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October 20, 2002
David Warsh, Proprietor

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Short Takes

International Economy is a glossy magazine that since 1987 has carved out a comfortable niche in the world of controlled circulation magazines by covering central bankers, treasury officials, global lenders, politicians and all those who seek to advise them. How comfortable? Its minimalist website has been down for months while the company moves its maintenance in-house. “Controlled-circulation” means that International Economy is mailed free to influential people who advertisers want to reach. The magazine itself will decide whether or not you are eligible, if you apply ( Otherwise, you’ll pay $72 a year for four issues. “There aren’t that many publications that write about treasury undersecretaries,” explains publisher David Smick.

The cover story of its autumn issue — “Think Tanks: Who’s Hot and Who’s Not — is a pretty good example of the formula. It presents a study comparing economic think-tank visibility in the media over the past five years. Among 16 institutions, The Brookings Institution came in first, with 1244 mentions in eleven top English-language publications (The Financial Times, The Wall Street Journal (US, Asian and European editions), The New York Times, The Washington Post, USA Today, The International Herald Tribune, The Economist, Business Week and Foreign Affairs.)

In second place was The Institute for International Economics (771 mentions). The American Enterprise Institute was third (624 cites), followed by Cato Institute, Economic Policy Institute, Hoover Institution, Heritage Foundation, Urban Institute, Center on Budget and Policy Priorities, Economic Strategy Institute, National Center for Policy Analysis, Council on Foreign Relations, Carnegie Endowment for International Peace, Progressive Policy Institute, Center for Strategic and International Studies and Hudson Institute.

Omitted from the list was perhaps the most successful of all Washington policy institutes, Resources for the Future. As National Journal columnist Jonathan Rauch wrote the other day, RFF is “the most important think tank you’ve never heard of.” Founded in 1952 amid fears that the world was running out of resources, RFF rejected appellations such as “National Resources Council” and “Dynamic Prosperity” before settling on the name given it by CBS chairman William Paley, who had successfully headed President Truman’s Materials Policy Commission at the beginning of the Korean War. Paley became RFF’s guiding spirit.

Aided by twenty years of generous support by the Ford Foundation, RFF evolved from tightly-focused group concerned with wartime shortages into the premier center of environmental research. John Krutilla and Otto Eckstein published a landmark book in 1958 urging a full accounting for the full environmental costs of dam construction. A trio of RFF economists (Harvey Perloff, Lowdon Wingo and Wilbur Thompson) in the early ’60s launched the studies that in time would become urban economics. Christy and Anthony Scott called attention to the risks of over-fishing in 1966. Harvey Levin identified the radio spectrum as an “invisible resource” in 1971, and by the end of the decade RFF would be championing its auction. Lester Lave and Eugene Seskin brought epidemiology to bear on the health costs of atmospheric pollution. The scope of RFF’s activities continued to expand. By the end of the 1990s, there was hardly any aspect of environmental regulation for which RFF was not a leading center of policy thought — from atmospheric gases to nuclear weapons biodiversity to pharmaceutical degradation. Its motto: “Independent. Balanced. Objective.”

Last week RFF celebrated its 50th anniversary in Washington with a gala and a symposium that included Nobel laureate Robert Solow, Harvard University President Lawrence Summers, editor Bill Emmott of The Economist, activist Bill McKibben and historian William Cronon. Apparent was a determination to become more like the Brookings Institution, the organization it most nearly resembles. Brookings was explicitly founded nearly 80 years ago as the next-nearest thing to a social science university. RFF slowly is evolving into one — with a $20 million capital campaign underway designed to produce its first four tenured research chairs. Its days of principled anonymity are numbered.

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2. Recent criticism of the Federal Reserve Board’s conduct of monetary policy during the late ’90s boom has clearly stung. Governor Ben S. Bernanke, the newest member of the board, responded to it at considerable length last week in a speech to a meeting of corporate economists in New York.

The Fed’s critics — academics, businessfolk and journalists — could be divided into two camps, Bernanke said. There were those who felt the central bank should have pursued a “lean against-the-bubble strategy.” The great majority of serious critics probably belonged here, he said. But a vocal minority feel hat the Fed should have undertaken what he called an “aggressive bubble popping” strategy — complete with vigorous interest rate increases directed at equity prices when they began to soar.

To begin with, Bernanke said, speculative bubbles were difficult to identify. All kinds of indicators of their presence had been proposed — the rate of ascent, various ratios intended to gauge the rate of return, the overall growth of bank credit. Even the best of these, the price-earnings ratio, was subject to vast differences of opinion, he said, since it turned critically on the changing value of the “equity premium,” the extra rate of return necessary to induce investors to hold risky stocks instead of safer bonds.

Still, Bernanke allowed, bubbles like the mania sometimes will occur. What then? The theoretical arguments that had been advanced for the “lean-against-the-bubble” strategy were “not entirely without merit,” he said, thus putting some distance between his views and the defense that Alan Greenspan offered in a speech in Wyoming in August. Greenspan maintained that the Fed could have done nothing differently.

True, a quarter or even half a percentage point added to interest rates in the tightening the Fed began in June of 1999, in hopes of sending a message to Wall Street, could have been justified in the name of “anti-bubble insurance,” at least theoretically. But there was no reason to believe it would have worked.

With investors hoping that they would be receiving an annual return of up to 20 percent through higher prices, it would have taken more than 50 basis points to convince them otherwise, he reasoned. Such a preemptive strike probably would have had no immediate effect at all on equity prices, while contributing to a weakening of the economy overall, Bernanke said.

Of “aggressive bubble-popping,” Bernanke was even more dismissive. He offered an extended parallel with the events of 1929, when central bankers’ determination to teach a lesson to the stock market succeeded only in wrecking an economy that already was slowing, he said. “A small compensation for the enormous tragedy of the Great Depression is that we learned some valuable lessons about central banking. It would be a shame if those lessons were forgotten,” he said.

It would be a shame, too, if the lessons of the mania — whatever they are — went undiscovered.

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3. Half the Nobel Prize for Physics this year went to Riccardo Giacconi, for laying to foundations of X-ray astronomy. The earth’s atmosphere absorbs X-ray radiation, so to use this “invisible” light to search the universe for hidden objects, Giacconi built the first X-ray telescopes and put them in space. Giacconi today is president of Associated Universities, Inc., the consortium which operates the National Radio Astronomy Observatory. But the work for which he won the prize he did in the 1960s at the little Cambridge, Massachusetts, firm of American Science and Engineering.

AS&E. was one of the high-tech startups whose growth led Boston out of its economic doldrums in the years following World War II. Digital Equipment (which invented real-time computing) and Bolt Beranek Newman (the Internet) were others. Among AS&E’s founders was the legendary MIT physicist Bruno Rossi. He was Giacconi’s mentor, and surely would have shared the prize had he not died at 88 in 1993.

AS&E was a 28-person private research corporation when Giacconi joined it in 1959 with a commission to take it into space research. Barely ten years later, more than 500 people were employed — a good proportion of them astrophysicists, none of them average. Defense Department funding had given way to NASA grants. Rockets had given way to satellites. The existence of black holes had been confirmed and neutron stars discovered. Giacconi had become executive vice president. The company went public, wheeled and dealed, moved to the suburbs. Giancconi joined the faculty of Harvard University in 1973.

Today, AS&E is a thriving if somewhat humbled instrument-maker, employing some 300 persons in Massachusetts and California. It built some of the first low-energy, high-resolution Computed Tomography scanning equipment for the human body. Its invention of the X-ray “flying spot” gave it a lock on imaging systems for airport carry-on inspections, but only for a time. Its “Backscatter” X-ray technology is used to detect illegal substances (drugs, plastic weapons, explosives) in everything from cargo containers to body searches.

Virtually all the really interesting questions about economic growth can be viewed through the prism of AS&E and those other celebrated Boston firms — the evanescence of intellectual property in particular. “Man is love, and loves what vanishes” wrote the poet Yeats. Priority, at least, endures. Hats off to Giacconi and Bruno Rossi.

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4. I wrote last week that a single economic experiment can take $50,000 in ready cash to provide incentives for its subjects. To which Professor Charles Plott of Caltech responds,

“No experiment costs that much. [The payout of] An expensive experiment might be $500. I have conducted some that cost as much as $10,000 per observation but no one else has done anything even close. The real cost are the programmers and upkeep on the lab. It takes full time staff. In addition there are accounting and record expenses to say nothing of the other expenses associated with data processing. So you have a full time laboratory technician and part-time administrative assistants and graduate students. Total tab – $200-$300 K per year… after you have the space and hardware in place. It is this background support that institutions should provide and do not.”

Checking further, I found that $50,000 might represent the total variable cost for an entire series of 30 experiments with the dozen or more subjects in each experiment that would be necessary to publish an academic paper. The $500 would be the typical subject payoff for a single three-hour experiment with 12 subjects. The expense of recruiting subjects and setting up and running the experiments and process the data would be far greater.

In other words, don’t worry. Nobody is walking out of National Science Foundation-sponsored economic labs, their pockets full of $100 bills.

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