years of tradition and practice in the operation of the US military and almost nobody notices.... I'm at a loss for words.

+ If the president literally ignores both the constitution and the law and almost nobody notices... ditto.

+ Draft Bloomberg? Apparently not.

+ Obama just won the endorsement of MoveOn.org. They held a 24-hour, members-only primary, and the vote wasn't even close.

+ He also won the endorsement of the California SEIU.

+ At this point, Republicans are probably getting used to hearing bad news about their party. But that said, this is very, very bad news.

+ Looking for evidence that would suggest the Clinton campaign is freaked out about Obama's surging popularity? Exhibit A: A spokesperson on a conference call arranged by the Clinton camp just said Obama's tactics on health care reform are as offensive as a Nazi march in Illinois.

Am I the only one who thinks this is a really dumb idea?

"We should even have a government blogging team where people in the agencies are constantly telling all of you, the taxpayers, the citizens of America, everything that's going on so that you have up-to-the-minute information about what your government is doing, so that you too can be informed, and hold the government accountable," Clinton said.

I wonder who precisely she think would want to read this thing? I'm a stone cold political junkie, and I can't imagine myself ever reading something like this. Just because we can blog doesn't mean we should. I'm all for the idea of increasing transparency and accountability in government, but please... no government blogging teams, OK?

Ross Douthat says the following:

We still have a costly welfare bureaucracy that caters more to minorities than to whites, but it’s no longer a political liability for liberals because the system is no longer the disaster that it became in the Seventies and Eighties

Which prompts John Cole to ask:

Is this accurate?

Answer: No. This is both a lie and a myth.

Although it is true that minorities are over-represented among the poor when calculated as a percentage, in sheer numbers a vast majority of the individuals who collect "welfare" are white.

According to the Census Dept, there were almost 36.5 million Americans living in poverty in 2006. Of that group, 16 million were white, 9 million black, and 9.2 million Hispanic.

Welfare doesn't "cater" to minority groups. If it "caters" to anyone it is to the poor.

And that, of course, assumes that you define "welfare" solely as means-tested programs designed to alleviate poverty. If you do not - a much more appropriate definition is any government program designed to transfer wealth from one group to another - you will be forced to include things like the mortgage interest tax deduction, a welfare program aimed at the middle class that explicitly transfers wealth from those who rent homes to those who own them. Or, as another example, the tax exemption provided to individuals for any contributions made by their employer to cover the cost of their health insurance, an exemption that transfers wealth from those who do not have health insurance to those who do.

Does Roth believe the myth or is he deliberately lying? Given that he's a smart guy, I'd assume the former over the later. And given that this claim comes in an apparent defense of Republican rhetoric on race and welfare, that may actually be worse.

More nonsense from CATO, this time thanks to the NYT. From the very same article linked to at the end of my last post on our disappearing middle class, the NYT offers this defense of growing income inequality from CATO:

Chris Edwards, director of tax policy for the Cato Institute, the nation’s leading promoter of libertarian thought, said that even the income gains among the top 1 percent might be illusory because this group gets most of the income from business. He pointed to a report this week in Tax Notes magazine, by Peter Merrill of PricewaterhouseCoopers, that said partnerships and limited liability companies reported 51.5 percent of all business income in 2004, up from 47.3 percent in 2000.

Mr. Edwards said that income from such businesses shows up on the tax returns of individuals, not their companies, and so the rise in reported income at the top may represent a change in how income is reported.

The gains among the top 1% might be "illusory" because they come from business. What the hell is this supposed to mean? If a partnership or an LLC is making more money, it is making more money for its owners. That's why they are required to include it in their income taxes. It's income. The source is irrelevant when you are considering which group is gaining the most.

Rich, successful business owners are making more money than ever. They are doing so in part because the rest of us are making less money than we used to. These facts are opposite sides of the same coin. CATO's defense isn't a defense at all. It's merely a restatement of the problem. But reading today's NYT you'd never know that. Reading today's NYT you'd think it was actually a defense.

This is neither hard to explain nor to understand. Is it really asking to much to expect the NYT to understand the things it reports on?

FP Passport has an interesting update on the sub-prime mortgage mess. Two parts worth passing along:

There is a widely held belief in the United States that the fallout from the subprime mortgage meltdown primarily affects lower-income borrowers who are primarily Hispanic or African American. While the subprime crash has affected the middle and upper class by slowing economic growth, few believed they would lose their homes.

Turns out, this perception is completely false.

As the post goes on to explain, subprime loans helped fuel the McMansion phenomenon across the nation's suburbs, so its actually much more of a middle class phenomenon than most people think. And that, as FP points out, is why it should almost inevitably lead to a fairly severe recession. It's one thing when poor people lose their homes; its another thing entirely when it starts happening to upper middle class people.

Which leads to the second point:

But the Dow keeps chugging along. I can't figure out why. I asked a trader in Chicago what he made of it, and his explanation was simple—it's irrational. Stocks are trading up on the hope that Fed Chairman Ben Bernanke will cuts rates again, as he did last month. But there's no indication that would happen. It would probably be a mistake, as it could (and probably would) trigger inflation.

I realize that it is probably naive of me to hope that this will one day become common knowledge, but I'm going to hope nonetheless. The performance of the stock market has nothing to do with the overall health of the economy. Nothing. The stock market really is just legalized gambling writ large. Its about large institutional investors betting on things like the next move made by the Federal Reserve.

Most Americans own homes or condos. Even greater numbers of us live in them. Most of us do not, however, own stocks or bonds. The things that Wall St. buys and sells belong to the upper class, not "middle America."

All of which leads to today's news:

NEW YORK (Reuters) - The richest one percent of Americans earned a postwar record of 21.2 percent of all income in 2005, up from 19 percent a year earlier, reflecting a widening income disparity among different classes in the nation, the Wall Street Journal reported, citing new Internal Revenue Service data.

The data showed that the fortunes of the bottom 50 percent of Americans are worsening, with that group earning 12.8 percent of all income in 2005, down from 13.4 percent the year before, the paper said.

It said that while the IRS data goes back only to 1986, academic research suggests that the last time wealthy Americans had such a high percentage of the national income pie was in the 1920s.

The article cited an interview with President Bush, who attributed income inequality to "skills gaps" among various classes. It said the IRS didn't identify the source of rising income for the affluent, but said a boom on Wall Street has likely played a part.

So the "skills gap" explanation is coming back, eh? OK, I'll bite. If you believe in this explanation of things, please explain to me what precisely has happened over the past 10 years that has allowed the skills of those at the top to improve so rapidly. A 2.2% increase in the total share of national income taken by the top 1% is an enormous jump for one year. Were they all going to school during that time? and if so, how did they have time to work so hard? Do those at the top really have that much more talent than all of the rest of us?

And before you answer those questions, consider this:

New data shows that after adjusting for inflation, 95 percent of Americans reported smaller incomes to the tax man in 2005 than in 2000.

Despite this, all Americans had more in their pockets as a result of the Bush tax cuts, although the increases ranged from barely perceptible for the bottom half of American earners to thousands of dollars a month for those at the top, Internal Revenue Service figures show.

For the bottom half of Americans, the average after-tax income in 2005 was $14,526, which was $20 a month more than in 2000. Without the tax cuts, their incomes would have slipped by $234 a year, or around $20 a month.

The next higher 25 percent, who made $30,881 to $62,068, had on average $52 a month more after taxes in 2005. For the next 20 percent above that, the increase ranged from $144 to $274 a month.

The only group to report higher incomes both before and after taxes was the top 5 percent.

After-tax income for the 96th through 99th rungs on the income ladder rose $5,656 on average, or $471 a month. For the top 1 percent, whose incomes averaged more than $1.2 million, after-tax income rose by $64,796, or $5,400 a month, even though their average income rose only $18,000 in the same period. More than 75 percent of taxpayers make less than $5,400 a month.

Analysis of the new income tax data, known as Table 5, also shows that while incomes rose markedly in 2005 from 2004, with all taxpayers’ average income up nearly 4 percent in real terms, average pretax income declined slightly for 75 percent of Americans.

Among the top quarter of American earners — those whose average incomes did rise in 2005 compared with the year before — more than half of the gains went to the top 1 percent.

The figures on incomes, both before and after taxes, help explain why so many Americans report feeling economic distress, despite overall economic growth since the Internet bubble burst on Wall Street in 2000 and the 9/11 attacks the next year. Other official data shows that median household income in 2006 rose by a fraction of 1 percent over 2005 only because more people were working and they were working longer hours.

Most Americans are working harder but earning less. Except for those uber-talented people up at the top. Not only are they earning more, they are being taxed less, too!

Trickle Down economics is one hell of a way to run a country, no?

For those of you who haven't been following the debate closely, Jonathan Cohn provides an excellent background here, as does Ezra Klein here\.

If you prefer your update in video form, this should take care of things: