Chronicle of the Conspiracy
Saturday, January 11, 2003
According to a story in the Wall Street Journal, Gotham Partners "...boasted a high-profile roster of investors, including Martin Peretz, publisher of the New Republic magazine. ...Mr. Peretz, who taught Mr. Ackman [Gotham co-head William Ackman] as an undergraduate, was the fund's first outside investor. "
What a coincidence... Martin Peretz also taught Cramer. Peretz was also James Cramer's first investor. And Peretz, with Cramer, was the co-founder of TheStreet.com. According to the most recent proxy statement of TheStreet.com Inc., Peretz is a director of the company, and owns 14% of its outstanding shares (and an entity identified as Peretz Partners LLC owns another 10%).
Mr. Spitzer, what about this don't you understand? If you are investigating hedge funds for abuse of the media -- if you are investigating Gotham Partners -- how, how in good conscience, can you not investigate TheStreet.com? Has TheStreet.com done anything illegal? I have no idea -- I'm not saying it has. But how can you not investigate?
As if I didn't know...
Posted by Donald L. Luskin at 6:48 PM | link
Yet online pundits, even conservative and libertarian ones who ought to know better, seem to always give DeLong a free pass -- maybe it's because he's an active blogger, or perhaps because he writes a column for the New Economy 'zine Wired. I've noticed many are even in the habit of uncritically linking to briefings on DeLong's site when they want to lead readers to background information on some economic concept such as "inflation" or "the Phillips Curve."
But make no mistake about it: compared to Krugman, DeLong may a small fry -- now -- but in the war on capitalism, he's an up-and-coming war criminal. Here's an inconspicuous item on an innocuous topic from DeLong's blog yesterday. It's a seemingly small thing, yet it cuts to the heart of the philosophy of capitalism, and reveals DeLong's heart of darkness.
Headlined "Libertarians Confuse Me," it is a comment on a short post from libertarian-leaning blogger Jane Galt, in which Galt writes:
Surely (as DeLong would say) the "property right" to which Galt was referring was the right of the owners of restaurants and bars to set their own policies with respect to smoking on their property. DeLong never even mentions that in any way. He simply changes the subject -- he's just talking about limits on the scope of actions by one individual that might cause a harm to another individual. Then, by virtue of his having changed the subject, he simply waves away the idea that property rights could be involved at all.
DeLong isn't "confused." There are good reasons why he wants to pretend that property rights aren't part of the debate. For one thing, DeLong himself is an egregious property right violator. His website shamelessly cuts-and-pastes thousands upon thousands of words from copyrighted sources -- and if he's paying royalties on them I'll take up smoking.
But far more fundamentally, DeLong knows that property rights are the third rail for American anti-capitalist warriors. It's very difficult for them to preserve the mantle of being crusaders for human decency when they are forced to admit that their methods mostly amount to expropriation. Even the loopiest liberals remember those awful scenes from Dr. Zhivago.
So their technique has to be subtler: frame the debate in a fantasy world where there is no private property to be considered, only various other rights -- to smoke, or to be free from smoke -- that are assumed to play out the same way whether they are being asserted in a public square, a bar, a restaurant or your living room.
Capital is, at its essence, private property -- and therein lies its inextricable link to human freedom. People like DeLong want you to forget that, so you're property rights can be taken away while you're busy debating something else. Don't.
Posted by Donald L. Luskin at 6:01 PM | link
Friday, January 10, 2003CORRECTION: MY ROCKER IS OFF An alert reader asks,
Good catch. In my report earlier today I mistakenly referred to hedge fund manager David Rocker as "John". I will amend the earlier report and log this in the Corrections section of our Subject Index.
To paraphrase Captain Renault in Casablanca, serves me right for not being athletic.
Posted by Donald L. Luskin at 4:20 PM | link
I guessed yesterday that Spitzer wouldn't snag his Harvard classmate Cramer -- in whose hedge fund Spitzer invested during the 1990s -- when he rounds up the usual suspects. Too bad, because of all the hedge fund managers on earth, there is probably not a single one for which an investigation of manipulative use of the media would be more interesting. And Cramer's web-site, TheStreet.com, is up to its eyeballs in the very issue Spitzer is looking into.
For one thing, David Rocker's hedge fund, Rocker Partners LP, owns 9.7% of TheStreet.com, and Rocker has twice published their research on the site under his byline. The most recent was last November, a negative analysis of Pre-Paid Legal Services -- a company in which Rocker disclosed his fund held a short position.
My informant Irrational Exuberance points out an astonishing irony: Rocker's bearish analysis of Pre-Paid was an explicit response to a bullish one published a week earlier by none other than Gotham Partners -- on TheStreet.com's website!
TheStreet.com's own coverage on Tuesday of Spitzer's investigation mentions the Gotham connection, and in a most interesting way.
TheStreet.com's own story admits that it published a report that was "touting." It fails to mention that, among "a number of critical stories," one was written by another hedge fund manager who just happens to own a big piece of TheStreet.com. Why is that not mentioned, and why is that not characterized as "touting"? Is it only "touting" when you say something bullish? Or is it only not "touting" when you own 9.7% of TheStreet.com?
I don't see how Spitzer, in good conscience, could
not expand his investigations to include these matters. But then again Eliot
Spitzer has no conscience -- luckily for James Cramer.
Posted by Donald L. Luskin at 1:43 PM | link
Among the many stretch-to-fit un-facts in this story is the allegation that administration's plan to eliminate the taxation of dividends would be unfair to 401(k) plans.
Those last two words -- "Trust me" -- entirely change the meaning of the last paragraph. Read it again without them, and you'll see. Without them, the administration official is seen as offering a complete and factual refutation of the story's claims. Because money contributed to a 401(k) is exempt from taxes as salary income, there are more dollars at work earning dividends in a 401(k) from the beginning. When the dividends are eventually taxed at ordinary income rates as they are withdrawn from the 401(k) years later, indeed it "all works out in the end" -- to the penny. If this isn't intuitively clear or you want a detailed proof, see economist Brian Wesbury's report yesterday.
I'll stipulate for the moment that the administration official actually said "Trust me." But by including those words in the text in this way, the reporter transforms what is in fact a correct shorthand argument that "it all works out in the end" into a dismissive evasion, something akin to, "Oh, don't bother me with the facts!" This leaves the false impression that the administration's analysis is thoughtless, shoddy, casual, and even deceptive (why else do people say "Trust me"?).
But the reality is that the reporter simply didn't bother do the hard work of sitting down with a pencil and a calculator and checking whether the administration official was right or wrong. As soon as he jotted down those words "Trust me" on his little notepad, he knew that he wouldn't have to bother -- right or wrong didn't matter then, because he could make the official look wrong.
Tricks like this work -- trust me (as it were). I've already seen this story quoted on the web (I won't give the link, because I don't want to send any traffic to these fools) with liberal lips being licked at the deliciousness of this seeming gotcha: "The Times has this gem in its distributional analysis piece on the Bush dividend-tax giveaway..."
This tabloid-quality trash is "distributional analysis"? This is a "gem"? Hardly -- this is an embarrassment, even for a newspaper that seems now to be beyond embarrassment. The official whom the Times made look wrong with this "gem" was precisely right. And the reporter's "distributional analysis" that the official was refuting are precisely wrong. The administration's proposal to eliminate dividend taxation outside of 401(k) accounts simply puts non-401(k) investors on the same footing that 401(k) investors have been on all along. It's not true that the plan is a "big new break" for "the much smaller number of people who currently pay big taxes on dividends." It's the same old break that everyone else has gotten all along.
Posted by Donald L. Luskin at 12:36 AM | link
Thursday, January 09, 2003
John Crudele reports that Spitzer is looking into Gotham Partners, a hedge fund that distinguished itself by posting information about its research and its investments on its web site (if you try to visit their site now, you'll be euphemistically told that it's "under construction" -- under destruction is more like it).
I thought the purpose of research was "to gain an advantage in trading stocks." But Crudele probably means to say that Spitzer is looking into market manipulation based on the manner or timing with which the research was shown to the public on the web.
And isn't that ironic? Eliot Spitzer is a Harvard buddy of media whore and former hedge fund manager James Cramer -- and according to reports, made a lot of money investing in Cramer's hedge fund in the mo-mo years of the 1990s. That's right, Cramer... the guy who literally wrote the book (and has had a tell-all written about him) on how to manipulate the media "to gain an advantage in trading stocks."
No surprise. There's never a space in the gas chamber for Spitzer's friends. He won't go after Cramer, just like he didn't go after J. P. Morgan in his Wall Street "tainted research" jihad -- Morgan was the bank who gave Spitzer his campaign loans.
Posted by Donald L. Luskin at 3:02 PM | link
Ironically, that "someone somewhere" was the same Bank of Tokyo-Mitsubishi, whose report was quoted in the misleading Reuters wire scare-story that Irrational Exuberance spotted for us on Christmas Eve. Baum dug deeper into the source, and came up with a story with a far more interesting -- but less sensationalistic -- meaning: that the persistent corrosion of monetary deflation has begun to play havoc with the nation's retailers. In financial journalism as in anything else, a little hard work can make all the difference.
Posted by Donald L. Luskin at 1:33 AM | link
Andrew Sullivan begins a commentary on the Bush economic plan today with the eight most rarely heard -- and most precious -- words in punditry:
And he closes with similar modesty and honesty, repeating his self-disqualification on economic issues and scrupulously separating any economic judgment from political judgment:
Stop whatever you're doing for a moment and appreciate how extraordinary this is. When's the last time you heard a pundit position himself on economics as anything but an expert? When's the last time you saw a pundit do the heavy crowbar work required to separate economics from politics?
If, as Goethe said, there is nothing more frightful than ignorance in action, then there is nothing more confidence-inspiring than seeing someone be simply honest about what he doesn't know. Bravissimo!
Posted by Donald L. Luskin at 12:26 AM | link
Wednesday, January 08, 2003
Number one in the coveted "Most Likely to Succeed" category, with a landslide 30 votes -- and number two overall as Word of the Year -- is "blog." It is defined as "from weblog, a website of personal events, comments, and links."
Posted by Donald L. Luskin at 5:36 PM | link
If DeLong wants to be the next Paul Krugman, he's going to have to do better than the talking points for the NPR radio show KQED Forum posted today on his site. Based on this near-plagiarism, DeLong seems to think that the way to become the next Paul Krugman is to become the last Paul Krugman. These notes are practically a point-for-point parroting of Krugman's New York Times column yesterday, right down to what seem to be cut-and-paste details.
But why bother to do more -- I'm sure KQED doesn't pay as well as Enron. That's the tough thing about being a media whore: you have to start by giving it away.
Posted by Donald L. Luskin at 10:00 AM | link
Tuesday, January 07, 2003
This is a contradiction that DeLong would be well served not to explore, because its essence is the utter disjunction between the real world and the sterile formulae taught by economics professors like DeLong. DeLong put out his own version of Hubbard's formula a couple weeks ago, and I criticized its sterility, narrowness and irrelevance then (see "Brad DeLong's Elephant Shit" December 19, 2003). Sure, you can express in algebraic terms the tautology that, all else equal, x dollars worth of tax cuts adds x dollars to the deficit, and the financing of that deficit will drive up interest rates y%. But all else is never equal, except in the textbooks.
For one thing, in the real world, changes in tax rates change human behavior -- lower rates might make people work harder and invest more, and the increased economic activity would help grow the economy out of its debts. In the real world, the choice of projects undertaken by government makes a difference -- stupid ones are a waste, smart ones could pay for themselves, however they are financed. These and several similarly straightforward issues take that simplistic formula and replaces it with a bogglingly complicated recursive function. As a result, Hubbard is right in the Journal -- the formulas really don't predict real world results very well.
But even taking Hubbard's formulas -- or DeLong's versions of them -- at face value, they add nothing to public policy debates. Because the formulae represent closed systems in which changing any one variable predictably impacts the others, then by their own terms, it really doesn't matter what you do in the realm of public policy -- you're stuck! According to the formula, you can cut taxes (that's good), but that drives up interest rates (that's bad) -- or you can lower interest rates (that's good), but you'll have to raise taxes to do it (that's bad). It's all just rearranging the deck chairs.
It's no different when the question is how to finance some brand-new initiative like, say, a war on terrorism. As soon as you've decided to undertake the initiative -- and not at the same time shut down a pre-existing initiative of the same cost -- then you've already done the damage. According to the formulas, it really doesn't matter whether you raise taxes to pay for the project in cash, or finance it with debt and drive interest rates higher -- it's just "pick your poison."
So even if the formulae were precisely right -- and they are barely even approximately right -- they are still irrelevant. They are not prescriptive with respect to any decision that anyone would ever make. They merely define -- incorrectly -- a set of trade-offs. They'd don't begin to tell you how to make the trade-offs. But DeLong is not interested in that, because he knows how to make the trade-offs. His Rubinomics gospel, not to be questioned, dictates axiomatically that one always wants to keep interest rates low regardless of the cost in terms of higher taxes. The formulae are just a blunt instrument for clubbing away priorities that compete with DeLong's priorities. The job of actually justifying those priorities in a rich and convincing way would be a lot harder work than playing gotcha games in the textbook library.
Here's a trade-off we could talk about. Is DeLong's salary at a public university taxpayer-financed? I have an idea for some spending we could cut...
Posted by Donald L. Luskin at 11:56 AM | link
For former paid Enron advisory board member Paul Krugman the answer is apparently "no." His New York Times column today cites various statistics to prove that more welfare for the unemployed would be better economic stimulus than President Bush's tax proposals -- every one of them baldly presented as fact, when they're really just somebody's opinion. Whose opinion? Who knows? Not a single one of Krugman's statistics today is sourced.
That last one is no fact. It's an outrageous distortion -- no, a downright lie (as I reported on December 10). And I know the source it, even if Krugman chooses not to disclose it. It's Citizens For Tax Justice, who put out a press release containing these lies on December 9, 2002, the day John Snow was nominated for Treasury Secretary. The press release has been picked up and its lies repeated by lots of people -- some who should know better, like Andrew Sullivan, and some who never do, like the New York Times. When the Times repeated the CSX tax lies in a story on Snow on December 26, at least they cited the source. But I warned that having been once cited in the Times, "it will be reported again over the coming years, over and over and over, passing into a realm of historicity where it is beyond questioning. And the source that will be cited? The New York Times."
I was half right. Yes, it is being repeated as history beyond questioning. But it's not being cited as sourced from the New York Times. It's not being sourced at all -- because the author is Paul Krugman, and the newspaper is the New York Times.
Posted by Donald L. Luskin at 12:31 AM | link
Monday, January 06, 2003HOW TAX SAUSAGE IS MADE More on the issue of the political incorrectness of asserting that tax cuts are anything but a deadweight cost to the federal budget...
A recent paper from the Cato Institute, "Reforming the Federal Tax Policy Process" by David R. Burton of the Argus Group, argues that Washington's official tax analysis embeds this and many other conceptual errors. The raw value of tax-cuts is treated as their cost; the time-frames for potential economic impact are artificially short-term; characterizations of the economic groups who get the burdens and benefits of tax changes are arbitrary; costs to tax-payers of complying with new tax laws are ignored; and worst of all, the entire process is carried out in secret with no opportunities for competing analyses or peer review.
Posted by Donald L. Luskin at 2:00 PM | link
I'm not talking about the usual class warfare arguments, though I'm sure there will be plenty of those. I'm talking about a subtler element of political correctness that infects the seemingly objective dollars-and-sense analysis of tax policy -- the idea that any tax-cut must be discussed as a dollar-for-dollar deadweight loss against the federal deficit.
It has now become an automatic element of politically correct style for both the Wall Street Journal and the New York Times to refer to the aggregate value of any proposed tax-cut as its "cost." For instance, the very first words of today's New York Times coverage are "President Bush will propose eliminating taxes on corporate dividends paid to shareholders, a measure that could cost the government $300 billion..." Today's Wall Street Journal writes, referring to the possible tax package in toto, "It's now expected to cost $600 billion over the next 10 years, administration officials say..."
Thankfully, the Washington Post does not automatically equate the amount of a tax-cut and its cost, writing today, "the economic package would include spending and tax cut proposals totaling about $600 billion over the next 10 years."
It is naive and incorrect to equate the amount of a tax-cut with its cost. The world just isn't that simple -- when tax rates change, human behavior changes, and that feeds back into the ultimate cost of a tax-cut. Simple common sense dictates that when tax rates fall, some people will be motivated to work more and invest more, all else equal -- overall taxable economic activity will increase, and will buffer or perhaps even reverse the "cost" of the tax-cut. When tax rates rise, some people will work and invest less, all else equal -- overall taxable economic activity will slow, so the revenue gains from the tax-hike may be less than anticipated, or evaporate entirely.
This elemental and obvious truth of human economic nature was standard doctrine during the Reagan presidency, when top marginal personal income tax rates were slashed from 70% to 28%, igniting one of the greatest epochs of economic growth in American history, and setting the stage for the present era of modest federal deficits. But after 15 years of the media repeating the "big lie" that Reaganomics did nothing but lead to catastrophic debt -- we are left with a monstrous confusion of cause and effect. Tax-cuts made economic growth possible, and economic growth made balanced budgets possible. Yet we are told (by the inheritors of the balanced budgets, who did nothing to cause them), that it's the other way around: balanced budgets cause growth.
This wholesale rewriting of economic history has become so ingrained that even conservative Bruce Bartlett -- seemingly a died-in-the-wool tax-cutter -- has joined in the rewriting. In a recent column for National Review Online, Bartlett states emphatically that no one in the Reagan administration ever asserted that tax-cuts would lose no tax revenues. He is shocked -- shocked! -- that anyone would suggest such a thing. Treating tax-cuts as anything but a deadweight cost is so politically incorrect now that Bartlett even tries pinning it on his opponents: "...today it is Democrats who are more likely to say that tax cuts may raise revenue."
It's not just the media and the pundits. Talking about tax cuts as anything but a deadweight cost is officially barred from policy discourse in Washington. Current House of Representatives rules require that, for budget reconciliation purposes, tax cuts be treated dollar-for-dollar as hits to federal revenues. The official analyses of the Congressional Joint Committee on Taxation staff, the Treasury's Office of Tax Analysis, and the Congressional Budget Office all look at tax cuts the same way.
Posted by Donald L. Luskin at 1:50 PM | link
Sunday, January 05, 2003UN-FACT OF THE DAY: DON'T BUY IT Kudos to Paul Farhi at the Washington Post for today's exposé of the financial media's abusive grandiosity in interpreting retail industry holiday sales figures as bellwethers of the overall economy (see also Un-Fact of the Day for 12/24/02). Among other gems in this article, Farhi writes,
"Consider this fact: Total retail sales in the United States have increased every month, with one exception, for the past 11 years, according to the U.S. Commerce Department's seasonally adjusted data. That's 130 months of rising sales (compared to the same month a year earlier) vs. one month of declining sales (October). I'll give 130-1 odds that December was yet another 'up' month.Farhi is free to truth-tell like this because he's a recovering business reporter who now writes for the Post's "Style" section. And, perhaps, because his conscience is clean. Heading off the legion of blogging fact-checkers like me, a post-script to the article states, "He was a Business section reporter for 11 years, during which he managed to avoid writing about the holiday shopping season."
Posted by Donald L. Luskin at 12:37 PM | link