.

Thursday, December 29, 2011

Healthcare:  Medicare Spending Growth Slowing

Medicare spending per person is rising more slowly than spending in the private health sector. And, because of the cuts that were part of last year's Affordable Care Act, it is expected to mirror overall growth in the economy for much of the next decade, staying well below targets set by Congress.

Medicare is not out of control, said Robert Berenson, vice chairman of the congressionally appointed Medicare Payment Advisory Commission, which studies the program's finances. This bloated and inefficient program is not bloated and inefficient.

Instead, the immediate and inescapable problem is a demographic one: the enormous wave of baby boomers who started enrolling this year. That concern suggests different solutions, experts say, from those needed to cope with runaway costs.

For more, see Medicare Spending Growth Rising Slower but Enrollment Will Rise by Lori Montgomery, December 22, 2011 at The Washington Post.

Wednesday, December 28, 2011

Economics:  Rehypothecation Heightens Systemic Financial Risk

The swift implosion of MF Global highlights a common practice used by aggressive speculators, one that experts say makes the broader financial system vulnerable to another crisis. It's called rehypothecation, and it allows a firm to essentially pledge the same limited collateral to arrange fresh loans.

MF Global is believed to have used client funds as collateral to borrow money to make bets on the risky sovereign debt of Portugal, Spain and Italy, leading to a daisy chain of securitization, Thomson Reuters Business Law Currents reported. It's akin to using a single home as collateral for several loans and then investing that money to earn dividends before payments are due on the loans.

Over the last decade, the practice has become riskier due to looser regulations. In 1934, U.S. lawmakers limited rehypothecated funds to investments in U.S. Treasury, state and municipal instruments, but those rules were relaxed from 2000 to 2005, allowing brokers to use client funds to make riskier bets on foreign bonds and sovereign debt.
Rehypothecation has been practiced for decades, but the systemic risks grow as the leverage increases. At the height of the financial crisis, the credit multiplier was 4, according to the IMF, and $1 trillion in hedge fund assets had been transformed into $4 trillion of pledgeable collateral at banks. The problem comes when everyone wants the money back.

Many of Wall Street's most prominent players "have been piling into re-hypothecation activity with startling abandon," reported Thomson Reuters Business Law Currents, essentially creating "what may be the world's largest ever credit bubble." Among them are Goldman Sachs ($28.17 billion rehypothecated in 2011), Wells Fargo ($19.6 billion), JPMorgan ($546.2 billion) and Morgan Stanley ($410 billion).

More alarming is the lack of transparency about such rehypothecations, which are off-balance-sheet transactions. Because they don't appear on a firm's ledger of revenues and expenses, a significant amount of liability may be hidden. Thus, it is not clear how much in rehypothecations is tangled up with risky sovereign debt. U.S. banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain, according to the Bank of International Settlements, but that total does not include off-balance-sheet transactions.

For more, see MF Global Collapse Spotlights Practice That Heightens Systemic Financial Risk by Marcus Baram and Catherine New, December 22, 2011 at The Huffington Post.

Monday, December 26, 2011

Law:  Michigan Judge Jails Lawyer for Doing His Job

Wow.

In early December, Attorney Scott G. Millard was held in contempt and jailed by 58th District Court Judge Kenneth Post for insisting that his client not answer questions about any prior drug use for fear of self-incrimination.

Millard's client, who was charged with a minor in possession of alcohol, was asked repeatedly by the judge if he would pass a drug test. Millard politely asserted his client's right to remain silent; however, Judge Post continued to press the issue and instructed Millard to sit down and be quiet. When Millard asserted his client's constitutional rights again in response to further questions, the judge held him in contempt and sent him to jail.

For more, see Michigan Judge Jails Lawyer for Doing His Job by Ed Brayton, December 23, 2011 at Dispatches from the Culture Wars.

Politics:  Modernizing Conservatism

By allowing their well-reasoned and often well-founded critiques of government action to metastasize into a categorical rejection of all prospective government action, while continuing to deny the basic political economy of the welfare state, conservatives increasingly find themselves in an ideological and practical straightjacket. Where conservatives have succeeded in cutting government, they have done so by taking an indiscriminate fire ax to non-defense discretionary spending. Meanwhile, they have had virtually no success at all in cutting middle-class entitlements, which represent the lion's share of federal spending and continue their unrestrained growth. This kind of conservatism would be unrecognizable to, for example, Calvin Coolidge, a current sentimental conservative favorite who favored minimum wage laws and child labor regulations, or even to Reagan, who favored large-scale government science research beyond just missile defense.
Consent does not require surrender. Liberals and conservatives do not agree about the principle of equality in American life and probably never will. Conservatives emphasize equal opportunity while accepting or even celebrating unequal outcomes. Conservatives see nothing inherently unjust about large disparities in the distribution of income or wealth, and also offer practical reasons why unequal rewards make for a more dynamic, creative, and ultimately wealthier society. Liberals strongly prefer more equal results, with many viewing disparities in income or wealth as random (Richard Gephardt once referred to the structure of America's wealth and income distribution as a "lottery"), and, as a result, favor egalitarian policies and entitlement programs.

Even so, most liberals are not pure redistributionists, and generally support policies that broaden opportunity for individual advancement, while few conservatives are entirely indifferent to the importance of income mobility and social opportunity. Liberal policies to advance individual opportunity tend to emphasize education, along with some job training efforts, to mixed effect. Meanwhile conservatives have tended to favor using the tax code to bring about rising incomes indirectly through higher rewards for capital investment in work effort. This much derided "trickle-down" approach has some evidence in its favor (for example, research showing the effect high corporate tax rates have on wage levels and wage growth). But even without settling that argument it can be noted that the supply-side string has been fully played out. Honest observers on the Right acknowledge the stagnation of middle-class incomes (though disagreeing on the causes).

I have written this paper in the hopes that my fellow conservatives will recognize the need for a conservative reformation, and I believe that liberals must follow suit.

For much more, see Modernizing Conservatism by Steven F. Hayward, Fall, 2011 at Breakthrough Journal.

Friday, December 23, 2011

Economics:  The 10 Worst Economic Ideas of 2011

2. Austerity works.

Is it conceivable that we have learned nothing from history -- or from economic theory, for that matter? It is hard to believe that after a year or so of the momentary return of Keynesianism in the wake of the deep recession of 2007-2009, it has been utterly renounced in practice in most rich nations around the world. The U.S. refuses to adopt a new fiscal stimulus as fears of a long-term deficit now determine short-term policy.

The eurozone's decision makers are even more obtuse and dangerous. Germany is leading the pack by imposing harsh limits on deficits as a percent of GDP on member states, which is sure to lead to slow growth and probably growing deficits. In the near term, the refusal to restructure the debt of the southern periphery along with demands for harsh austerity there could lead to a break-up of the eurozone and general catastrophe.

...

IMF economists have recently produced solid research putting the lie to claims that austerity has led to rapid growth in some countries in the past. It almost never has, and in the couple of cases it has, it was because the countries devalued their currencies sharply to promote exports. Of course, there will be no devaluations in the eurozone.

7. The Medicare eligibility age should be raised.

Reports had it that President Obama had momentarily agreed to raise the Medicare eligibility age from 65 to 67. Indeed, a New York Times editorial recently seemed (a little less than wholeheartedly) to endorse the idea. Yes, this might reduce Medicare expenditures, but it would raise the total amount Americans spend on health care. In fact, the Kaiser Family Foundation figures it would increase private health care costs for most of the seniors leaving Medicare by more than $2,000 a year on average. There would be other cost-raising effects, as, for example, healthier seniors left Medicare. Kaiser figures the increase in total health spending by Americans would be twice the amount of savings to Medicare. And of course some seniors would simply give up coverage. Call it triage.

For more, see The 10 Worst Economic Ideas of 2011 by Jeff Madrick, December 22, 2011 at The Huffington Post.

Education:  Law Schools

The debate about legal education has focused on tuition costs in the stratospheric layers of the law-school world. But what of the ground floor? Duncan hopes to draw students from economically distressed parts of the country, including the Appalachian Mountains of Tennessee, and sincere efforts have been made to keep overhead to a minimum.

But tuition here is still $28,664 a year. With living expenses and various fees, the student handbook warns, the total price tag for a year runs $50,000.

The reason, according to Pete DeBusk, a retired businessman and the school's main benefactor, is the A.B.A. standards. Without them, he says, Duncan could have cut its tuition in half, maybe by two-thirds.

... the United States churns out roughly 45,000 lawyers a year, but survey after survey finds enormous unmet need for legal services, particularly in low- and middle-income communities. This year, the World Justice Project put the United States dead last among 11 high-income countries in providing access to civil justice.
Nashville School of Law [is] a night school that started as the Nashville Y.M.C.A. Night Law School in 1911. Nashville's graduates are not recruited by large corporate firms. Most will remain in Tennessee, because only a few states deem a diploma from a school that lacks A.B.A. accreditation as a ticket to practice.

But tuition costs $21,000 — in total, for all four years it takes to complete the degree. The reasons? Nobody has tenure. There are no full-time professors. The library costs $65,000 a year.

Our mission from Day 1, says Virginia M. Townzen, associate dean, was to provide a quality, affordable education to those who might not otherwise be able to attend law school.

The graduates get high marks from local judges, including Lawrence H. Puckett of the 10th Judicial District of Tennessee. Some of our more outstanding practitioners have come through the Nashville School, he said. Many of the teachers are judges that I know, and I'm sure they are excellent instructors. But I think it's also the quality of students. They persevere while also holding down a job. That speaks highly of their character.

For more, see The Price to Play Its Way by David Segal, December 17, 2011 at NYTimes.com.

Wednesday, December 21, 2011

Mind:  I Was Wrong, and So Are You

Back in June 2010, I published a Wall Street Journal op-ed arguing that the American left was unenlightened, by and large, as to economic matters. Responding to a set of survey questions that tested people's real-world understanding of basic economic principles, self-identified progressives and liberals did much worse than conservatives and libertarians, I reported. To sharpen the ax, The Journal titled the piece Are You Smarter Than a Fifth Grader?—the implication being that people on the left were not.
I'm a libertarian, and I found it easy to believe that people on the left had an especially bad grasp of economics.
But one year later, in May 2011, Buturovic and I published a new scholarly article reporting on a new survey. It turned out that I needed to retract the conclusions I'd trumpeted in The Wall Street Journal. The new results invalidated our original result: under the right circumstances, conservatives and libertarians were as likely as anyone on the left to give wrong answers to economic questions. The proper inference from our work is not that one group is more enlightened, or less. It's that myside bias—the tendency to judge a statement according to how conveniently it fits with one's settled position—is pervasive among all of America's political groups. The bias is seen in the data, and in my actions.
Buturovic and I largely refrained from replying to the criticism (much of which focused on myside bias) that followed publication of the article. Instead, we planned a second survey that would balance the first one by including questions that would challenge conservative and/or libertarian positions.
Buturovic began putting all 17 questions to a new group of respondents last December. I eagerly awaited the results, hoping that the conservatives and especially the libertarians (my side!) would exhibit less myside bias. Buturovic was more detached. She e-mailed me the results, and commented that conservatives and libertarians did not do well on the new questions. After a hard look, I realized that they had bombed on the questions that challenged their position. A full tabulation of all 17 questions showed that no group clearly out-stupids the others. They appear about equally stupid when faced with proper challenges to their position.

For more, see I Was Wrong, and So Are You by Daniel B. Klein, December, 2011 at The Atlantic.

Security:  Iran Hijacked Us Drone, Says Iranian Engineer

Iran guided the CIA's "lost" stealth drone to an intact landing inside hostile territory by exploiting a navigational weakness long-known to the US military, according to an Iranian engineer now working on the captured drone's systems inside Iran.

Iranian electronic warfare specialists were able to cut off communications links of the American bat-wing RQ-170 Sentinel, says the engineer, who works for one of many Iranian military and civilian teams currently trying to unravel the drone's stealth and intelligence secrets, and who could not be named for his safety.

Using knowledge gleaned from previous downed American drones and a technique proudly claimed by Iranian commanders in September, the Iranian specialists then reconfigured the drone's GPS coordinates to make it land in Iran at what the drone thought was its actual home base in Afghanistan.

For more, see Exclusive: Iran Hijacked Us Drone, Says Iranian Engineer by Scott Peterson and Payam Faramarzi, December 15, 2011 at CSMonitor.com.

Monday, December 19, 2011

International:  Israel's Culture War

Gideon Levy, a powerful liberal voice, writing in Haaretz, the Israeli daily, this week [said] that anyone who says this is a matter of a few inconsequential laws is leading others astray. ... What we are witnessing is w-a-r. This fall a culture war, no less, broke out in Israel, and it is being waged on many more, and deeper, fronts than are apparent. It is not only the government, as important as that is, that hangs in the balance, but also the very character of the state.

For more, see Newt, Mitt, Bibi and Vladimir by Thomas L. Friedman, December 13, 2011 at NYTimes.com.

Economics:  Analysis: China's $300 Billion Fund a Wake-up Call to U.S.

China's plan for a new $300 billion sovereign wealth fund is as much a warning to Washington as it is a body blow to Brussels.

It's the clearest sign yet of Beijing's waning faith in bonds issued by Europe and the United States. Europe's festering debt debacle, record low yields on U.S. Treasuries and a depreciating dollar all add weight to the view in China that the time is ripe to change investment tack.

"China has decided that real assets are better than broken debt fix promises and low interest rates," says Paul Markowski, president of MES Advisers and a long-time external adviser to China's monetary policymakers on global financial markets.

"They want underlying assets. Equities, corporate bonds, real estate ...."

For more, see Analysis: China's $300 Billion Fund a Wake-up Call to U.S. by Reuters, December 14, 2011 at NYTimes.com.

Monday, December 12, 2011

Taxes:  Taxing Wages Instead of Wealth

Wow!

I compared the taxes of two hypothetical married couples for tax year 2011. Mr. and Mrs. Owner received $90,000 in taxable, qualified dividends, and Mr. and Mrs. Worker received $90,000 in wages. Neither couple had any other income, and both took the standard deduction and had no dependents, adjustments, nor credits, and live in Nevada, which has no state income tax. Each had a taxable income of $71,000 after a $11,600 standard deduction and $7,400 in exemptions.

The Owners owed $300 in federal income tax according to my tax software.

The Workers owed $10,006 in federal income tax + $5,085 in payroll taxes for a total of $15,091.

But if there weren't a temporary Social Security tax cut for 2011, the Workers would have paid $1,800 more, for a total of $16,891 out of their pocket.

And that does not include another $6,885 in payroll taxes their employer would have paid, for a grand total of $23,776 in taxes due to $90,000 in wages.

The calculations for Mr. and Mrs. Worker:

 10,006  federal income tax
+ 1,305  Medicare tax  (1.45% of 90,000)
+ 3,780  Social Security tax  (4.2% of 90,000)
--------
 15,091  tax paid out of their pocket for 2011
+ 1,800  Social Security if wasn't a tax break  (2.0% of 90,000)
--------
 16,891  tax out of their pocket if 2011 were a "normal" year
+ 6,885  employer payroll tax  (1.45% + 4.2% + 2.0% of 90,000)
--------
 23,776  total for the Workers and employer in a normal year

International:  Democracy in Hungary

One of Hungary's major parties, Jobbik, is a nightmare out of the 1930s: it's anti-Roma (Gypsy), it's anti-Semitic, and it even had a paramilitary arm. But the immediate threat comes from Fidesz, the governing center-right party.

Fidesz won an overwhelming Parliamentary majority last year, at least partly for economic reasons; Hungary isn't on the euro, but it suffered severely because of large-scale borrowing in foreign currencies and also, to be frank, thanks to mismanagement and corruption on the part of the then-governing left-liberal parties. Now Fidesz, which rammed through a new Constitution last spring on a party-line vote, seems bent on establishing a permanent hold on power.

The details are complex. Kim Lane Scheppele, who is the director of Princeton's Law and Public Affairs program — and has been following the Hungarian situation closely — tells me that Fidesz is relying on overlapping measures to suppress opposition. A proposed election law creates gerrymandered districts designed to make it almost impossible for other parties to form a government; judicial independence has been compromised, and the courts packed with party loyalists; state-run media have been converted into party organs, and there's a crackdown on independent media; and a proposed constitutional addendum would effectively criminalize the leading leftist party.

Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it's a sample of what may happen much more widely if this depression continues.

For more, see Depression and Democracy by Paul Krugman, December 11, 2011 at NYTimes.com.

Saturday, December 10, 2011

Politics:  For and Against Newt

From a very good analysis you might want to read ...

Of all the major Republicans, the one who comes closest to my worldview is Newt Gingrich. Despite his erratically shifting views and odd phases, he continually returns to this core political refrain: He talks about using government in energetic but limited ways to increase growth, dynamism and social mobility.
But how you believe something is as important as what you believe. It doesn't matter if a person shares your overall philosophy. If that person doesn't have the right temperament and character, stay away.

From The Gingrich Tragedy by David Brooks, December 8, 2011 at NYTimes.com.

International:  China Sovereign Fund Has About 60% of Assets in U.S.

China Investment Corp., the nation's sovereign wealth fund, has about 60% of its assets in the U.S., which has many investment opportunities and a good legal system, Jin Liqun told CNBC in an interview yesterday.

Jin, chairman of CIC's supervisory board, said that much of the rest of the fund's assets are in Europe, other nations in Asia and Canada, with investments in resources, real estate and open market transactions.

For more, see China Sovereign Fund Has About 60% of Assets in U.S., JIN Says by Joshua Fellman and Sylvia Wier, December 9, 2011 at Washington Post Business Page.

Thursday, December 8, 2011

Great Recession:  Separating Fact from Fiction on the Fed's Loans

It sounds like a great story: The Federal Reserve lent the banks $7.7 trillion during the financial crisis. And Congress wasn't told.

But it isn't true. Even if Jon Stewart says otherwise.

The Fed and the taxpayers did bail out the banks, including some that occasionally pretend otherwise today. The Fed lent enormous sums: $1.6 trillion in emergency loans and individual bailouts at the December 2008 peak. The Fed has been too secretive in the past. The Fed deserves some blame for not preventing the crisis. The Fed executed some aggressive plays during the crisis that demand post-game scrutiny.

But lending against collateral to solvent, but cash-short, banks during a panic isn't among the Fed's more controversial moves. That's what central banks have done since 19th-century England. And the Fed didn't lend anywhere near $7.7 trillion. Nor did it keep the size of its lending secret, though it did unsuccessfully try to keep the borrowers' identities secret.

For more, see Separating Fact from Fiction on the Fed's Loans by David Wessel, December 7, 2011 at WSJ.com.

Tuesday, December 6, 2011

Diversion:  The Beauty of Pollination

A beautiful video of the birds and the bees (and the bats and the butterflies) ...

Contributed by Pat W. from The Beauty of Pollination by mdemirst, at YouTube.

Government:  The Wonky Liberal

Republicans have many strong arguments to make against the Obama administration, but one major criticism doesn't square with the evidence. This is the charge that President Obama is running a virulently antibusiness administration that spews out a steady flow of job- and economy-crushing regulations.
Over all, the Obama administration has significantly increased the regulatory costs imposed on the economy. But this is a difference of degree, not of kind.

During the final year of their administrations, presidents generally issue tons of new rules. Nineteen-eighty-eight, under Ronald Reagan, 1992, under George H.W. Bush and 2008, under George W. Bush, were monster years for new regulations. In his first years, Obama has not increased regulatory costs more than Reagan and the Bushes did in their final years.

Data collected by Bloomberg News suggest that the Obama White House has actually reviewed 5% fewer rules than George W. Bush's did at a similar point in his presidency. What has increased is the cost of those rules.

George W. Bush issued regulations over eight years that cost about $60 billion. During its first two years, the Obama regulations cost between $8 billion and $16.5 billion, according to estimates by the administration itself, and $40 billion, according to data collected, more broadly, by the Heritage Foundation.

That's a significant step up, as you'd expect when comparing Republican to Democratic administrations, but it is not a socialist onslaught.

Nor is it clear that these additional regulations have had a huge effect on the economy. Over the past 40 years, small business leaders have eloquently complained about the regulatory burden. And they are right to. But it's not clear that regulations are a major contributor to the current period of slow growth.

The Bureau of Labor Statistics asks companies why they have laid off workers. Only 13% said regulations were a major factor. That number has not increased in the past few years. According to the bureau, roughly 0.18% of the mass layoffs in the first half of 2011 were attributable to regulations.

For more, see The Wonky Liberal by David Brooks, December 5, 2011 at NYTimes.com.

Saturday, December 3, 2011

Economics:  Why Germans Fear Inflation

By robbing a currency of its value, inflation wipes the slate clean for debtors and savers alike. Germans say they like the slate the way it is because they are on the plus side of the ledger.

Consumer debt, whether credit cards or in many cases even home mortgages, is frowned upon here. According to figures of the Organization for Economic Cooperation and Development, the German savings rate was more than 10% every year between 2003 and 2009, while during the same period it bottomed out at 1.5% in the United States, and never rose above 6.2%. As a result German households had net savings of $4.3 trillion, according to the Bundesbank, in a country of fewer than 82 million people.

Germans own homes at a lower rate, 41.6%, than the 66.3% of Americans who do. And most people do not invest in the stock market here.

For the average American, inflation means the home price is increasing and the value of debt is going down, said Peter Bofinger, a prominent economist on Mrs. Merkel's independent council of economic advisers, whereas the German invested in life insurance and sitting in an apartment he rented is much more vulnerable to inflation.

For more, see German Fears About Inflation Stall Bold Steps in Debt Crisis by Nicholas Kulish, December 1, 2011 at NYTimes.com.

Government:  Gingrich and the Destruction of Congressional Expertise

On Nov. 21, Newt Gingrich, who is leading the race for the Republican presidential nomination in some polls, attacked the Congressional Budget Office. In a speech in New Hampshire, Mr. Gingrich said the C.B.O. is a reactionary socialist institution which does not believe in economic growth, does not believe in innovation and does not believe in data that it has not internally generated.

Mr. Gingrich's charge is complete nonsense. The former C.B.O. director Douglas Holtz-Eakin, now a Republican policy adviser, labeled the description ludicrous. Most policy analysts from both sides of the aisle would say the C.B.O. is one of the very few analytical institutions left in government that one can trust implicitly.

It's precisely its deep reservoir of respect that makes Mr. Gingrich hate the C.B.O., because it has long stood in the way of allowing Republicans to make up numbers to justify whatever they feel like doing.

For example, Republicans frequently assert that tax cuts, especially for the rich, generate so much economic growth that they lose no revenue. This theory has been thoroughly debunked, most recently by the tax cuts of the George W. Bush administration, which, according to C.B.O., reduced revenues by $3 trillion. Nevertheless, conservative groups like the Heritage Foundation (where I worked in the 1980s) still peddle the snake oil that the Bush tax cuts paid for themselves.

Mr. Gingrich's unprovoked attack on the C.B.O. is part of a pattern. He disdains the expertise of anyone other than himself and is willing to undercut any institution that stands in his way. Unfortunately, we are still living with the consequences of his foolish actions as speaker.

For much more, see Gingrich and the Destruction of Congressional Expertise by Bruce Bartlett, November 29, 2011 at Economix.

Thursday, December 1, 2011

Diversion:  Pearls Before Swine

From Pearls Before Swine by Stephan Pastis, November 22, 2011 at GoComics.

Mind:  The Certainty of Memory Has Its Day in Court

For scientists, memory has been on trial for decades, and courts and public opinion are only now catching up with the verdict. It has come as little surprise to researchers that about 75% of DNA-based exonerations have come in cases where witnesses got it wrong.
While most of us tend to think memory works like a video recorder, it is actually more like a grainy slide show. Lost details, including imaginary ones, often are added later. One of the earliest and more famous experiments to demonstrate that memories are malleable was conducted by Elizabeth Loftus, a psychology professor at the University of California, Irvine, and an early pioneer of witness memory research.

In a 1974 study published in The Journal of Verbal Learning and Verbal Behavior, she asked participants to view films of fender-benders in which no car windows or headlights were broken. Later, the subjects who were asked how fast the cars were going when they smashed into each other — as opposed to hit — were more likely to report speeding and describe shattered glass they never actually saw.

In another experiment, conducted in Scotland, participants were four times as likely to report a memory of a nonexistent event — in this case, a nurse removing a skin sample from their little finger — if they had been asked to imagine it just one week before. Others in the experiment read a description, but were not asked to picture it happening.

Even the process of police questioning and prepping for trial can crystallize a person's own faulty reconstruction. In 2000, Dr. Tversky published a series of experiments conducted at Stanford University in the journal Cognitive Psychology. In one, volunteers read profiles of fictitious roommates with both charming and annoying habits; they were then asked to write either a letter of recommendation or letter making a case for a replacement.

When later asked to repeat the original description, the volunteers' recollections were skewed by the type of letter they had written. Their minds had shed qualities that didn't match the first draft of their own recall and had embellished those that did.

When we don't remember, we make inferences, Dr. Tversky said.

Sometimes we miss details because we weren't paying attention, but sometimes we are concentrating too hard on something else. Nothing is as obvious as it seems.

All this makes sense, he said, when you consider the purpose of memory. He and his colleagues believe that memory is designed not just to keep track of what has happened, but to offer a script for something that might.

Evidence for this also comes from brain scans. Just as the recall of a bogus event lights up the brain's memory centers, so does thinking about something that might occur.

Because the brain uses memories for mental dress rehearsal, we are not wired to retain every facet of an event, scientists say. We don't have to. A general framework is all that's necessary to keep from getting lost, or find food, or know what to do when a storm is coming.

For more, see The Certainty of Memory Has Its Day in Court by Laura Beil, November 28, 2011 at NYTimes.com.