Tidbits Quotations on December 1, 2010
To Accompany the December 1, 2010 edition of Tidbits
http://www.trinity.edu/rjensen/tidbits/2010/tidbits120110.htm       
Bob Jensen at Trinity University

Archive of Tidbits Quotations --- http://www.trinity.edu/rjensen/TidbitsDirectory.htm

Video on IOUSA Bipartisan Solutions to Saving the USA

If you missed Sunday afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/   (Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause.

One take home from the CNN show was that over 60% of the booked National Debt increases are funded off shore (largely in Asia and the Middle East).
This going to greatly constrain the global influence and economic choices of the United States.

By 2016 the interest payments on the National Debt will be the biggest single item in the Federal Budget, more than national defense or social security. And an enormous portion of this interest cash flow will be flowing to foreign nations that may begin to put all sorts of strings on their decisions  to roll over funding our National Debt.

The unbooked entitlement obligations that are not part of the National Debt are over $60 trillion and exploding exponentially. The Medicare D entitlements to retirees like me added over $8 trillion of entitlements under the Bush Presidency.

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

Many of the possible “solutions” are really too small to really make a dent in the problem. For example, medical costs can be reduced by one of my favorite solutions of limiting (like they do in Texas) punitive damage recoveries in malpractice lawsuits. However, the cost savings are a mere drop in the bucket. Another drop in the bucket will be the achievable increased savings from decreasing medical and disability-claim frauds. These are important solutions, but they are not solutions that will save the USA.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

·     Extend retirement age significantly (75 years maybe?).
When Social Security was enacted, life expectancy was slightly over 65 years of age.
Now it is well over 75 years of age for men and women combined.
http://www.efmoody.com/estate/lifeexpectancy.html
 

·     Hit Medicare retirees like me with higher fees for physicians, hospital services, and Medicare D drug payments.
Perhaps this should be on a scale based upon wealth/income levels such that people, like me, who can afford to pay more must pay more.
 

·     Greatly curb the biggest cost of Medicare --- keeping dying people alive in expensive hospitals for a few weeks or maybe even a few months. Sometimes dying people must be kept alive in ICU units costing over $10,000 per day when there is no hope of recovery. There was not any hint of suggesting euthanasia as an alternative. But dying people can be allowed to die more naturally and pain free.
http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)
 

·     Limit the National Debt is some way. It’s now more common in Europe to limit national debt to 60% of GDP. Various other means of constraining our National Debt were discussed in the CNN longer version of the IOUSA Solutions video.

 Peter G. Peterson Website on Deficit/Debt Solutions ---
http://www.pgpf.org/

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Here is the original (and somewhat dated video that does not delve into solutions very much)
IOUSA (the most frightening movie in American history) ---
(see a 30-minute version of the documentary at www.iousathemovie.com )

If you missed Sunday afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/   (Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause.

Watch the World Premiere of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

CBS Sixty minutes has a great video on the enormous cost of keeping dying people artificially alive:
High Cost of Dying --- http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)

U.S. Debt/Deficit Clock --- http://www.usdebtclock.org/

"The Looming Entitlement Fiscal Burden," by Gary Becker, The Becker-Posner Blog, April 11, 2010 ---
http://uchicagolaw.typepad.com/beckerposner/2010/04/the-looming-entitlement-fiscal-burdenbecker.html

"The Entitlement Quandary," by Richard Posner, The Becker-Posner Blog, April 11, 2010 ---
http://uchicagolaw.typepad.com/beckerposner/2010/04/the-entitlement-quandaryposner.html

David Walker --- http://en.wikipedia.org/wiki/David_M._Walker_(U.S._Comptroller_General)

Harvard Professor Niall Ferguson --- http://en.wikipedia.org/wiki/Niall_Ferguson

Harvard Profession Video:   Niall Ferguson: Empires on the Edge of Chaos ---
http://fora.tv/2010/07/28/Niall_Ferguson_Empires_on_the_Edge_of_Chaos

Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.
Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1
Please note that this is NBC’s liberal Newsweek Magazine and not Fox News or The Wall Street Journal.

. . .

In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman.

. . .

Another way of doing this kind of exercise is to calculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt.

Continued in article --- http://www.newsweek.com/id/224694/page/1

Niall Ferguson is the Laurence A. Tisch professor of history at Harvard University and the author of The Ascent of Money. In late 2009 he puts forth an unbooked discounted present value liability of $104 trillion for Social Security plus Medicare. In late 2008, the former Chief Accountant of the United States Government, placed this estimate at$43 trillion. We can hardly attribute the $104-$43=$61 trillion difference to President Obama's first year in office. We must accordingly attribute the $61 trillion to margin of error and most economists would probably put a present value of unbooked (off-balance-sheet) present value of Social Security and Medicare debt to be somewhere between $43 trillion and $107 trillion To this we must add other unbooked present value of entitlement debt estimates which range from $13 trillion to $40 trillion. If Obamacare passes it will add untold trillions to trillions more because our legislators are not looking at entitlements beyond 2019.

The Meaning of "Unbooked" versus "Booked" National Debt
By "unbooked" we mean that the debt is not included in the current "booked" National Debt of $12 trillion. The booked debt is debt of the United States for which interest is now being paid daily at slightly under a million dollars a minute. Cash must be raised daily for interest payments. Cash is raised from taxes, borrowing, and/or (shudder) the current Fed approach to simply printing money. Interest is not yet being paid on the unbooked debt for which retirement and medical bills have not yet arrived in Washington DC for payment. The unbooked debt is by far the most frightening because our leaders keep adding to this debt without realizing how it may bring down the entire American Dream to say nothing of reducing the U.S. Military to almost nothing.

Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1

This matters more for a superpower than for a small Atlantic island for one very simple reason. As interest payments eat into the budget, something has to give—and that something is nearly always defense expenditure. According to the CBO, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon's present plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028.

Over the longer run, to my own estimated departure date of 2039, spending on health care rises from 16 percent to 33 percent of GDP (some of the money presumably is going to keep me from expiring even sooner). But spending on everything other than health, Social Security, and interest payments drops from 12 percent to 8.4 percent.

This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America's debt crisis. According to a recent Rasmussen report, 42 percent of Americans now say that cutting the deficit in half by the end of the president's first term should be the administration's most important task—significantly more than the 24 percent who see health-care reform as the No. 1 priority. But cutting the deficit in half is simply not enough. If the United States doesn't come up soon with a credible plan to restore the federal budget to balance over the next five to 10 years, the danger is very real that a debt crisis could lead to a major weakening of American power.

I haven't left my house in days. I watch the news channels incessantly. All the news stories are about the election; all the commercials are for Viagra and Cialis. Election, erection, election, erection -- either way we're getting screwed!
Bette Midler

Blessed are the young, for they shall inherit the national debt.
Herbert Hoover --- http://www.brainyquote.com/quotes/quotes/h/herberthoo110353.html

I think political correctness can lead to some kind of paralysis where you don't address reality.
Juan William before he was fired after a distinguished career on NPR.
http://townhall.com/columnists/GuyBenson/2010/10/21/npr_finally_finds_an_excuse_to_fire_juan_williams

Whether or not you love or hate the scholarship and media presentations of the University of Chicago's Milton Friedman, I think you have to appreciate his articulate response on this historic Phil Donohue Show episode. Many of the current dire warnings about entitlements were predicted by him as one of the cornerstones in his 1970's PBS Series on "Free to Choose." We just didn't listen as we poured on unbooked national debt ($60 trillion and not counting) for future generations to deal with rather than pay as we went so to speak! . And yes Paul and Zafer, I know there may be better alternatives than capitalism as a basis for optimization of economies in theory. But all economic systems must deal with inherent greed in practice.
The Grand Old Scholar/Researcher on the subject of greed in economics
Video:  Milton Friedman answers Phil Donohue's questions about capitalism.--- http://www.cs.trinity.edu/~rjensen/temp/MiltonFriedmanGreed.wmv  

Landesman wasn't being asked specifically about negative feelings over the Loveland Museum Gallery in Loveland, Colo., a taxpayer-funded art space that recently featured a controversial painting with Jesus Christ receiving oral sex from a man. He's certainly not used to critical questions about just how this blasphemy-by-numbers seems like a tiresome rerun -- Jesus in urine, Jesus in chocolate, Jesus in (homo)sexual ecstasy.
Brent Boswell, Shock and Awful Art, Townhall, October 22, 2010 ---
http://townhall.com/columnists/BrentBozell/2010/10/22/shock_and_awful_art
Rocco Landesman is the chairman of the National Endowment for the Arts
Landesman does not have the guts to display a similar offensive picture of Allah

Preliminary draft of President Obama's long-awaited bipartisan National Commission on Fiscal Responsibility and Reform report

Jensen Comment
A very preliminary draft of President Obama's long-awaited bipartisan National Commission on Fiscal Responsibility and Reform report was released as a Co-Chairs' Proposal on November 10, 2010
Very Brief Summary --- http://pnhp.org/blog/2010/11/10/deficit-commission-co-chairs-proposal/
Huffington Post Slide Show --- http://big.assets.huffingtonpost.com/CoChairDraft.pdf
Full Report --- http://www.fiscalcommission.gov/news/cochairs-proposal

It's probably a time when accounting professors and students should have more scholarly debates on comprehensive tax reform alternatives. Such debates should be civil and as well-informed as possible. Tax reforms could possibly have an enormous impact on the accounting profession in terms of tax services, course content, employment alternatives for graduates, software development, AIS content, and scholarly research reported in accounting and tax journals.

Initial Reactions on the Left ---
"Deficit panel leaders propose curbs on Social Security, major cuts in spending, tax breaks," The Washington Post, November 11, 2010 ---
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/10/AR2010111004029.html
Initial Reactions on the Right ---
"A Deficit of Nerve," The Wall Street Journal, November 11, 2010 ---
http://online.wsj.com/article/SB10001424052748703848204575608610971091280.html?mod=djemEditorialPage_t

Jensen Opinion
The conservative right always has knee jerking opposition to increased taxes and new taxes of any kind. The liberal media objects to increasing burdens on the middle income class and labor. Nancy Pelosi has already commenced all out war against the deficit commission's preliminary recommendations. Democrats, Republicans, and everybody else agree that the incomprehensible tax system of the United States needs to be drastically reformed but Congress probably will never agree to drastic reforms. Trying for comprehensive tax reforms will be an absolute political dogfight.

Personally, I lean toward eliminating the corporate income tax entirely and replacing the personal income tax code with a flat tax. But in order to keep the flat tax rate relatively low, I support introducing a Value Added Tax (VAT) sales tax that is now common in other parts of the world, especially in Europe. Businesses in the U.S. will fight a VAT tax tooth and nail, and the VAT tax will seriously increase prices of consumer and industrial goods. But serious deficit reductions cannot be financed without pain and sacrifice in all economic sectors These are my personal thoughts and are not all included in the Co-Chair's Report..

More importantly, the VAT tax should be the primary tax that is used to gradually put Social Security, Medicare, Medicaid, and the new "Affordable" Health Care law on a pay-as-you-go basis that no longer will keep piling on to deficits and unfunded entitlements. These are my personal thoughts and are not all included in the Co-Chair's Report..

But the most important thing to do immediately is to extend the retirement age to current average life expectancy averaged across race and gender categories. Persons that elect early retirement should take a heavy hit in benefits and not be eligible for Medicare before reaching the established retirement age.

Of course any increases in taxes will probably slow economic growth. But the insanity of simply printing money (read that buying back Treasury notes by the Fed) and borrowing that increases deficit by well over a trillion each year will eventually destroy the the economy and standard of living of the entire United States ---
http://www.trinity.edu/rjensen/entitlements.htm

From the Left
"Deficit panel leaders propose curbs on Social Security, major cuts in spending, tax breaks," The Washington Post, November 11, 2010 ---
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/10/AR2010111004029.html

The chairmen of President Obama's bipartisan deficit commission on Wednesday offered an aggressive plan to rebalance the federal budget by curbing increases in Social Security benefits, slashing spending at the Pentagon and other agencies, and wiping out more than $100 billion a year in popular tax breaks for individuals and businesses.

The blueprint drafted by former Clinton White House chief of staff Erskine Bowles and former senator Alan K. Simpson (R-Wyo.) would slice more than $3.8 trillion from deficits over the next decade, reversing a rapid run-up in the national debt that many fear has the country headed for crisis.

To meet that goal, Bowles and Simpson are proposing to slay a herd of sacred cows, including the tax deduction for mortgage interest claimed by many homeowners, the tax-free treatment of employer-provided health insurance and the practice of letting retirees claim Social Security benefits starting at age 62. The blueprint would raise the early retirement age to 64 and the standard retirement age to 69 for today's toddlers.

During a briefing for reporters, Bowles and Simpson stressed that the plan is theirs alone and acknowledged that it is unlikely to win support from a majority of the commission's 18 members, many of whom seemed startled Wednesday by its breadth and scope. Bowles called it "a starting point" as the panel attempts to forge an agreement by Dec. 1.

Obama, speaking Thursday at a news conference in Seoul where he is attending the G-20 conference, cautioned that "before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts."

"If people are, in fact, concerned about spending, debt, deficits and the future of our country, then they're going to need to be armed with the information about the kinds of choices that are going to be involved, and we can't just engage in political rhetoric," the president said.

"I set up this commission precisely because I'm prepared to make some tough decisions," Obama said, adding that "I'm going to need Congress to work with me."

Balanced-budget advocates praised the seriousness of the effort, saying it has the potential to reframe the debate over taxes and spending that dominated this month's congressional elections, regardless of how many commission members ultimately support it.

"A White House commission has put out a credible plan to eliminate the deficit and debt. This has changed the rules of the game and, for the first time, things are serious," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, who hailed the blueprint as "a breakthrough."

"After this," she said, "the debate simply cannot go back to silly games where people pretend that eliminating earmarks will solve the problem."

Still, the reaction was harsh in some quarters, particularly among liberals who have vowed to protect retirees from any reduction in benefits. House Speaker Nancy Pelosi (D-Calif.) called the plan "simply unacceptable."

Speaker-in-waiting John A. Boehner (R-Ohio) declined to comment, saying he would discuss the plan with his three representatives on the panel. But Republican anti-tax activist Grover Norquist was not happy and warned that Republicans who support the proposal would be breaking their pledge not to raise taxes.

Continued in article

Jensen Comment
Many far more hostile reactions are pouring forth to support Pelosi's resistance plan. It's unlikely that a sharply divided House versus Senate over the next two years will accomplish a single recommendation in the deficit commission's preliminary report.  Much depends on reducing the Congressional divide in the 2012 election, and at this point we don't know whether the 2013 Congress will be sipping on tea or vodka.

From the Right
"A Deficit of Nerve," The Wall Street Journal, November 11, 2010 ---
http://online.wsj.com/article/SB10001424052748703848204575608610971091280.html?mod=djemEditorialPage_t

We've been expecting to dislike the report of President Obama's deficit commission, so count us as pleasantly surprised by the draft outline released on Wednesday by its two chairmen. There's plenty to oppose but also something for the next Congress to build on, not least the plea for a more efficient, competitive tax code.

Neither Democrat Erskine Bowles nor Republican Alan Simpson are trusted by their respective parties these days, so the duo seem to have decided to roil everybody. Fair enough. Even if their proposals fail to gain the 14 commission votes out of 18 needed for a consensus judgment by December 1, they've at least shown that restraining the federal Leviathan is possible.

Before we pound the details, it's important to understand why we have had deficits of 10% and 8.9% of GDP for the past two years, with another 10% or so anticipated in fiscal 2011. The most important reason is the burst of spending from the 111th Congress that has taken federal outlays as a share of GDP to 25% in 2009, 23.8% in 2010 and back to an estimated 25% in 2011. This is unheard of in the modern era, when the average has been under 21%.

The second reason is a revenue shortfall due to the recession and feeble economic recovery. Revenues have averaged about 18.5% of GDP in recent decades, but in 2009 and 2010 they were only 14.9% with little improvement expected this fiscal year. The single least painful way to reduce the deficit is to get the economy growing at a healthy pace again, which would cut the deficit by 3.5% of GDP a year without a dime of spending cuts.

This is where the chairmen's draft is both wrong and useful. Its mistake is proposing new taxes—notably on Social Security payroll taxes—that it claims would raise revenues as a share of GDP to no more than 21%. But this is an accountant's-eye view of taxation. The conceit is that Washington can raise taxes and, voila, revenue will follow on demand. But revenue will only follow if the economy grows, and higher taxes will restrain growth to some extent, depending on the timing and incidence of the tax increases.

The chairmen are on better ground arguing for fundamental tax reform that would swap lower rates for fewer loopholes and "tax expenditures." On the latter, the draft is right to put the mortgage interest deduction on the table, as taboo as that is in Washington. If we've learned anything from the last decade, it ought to be that our many housing subsidies have led to a misallocation of capital with few benefits. Canada has no such deduction but a higher rate of home ownership.

Ditto for the employer deduction for health insurance, which costs some $200 billion a year and has also distorted incentives by creating a system of third-party payments. Individuals who bear little responsibility for their health-care expenses have little incentive to reduce costs, much less lead a healthier life-style that would save money over time. Refocusing this tax benefit on the needy while encouraging wealthier consumers to economize would help health markets and the federal budget.

The chairmen also take aim at the corporate tax rate, proposing in one option a reduction to 26%. Everyone to the right of MoveOn.org knows that the 35% corporate tax rate is a disincentive to invest in America and has sent businesses pleading to Congress for this or that loophole. This is the second Obama-appointed outfit to recommend a cut in the corporate tax rate, following Paul Volcker's economic advisory group this year, and it ought to be one basis for bipartisan agreement.

The draft also proposes spending cuts, albeit far too timidly. Its discretionary spending proposals would take outlays down only to 2010 levels, though Republicans have already promised to take them back to 2008. We wonder if this is a bow to Democrats who think that spending at 25% of GDP should be the new normal.

More egregiously, the chairmen tiptoe around ObamaCare, which has led some on the right and left to claim that the commission is essentially endorsing the largest new entitlement in 40 years. We're told the chairmen mostly dodged the subject because Democrats on the commission made that a nonnegotiable demand. A truly bold report would consider Congressman Paul Ryan's model to make Medicare a defined contribution program. Instead, the chairmen settle for the familiar likes of "payment reforms," which never work because of Medicare's flawed political price-control model.

Medicaid also gets a near total pass, probably because ObamaCare is expanding that program more than at any time since its inception in 1965. Worse, the federal Medicaid formula rewards states for spending more. If the commission's goal is to spur debate, it ought to propose making Medicaid an annual block grant that would force state politicians to better manage what is often the biggest expense line in their budgets. The status quo will lead to huge state tax increases over the next two decades.

The chairmen are braver on Social Security, though again not brave enough. They propose to raise the retirement age for receiving full benefits to 68 from 67 by—brace yourself—2050, and 69 by 2075. For context, consider that the average American woman born today will live to be 80.

The draft also suggests a payroll tax increase, in particular on upper-middle-class earners, even as it proposes to cut their benefits to a greater extent than lower earners. Republicans should rule out a tax increase, while accepting that some benefit cuts on the basis of need will be required.

Mr. Obama conceived the deficit commission as a form of political cover for his spending blowout—and to coax Republicans into a tax increase. So it's notable that Democrats and liberals have been more critical of the chairmen's draft than have Republicans. Having put the U.S. in a fiscal hole, Nancy Pelosi's minority wants to oppose all spending cuts or entitlement reform to climb out.

House Republicans should react accordingly, which means taking what they like from the commission report and making it part of their own budget proposals. If Senate Democrats and Mr. Obama want to regain any fiscal credibility, they'll be willing to listen and talk. If not, the voters will certainly have a choice in 2012.

Jensen Comment
Meanwhile the United States will continue to both print more money supported by neither taxes nor borrowing plus continued to borrow over a trillion dollars each year to finance the cash flow deficit differences between what the government takes in in revenue and what the government pays out. At this point voters are simply numb to the difference between a billion dollars and a trillion dollars, but in terms of economic survival the difference is crucial.

"Is Economics Ready for a New Model?" by Justin Fox, Harvard Business Review Blog, December 2, 2010 --- Click Here
http://blogs.hbr.org/fox/2010/12/economics-ready-for-new-model.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Economic theories based on rational behavior have been called into doubt by recent events. A few maverick scholars "are stepping up the hunt for new models that could more accurately describe the real world." Some look to psychology for answers; others are interested in importing approaches from the physical sciences.

Sound like something you might have read in Tuesday's Wall Street Journal? It does in fact accurately describe Mark Whitehouse's article, headlined, "Economists' Grail: A Post-Crash Model." But it also describes (and the quote is taken from) a 1988 article in Fortune by Gary Hector.

If you want to learn about the subject, in fact, Hector's article is probably better — it's clearer in its descriptions of the relevant theories. But it's 22 years old. Have we learned nothing in the intervening two decades?

In the sense that financial markets and the economy in general are far more fragile than most mainstream economists contemplated before 2008, there was a bit of unlearning done in the 1990s and early 2000s. The 1987 stock market crash was a scare. So were the currency and debt crises of 1997 and 1998, and the stock market collapse of 2000-2002. None of them brought economic devastation in the U.S. and Europe, though (and Japan's long struggles were seen as the product of peculiarly Japanese economic traits). The conviction spread that, thanks in part to financial innovation, the world's developed economies had become more resilient even as financial markets became more volatile. Alan Greenspan was the most prominent cheerleader for this idea, but he sure wasn't alone. I know I believed it.

I don't really buy that anymore, and I don't think all that many economists do, either. But does that mean their theories and their way of going about their work are about to undergo wholesale change?

To get an idea, it's helpful to go back to that 1988 Fortune article. It focused on three young economists who were arguing that emotion and error played a big role in financial market fluctuations than was countenanced in then-standard theories of the market. Their names: Robert Shiller, Lawrence Summers, and Richard Thaler. Thaler and Shiller are now among the most prominent economists on earth, best-selling authors, and regular betting favorites for (albeit not yet actual winners of) the economics Nobel. Summers, meanwhile, is the second most powerful economic official in the U.S. — at least for another couple of weeks.

Did these three men turn economics upside down? No. But they — mainly Shiller and Thaler, as Summers didn't spend a whole lot of time on the practice of academic economics over the past two decades — have definitely helped open the discipline to new ideas about market volatility and the strange quirks of human behavior. You can find lots of scholars at top economics departments who study why bubbles and crashes happen, and how psychology and genetics shape individual decisionmaking. What you won't find is many who think the entire infrastructure of rationality-based economics needs to be tossed out.

The other big idea in the 1988 article was chaos theory. The hope, expressed in the piece mainly by William "Buz" Brock of the University of Wisconsin, was that economists would soon be able to use tools developed by physicists, biologists and other hard scientists to predict market behavior. Chaos — and the broader catch-all, complexity — became an enormously fashionable economic topic for a few years.The physicist-founded Santa Fe Institute in New Mexico was the center of this work. Most of the economists involved, though, eventually concluded that chaos and complexity theory held few answers for them and physicists were on the whole too ignorant of and arrogant about economics to be much help. So they moved on (Brock's Santa Fe affiliation ended in 2002).

In recent years J. Doyne Farmer, a Los-Alamos-National-Laboratory-scientist-turned-hedge-fund-manager-turned-Santa-Fe-Institute-professor, has bent over backwards not to be ignorant and arrogant about economics. He's co-authored papers with economists from Yale, MIT, and other perfectly respectable places, and learned a remarkable amount about the nitty-gritty of financial market functioning. Have economists begun to move in his direction? Farmer, as quoted in the Wall Street Journal article — and in a panel discussion I did with him over the summer — is a bit frustrated with how economists remain stuck on old, static ways of modeling reality. And economists are dubious of his proposals for massive agent-based computer models of the economy.

So if you're looking for a revolution in economics, you'll probably have to wait a long, long while. But evolution, sure, there's some of that. And lots of cycling back and forth between the belief that, in a market-based economy, everything will always work out for the best, and the concern that markets — especially financial markets — might have a natural tendency to self-destruct from time to time.

Bob Jensen's threads on theory are at
http://www.trinity.edu/rjensen/theory01.htm

"The 25 Best Quotes About Liberals," by John Hawkins, Townhall, November 23, 2010 ---
http://townhall.com/columnists/JohnHawkins/2010/11/23/the_25_best_quotes_about_liberals

Bob Jensen's universal health care messaging --- http://www.trinity.edu/rjensen/Health.htm

Return to the Tidbits Archives ---
http://www.trinity.edu/rjensen/tidbitsdirectory.htm 

Shielding Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

·     With a Rejoinder from the 2010 Senior Editor of The Accounting Review (TAR), Steven J. Kachelmeier

·     With Replies in Appendix 4 to Professor Kachemeier by Professors Jagdish Gangolly and Paul Williams

·     With Added Conjectures in Appendix 1 as to Why the Profession of Accountancy Ignores TAR

·     With Suggestions in Appendix 2 for Incorporating Accounting Research into Undergraduate Accounting Courses

Shielding Against Validity Challenges in Plato's Cave  --- http://www.trinity.edu/rjensen/TheoryTAR.htm
By Bob Jensen

What went wrong in accounting/accountics research?  ---
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

The Sad State of Accountancy Doctoral Programs That Do Not Appeal to Most Accountants ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

AN ANALYSIS OF THE EVOLUTION OF RESEARCH CONTRIBUTIONS BY THE ACCOUNTING REVIEW: 1926-2005 ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1

Bob Jensen's threads on accounting theory ---
http://www.trinity.edu/rjensen/theory01.htm

Tom Lehrer on Mathematical Models and Statistics ---
http://www.youtube.com/watch?v=gfZWyUXn3So

Systemic problems of accountancy (especially the vegetable nutrition paradox) that probably will never be solved ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

Bob Jensen's economic crisis messaging http://www.trinity.edu/rjensen/2008Bailout.htm

Bob Jensen's threads --- http://www.trinity.edu/rjensen/threads.htm

Bob Jensen's Home Page --- http://www.trinity.edu/rjensen/