Category Archive for: Policy [Return to Main]

Tuesday, October 05, 2010

"Retraining Workers Won't Work"

Rebecca Wilder:

Retraining workers won't work: From the NY Times, White House Plans Job Training Partnership (bold by me):

As part of efforts to address record-high levels of long-term unemployment, President Obama plans to announce a new national public-private partnership on Monday to help retrain workers for jobs that are in demand.

The national program is a response to frustrations from both workers and employers who complain that public retraining programs frequently do not provide students with employable skills. This new initiative is intended to help better align community college curriculums with the demands of local companies.

“The goal is to encourage community colleges and other training providers to work in close partnership with employers, to design a curriculum where they want to hire the people coming out of these programs right away,” said Austan Goolsbee, chairman of the President’s Council of Economic Advisers.

The White House has coined this program Skills for America's Future. The complication is, that lack of skills is not the problem for the 66% of the labor force aged 25 years and over without a bachelor's degree. The problem is the lack of jobs.


The chart illustrates the dynamics of employment by level of education through August 2010, as measured by the Bureau of Labor Statistics. Note that the data are indexed to the onset of the recession, December 2008, where 100 implies that employment is now at its pre-recession level.

The only category to recover employment in full is that requiring a Bachelor's degree or higher. Furthermore, no material change in employment for BA's (or higher) has occurred since about a year ago, as indexed employment hovers around 100. No new jobs.

The levels of employment for those workers with the lowest levels of educational attainment, 1. and 2., are 3.4% and 5.4% below pre-recession levels, respectively. That is near 2 million jobs.

The White House program is targeted at community college students, or education category 3., some college or associate degree in the chart above. Employment for workers with a community college degree sits over 2.5% below pre-recession levels, or 1 million jobs. Retraining workers will not raise the employment level further.

The government needs to "add jobs", not "retrain workers", and stimulate domestic aggregate demand.

Friday, October 01, 2010

"Current Targets for Limiting Climate Change are Unsafe"

News on the urgency of combating greenhouse gases:

Research suggests climate change target 'not safe', EurekAlert: An analysis of geological records that preserve details of the last known period of global warming has revealed 'startling' results which suggest current targets for limiting climate change are unsafe.
The study by climate change experts at the University of Exeter has important implications for international negotiators aiming to agree binding targets for future greenhouse gas emission targets.
Professor Chris Turney and Dr Richard Jones ... have reported a comprehensive study of the Last Interglacial, a period of warming some 125,000 years ago, in the latest issue of the Journal of Quaternary Science.
The results reveal the European Union target of limiting global temperature rise to less than 2°C above pre-industrial levels shouldn't be considered 'safe'. ...
Professor Turney said: "The results here are quite startling and, importantly, they suggest sea levels will rise significantly higher than anticipated and that stabilizing global average temperatures at 2˚C above pre-industrial levels may not be considered a 'safe' target as envisaged by the European Union and others. The inevitable conclusion is emission targets will have to be lowered further still."

Thursday, September 30, 2010

"The Ghost of Full Employment"

Should the government guarantee a job for anyone who wants one?:

The Ghost of Full Employment, by Jefferson Cowie, TAP: After nearly two years of bad economic news,... the ... government's direct response to the jobs and poverty crisis has ... drawn only from the narrow menu of economic fundamentalism -- tax cuts and stimulus. Now that gross domestic product is positive, the unemployment problem is mostly considered "structural" -- a skills mismatch -- and thus beyond our capacity to solve.
Yet not that long ago, in the midst of another long-term economic meltdown, politicians dared to think beyond the idea that growth alone would solve all problems. National leaders, including mainstream politicians in both parties, went so far as to propose a federally mandated and legally enforceable right to a job for every American.
That's right -- the federal guarantee of a job.
Their premise? That people's livelihoods are too important to be left to market mechanisms. ... In 1974, when the United States faced another period of double-digit unemployment and global economic crisis,... Sen. Hubert Humphrey and Rep. Augustus Hawkins ..., teamed up to advance a seductive idea: national planning that wouldn't simply promote growth, support Wall Street, or prop up consumption but ensure a job for every person. ...
Humphrey and Hawkins looked to revive Franklin Roosevelt's famous Economic Bill of Rights, the core of which was, as FDR explained in 1944, "the right to a useful and remunerative job in the industries or shops or farms or mines of the nation." The aggressive Keynesianism of the Humphrey-Hawkins Act was simple in concept: Federal policy should promote full employment..., and if that failed, government would then be triggered as the employer of last resort. ...
To contemporary ears, the idea of a federally guaranteed job sounds like crazy talk...
Today, as a similar economic malaise haunts the land, we ... need ... spirit and imagination. Despite its failure to deliver much of anything, the Humphrey-Hawkins Act serves as a striking example of national leaders thinking boldly about the collective economic well-being of the citizenry. ...
President Barack Obama's failure is not on specific policy grounds; it is in his more significant inability to help the nation reimagine a constructive role for the state. ...
The boldness of the Humphrey-Hawkins Act remains a forgotten artifact of a bygone political era, buried deep in the ideological layers of the post-Reagan world. Perhaps it's time to dig it up and ask ourselves if ... we actually have the courage and imagination to govern ourselves.

I can imagine how to do this in a large, one-shot, New Deal kind of way in times where there is a substantial amount of idle labor, but it's harder to imagine how to design a job guarantee program that would operate on an ongoing basis.

Tuesday, June 22, 2010

Fannie, Freddie, and Fixed Rate Mortgages

Richard Green says "If we do away with Fannie and Freddie, we may also do away with the 30-year fixed rate mortgage," and that may not be good for home buyers:

Bob Hagerty blogs about Patrick Lawyer on Fixed Rate Mortgages, by Richard Green: He writes, in part:

Allotted only about 10 minutes to share his vision, Mr. Lawler....first made the obligatory statement that he was expressing his own views and not those of his federal agency. Yeah, right, I thought, and reached for my triple espresso.
But then Mr. Lawler launched a frontal assault on the most sacred element in U.S. housing-policy dogma: the 30-year fixed-rate mortgage loan, providing the right to refinance at any time, with no prepayment penalty. If more members of the audience had been fully awake at this moment, I feel sure that their gasps would have been audible.
Now, Americans are very attached to their 30-year fixed-rate freely prepayable mortgages. They like not having to fuss about the possibility of 28% interest rates in 2032, even though most of us will move or die long before then. They love to refinance every time rates drop and then brag to their neighbors about how much they are saving per month.
What they don’t stop to realize often enough is that they are paying a very large price for that privilege– twice.
The context is important.  One of the reasons the 30 year fixed rate mortgage is ubiquitous is the United States may be the existence of Fannie and Freddie.  If we do away with FF, we may also do away with the 30-year fixed rate mortgage.  So let me defend the 30-year fixed a bit with something I wrote about 3 years ago:
The problem with advising people to use adjustable rate mortgages, however, is that ARMs give households liabilities that have short duration--that is, liabilities whose market value remains close to face value at all times. This is because the rates on ARMs by definition change to meet market rates on a regular basis. Houses, on the other hand, are assets with lots of duration. The services they give to homeowners (shelter and a set of amenities) is pretty much invariant to market conditions. Consequently, house values change with market conditions, such as changing interest rates.
Good financial management practice suggests that to minimize risk, the duration of of assets and liabilities for any institution, including households, should be matched. In the case of houses, this means that households looking to minimize risk should use a fixed rate mortgage to finance their house. There are exceptions--if one buys a house and expects to sell it in five years, a five year ARM makes lots of sense, because the duration of the asset (housing services over five years) and the liability would match.
This is not to say there is anything wrong per se with people getting ARMS, so long as they explicitly understand the risk embedded in them. But a principle I have been pushing for years is that if people can't afford a house with a fixed-rate mortgage, they probably shouldn't buy a house. It is one thing to have the option of the FRM, and then decide to take the risk of the ARM anyway. One of the nice things about the United States is that FRMs are easy to come by--this is not true in most countries around the world. It is something else to be forced into taking a risk in order to buy. Under these circumstances, buying probably isn't worth it. 

Thursday, June 17, 2010

Weekly Claims for Unemployment Insurance Increase

We're moving sideways:


And a closer look (the red line is initial claims, the black line is the 4 week average):


Unemployment Insurance weekly Claims Report: In the week ending June 12, the advance figure for seasonally adjusted initial claims was 472,000, an increase of 12,000 from the previous week's revised figure of 460,000. The 4-week moving average was 463,500, a decrease of 500 from the previous week's revised average of 464,000.

I'd make the usual plea that labor markets need more help, but what good would it do? Congress is not going to do anything substantial to try to help with the employment problem. Brad DeLong is equally frustrated:

I tell you. Writing the history of this episode is going to be next to impossible. "But why didn't they see?!?" is what the students are all going to ask. And I have no answer...

The austerians are winning, but at what cost? How does a stubbornly high unemployment rate increase business and market confidence?

Thursday, June 10, 2010

"Why Economic Advisors Are Paid to Be Economic Advisors"

Robert Reich says there are two types of economic advisors, but only one of the two has any value to the president:

Why Economic Advisors Are Paid to Be Economic Advisors, by Robert Reich: Say you’re a high government official with some responsibility for advising the President on what he should be doing and saying about the economy. You know the economy is still in a deep hole, the deepest since the Great Depression. The jobs report for May was dismal... 
You also know that consumers don’t have the buying power to get it out of the hole... The housing market is still awful. You know businesses are reluctant to create new jobs if there are few customers... And you know export markets are drying up because of a high dollar..., and Europe has embarked on austerity measures to shrink its deficits.  You also know state revenues are way down because of the deep economic hole, and they’re forced to raise taxes, cut services, and lay off large numbers of state workers, including teachers.
Oh, and one more thing: You know that all the boosters keeping the economy barely going now are coming to an end. The Fed can’t keep interest rates near zero for long because it’s starting to worry about inflation. ... The federal stimulus is 75 percent spent, and the money will be gone in a few months. Census workers will also be gone by the end of the summer. 
So what do you do?
A) Tell the President the economy will either go into a “double-dip” recession or, at best, suffer anemic growth over the next five years — creating enormous pain and suffering for millions of Americans, and imperiling his reelection — unless he immediately champions a $300 billion jobs bill, including zero-interest loans to states and locales to prevent them from having to raise taxes and cut services, public-service jobs (cleaning up the Gulf), and a one-year payroll tax holiday on the first $100,000 of income. To sell this, he’ll need to explain to the American people why larger short-term deficits are necessary now, in order to get jobs back and the economy growing again so that long-term structural deficits (read health care and Medicare, mostly) can be tackled. 
B) Tell the President you understand the political pressures for deficit reduction are growing, and Republicans are making headway fooling the public into believing that this terrible recovery is due to to excessive government deficits. So so it’s perfectly fine for the President to bend to those political pressures. Cut the budgets of most federal agencies by 5 percent, enforce “pay-go” rules that don’t allow bigger deficits, build up expectations for the report of his “deficit commission” on December, and tell the American public that we now have to move toward fiscal austerity. 
If you choose B, you shouldn’t be advising the President. 

I think political realities have to play a role in the advice that is given to the president. Staff time is valuable, and policy proposals take quite a bit of time to construct. No matter how good a proposal is, it doesn't do much good to spend a lot of time developing policy proposals that you know are dead in the water when they arrive, especially if a second best option exists that isn't perfect, but makes substantial progress. However, even when it's clear that a policy has not chance at all of passing, I'd hope the more attractive proposal is at least articulated to the president as an option.

But Robert Reich is talking about something different from operating within the feasible set of policies. He's objecting to economic advisors getting behind proposals that might could be harmful economically if they are enacted, but that are popular politically due to public misperceptions about the underlying economics. Hard to disagree with that.

I'd go even further. When the president's political advisors decide to sell economic policies to the public based upon untrue statements, e.g. telling people that tax cuts pay for themselves, then I think the advisors have an obligation to either set the record straight, or resign.

Tuesday, June 01, 2010

"A Political Economy Moment"

Peter Dorman argues that economic policy is determined by economic and political interests rather than academic argument, and that this can explain the reason that governments are adopting the views of the inflation and deficit hawks. That is, "economic orthodoxy is regaining control over policy because it reflects the outlook of those who occupy the upper reaches of government and business":

A Political Economy Moment, EconoSpeak: This is a critical moment for economic policy in the industrialized countries. After a year and a half of emergency rescue, with large fiscal deficits and rock-bottom interest rates, governments are beginning to pull back. Especially in countries with large current account deficits, stimulus spending is being withdrawn, and central banks are under pressure to begin raising rates and tightening money. The threat of deflation and cascading insolvencies in the financial system are so yesterday; today’s threat is said to be inflation and sovereign default.

If you survey the center-to-left economics blogs, including this one—economists who see the world at least in part through Keynesian eyes—you will find howls of protest. It is simply irrational, we say, to allow this slump to run its course. There is no threat of inflation at all, which is actually a problem, since a bit of inflation would be medicine against effectively high nominal interest rates at the zero lower bound. And every indication is that the recovery under way owes its feeble pulse to the lingering effects of last year’s stimulus.

But is this just a problem of economic analysis? Is it only that New, Post and other Keynesians haven’t been persuasive enough? Does economic argument and evidence drive policy?

In a sense yes: those who make the decisions summon economic arguments to justify their actions. But who gets to make the decisions and what arguments they find appealing is not the outcome of academic seminars. What got us into this mess in the first place, and what now threatens to throw us back into the maelstrom, is the political hegemony of the “finance perspective”, the interests and outlook of those whose main concern is maximizing (and now simply protecting) the value of their financial assets.

Within the world of elite interests, this is almost a mass constituency. While the bulk of such assets are held by an infinitesimal few, perhaps the top 10-20% of the population in the industrialized countries have significant financial wealth and actively monitor their returns. Their understanding of how economies work and what priorities policy-makers should adhere to follow from their personal position. Inflation is a constant threat to asset-holders. They fear the laxity of central banks as well as the buildup of government debt, which can serve as an incentive to future inflation. They want their portfolios to have a component of absolutely risk-free government securities, and the very whisper of sovereign default chills them to the core. They believe in the inherent reasonableness of financial markets and believe that anyone who wishes to borrow from them should demonstrate their prudence and fiscal rectitude. They were willing to relax their principles temporarily during the panic, but now that they have caught their breath they want to see a return to “sound” practices. Governments will bend to their wishes not because they have better arguments, but because they hold power.

Don’t get me wrong. I am not making the crude claim that policy is driven directly by interests. In fact, I believe that, if they get their way, holders of financial assets will suffer along with the rest of us. (Not as much, of course: succumbing to a haircut because of debt deflation cannot be compared to losing one’s job and not being able to meet basic needs.) The process is more complicated: where one sits in society and the kinds of problems one typically has to solve leads to a way of thinking, and this manner of thinking then informs politics. For centuries, the finance perspective has played a central role in economic theorizing, and there is ordinarily a body of research to support it. What I am proposing is this: economic orthodoxy is regaining control over policy because it reflects the outlook of those who occupy the upper reaches of government and business.

Up to this point, the Great Economic Event we are passing through has not caused even a hint of political realignment, and that is why policy is returning to the old normal.

Monday, May 31, 2010

Paul Krugman: The Pain Caucus

The budget and inflation hawks are winning the battle to define the "conventional wisdom" over how policymakers should respond now that the economy is just setting out on the long road to recovery. The wisdom may be conventional, but it is not very wise:

The Pain Caucus, by Paul Krugman, Commentary, NY Times: What’s the greatest threat to our still-fragile economic recovery? Dangers abound... But what I currently find most ominous is the spread of a destructive idea: the view that now, less than a year into a weak recovery from the worst slump since World War II, is the time for policy makers to stop helping the jobless and start inflicting pain.
When the financial crisis first struck, most of the world’s policy makers responded appropriately, cutting interest rates and allowing deficits to rise. And by doing the right thing, by applying the lessons learned from the 1930s, they managed to limit the damage: It was terrible, but it wasn’t a second Great Depression.
Now, however, demands that governments switch from supporting their economies to punishing them have been proliferating in op-eds, speeches and reports from international organizations. Indeed, the idea that what depressed economies really need is even more suffering seems to be the new conventional wisdom...
The extent to which inflicting economic pain has become the accepted thing was driven home to me by the ... Organization for Economic Cooperation and Development... The O.E.C.D. is a deeply cautious organization; what it says at any given time virtually defines that moment’s conventional wisdom. And what the O.E.C.D. is saying right now is that policy makers should stop promoting economic recovery and instead begin raising interest rates and slashing spending.
What’s particularly remarkable ... is that ... the O.E.C.D.’s own forecasts show no hint of an inflationary threat. So why raise rates? The answer, as best I can make it out, is that the organization believes that we must worry ... that markets might start expecting inflation, even though they shouldn’t and currently don’t...
A similar argument is used to justify fiscal austerity. Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts. And the O.E.C.D. predicts that high unemployment will persist for years. Nonetheless, the organization demands both that governments cancel any further plans for economic stimulus and that they begin “fiscal consolidation” next year.
Why do this? Again, to give markets something they shouldn’t want and currently don’t. Right now, investors don’t seem at all worried about the solvency of the U.S. government; the interest rates on federal bonds are near historic lows. ...
The best summary I’ve seen of all this comes from Martin Wolf..., who describes the new conventional wisdom as being that “giving the markets what we think they may want in future — even though they show little sign of insisting on it now — should be the ruling idea in policy.”
Put that way, it sounds crazy. And it is. Yet it’s a view that’s spreading. And it’s already having ugly consequences. Last week conservative members of the House, invoking the new deficit fears, scaled back a bill extending aid to the long-term unemployed — and the Senate left town without acting on even the inadequate measures that remained. As a result, many American families are about to lose unemployment benefits, health insurance, or both — and as these families are forced to slash spending, they will endanger the jobs of many more.
And that’s just the beginning. More and more, conventional wisdom says that the responsible thing is to make the unemployed suffer. And while the benefits from inflicting pain are an illusion, the pain itself will be all too real.

Wednesday, May 19, 2010

"Politicians Ignore Keynes at their Peril"

Dean Baker says policymakers need to "to pick up Keynes again":

Politicians ignore Keynes at their peril, by Dean Baker: John Maynard Keynes explained the dynamics of an economy in a prolonged period of high unemployment more than 70 years ago in The General Theory. Unfortunately, it seems very few people in policymaking positions in the United States or Europe have heard of the book. Otherwise, they would be pushing economic policy in the exact opposite direction than it is currently heading.
Most wealthy countries have now made deficit reduction the primary focus of their economic policy. Even though the US and many eurozone countries are projected to be flirting with double-digit unemployment for years to come, their governments will be focused on cutting deficits rather than boosting the economy and creating jobs.
The outcome of this story is not pretty. Cutting deficits means raising taxes and/or cutting spending. In either case, it means pulling money out of the economy at a time when it is already well below full employment. This can lower deficits, but it also means lower GDP and higher unemployment.
This might be OK if we could show some benefit from lower deficits, but this is a case of pain with no gain. Ostensibly, there will be a lower interest-rate burden in future years, but even this is questionable. First, the contractionary policy being pursued by the deficit hawks will slow growth and lead to lower inflation or possibly even deflation. It is entirely possible that the debt-to-GDP ratio may actually end up higher by following their policies than by pursuing more expansionary policy.
In other words, we may end up with smaller deficits and therefore accumulate less debt, but we may slow GDP growth even more. The burden of the debt depends on the size of the economy and in the scenario where we do more to slow GDP growth than the growth of the debt, then we end up with a higher interest-rate burden, not a lower one.
The other reason why we may not end up with a lower interest rate-burden is that we need not issue debt to finance the budget deficits. Countries such as the United States and the United Kingdom that control their central banks can simply have the central banks buy up the bonds used to finance the deficits. In this story, the interest payments on the bonds are paid to the central bank, which is in turn refunded to the government. This means that there is no interest-burden created by these deficits.
If that sounds impossible, then it's necessary to pick up Keynes again. The economies of Europe and the United States are not suffering from scarcity right now. They are suffering from inadequate demand. This means that if governments run deficits, and thereby expand demand, the economy has the capacity to fill this demand. The decision of central banks to expand the money supply by buying bonds simply leads to an increase in output, not to inflation.
The idea that there is a direct link between the money supply and inflation is absurd. Do any businesses raise their prices because the Fed has put money into circulation? How many businesses even have a clue as to how much money is in circulation? In the real world, prices are set by supply and demand. If any businesses tried to raise their prices just because the Fed has put more money into circulation they would soon find themselves wiped out by the competition – at least as long as we are in this situation of having enormous excess supply.
This story should be old hat to those who have studied Keynes. In a period of high unemployment, like the present, governments can literally just print money. Not only will this put people back to work, this process can also lay the basis for stronger growth in the future by creating better infrastructure, more energy-efficient buildings, supporting research and development of clean energy and improving the education of our children.
Unfortunately, our political leaders don't give a damn about mundane issues such as unemployment and economic growth. It is far easier for them to bandy about silly cliches about fiscal responsibility and generational equity, even though the policies they are pushing are 180 degrees at odds with anything that will help our children or grandchildren. Their main concern is pushing policies that keep the financial industry happy. And 10 million unemployed never bothered anyone at Goldman Sachs, just as Fabulous Fabio.

Sunday, May 16, 2010

Shiller: Fear of a Double Dip Could Cause One

If you believe the price of a good you consume regularly is going to go up in the future, the best thing to do is to stock up now. If everyone else shares that belief, that will drive the price up, just as you thought. Thus, even if the expectation of an increase in the price was driven by nothing more than speculation and rumor, the expected change in the price will be self-fulfilling. Beliefs about the future will be validated by observable events, and this will tend to reinforce the beliefs (this is one way a bubble could get started, but the point here is simply that expectations can be self-fulfilling).

Robert Shiller says there is a growing belief that the economy will have a double-dip recession, and that this belief may cause the outcome people are worried about:

Fear of a Double Dip Could Cause One, by By Robert J. Shiller, Commentary, NY Times: The risk of a double-dip recession hasn’t abated..., the danger stems from the weakness and vulnerability of confidence — whose decline could bring markets down, further stress balance sheets and cause cuts in consumption, investment and local government expenditures.
Ultimately, the risk resides largely in social psychology. It is the fear of fear itself, of which Franklin D. Roosevelt famously spoke.
From 2007 to 2009, there was widespread concern about the risk of an economic depression, but that scare has been abating. Since mid-2009, it has been replaced by the milder worry of a double-dip recession... And with that depression scare still fresh in our minds, sensitivity to the possibility of another downturn remains high.
To be sure, many economists doubt that a double-dip recession is in store. ... And there have been encouraging factors... But forecasters ... may be missing the real worry that many people harbor about the economy.
I use a definition of a double-dip recession that doesn’t emphasize the short term. Instead, I see it as ... a recession in which unemployment rises to a high level and then falls at a disappointingly slow rate. Before employment returns to normal, there is a second recession. As long as economic recovery isn’t complete, that’s a double-dip recession, even if there are years between the declines.
Under that definition, there has been only one serious double-dip recession in the last century — and it was serious indeed. It started with the 1929-33 recession, which was followed by a recession in 1937-38. Between those declines, the unemployment rate never moved below 12.2 percent. Those two recessions, four years apart, are now typically lumped together as one event, the Great Depression.
Many negative factors persisted between those dips. High among them was a widespread sense then that something was amiss with the economy. There was a feeling of uncertainty that discouraged entrepreneurship, lending and spending, and most important, hiring.
We have to deal with a similar — though less extreme — problem today. Many of us are unsettled by images that are preventing a return to normal confidence — images of rioting in Athens, or of baffled American traders during the nearly 10 percent drop in the stock market on May 6. And if the BP oil spill ... eventually wreaks havoc on the gulf economy, we may need to add it to the list, too. ...
Fostered by mass psychology,... aftershocks could occur in the next year or two. This ...  could be ... severe. ... We need to look at short-run events, like the market reaction to the Greek bailout, as no more than side effects. Slowly moving changes in our animal spirits represent the real risk of a double-dip recession.
I think the more likely trigger is further economic trouble. We could be hit by big shocks that we are vaguely aware might be a problem but do not yet fully anticipate, or it could be something else unexpected -- another big oil shock for political or other reasons would be hard for the recovering economy to absorb. Even more likely is an outbreak of extreme hawkishness causing us to pull back too fast on fiscal stimulus, and to raise interest rates too fast. That is, I think it's more likely that economic events will drive fear rather than the other way around. That's not to say that fear doesn't provide an important negative feedback mechanism, I think it does, but I'm not convinced that psychology is the prime causal mover.

Friday, May 14, 2010

What Economic Policies Should Government Pursue During the Recovery?

Help me complete a list of policies that the government should pursue during the recovery period:

What Economic Policies Should Government Pursue During the Recovery?

Even though things are looking better, the government's job is far from done.

Saturday, May 01, 2010

"Flying Blind in Policy Reforms"

Jeff Sachs says "our political system regularly puts around the table people who are not the best equipped to find deep solutions to our problems." He wants outside experts to have more influence in the formulation and execution of major policy changes:

Flying Blind in Policy Reforms, by Jeffrey D. Sachs, Commentary, Scientific American: The long and divisive fight over U.S. health care reform exposed basic weaknesses in the processes of governance. As is so often true in American politics these days, politicians and lobbyists kept complex subjects to themselves, pushing expert discussion and systematic public debate to the sidelines. ...
During 14 months of debate over health care, the administration did not put forward a clear, analytical policy white paper on the aims, methods and expected results of the proposed reforms. ... The actual health consequences of the legislation were never reviewed or debated coherently. ...
One might think that the real action had all happened earlier, in congressional hearings, in brainstorming sessions and in the bargaining sessions with key stakeholders. Yet the earlier process was relentlessly driven by political and lobbying calculations and without the informed participation of the American people, who were left to vent at Tea Parties and on blog sites. The mammoth legislation is impenetrable... Experts were never invited systematically to comment or debate about it so as to help the public and politicians understand the issues. The lack of clear policy documents from the administration meant that the public had little basis for reaction other than gut instincts and fearful sentiments fanned by talk-show hosts.
In general, our political system regularly puts around the table people who are not the best equipped to find deep solutions to our problems. Certainly it has also done so on climate change... As with health care, the outcome has been House and Senate draft legislation that lacks public support. The same has been true on Afghanistan: the “war cabinet” has lacked real expertise on that country’s culture, economy and development challenges, and the U.S. public has remained uninformed of true options.
As a start toward better policy making, the administration should put forward a detailed analysis justifying each major proposed policy change. That white paper could form the basis for coherent public debate and reflection, along with Web sites where outside experts would be invited to share opinions accessible to the public. The public, too, would be invited to blog about that position paper. ... The administration and Congress would rely more heavily on external advisory panels to tap into the nation’s wealth of expertise...

I would not presume or recommend that decisions be left to the purported experts, who often represent special interests or have their own biases or narrow views. Still, a systematic vetting of policy options, with recognized experts and the public commenting and debating, will vastly improve on our current policy performance, in which we often fly blind or hand the controls over to narrow interests and viewpoints.

The problem I see, at least in economics, is not so much the absence of experts weighing in on issues. Instead, it's the inability of the press, and hence the public more generally, to distinguish between expert and non-expert opinion. All too often the two are given a false equivalence in a "he said, she said" journalistic construction that obscures and confuses people about the issue. This can even do more harm than good in terms of informing the public.

Tuesday, April 06, 2010

Giving Up on Policymakers

I've been pushing hard for more help for labor markets for quite awhile -- at times I've thought it was a bit repetitive, but necessary -- but it's probably time for me to give up and accept that we are going to have a slower recovery than we could have had with more aggressive fiscal policy. Unless there is a dramatic reversal of recent indications that we are at the beginning of a recovery, Congress is not going to provide anything more than token help from here forward.

The fiscal policy response to the crisis has been disappointing. Monetary policy loses its effectiveness in a recession. There are some things monetary policy can do -- important things such as injecting liquidity into fearful, frozen financial markets to prevent a complete meltdown of the system. But when it comes to providing a big shock to aggregate demand sufficient to turn the economy around and propel it back toward full employment, monetary policy alone isn't enough. It's true that monetary policy can lower real interest rates -- even at the zero bound for the federal funds rate, it's still possible to use quantitative easing to nudge long-term interest rates downward -- the problem is that all this does is create an incentive for more investment and consumption (mainly of durables), there is nothing to guarantee that people will actually respond. My reading of the evidence is that to the extent that households and businesses do respond to lower real interest rates during a recession by consuming or investing more, the response is not very strong.

Because monetary policy loses effectiveness in a deep recession -- something I've been teaching for decades -- I was among the first to call for aggressive fiscal policy. Fiscal policy creates demand directly, it does not rely upon incentives and the hope that people will respond to them. When the crisis hit, we needed fiscal policy right away. Given the lags between changes in policy and actual effects on the economy, which were known to be lengthy, and given that monetary policy was not going to be enough, there was no time to "wait and see" (as many people I respect were calling for). But the reality is that fiscal policy didn't get put into place until much, much later, far too late to stop the worst of the downturn (and it wasn't big enough anyway). The way too slow policy process, and the way too small policy that came out of it, was frustrating to watch.

I think we'd be much better off today if we'd done what is necessary right away instead of hoping and hoping that things weren't going to be so bad, and that we could escape the need for an aggressive policy intervention. This crisis has taught me that policy of that magnitude is nearly impossible to put in place based upon what looks to be happening, i.e. before the recession actually occurs. There must be clear evidence that a severe recession is actually underway before policy will be considered. Unfortunately, by that time it's too late to prevent the worst part of the downturn.

Now that we are hitting the other side, I'm feeling frustrated again with the lack of action from policymakers. I expect the recovery to proceed at a snail's pace, labor markets in particular. If employment rebounds quickly, great, but that's not what I think is going to happen, and that's not what the evidence suggests. If the recovery is going to be slow, then it's not too late to provide more help. Instead of getting back to full employment by, say, 2013, we could get there sooner if we act now. I'm not the greatest artist in the world, but I even drew a picture:


Why settle for the blue line recovery when the green line is possible? Frustration over the fact that we seem to be headed on the blue-line trajectory explains why I've been reluctant to highlight what little good news there has been about labor markets recently. I don't want to jump on the "things are getting better" bandwagon when there is still more that policymakers can do to help, and when there are still considerable uncertainties about the strength of the budding recovery.

But, as I said at the beginning, even though it's not too late for more help to make a difference, it's not going to happen. Now that the recovery seems to have started and the budding optimism is apparent, we will turn our attention elsewhere, to financial reform, to global warming, and to other issues. We'll forget about all the people who could have been working, but instead have to hope Congress doesn't cut off their unemployment insurance before they can find a job.

I'll still complain -- there's no reason to let policymakers off the hook -- but it's time to give up the hope that anything more will be done to help the unemployed find jobs.

Monday, March 15, 2010

Paul Krugman: Taking on China

Paul Krugman says it's time to take a stand against China's currency policy:

Taking on China, by Paul Krugman, Commentary, NY Times: Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done. ...
Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. ... This is the most distortionary exchange rate policy any major nation has ever followed.
And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.
So how should we respond? First of all, the U.S. Treasury Department must stop fudging and obfuscating.
Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar...” ... Treasury has been ... unwilling to take action on the renminbi... Instead, it has spent the past six or seven years pretending not to see the obvious.
Will the next report, due April 15, continue this tradition? Stay tuned.
If Treasury does find Chinese currency manipulation,... we have to get past a common misunderstanding ... that the Chinese have us over a barrel because we don’t dare provoke China into dumping its dollar assets.
What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed... Long-term rates might rise slightly, but ... the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds.
It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies... But that would be a good thing ... since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.
So we have no reason to fear China. But what should we do?
Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years ... and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. ... And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”
But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.
I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

Sunday, February 28, 2010

"We Can't Wish Away Climate Change"

Al Gore says "a hubristic 'bubble' of market fundamentalism" tilted the political playing field against action on global warming:

We Can’t Wish Away Climate Change, by Al Gore, Commentary, NY Times: It would be an enormous relief if the recent attacks on the science of global warming actually indicated that we do not face an unimaginable calamity requiring large-scale, preventive measures to protect human civilization as we know it. ... We would no longer have to worry that our grandchildren would one day look back on us as a criminal generation that had selfishly and blithely ignored clear warnings that their fate was in our hands. ...
I, for one, genuinely wish that the climate crisis were an illusion. But unfortunately, the reality of the danger we are courting has not been changed... In fact, the crisis is still growing...
January was seen as unusually cold in much of the United States. Yet from a global perspective, it was the second-hottest January since surface temperatures were first measured 130 years ago.
Similarly, even though climate deniers have speciously argued for several years that there has been no warming in the last decade, scientists confirmed last month that the last 10 years were the hottest decade since modern records have been kept.
The heavy snowfalls this month have been used as fodder for ridicule by those who argue that global warming is a myth, yet scientists have long pointed out that warmer global temperatures have been increasing the rate of evaporation from the oceans, putting significantly more moisture into the atmosphere — thus causing heavier downfalls of both rain and snow in particular regions, including the Northeastern United States. Just as it’s important not to miss the forest for the trees, neither should we miss the climate for the snowstorm. ...
The political paralysis that is now so painfully evident in Washington has thus far prevented action by the Senate — not only on climate and energy legislation, but also on health care reform, financial regulatory reform and a host of other pressing issues. ...
The decisive victory of democratic capitalism over communism in the 1990s led to a period of philosophical dominance for market economics worldwide and the illusion of a unipolar world. It also led, in the United States, to a hubristic “bubble” of market fundamentalism that encouraged opponents of regulatory constraints to mount an aggressive effort to shift the internal boundary between the democracy sphere and the market sphere. Over time, markets would most efficiently solve most problems, they argued. Laws and regulations interfering with the operations of the market carried a faint odor of the discredited statist adversary we had just defeated.
This period of market triumphalism coincided with confirmation by scientists that earlier fears about global warming had been grossly understated. But by then, the political context in which this debate took form was tilted heavily toward the views of market fundamentalists, who fought to weaken existing constraints and scoffed at the possibility that global constraints would be needed to halt the dangerous dumping of global-warming pollution into the atmosphere.
Over the years, as the science has become clearer and clearer, some industries and companies whose business plans are dependent on unrestrained pollution of the atmospheric commons have become ever more entrenched. They are ferociously fighting against the mildest regulation — just as tobacco companies blocked constraints on the marketing of cigarettes for four decades after science confirmed the link of cigarettes to diseases of the lung and the heart.
Simultaneously, changes in America’s political system — including the replacement of newspapers and magazines by television as the dominant medium of communication — conferred powerful advantages on wealthy advocates of unrestrained markets and weakened advocates of legal and regulatory reforms. Some news media organizations now present showmen masquerading as political thinkers who package hatred and divisiveness as entertainment. And as in times past, that has proved to be a potent drug in the veins of the body politic. Their most consistent theme is to label as “socialist” any proposal to reform exploitive behavior in the marketplace.
From the standpoint of governance, what is at stake is our ability to use the rule of law as an instrument of human redemption. After all has been said and so little done, the truth about the climate crisis — inconvenient as ever — must still be faced. ...
We have overcome existential threats before. Winston Churchill is widely quoted as having said, “Sometimes doing your best is not good enough. Sometimes, you must do what is required.” Now is that time. Public officials must rise to this challenge by doing what is required; and the public must demand that they do so — or must replace them.

The financial crisis might help to dissuade people of the notion that the market can solve the climate change problem by itself, and that it's best to let it do so.

I suppose the financial crisis could also convince people that the market can't necessarily prevent big meltdowns by itself, and that government can't stop meltdowns either. And -- thinking, for example, of unemployment -- it could show that once the government wakes up to the fact that a crisis has started, it will do far short of what's needed to counteract the effects.

We're all doomed.

[Note: the original article is much longer; also, Thomas Friedman is far more hopeful about Republican participation in climate change legislation than I am.]

Wednesday, February 10, 2010

Reich: People Don't Get Obamanomics

Robert Reich defends Obama's economic policies:

Obamanomics one year out, by Robert Reich , Commentary, Salon: Obamanomics suffers from a misunderstanding of what the President is trying to achieve and what he’s up against. Into the breach come Republicans, Tea Partiers, nay-sayers, deficit vultures, and Raging-Dog Democrats, all viewing Obamanomics as more taxes and more spending. That’s nonsense. ...
You don’t have to be an orthodox Keynesian to understand that as long as the private sector is deleveraging, the public sector has to borrow and spend in order to keep the economy moving forward. ...
Obama needs to spend more. Just look at projected unemployment. ... The Council of Economic Advisors foresees 10 percent unemployment through the rest of 2010, falling only to 9.2 percent in 2011. ... High unemployment ... allows firms to keep wages low. That’s good for corporate profits but not for ... employees. ...
The federal budget deficit is a huge problem, to be sure. But you need to distinguish between deficits occurring this year and next when the economy is still trying to climb out of a hole, and deficits five to ten years from now. ... The public doesn’t quite get this distinction, which is probably why the President thought it necessary to freeze discretionary nonmilitary spending. ...
The economic stresses of continued high unemployment and low wages are contributing to the growth of the "I’m Mad As Hell" Party -- a rag-tag collection of Tea Partiers furious at establishment Republicans, left-wing Democrats angry at what they consider lily-livered Democrats in Washington, and Independents disgusted with everybody inside the Beltway.
Mad-as-hellers on the right hate government; mad-as-hellers on the left hate big business. Both share a growing sense that the economic game is rigged against them. The two are also united by how much they detest Wall Street and its bailout, and their contempt for any cozy relationship between big business and government. They distrust the Fed, and have no particular fondness for international trade, either. Mad-as-hellers are likely to be a formidable force in the upcoming midterms and beyond.
Obama is responding. That’s one way to view his newly-proposed crackdown on Wall Street... It also explains why the President is making another attempt to increase taxes on the overseas earnings of multinational corporations, and reduce tax breaks for hedge-fund managers and oil and gas companies. And why he feels it’s a good time to let the Bush tax cuts expire on higher-income individuals..., although not on the middle class. ...

They're still mad. That won't change for some members of this group no matter what. For the rest, the anger will persist until economic conditions improve, labor markets in particular, and there is some sense that justice has prevailed.

I think it will take a long time for labor markets to improve, policy has not been adequate to change that, and there's no sign that the help that is needed will be forthcoming. The political climate won't allow it.

I also think it will be far, far longer, if ever, before there is any general sense that the actions that were taken during the crisis served the needs of middle and lower class households rather than the needs of bankers. Charging banks for the cost of the bailout and other such proposals from the administration is an attempt to change this perception, but the perception of unfairness will be difficult to overcome.

Sunday, February 07, 2010

"Stimulus Should Put Cash in Poor Pockets"

Roger Altman:

Stimulus should put cash in poor pockets, by Roger Altman, Commentary, FT: On taking office, President Barack Obama’s first move was the $787bn economic stimulus... There was a classic case for this legislation..., it was supported by most economists, passed Congress in a month and was seen as the right step at the right time.
Improbably, a year later, the programme is decidedly unpopular. In the latest CNN poll, 56 per cent opposed it. Progressives characterise it as too small and conservatives link it to the 10 per cent unemployment rate and argue that it failed. Such attacks go too far, because the stimulus prevented a steeper decline. Nevertheless, there were meaningful flaws in it. Mr Obama’s second stimulus, announced last week, should be designed differently.
Why is the 2009 stimulus legislation such a punchbag? It fell victim to slow implementation, the difficulty of aiding state governments, and unrealistic expectations on jobs. Once it passed, Washington’s focus turned to healthcare. The chance to explain the stimulus, and build support, was lost. ...
Now, the administration has proposed $270bn of extra stimulus. ... About $100bn would be dispensed this year, $150bn in 2011 and the balance beyond that. If Congress authorises this, the total Obama stimulus would exceed $1,000bn.
The first question is whether a second stimulus is needed. The answer is yes. The economic picture is profoundly weak... The labour market outlook is even worse...
It is true that the 2009 legislation already mandates $300bn of stimulus funding this year. But that is too small in a $14,000bn economy. Moreover, it is already incorporated into the low growth rates that are forecast.
The second question is whether this proposal is designed any better that its predecessor. Here, the answer is no. It will again spend out more slowly than it should. This means that the biggest disbursement will not occur in 2010, when it is most needed.
The lesson of 2009 is that the best stimulus puts money directly into the pockets of middle- and lower-income Americans. On that basis, extending the earlier unemployment benefits and tax cuts makes good sense. So does the addition of temporary tax credits for employers who add jobs now. But the infrastructure pipeline is already clogged. Adding to it will not provide any near-term boost. Furthermore, additional aid to states will not have a serious economic impact.
These flaws, together with the untenable deficit outlook, raise doubts as to whether the full second stimulus can pass. A smaller, faster proposal, which incorporates the lessons of the 2009 bill, would be more appealing. This is the way Congress should go.

He says the stimulus package was "was seen as the right step at the right time." Not so sure about that. It was a step in the right direction perhaps, but not the large step or the type of step many of us wanted. The tax cut component was questioned, including where the tax cuts were targeted, the size of the package was criticized, there were all sorts of objections. Economists who strongly supported the idea still questioned the composition of the package.

He goes on to say:

Improbably, a year later, the programme is decidedly unpopular. ... Progressives characterise it as too small and conservatives link it to the 10 per cent unemployment rate and argue that it failed.

Improbably? Only if you ignored people like Krugman and decided you knew better. This is Krugman writing contemporaneously about the stimulus package:

And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Back to the article. He then says of the stimulus package:

Nevertheless, there were meaningful flaws in it.

Good he finally noticed. But I think he is flat wrong about this "flaw":

Furthermore, additional aid to states will not have a serious economic impact.

That's one of the places where the federal government can do the most good.

I like the idea of targeting lower and middle class households, especially with successful job creation programs or programs that ease the recessionary impact on these households in other ways. But I think Altman has his history wrong. Maybe he and others weren't paying attention the first time around, maybe they listened to the wrong people, but the warnings were there.

Tuesday, December 29, 2009

"The Fairness of Financial Rescue"

Brad DeLong says the undesirable act of bailing out those who helped to cause the financial crisis is justified by the greater good that came from this policy, but the public does not see it that way:

The Fairness of Financial Rescue, by J. Bradford DeLong, Commentary, Project Syndicate: Perhaps the best way to view a financial crisis is to look at it as a collapse in the risk tolerance of investors in private financial markets. ... [W]hen the risk tolerance of the market crashes, so do prices of risky financial assets. ... This crash in prices of risky financial assets would not overly concern the rest of us were it not for the havoc that it has wrought on the price system... The price system is saying: shut down risky production activities and don’t undertake any new activities that might be risky.
But there aren’t enough safe, secure, and sound enterprises to absorb all the workers laid off from risky enterprises. ... Ever since 1825, central banks’ standard response in such situations – except during the Great Depression of the 1930’s – has been the same: raise and support the prices of risky financial assets, and prevent financial markets from sending a signal to the real economy to shut down risky enterprises and eschew risky investments.
This response is understandably controversial, because it rewards those who ... bear some responsibility for causing the crisis. But an effective rescue cannot be done any other way. A policy that leaves owners of risky financial assets impoverished is a policy that shuts down dynamism in the real economy.
The political problem can be finessed: as Don Kohn, a vice-chairman of the Federal Reserve, recently observed, teaching a few thousand feckless financiers not to over-speculate is much less important than securing the jobs of millions of Americans and tens of millions around the globe. Financial rescue operations that benefit even the unworthy can be accepted if they are seen as benefiting all – even if the unworthy gain more than their share of the benefits.
What cannot be accepted are financial rescue operations that benefit the unworthy and cause losses to other important groups – like taxpayers and wage earners. And that, unfortunately, is the perception held by many nowadays, particularly in the United States.
It is easy to see why.
When Vice Presidential candidate Jack Kemp attacked ... the Clinton administration’s decision to bail out Mexico ... during the 1994-1995 financial crisis, Gore responded that America made $1.5 billion on the deal.
Similarly, Clinton’s treasury secretary, Robert Rubin, and IMF Managing Director Michel Camdessus were attacked for committing public money to bail out New York banks that had loaned to feckless East Asians in 1997-1998. They responded that they had not rescued the truly bad speculative actor, Russia; that they had “bailed in,” not bailed out, the New York banks, by requiring them to cough up additional money to support South Korea’s economy; and that everyone had benefited massively, because a global recession was avoided.
Now, however, the US government can say none of these things. Officials cannot say that a global recession has been avoided; that they “bailed in” the banks; that – with the exception of Lehman Brothers and Bear Stearns – they forced the bad speculative actors into bankruptcy; or that the government made money on the deal.
It is still true that the banking-sector policies that were undertaken were good – or at least better than doing nothing. But the certainty that matters would have been much worse under a hands-off approach to the financial sector, à la Republican Treasury Secretary Andrew Mellon in 1930-1931, is not concrete enough to alter public perceptions. What is concrete enough are soaring bankers’ bonuses and a real economy that continues to shed jobs.

Tuesday, December 22, 2009

Policymakers Need Better and More Timely Economic Data

[Also posted at CBS MoneyWatch]

When it was announced two months ago that GDP had grown by 3.5 percent in the third quarter of this year, it took the sails out of any movement toward another stimulus package. Now the number has been revised downward to 2.2 percent.

At a growth rate of 3.5 percent, the economy would be growing slightly faster than the long-run trend so that, although progress would be very, very slow, the economy would at least be catching up to the long-run trend (in the recovery from previous recessions, it was not unusual for GDP to grow at 6 or 7 percent, but even at those high growth rates the recovery takes time). At a growth rate of 2.2 percent, the economy is not even treading water let alone making up for past losses.

The economy needs more help, but they way in which the GDP numbers arrived, with the 3.5 percent initial figure heralded as the sign that better times were just around the corner, undermined the case for a new fiscal stimulus package and likely caused the Fed to back off of any further plans it might have had to do more to help the economy recover. Now we know the 3.5 percent figure was overly optimistic, but two months have passed and any momentum towards providing additional stimulus has largely faded from discussion.

This points to the fact that policymakers need better and more timely data. The fourth quarter is almost over yet we are still trying to figure out what happened in the third quarter, and we still don't know for sure. There has been lots of criticism of how policymakers have reacted in this recession, much of it deserved, but little of that discussion has recognized the data problems. I don't know for sure what the problems are in collecting data in nearly real time, or if data collection can be improved, but it seems we can do better in the digital age sand it would certainly be worthwhile for Congress to look into this carefully and see if some investment into data collection would be helpful. If we can give policymakers better and more timely guidance about the state of the economy, it could improve policy considerably, and that would be money well spent.

In any case, let me say one more time as loudly as I can that given the data that we do have, it's clear that the economy -- the labor market in particular -- needs more help.

Sunday, December 20, 2009

"Obama as Climate Change Villain"

More unhappiness with Obama:

Obama as Climate Change Villain, by Jeffrey D. Sachs, Commentary, Project Syndicate: Two years of climate change negotiations have now ended in a farce in Copenhagen. ... Responsibility for this disaster reaches far and wide. Let us start with George W. Bush, who ignored climate change for the eight years of his presidency, wasting the world’s precious time. Then comes the United Nations, for managing the negotiating process so miserably during a two-year period. Then comes the European Union for pushing relentlessly for a single-minded vision of a global emissions-trading system, even when such a system would not fit the rest of the world.
Then comes the United States Senate, which has ignored climate change for 15 consecutive years since ratifying the UN Framework Convention on Climate Change. Finally, there is Obama, who effectively abandoned a systematic course of action under the UN framework, because it was proving nettlesome to US power and domestic politics.
Obama’s decision to declare a phony negotiating victory amounts to a declaration that rich countries will do what they want and must no longer listen to the “pesky” concerns of many smaller and poorer countries. Some will view this as pragmatic, reflecting the difficulty of getting agreement with 192 UN member states. But it is worse than that. International law, as complicated as it is, has been replaced by the insincere, inconsistent, and unconvincing word of a few powers, notably the US, which has never shown goodwill to the rest of the world on this issue, nor the ability or interest needed to take the lead on it.
From the standpoint of actual reduction of greenhouse-gas emissions, this agreement is unlikely to accomplish anything real. ... The reality is that the world will now wait to see if the US accomplishes any serious emissions reduction. Grave doubts are in order... Obama does not have the votes in the Senate, has not displayed any willingness to expend political capital to reach a Senate agreement, and may not even see a Senate vote on the issue in 2010...
The Copenhagen summit also fell short on financial help from rich countries to poor countries. Plenty of numbers were thrown around, but ... the big news was a commitment of $100 billion per year for the developing countries by 2020. ... Experience with financial aid for development teaches us that announcements about money a decade from now are mostly empty words. ...
One of the most notable features of the US-led document is that it doesn’t mention any intention to continue negotiations in 2010. This is almost surely deliberate..., in effect declaring that the US will ... not become further entangled in messy UN climate processes in 2010.
That stance might well reflect the upcoming 2010 mid-term Congressional elections... Obama does not want to be trapped in the middle of unpopular international negotiations when election season arrives. He may also feel that such negotiations would not achieve much. Right or wrong on that point, the intention seems to be to kill the negotiations. If so, Obama will prove to have been even more damaging to the international system of environmental law than George Bush was.
For me, the image that remains of Copenhagen is that of Obama appearing at a press conference to announce an agreement that only five countries had yet seen, and then rushing off to the airport to fly back to Washington, DC, to avoid a snowstorm... If ... the voluntary commitments of the US and others prove insufficient, it will have been Obama who single-handedly traded in international law for big-power politics on climate change.

Perhaps the UN will rally itself to get better organized. Perhaps Obama’s gambit will work, the US Senate will pass legislation, and other countries will do their part as well. Or perhaps we have just witnessed a serious step towards global ruin...

Update: See also: What Hath Copenhagen Wrought? A Preliminary Assessment of the Copenhagen Accord, by Robert Stavins (wonkish, relatively positive assessment).

Friday, December 18, 2009

"Sachs: The Need for Open Process"

Jeffrey Sachs says the administration needs to lead the way forward on important legislation instead of brokering deals that emerge through a "lobby-infested bargaining process" in Congress:

Looking for Change in the Beltway: The Need for Open Process, by Jeffrey D. Sachs, Scientific American: When President Barack Obama promised change, he put two kinds on the agenda. The first was substantive change: reforms to key sectors of the economy, such as health care, climate change, financial markets and arms procurement.
The second was process change: improvements to how public policies are shaped and how decisions over public funding are made. Against the odds, the Obama administration is making some progress on the first—but at the sacrifice of the second.
The important health care legislation inching its way through Congress ... will help expand the number of Americans covered by health care insurance and will limit some of the abuses by the private insurance industry in denying coverage and reimbursements to the public. Similarly, climate change legislation is also moving forward, with the chance that a permit system will begin to limit the emissions of greenhouse gases and start the lengthy shift of the U.S. economy to lower-emissions technologies.
Yet how this modest progress is being achieved is alarming. The Obama administration has not put forward one coherent plan as a detailed policy proposal. Every major piece of public policy has been turned over to the backrooms of Congress, emerging through the lobby-infested bargaining process among vested and regional interests. There was no overarching plan for the economic stimulus; no clear plan for health care reform; no defined strategy for climate change control; and so forth. ...
The complex, crucial issues we face require both expert inputs and public understanding. On each major issue of public policy, the administration should first put forward a white paper explaining why it is calling for a policy initiative, what it will cost, what benefits it will bring and how it will work. Legislative proposals should be shaped around these strategy documents. Independent expert groups should be invited to draft responses.
Most important, lobbying needs to be scorned rather than promoted. If given a chance, the public would back the Obama administration in facing down these narrow interests, the very interests that have contributed so much to our financial meltdowns, overpriced health care, clunker automobiles and energy insecurity. Scientists, engineers and public policy specialists can help craft real solutions, and an enlightened and trusted public would help put those solutions into place above the opposition of narrow interests. [full article]

Thursday, December 17, 2009

FTC Files Antitrust Suit against Intel

Maybe I was wrong when I said that the administration is all talk and no action when it comes to reining in market power. Hope so:

F.T.C. Accuses Intel of Trying to Stifle Competition, by Steve Lohr, NY Times

Monday, December 14, 2009

Too Big to File Suit?

I've been somewhat encouraged by this administration's attention to anti-trust issues, but so far there's been more talk than action. I don't think this issue received enough attention in the previous administration -- if anything the Bush administration promoted the interests of large, powerful firms -- and the movement away from strict enforcement of anti-trust rules can be traced to Ronald Reagan's push against government intervention in markets. There have been a few headline cases, e.g. Microsoft, but not the kind of systematic examination of markets and the enforcement of rules to promote competition as I'd like to see. I've been hoping this administration would change that.

Maybe there's a reason for the lack of action. One cost of a severe recession is that anti-trust enforcement is likely to be pursued with less vigor. Suppose, for example, that the government is considering initiating an anti-trust suit against a few large, systemically important firms within the economy (e.g. Google and Wal-Mart? Goldman Sachs?). The government might worry that doing so would create uncertainty in these businesses and cause them to pull back on expansion plans, be less aggressive, etc. That could make already bad conditions even worse, and it could also create uncertainty more broadly within the business community and cause similar, amplifying effects. Thus, the government might prefer to withhold action until things got better (much as though it might be willing to let a car company fail during good times, but not in a recession).

Even if the initiation and pursuit of such action has no effect at all on economic activity, the recovery from the recession could drag on for awhile, and the sluggish recovery could be attributed, in part, to the government's action. Thus, initiating an anti-trust suit against a large, economically important firm would leave the party in power vulnerable to a charge from the other side that their "overly zealous" enforcement of these laws prolonged the recession. As a political calculation, why not wait until things improve before taking such potentially politically volatile action?

There may be other reasons to wait as well. e.g. needing votes to pass a stimulus package that might be lost if anti-trust action is announced. So it seems quite likely that an administration might decide to delay action until the economy is on more solid footing rather than taking action that might upset the economy or leave them politically vulnerable to charges of making conditions worse. It could also be that these types of cases are complicated and take time to build, and with no foundation from the previous administration to build upon, it's too soon to expect results.

But I also worry that, for whatever reason, the administration won't actually take the needed action even when things get better and they've had plenty of time to build their case. One argument used in the past to forestall the regulation of market power is the argument that markets are self-regulating, that they can take care of market power problems by themselves (and it's best to let them do so). We've seen how well the self-regulation argument works when it's applied to financial markets, and it doesn't work any better when it comes to market power. Regulation and effective enforcement of the rules are needed to solve the problem.

It's costly when one or a few firms dominate markets, and it's not just the economic losses that are the problem. Excessive size also gives firms political power and influence and this, too, is costly. We should have done something about this long ago -- perhaps more attention to the costs associated with excessive size and power would have left us less tolerant of too big to fail firms in the financial sector. But in any case, I hope the administration follows up on its increased scrutiny of market power and anti-competitive behavior with meaningful action. We shall see.

Wednesday, December 02, 2009

"The Wrong Jobs Summit"

Brad DeLong says the wrong people are meeting at the jobs forum:

The wrong jobs summit, by Brad DeLong, Commentary, The Week: The White House is hosting a jobs summit this week. I, however, cannot but think that ... it will be the wrong people talking about the wrong things.

Let me back up. Ever since the 1930s, economists trying to analyze the determinants of spending have focused on two of the economy’s markets: the market for liquidity and the market for savings. ...
For the government to boost jobs, it must to do something to change the balance of supply and demand in either the market for liquidity or the market for savings. In general, the ... Federal Reserve ... acts to tweak supply and demand in the market for liquidity. The president and Congress act to tweak supply and demand in the market for savings. ...

Right now, if you ask the decisive members of congress—by which I mean the Blue Dog Democrats in the House, or the most conservative Democrats and most liberal Republicans in the Senate —why the president and the Congress are not doing more to reduce unemployment and boost spending and income, the answer you’ll get is ... well, you probably wouldn't get an intelligible answer.

But if you did get an explanation for the lack of congressional action it would go something like this: Attempts to ... boost spending would (a) increase the national debt burden on future taxpayers and (b) lead to a large decline in bond prices and a boost in interest rates. Why? Because businesses would try to increase their liquidity to support higher spending, driving up interest rates, which, in turn, would cause businesses to cut back on investment, thus neutralizing most or all of the stimulative policies.

Similarly, if you were to ask the Federal Reserve why it isn’t doing more to reduce unemployment and boost spending and income, the answer you would get is this: Spending is in no way constrained by a shortage of liquidity..., indeed we have “flooded the zone” with liquidity. As a result, the Fed is disinclined to pursue additional tweaks ... in ... liquidity because it fears such efforts would fuel destructive inflation in the future without boosting employment and spending in the present.

Both of these arguments are comprehensible... But they cannot both be true at the same time. Either the economy is so awash in liquidity that the Federal Reserve cannot do much to boost spending—in which case additional spending by the government won’t generate any substantial rise in interest rates. Or additional government spending will crowd out investment...—in which case the economy is not awash in liquidity, and quantitative easing by the Federal Reserve could do a lot right now to boost spending and employment.

It appears that what we have here is a failure to communicate. ...

Thus we need a jobs summit right now. We need the White House's National Economic Council and key congressional “centrists” on one side and the Federal Reserve Open Market Committee on the other to meet. Those two groups seem to have very inconsistent views of the economic situation. ... Something has to give. If they could reach agreement on whose view ... is likely correct, then a rescue plan—entailing either more government spending or greater liquidity—would become obvious.

Until that “jobs summit” is convened, others are moot.

Tuesday, December 01, 2009

"A Lost Decade for Private Sector Jobs"

Private sector employment is lower than it was a decade ago:

A Lost Decade for Private Sector Jobs, by Jon Hilsenrath, Real Time Economics: To mark this week’s focus on the dismal state of the U.S. job market, check out the following chart, which shows the trajectory of private sector U.S. employment since 1998. It tells a story of a lost decade for U.S. workers.

The U.S. now produces fewer private sector jobs than it did a decade ago. This been the case since August, and it’s getting worse. ... Not since the Labor Department began tracking payroll employment in 1939 has there been such a stretch with no net job gains. ...
With the economy recovering from last year’s shock, private sector firms might start hiring again. But it likely will take months if not years to make up this gap.
How to explain the gap? One obvious answer is that the U.S. has suffered through two recessions during this stretch. The first, in 2001, was short and mild but included more than two years of job cuts. The second one starting in 2007 has been long and brutal. The other answer is that the U.S. has enjoyed a big burst of productivity growth during this stretch — which means firms are producing more with fewer workers. In the long-run this is supposed to be a good development because it leads to profit and income gains. But the short-term costs are looking increasingly more debilitating.
It’s worth nothing that overall employment is higher than it was a decade ago, but that’s only because the government has produced two million additional jobs during that stretch. You can expect both sides of Washington’s political spectrum to spin the lost decade for jobs in their own direction. Republicans will use it to blast Mr. Obama’s big government approach — though it’s worth remembering that most of these jobs were lost when a Republican controlled the White House. Democrats will use the data to demonstrate the benefits of a helping government hand in down economic times. ...

The administration is holding a jobs summit later this week, but the fear is that it is more for show than anything else, and it is not clear what, if anything, will come of it. If so, that's a mistake. The administration needs to do more than just acknowledge that it "feels your pain," it needs to alleviate some of the problem with a jobs program that produces results. The midterm elections are less than a year away, and there's every indication that when the election is held the employment problem will still be present and that could be problematic for Democrats.

I don't like using the election as a reason and motivation to do something about this problem, the struggles that the unemployed face should be enough on its own to motivate action, but if elections are what it takes to move congress and the administration to do something about this, then I suppose we'll have to settle for that. But given the lags in the process of creating jobs, I'd say six months is optimistic, there's only a month or two left before it will be too late to do anything in time to affect employment before the election. And if it doesn't get done in time to help congress get votes, it's unlikely it will get done at all no matter how bad the problem gets.

One final note. Timidity the first time around -- even if it was driven by political realities -- is part of the problem. With a more aggressive package employment would likely be much improved right now, but unfortunately that's not the policy that was implemented. If the administration puts a jobs program in place that is too reserved and does little to help with employment, that will make its political problems even worse since it will appear that its job policy was largely a failure. If it does move on a jobs program -- as it should -- it needs to be sufficiently aggressive and it needs to target jobs directly. Then we should all cross our fingers, not because of worry over the election (though losing ground would be a big disappointment for Democrats), but in the hopes that jobs will come to households struggling to make ends meet.

[Note: A version of this is also posted at MoneyWatch.]

Monday, November 30, 2009

Paul Krugman: The Jobs Imperative

It's (past) time for the administration to get serious about creating jobs:

The Jobs Imperative, by Paul Krugman, Commentary, NYTimes: If you’re looking for a job right now, your prospects are terrible. There are six times as many Americans seeking work as there are job openings, and the average duration of unemployment ... is more than six months, the highest level since the 1930s.
You might think, then, that ... the employment situation would be a top policy priority. But now that total financial collapse has been averted, all the urgency seems to have vanished... There’s a pervasive sense in Washington that ... we should just wait for the economic recovery to trickle down to workers.
This is wrong and unacceptable. ... Historically, financial crises have typically been followed ... by anemic recoveries; it’s usually years before unemployment declines to anything like normal levels. And all indications are that ... the latest financial crisis is following the usual script. ...
And the damage from sustained high unemployment will last much longer. The long-term unemployed can lose their skills... Meanwhile, students who graduate into a poor labor market ... pay a price in lower earnings for their whole working lives. Failure to act on unemployment isn’t just cruel, it’s short-sighted.
So it’s time for an emergency jobs program.
How is a jobs program different from a second stimulus? It’s a matter of priorities. The 2009 Obama stimulus bill was focused on restoring economic growth. ... That strategy might have worked if the stimulus had been big enough — but it wasn’t. And as a matter of political reality, it’s hard to see how the administration could pass a second stimulus big enough to make up for the original shortfall.
So our best hope now is for a somewhat cheaper program that generates more jobs for the buck. Such a program should shy away from measures, like general tax cuts, that at best lead only indirectly to job creation... Instead, it should consist of measures that more or less directly save or add jobs.
One such measure would be another round of aid to beleaguered state and local governments... More aid would help avoid ... the elimination of hundreds of thousands of jobs.
Meanwhile, the federal government could provide jobs by ... providing jobs. It’s time for at least a small-scale version of the New Deal’s Works Progress Administration, one that would offer relatively low-paying (but much better than nothing) public-service employment. There would be accusations that the government was creating make-work jobs, but the W.P.A. left many solid achievements in its wake. And the key point is that direct public employment can create a lot of jobs at relatively low cost. ...[T]he Economic Policy Institute, a progressive think tank, argues that spending $40 billion a year for three years on public-service employment would create a million jobs, which sounds about right.
Finally, we can offer businesses direct incentives for employment. It’s probably too late for a job-conserving program... But employers could be encouraged to add workers as the economy expands. The Economic Policy Institute proposes a tax credit for employers who increase their payrolls, which is certainly worth trying.
All of this would cost money, probably several hundred billion dollars, and raise the budget deficit in the short run. But this has to be weighed against the high cost of inaction in the face of a social and economic emergency.
Later this week, President Obama will hold a “jobs summit.” Most of the people I talk to are cynical about the event, and expect the administration to offer no more than symbolic gestures. But it doesn’t have to be that way. Yes, we can create more jobs — and yes, we should.

Friday, November 27, 2009

"Muddying the Waters on AIG"

John Berry defends the Fed and Treasury's assistance to AIG:

Muddying the waters on AIG, by John M. Berry, Commentary, Reuters: Neil Barofsky, inspector general of the Troubled Asset Relief Program, is making a name for himself with a misleading analysis of actions by the Federal Reserve and Treasury in combating the financial crisis.
A column in the New York Times called Barofsky “one of the few truth tellers in Washington”... Barofsky’s report, which is logically flawed, uses loaded language to create the impression that saving the economy wasn’t the Fed’s goal at all. No, it was all about helping the central bank’s friends on Wall Street.
“Questions have been raised as to whether the Federal Reserve intentionally structured the AIG counterparty payments to benefit AIG counterparties...,” the report says. ... The report duly notes that Fed officials deny a backdoor bailout was their objective. But the next sentence suggests the officials must be lying.
“Irrespective of their stated intent, however, there is no question that the effect of the Federal Reserve Bank of New York’s decisions — indeed the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties.” (Emphasis in the original.)
Well, AIG had sold the counterparties a great many credit default swap contracts covering collateralized debt obligations secured by mortgages. ...AIG owed the counterparties a whole pot full of money which it couldn’t pay.
If AIG was to be kept out of bankruptcy, of course the very design of the federal assistance had to include funneling tens of billions of dollars to the institutions to which it was owed. There was no other way to avoid a bankruptcy that would have affected not just big financial institutions but thousands of municipalities, individual savers and other investors. ...

The report does not offer an alternative way to avoid an AIG bankruptcy, and there wasn’t one. It does, however, suggest the Fed should have used its power as a banking regulator to force the AIG creditors to accept less than full payment of what they were owed.
The report acknowledges that the New York Fed tried to negotiate such a haircut... But the French banking regulator said it would be illegal for the two French institutions involved to take a haircut unless AIG was in formal bankruptcy, and the Fed said it had to treat all the banks the same way.
Nevertheless, Barofsky insists the Fed should have used its authority to force concessions. Unsaid, but implied: The Fed didn’t do that because its goal was to help its Wall Street friends.
Barofsky is getting great press and kudos on Capitol Hill by pandering to the public anger at Wall Street. Pity he’s not really a truth teller at all.

Tuesday, November 10, 2009

Counting the Jobs Produced by the Stimulus

Gary Burtless argues that the job creation numbers the administration issued underestimate the true size of the impact:

Counting the Jobs Produced by the Stimulus, by Gary Burtless, Brookings: When the stimulus package was enacted last winter, the Administration said its goal was to create or save 3½ million jobs by the end of next year. How closely has the Administration come to achieving that goal? A couple of weeks ago the White House issued an interim report on jobs directly created or saved as a result of one part of the stimulus package, the grants or contracts directly made by the federal government or indirectly provided through federal aid to state and local governments. The report has been subject to minor carping and major criticism. ...
In essence, the reports distilled by the White House provided evidence from 150,000 anecdotes.  According to the Administration’s summary, the reports offered evidence that 640,000 jobs have been directly created or saved... Jared Bernstein, the Vice President’s chief economist, emphasized that the 640,000 count represents an incomplete tally of the total jobs added or saved as a result of the stimulus package. It ignores, for example, the jobs created or saved as a result of personal tax cuts or hikes in unemployment compensation checks. We cannot collect anecdotes from Walmart, Safeway, or Disney World telling us how many jobs have been produced by higher consumer spending induced by the stimulus package. ... We must rely on elaborate, less transparent data analysis to uncover the indirect effects of the stimulus package. When the indirect effects are included, White House economists estimate that over a million jobs have so far been added or saved as a result of the stimulus.
The Wall Street Journal suggests that the White House estimate of 640,000 jobs directly saved or created may overstate direct job creation by 20,000 positions. Even if the Journal’s estimate is correct, the difference represents less than 2% of the total number of jobs directly or indirectly saved and created by the stimulus. ...
Unless the labor market deteriorates much further, I am pessimistic about the political prospects for another major stimulus package. The Administration’s opponents have been successful in sowing doubts about the wisdom of the last stimulus. ...

In this political environment it is unlikely Congress will pass a major new stimulus package anytime soon. What is more likely - indeed, what is essential - is the continuation of stimulus programs that are currently scheduled to expire.  Last week the House and Senate extended unemployment protection for workers who have lost jobs in the current recession. These protections ought to be extended until the job market improves significantly... If unemployment is likely to remain over 9% for an extended time, there is a compelling case for additional public infrastructure investment. Given high unemployment in the construction and capital goods industries and federal borrowing costs that remain near a post-war low, it makes sense to invest in public capital projects over the next few years. If the federal government does not have adequate plans for such investments, it should start making them soon.

It's going to take quite awhile for the economy to generate enough jobs to return unemployment to normal levels, and more stimulus to help the process along is certainly needed. But I also think that its hard to imagine a major stimulus package getting through Congress. If Washington's interest in helping wanes as the business and the financial sectors begin to recover even though labor markets continue to struggle, then, despite the professed allegiance of many Democrats to the working class, it will tell you that their true allegiance lies elsewhere.

Wednesday, October 28, 2009

"A Clunker of a Climate Policy"

Jeff Sachs says we need to be sure that climate control legislation is not captured by powerful special interest groups:

A Clunker of a Climate Policy, by Jeffrey D. Sachs, Commentary, Scientific American: The Cash for Clunkers program offers a cautionary tale for the future of climate change control. ... The broad principle of climate change mitigation is to reduce greenhouse gas emissions ... to target levels at the minimum net cost to society. There are many ways to reduce emissions: drive more efficient or electrically powered vehicles; produce electricity with renewable energy sources; capture CO2 from power plants and store it geologically; restart the nuclear power sector; weatherproof homes... The list is long, with different time horizons, costs and uncertainties.
Clearly, not every method of reducing emissions makes equal sense. ...McKinsey & Company has recently published estimates of the abatement costs of various technologies. Highly efficient lighting, appliances and vehicles, along with better insulation and other technologies, can save more in energy costs during their lifetime than the upfront capital for installing them: they are better than free to society. Other options—notably, renewable energy sources, forest conservation programs and carbon capture and storage—tend to come in below $60 per ton of avoided CO2 emissions.
Some carbon-reduction ideas are so expensive they should play no part in the policy mix. Yet because lobbyists overrun our legislative processes,... lots of terrible ideas will no doubt be advocated.
Let’s make a rough calculation of how much mitigation per dollar the Cash for Clunkers program really achieved. ...[calculations]... The net annual cost of the CO2 reduction is therefore ... $141 per ton of CO2. ... This crude calculation is subject to many refinements but shows that Cash for Clunkers represented a very high cost per ton of CO2 avoided. Countless ways to reduce CO2 emissions are less expensive than smashing up autos five years before their natural demise.
We will blunder badly and repeatedly in climate change control unless we put some transparent control systems in place. We should rely heavily on price signals rather than one-by-one subsidized programs, except for the subsidies needed to bring new technologies such as electric vehicles to the commercial phase. An economy-wide tax on each ton of CO2 emissions, programmed to rise gradually over time at an appropriate social discount rate, would induce the marketplace to take actions that are less expensive per ton than the tax and to leave behind measures such as Cash for Clunkers or corn to ethanol. A carbon tax would be far more effective in this regard than the cumbersome cap-and-trade system proposed by the House of Representatives.
We’ll need to spend trillions of dollars over time to save the planet from climate change. All the more reason not to let lobbyists make a financial game out of this deadly serious effort.

Tuesday, October 27, 2009

"The Chamber's Mistakes"

Daniel Gross says it's no mystery why the Chamber of Commerce suddenly finds itself on the outside looking in:

The Chamber's Mistakes, by  Daniel Gross, Commentary, Slate: This has been a rough period for the Chamber of Commerce, the Washington, D.C., organization that claims to be the voice of American business. Its doubts about climate change ... have led prominent members to quit... With Democrats controlling both Congress and the White House, it doesn't have natural allies. ... The change in political facts ... and its own poor choice of words have left the chamber feeling a bit left out. CEO Thomas Donahue gave a long interview to the Wall Street Journal (the editorial page) complaining about the chamber's poor treatment, lamenting that its wise counsel wasn't being sought in the formulation of policy, and vowing to fight. ...
But there is a fundamental reason why the chamber isn't being invited into the rooms where legislation and policy are being made these days: It doesn't have much to offer. For generations, the Chamber of Commerce has held itself out as the sensible, we-know-better voice of business: Follow the policies we—i.e. American business—approve and advocate, and the nation will grow and prosper. We'll have more jobs, higher wages, rising asset values, and widely shared prosperity. ...
From 2001 to 2008, the nation listened. It elected and then put into place exactly the policies the chamber advocated. And the chamber utterly failed to deliver.
The Chamber of Commerce may not have ruled the country during the Bush years. But it had the next best thing: a Republican administration in the White House and Republican control of Congress for most of that period. The chamber applauded as they delivered cuts in marginal tax rates and in taxes on capital gains, dividends, and estates. The government was supportive of free trade and largely hostile to labor unions, which continually lost ground. We saw aggressive moves to outsource government functions and increase the use of private-sector contractors. We opened up energy resources to development. Interest rates were low. Regulation? Virtually nonexistent in many sectors. Business lobbyists were allowed essentially to write crucial legislation. These policies, the Bush administration economic team promised us, would be superior to the ones that prevailed in the 1990s. And the proof would be in the numbers: jobs, market performance, income, wealth.
But it didn't work out for anybody. By pretty much any measure, the years from 2001 to 2008 were lost ones. Job creation was extraordinarily weak... Wealth didn't expand, either. In fact,... in this decade, income inequality rose, the percentage of people living below the poverty line rose..., the number of people getting health insurance from their employers fell, and median income failed to budge. The stock market? Forget about it. Oh, and at the end of it, the financial system, which got precisely the regulatory environment it wanted from Washington, blew itself up, inflicting hundreds of billions of dollars of costs on taxpayers. ...
These were excellent conditions for businesses to do what the Chamber of Commerce says they're supposed to do. But the policies failed in their intended results, which is the reason Democrats now control every lever of power—and why the Chamber of Commerce is standing with its face pressed against the glass.

Sunday, October 25, 2009

"The Roots of Protectionism in the Great Depression"

Lessons from the Great Depression:

The Roots of Protectionism in the Great Depression, by Laurent Belsie, NBER Reporter: The Great Depression was a breeding ground for protectionism. Output fell, prices declined, and unemployment rose, pressuring governments to do something to revive their economies, even if that meant limiting imports. But contrary to popular perception, some countries went much further down this protectionist road than others, according to "The Slide to Protectionism in the Great Depression: Who Succumbed and Why?" (NBER Working Paper No. 15142). Co-authors Barry Eichengreen and Douglas Irwin conclude that a key factor behind this variation in trade policies was nations' adherence to the gold standard. Those countries that clung to the gold standard were more likely to restrict trade than those that abandoned it.
Previous research has shown that countries that remained on the gold standard tended to endure sharper and longer downturns than those that allowed their currencies to depreciate. Eichengreen and Irwin offer an important trade-policy corollary: without the flexibility to depreciate their currencies, many gold-standard nations turned to trade restrictions in hopes that these would boost their domestic industries and curb unemployment. Thus, the 1930s' rush to protectionism was not so much a triumph of special-interest politics as it was a result of second-best macroeconomic policies, the authors write. Their study "suggests that had more countries been willing to abandon the gold standard and use monetary policy to counter the slump, fewer would have been driven to impose trade restrictions."

Continue reading ""The Roots of Protectionism in the Great Depression"" »

Thursday, October 22, 2009

"The United States has Proved to be the Biggest Laggard in the World"

Jeff Sachs says "America has acted irresponsibly since signing the climate treaty in 1992":

King coal's climate policy: Will the US prove to be the world's last holdout?, by Jeffrey D. Sachs, Commentary, Project Syndicate: The United Nations Climate Change Treaty, signed in 1992, committed the world to “avoiding dangerous anthropogenic interference in the climate system.” Yet, since that time, greenhouse-gas emissions have continued to soar.
The United States has proved to be the biggest laggard in the world, refusing to sign the 1997 Kyoto Protocol or to adopt any effective domestic emissions controls. ... There are several reasons for US inaction – including ideology and scientific ignorance – but a lot comes down to one word: coal. No fewer than 25 states produce coal, which not only generates income, jobs, and tax revenue, but also provides a disproportionately large share of their energy. ...
Since addressing climate change is first and foremost directed at reduced emissions from coal – the most carbon-intensive of all fuels – America’s coal states are especially fearful about the economic implications of any controls (though the oil and automobile industries are not far behind). ...
Under the US Constitution, domestic legislation ... requires a simple majority in both the House of Representatives and the Senate... Getting 50 votes for a climate-change bill (with a tie vote broken by the vice president) is almost certain.
But opponents of legislation can threaten to filibuster..., which can be ended only if 60 senators support bringing the legislation to a vote. ... Securing 60 votes is a steep hill to climb. ...[O]ne analysis counts 50 likely Democratic “Yes” votes and 34 Republican “No” votes, leaving 16 votes still in play. Ten of the swing votes are Democrats, mainly from coal states; the other six are Republicans who conceivably could vote with the president and the Democratic majority.
Until recently, many believed that China and India would be the real holdouts in the global climate-change negotiations. Yet China has announced a set of major initiatives – in solar, wind, nuclear, and carbon-capture technologies – to reduce its economy’s greenhouse-gas intensity.
India, long feared to be a spoiler, has said that it is ready to adopt a significant national action plan... These actions put the US under growing pressure to act. With developing countries displaying their readiness to reach a global deal, could the US Senate really prove to be the world’s last great holdout?
Obama has tools at his command to bring the US into the global mainstream on climate change. First, he is negotiating side deals with holdout senators to cushion the economic impact on coal states and to increase US investments in the research and development, and eventually adoption, of clean-coal technologies.
Second, he can command the Environmental Protection Agency to impose administrative controls on coal plants and automobile producers... The administrative route might turn out to be even more important than the legislative route.
The politics of the US Senate should not obscure the larger point: America has acted irresponsibly since signing the climate treaty in 1992. It is the world’s largest and most powerful country, and the one most responsible for the climate change to this point, it has behaved without any sense of duty – to its own citizens, to the world, and to future generations.
Even coal-state senators should be ashamed. Sure, their states need some extra help, but narrow interests should not be permitted to endanger our planet’s future. It is time for the US to rejoin the global family.

Monday, October 19, 2009

Paul Krugman: The Banks Are Not Alright

The failure to pursue the best strategy for cleaning up the financial system, temporary nationalization and a large injection of capital, is slowing down the recovery, particularly for "the part of banking that really matters — lending, which fuels investment and job creation":

The Banks Are Not Alright, by Paul Krugman, Commentary, NY Times: ...[Many people] reacted with fury to the spectacle of Goldman Sachs making record profits and paying huge bonuses even as the rest of America, the victim of a slump made on Wall Street, continues to bleed jobs. ...

Ask the people at Goldman, and they’ll tell you that it’s nobody’s business but their own how much they earn. But as one critic recently put it: “There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.” Indeed: Goldman has made a lot of money..., but .... only ... thanks to policies that put vast amounts of public money at risk...

So who was this thundering bank critic? None other than Lawrence Summers... Administration officials are furious at the way the financial industry, just months after receiving a gigantic taxpayer bailout, is lobbying fiercely against serious reform. But you have to wonder what they expected to happen. They followed a softly, softly policy, providing aid with few strings, back when all of Wall Street was on the ropes; this left them with very little leverage over firms like Goldman that are now, once again, making a lot of money.

But there’s an even bigger problem: while the wheeler-dealer side of the financial industry,... trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not. Key banks remain financially weak, and their weakness is hurting the economy as a whole.

You may recall that earlier this year there was a big debate about how to get the banks lending again. Some analysts, myself included, argued that at least some major banks needed a large injection of capital from taxpayers, and that the only way to do this was to temporarily nationalize the most troubled banks. The debate faded out, however, after Citigroup and Bank of America, the banking system’s weakest links, announced surprise profits. All was well, we were told, now that the banks were profitable again.

But a funny thing happened on the way back to a sound banking system: last week both Citi and BofA announced losses in the third quarter. What happened?

Part of the answer is that those earlier profits were in part a figment of the accountants’ imaginations. More broadly,... economic distress, especially persistent high unemployment, is leading to big losses on mortgage loans and credit cards.

And here’s the thing: The continuing weakness of many banks is helping to perpetuate that economic distress. Banks remain reluctant to lend, and tight credit, especially for small businesses, stands in the way of the strong recovery we need.

So now what? Mr. Summers still insists that the administration did the right thing: more government provision of capital, he says, would not “have been an availing strategy for solving problems.” Whatever. In any case, as a political matter the moment for radical action on banks has clearly passed.

The main thing for the time being is probably to do as much as possible to support job growth. With luck, this will produce a virtuous circle in which an improving economy strengthens the banks, which then become more willing to lend.

Beyond that, we desperately need to pass effective financial reform. For if we don’t, bankers will soon be taking even bigger risks than they did in the run-up to this crisis. After all, the lesson from the last few months has been very clear: When bankers gamble with other people’s money, it’s heads they win, tails the rest of us lose.

Thursday, October 08, 2009

"So Much Happening in Washington and So Little To Show for It"

Robert Reich is not pleased with the proposals from congress for health care reform, financial regulation, environmental legislation, and job creation, all of which come up far short of what is needed, and he says lobbyists are to blame:

So Much Happening in Washington and So Little To Show for It, So Far, by Robert Reich: The Senate Finance Committee is set to vote Tuesday on a healthcare bill that just got a seal of approval from the Congressional Budget Office and is very likely to garner the vote of Republican Senator Olympia Snowe -- a twofer that gives the bill preeminence over four other healthcare bills that have emerged from House and Senate committees... Unlike those bills, though, the Senate Finance bill won't it have a public insurance option to compete with private insurers. Nor does it allow Medicare to use its bargaining power to negotiate lower drug prices, or adequately subsidize millions of middle-class families who will be required to buy health insurance that will be hard for them to afford. In short, it's a great deal for private insurers and Big Pharma but not such a great deal for middle-class Americans.

Meanwhile, the House Banking Committee is quietly circulating a draft set of reforms of financial markets... Barney Frank, who heads the Committee, is a thoughtful progressive. But the draft has gaping loopholes that will let most financial firms escape -- such as one that exempts corporations that deal in financial derivatives from any requirements for capital, business conduct, record-keeping, and reporting if they use derivatives for the purpose of "risk management," which is the very thing they all claim they're doing. Neither the draft bill, nor the Committee, nor anyone on the Hill having anything to do with financial regulation, is ... resurrecting the Glass-Steagall Act that once separated commercial from investment banking, and applying antitrust laws to the remaining five biggest Wall Street banks so none is "too big to fail."

At the same time, environmental legislation is now slinking its way through Congress..., but the bills are, frankly, far short of what's needed. ...

And what's happening on the job's front? Nothing except a blip of interest in tax credits to small businesses that create new jobs. That's not a bad move (I suggested it myself), but it's rather like bailing out the ocean with a teacup. If that's all there is, we're headed toward two years of double-digit unemployment. No one on the Hill or in the Administration is yet willing to say openly and clearly that the stimulus plan must be larger, and continued through 2010 and 2011.

My friends in the Administration and on the Hill repeatedly tell me "don't make the perfect the enemy of the better," or words to that effect. Politics is the art of the possible, blah blah blah. True. But in each of these areas -- healthcare, financial regulation, environment, and jobs -- the "better" is really not that much better. Forget perfect; anything that offered real reform would suffice for now. But in every case, what should be the centerpieces of reform are being left out.

Why? Congress is overwhelmed with corporate and Wall Street lobbyists (far too many of whom are former Democratic office holders). The White House is trying best it can to push ... in the right direction but there's too much going on, too many arenas where private interests are framing the debate and stifling major reform, and too many friends of friends and relations of relations who are making tons of money working for the other side. The public doesn't know what's going on because the national media would rather report on the sexual escapades of famous people... And progressives -- that is, progressive organizations in our nation's capital -- have been remarkably and consistently outgunned, outmaneuvered, or just plain ineffectual. This is largely due to the fact that they're sitting in Washington rather than organizing and mobilizing the rest of the country.

And I haven't even brought up Afghanistan.

Thursday, September 24, 2009

"The Crisis of Public Management"

Jeffrey Sachs says our public management systems need an overhaul:

The Failing U.S. Government--The Crisis of Public Management, by Jeffrey D. Sachs, Scientific American: The crisis of American governance goes much deeper than political divisions and ideology. The U.S. is in a crisis of policy implementation. Not only are Americans deeply divided on what to do about health care, budget deficits, financial markets, climate change and more, but government is also failing to execute settled policies effectively. Management systems linking government, business and civil society need urgent repair.

The recent systems failures are legion and notorious. The 9/11 attacks might well have been prevented if the FBI and the intelligence agencies had cooperated more effectively... Hurricane Katrina caused mass devastation and loss of life because recommendations to bolster the levees ... and other protective measures were neglected for decades despite urgent expert warnings, and because the federal emergency relief effort failed... The U.S. occupation of Iraq was marked by massive ... corruption, incompetence, and implementation failures by U.S. agencies.

On the economic front, the current financial crisis is a remarkable systems failure. Government regulatory agencies completely dropped the ball... The list, alas, goes on and on. Military procurement systems are ... broken... Public construction systems are failing... Roads, bridges, rail, water and sewerage systems and many dams are in dangerous disrepair...
We need a better scientific understanding of these pervasive systems failures. It is wrong to think that they illustrate the inevitable failure of government. Other governments around the world more successfully manage infrastructure investments, health systems and environmental resources, apparently with greater flexibility, less corruption, lower costs and better outcomes. America should be learning from their experiences.

Several factors are at play. A key one has been the flawed privatization of public-sector regulatory functions. ... A second has been the collapse of planning functions within the federal government. ...

A third, and paradoxical, factor is the chronic underfunding of government itself. ... The public is wary of putting more funds into government having witnessed one public sector failure after another. Yet without investing more resources in skilled public managers in health care, energy systems, and national security, we are probably doomed to remain stuck in the hands of vested interests and lobbies.

Fourth, today’s challenges cut across technical specialties, government departments and public and private sectors. ... Yet our government agencies are not designed to take a holistic approach.

In short, we have arrived at a point where the challenges of sustainable development —including public health, infrastructure, energy and national security—require changes not only to policy but also to basic public management systems. In many crucial areas, tinkering will no longer suffice: we need an overhaul to regain government control over regulatory processes, reduce lobbying, restore public planning and ensure the adequate financing of skilled public managers, and align public management systems with holistic strategies.

As evidenced by the response to the recent crisis, I'd add a fifth item to the list, opposition to the construction of the kinds of technocratic institutions that are needed to manage public systems:

Conservative Interventionism: The US government especially, but other governments as well, have gotten themselves deeply involved in industrial and financial policy during this crisis. They have done this without constructing technocratic institutions like the 1930’s Reconstruction Finance Corporation and the 1990’s RTC, which played major roles in allowing earlier episodes of extraordinary government intervention into the industrial and financial ... economy ... without an overwhelming degree of corruption and rent seeking. The discretionary power of executives, in past crises, was curbed by new interventionist institutions constructed on the fly by legislative action.

That is how America’s founders ... envisioned that things would work. They were suspicious of executive power, and thought that the president should have rather less discretionary power than the various King Georges of the time. ...

So I wonder: why didn’t the US Congress follow the RFC/RTC model when authorizing George W. Bush’s and Barack Obama’s industrial and financial policies? Why haven’t the technocratic institutions that we do have ... been given a broader role in this crisis?

Sunday, September 20, 2009

The Response to Climate Change "Can Be Gradual—and Affordable"

When the topic of climate change legislation comes up, Republicans predictably respond with "but what about small business?," though the concerns generally extend to big business as well. Again and again we hear that any attempt to reduce carbon emissions will significantly reduce economic growth. For example, tomorrow's Wall Street Journal asks "Can Countries Cut Carbon Emissions Without Hurting Economic Growth?"

Taking the no we can't side of the debate, a side I disagree with, is Steven Hayward of the American Enterprise Institute. Taking the yes we can side is Robert Stavins of Harvard (see here too). He argues, persuasively in my opinion, that objections to climate change legislation based upon what it will do to business, small or large, and what it will do to the economic growth rate suffer from "basic errors":

Yes: The Transition Can Be Gradual—and Affordable, by Robert Stavins, WSJ [podcast of debate]: ...Critics argue that the legislation passed earlier this year by the U.S. House of Representatives—to cut U.S. emissions 80% below 2005 levels by 2050—will mean big, disruptive changes to our infrastructure and untold economic damage. But they make a couple of basic errors. For one thing, they seem to think we'd have to replace the entire infrastructure quickly, paying trillions of dollars to shift to cleaner power. They also seem to assume that we have to choose between much more expensive energy and no energy at all.
The move to greener power doesn't have to be completed immediately, and it doesn't have to be painful. ... How would this work? One way is via a combination of national and multinational cap-and-trade systems. ... The effect would be to send price signals through the market—making use of less carbon-intensive fuels more cost-competitive, providing incentives for energy efficiency and stimulating climate-friendly technological change, such as methods of capturing and storing carbon.
More Efficient
True, in the short term changing the energy mix will come at some cost, but this will hardly stop economic growth. ... Consider this: From 1990 to 2007, while world emissions rose 38%, world economic growth soared 75%—emissions per unit of economic activity fell by more than 20%.

Critics argue we can't possibly increase efficiency enough to hit the 80% goal. In a very limited sense, that's true. Efficiency improvements alone ... won't get us where we need to go by 2050. But this plan doesn't rely solely on boosting efficiency. It brings together a host of other changes,... What's more, making gradual changes means we don't have to scrap still-productive power plants...
As for how much this will cost, the best economic analyses—including studies from the U.S. Congressional Budget Office and the U.S. Energy Information Administration—say such a policy in the U.S. would cost considerably less than 1% of gross domestic product per year in the long term, or up to $175 per household in 2020. (That's the cost of one postage stamp per household per day.)
In the end, we would be delaying 2050's expected economic output by no more than a few months. And bear in mind that previous environmental actions, such as attacking smog-forming air pollution and cutting acid rain, have consistently turned out to be much cheaper than predicted.
Critics ... challenge the price estimates the experts have set out. ... In particular, they say, developing nations won't sign onto plans for curbing emissions, for fear of losing their economic momentum. Indeed, we do need a sensible international arrangement in place..., and the economic pain will be much greater if we don't set up an international carbon market. But it can be done. ...
Road to Cooperation
For instance, the U.S. and China have been involved in intense talks about climate policy. If the two nations come together in a bilateral agreement—a real possibility—they would have much more leverage to persuade other major nations to join. From there, developing nations could be brought on board by giving them targets that reduce emissions without stifling growth. Advanced nations might agree to more-severe emissions cuts and allow developing nations to make gradual cuts in the early decades as they rise toward the world's average per-capita emissions. With the right incentives, developing countries can and will move onto less carbon-intensive growth paths.
The longer we put off serious action, the more aggressive our future efforts will need to be... For every year of delay before moving to a sustainable emissions path, the global cost of taking necessary actions increases by hundreds of billions of dollars. ... [A]cting sooner ... will lower the ultimate costs of achieving the target, because there will be more time allowed for gradual transition—which is what keeps costs down. Perhaps most important, the costs of failing to take action—the damages of climate change—would be substantially greater. ...

Tuesday, September 08, 2009

Reich: The Lessons from History on Health Care Reform

Robert Reich says one of the keys to health care reform is to ignore or disregard economists:

The Lessons from History on Health Care Reform, by Robert Reich: With Congress returning from recess to consider health care legislation and the President set to deliver a major address on the subject to both houses of Congress tomorrow, a bit of history may be in order. An excellent starting place David Blumenthal's and James Marone's "The Heart of Power," which I reviewed for the New York Times this past weekend. Here are the major points:
Universal health care has bedeviled, eluded or defeated every president for the last 75 years. ...
Devising a plan is easy compared with the politics of getting it enacted. Mere mention of national health insurance has always prompted a vigorous response from the ever-vigilant American Medical Association; in the 1930s, the editor of its journal equated national health care with “socialism, communism, inciting to revolution.” Bill Clinton’s plan was buried under an avalanche of hostility that included the now legendary ad featuring the couple Harry and Louise voicing their fears that the Clinton plan would substitute government for individual choice — “they choose, we lose.”
One lesson is that a new president must move quickly, before opponents have time to stoke public fears. ...
Congress can be just as much of an obstacle:... a president must set broad health reform goals and allow legislators to fill in the details, but be ready to knock heads together to forge a consensus. ...
Presidents who have been most successful in moving the country toward universal health coverage have disregarded or overruled their economic advisers. Plans to expand coverage have consistently drawn cautions or condemnations from economic teams in every administration, from Harry Truman’s down to George W. Bush’s. An exasperated Lyndon Johnson groused to Ted Kennedy that “the fools had to go to projecting” Medicare costs “down the road five or six years.” Such long-term projections meant political headaches. “The first thing, Senator Dick Russell comes running in, says, ‘My God, you’ve got a one billion dollar [estimate] for next year on health. Therefore I’m against any of it now.” Johnson rejected his advisers’ estimates and intentionally lowballed the cost. “I’ll spend the goddamn money.” An honest economic forecast would most likely have sunk Medicare.
It’s not so much that presidential economic advisers have been wrong — in fact, Medicare is well on its way to bankrupting the nation — but that they are typically in the business of thinking small and trying to minimize risk, while the herculean task of expanding health coverage entails great vision and large risk. Economic advice is important, but it’s only one source of wisdom.
Yet since Johnson, presidents have found it increasingly difficult to keep their economists at bay, mainly as a result of the growth of Washington’s economic policy infrastructure. Cost estimates and projections emanating from the White House’s Office of Management and Budget and the Congressional Budget Office, both created during the Nixon administration, have bound presidents within webs of technical arguments, arcane rules and budget limits. To date, Democratic presidents have felt more constrained by this apparatus than Republicans, perhaps because they have felt more of a need to prove their cost-cutting chops.
President Obama seems to have anticipated many of these lessons. He’s moved as quickly on the issue as this terrible economy has let him, and he has not been too rattled by naysaying economists (although the cost estimates of the Congressional Budget Office set him back). But although he outlined his goals but left most details to Congress, the lesson from history is that he may have waited too long to force a deal on that disorderly body (especially disorderly when Democrats are in charge). The question remains whether, in the weeks and months ahead, he can knock Congressional heads together to clinch it, and overcome those who inevitably feed public fears about a “government takeover” of health care and of budget-busting future expenditures. He needs to work fast, and be tough as nails.
But even if Obama fails, there is an art to losing, too — in a way that can tee up the issue for future presidents. Truman lost but nonetheless redefined the terms of debate, setting the stage for Medicare (which is why Johnson honored Truman when he signed it into law). Compare him with Clinton, who walked away from the wreckage of his health care plan and rarely mentioned the subject again. This allowed opponents to gain control over the spin and history, so that the Democrats’ signature cause slipped out of political sight for a decade. ...

Thursday, September 03, 2009

Does Curing Health Care Require That Consumers Feel the Pain?

Jonathan Gruber says controlling health care costs requires that consumers face the consequences of their health insurance choices:

[F]undamental cost control can only come from the supply side. ... But ... effective supply-side control will involve restricting consumers in some way ... Unless consumers face a financial penalty from their choices that drive health care upward, supply-side reforms will fail.

Update: Robert Fogel:

There is no need to suppress the demand for healthcare. Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective.

Sunday, August 23, 2009

"Five Myths about Health Care around the World"

An attempt to "dispel a few myths about health care abroad":

5 Myths About Health Care Around the World, by By T.R. Reid, Commentary, Washington Post: ...I've traveled the world ... to see how other developed democracies provide health care. Instead of dismissing these models as "socialist," we could adapt their solutions to fix our problems. To do that, we first have to dispel a few myths about health care abroad:

1. It's all socialized medicine out there. Not so. ... In some ways, health care is less "socialized" overseas than in the United States. Almost all Americans sign up for government insurance (Medicare) at age 65. In Germany, Switzerland and the Netherlands, seniors stick with private insurance plans for life. Meanwhile, the U.S. Department of Veterans Affairs is one of the planet's purest examples of government-run health care....

2. Overseas, care is rationed through limited choices or long lines. Generally, no. Germans can sign up for any of the nation's 200 private health insurance plans -- a broader choice than any American has. ... The Swiss, too, can choose any insurance plan in the country.

In France and Japan, you ... can go to any doctor, any hospital, any traditional healer. There are no U.S.-style limits such as "in-network" lists of doctors or "pre-authorization" for surgery. You pick any doctor, you get treatment -- and insurance has to pay. ...

As for those notorious waiting lists, some countries are indeed plagued by them. Canada makes patients wait weeks or months for nonemergency care, as a way to keep costs down. But ... many nations -- Germany, Britain, Austria -- outperform the United States on measures such as waiting times for appointments and for elective surgeries. In Japan, waiting times are so short that most patients don't bother to make an appointment. ...

3. Foreign health-care systems are inefficient, bloated bureaucracies. Much less so than here. ...

4. Cost controls stifle innovation. False. The United States is home to groundbreaking medical research, but so are other countries... Any American who's had a hip or knee replacement is standing on French innovation. ... Many of the wonder drugs promoted endlessly on American television, including Viagra, come from British, Swiss or Japanese labs. Overseas, strict cost controls actually drive innovation. ...

5. Health insurance has to be cruel. Not really. American health insurance companies routinely reject applicants with a "preexisting condition"... They employ armies of adjusters to deny claims. If a customer ... faces big medical bills, the insurer's "rescission department" digs through the records looking for grounds to cancel the policy... Foreign health insurance companies, in contrast, must accept all applicants, and they can't cancel as long as you pay your premiums. ...

In many ways, foreign health-care models are not really "foreign" to America, because our ... system uses elements of all of them. For Native Americans or veterans, we're Britain: The government provides health care, funding it through general taxes, and patients get no bills. For people who get insurance through their jobs, we're Germany: Premiums are split between workers and employers, and private insurance plans pay private doctors and hospitals. For people over 65, we're Canada: Everyone pays premiums for an insurance plan run by the government, and the public plan pays private doctors and hospitals according to a set fee schedule. And for the tens of millions without insurance coverage, we're Burundi or Burma: In the world's poor nations, sick people pay out of pocket for medical care...

This fragmentation is another reason that we spend more than anybody else and still leave millions without coverage. All the other developed countries have settled on one model for health-care delivery and finance; we've blended them all into a costly, confusing bureaucratic mess.

Which, in turn, punctures the most persistent myth of all: that America has "the finest health care" in the world. We don't. In terms of results, almost all advanced countries have better national health statistics than the United States... In terms of finance, we force 700,000 Americans into bankruptcy each year because of medical bills. In France, the number of medical bankruptcies is zero. Britain: zero. Japan: zero. Germany: zero.

Given our remarkable medical assets -- the best-educated doctors and nurses, the most advanced hospitals, world-class research -- the United States ... should be the best in the world. To get there, though, we have to be willing to learn some lessons about health-care ... from the other industrialized democracies.

There are, of course, groups that have a strong interest in perpetuating these myths as part of their attempt to block health care reform.

Friday, August 21, 2009

"Public Auction Option Shouldn't be a Deal Breaker"

Tim Duy recommends this piece on public-private competition. The argument, based upon the outcome of public-private competition in electrical power and worker's compensation insurance, is that there is no reason to fear a public option for health care:

Public option shouldn’t be deal breaker for reform, by Jack Roberts, Guest Viewpoint, Register Guard: Recent reports that the Obama administration may (or may not) be backing away from a public option for health care reform are likely to raise the decibel level of the debate even higher. Unfortunately, the result may be to reduce further the chances of getting health care reform passed at all. ...

To a great extent, this is reminiscent of the great debate in the 1930s over public vs. private power... Nowhere was this debate more contentious than in Oregon.

Public power advocates believed that private utilities were strangling the economy and robbing ratepayers, while opponents insisted that public power was a sure route to socialism. Sound familiar? The only thing both sides seem to agree on was that one system or the other must prevail and that public and private power could not coexist.

Jump ahead 70 years. Here in Lane County, most people receive their electrical power from municipal utilities, cooperatives or a people’s utility district. Private utilities such as Portland General Electric and Pacific Power serve most of the rest of the state.

Today, we may use euphemisms such as “consumer-owned” and “investor-owned” utilities, but it is still the same public vs. private power distinction. ...[T]here is actually little difference in the way public and private utilities operate. The reason is that both public and private utilities are funded by their ratepayers. Public utilities are not subsidized by general tax dollars, as private power advocates once feared. ...

There is little reason to believe that a public health insurance option would operate much differently from private health insurance companies, either. Already there are nonprofit health insurance companies that operate more or less like their for-profit competitors. Their incentive to hold down costs ... is no less than a for-profit company’s. After all, their top management still wants to keep its jobs and be compensated for good performance, too.

Probably the best example of how a public health insurance option could operate is Oregon’s experience with a quasi-public worker’s compensation insurance company, the State Accident Insurance Fund...

True, its principal private sector competitor, Liberty Northwest, complains about unfair competition... Yet in a state that requires businesses to carry worker’s compensation insurance, SAIF serves as a critical provider of affordable workers’ comp coverage for thousands of Oregon companies, large and small. ...[M]ost Oregonians don’t regard SAIF as representing a government takeover of workers’ compensation, much less a harbinger of socialism. ...

Yet Oregon’s workers’ comp system is not so clearly better than the 25 states that have no equivalent to SAIF as to render their mandatory workers’ compensation laws worthless or unworkable. The fact is that mandatory workers’ compensation laws were a major step forward..., with or without a public option for providing worker’s comp insurance.

Adopting universal health care coverage will be equally revolutionary in its effect on our society, whether it initially includes a mandatory public option, and whatever the precise form that option originally takes.

The real key to health insurance reform is to prevent insurance companies from excluding people from coverage or charging higher premiums based on a person’s pre-existing health condition, and then to mandate coverage for everyone. ...

Thursday, August 20, 2009

"The Rationing Canard"

Free Exchange responds to a WSJ editorial by Martin Feldstein charging that "rationing health care is central to President Barack Obama's health plan":

The rationing canard, Free Exchange: Many, many people have already weighed in on whether or not the health care plan making its way through Congress will involve "rationing", and it was inevitable, I suppose, that Martin Feldstein would eventually decide that it's his turn. Here he is:
...The Obama strategy is to reduce health costs by rationing the services that we and future generations of patients will receive.
The White House Council of Economic Advisers issued a report in June explaining the Obama administration's goal of reducing projected health spending by 30% over the next two decades. That reduction would be achieved by eliminating "high cost, low-value treatments," by "implementing a set of performance measures that all providers would adopt," and by "directly targeting individual providers . . . (and other) high-end outliers."
The president has emphasized the importance of limiting services to "health care that works." To identify such care, he provided more than $1 billion in the fiscal stimulus package to jump-start Comparative Effectiveness Research (CER)... Comparative effectiveness could become the vehicle for deciding whether each method of treatment provides enough of an improvement in health care to justify its cost. ...
...The deployment of scare quotes would seem to suggest that Mr Feldstein has a problem with the government limiting high cost, low-value treatments, even though they're costly and not very valuable. In his third paragraph he says that Comparative Effectiveness Research—that is, research to determine whether treatments are effective or not—could lead to a cost-control mechanism which could become the vehicle for deciding whether a treatment's effectiveness justifies its cost. And then he says something about a system that in no way resembles the one America would have if the current reform package passed. Left unaddressed is whether it counts as rationing if you're still allowed to pay for additional services out of pocket.
It's fair for Mr Feldstein to recommend certain changes in the tax code, as he then proceeds to do, as a useful policy step. But why the long and dishonest preamble?
The bigger problem with the argument by rationing is that it seems to ignore how resources are allocated in a perfectly free market—by willingness or ability to pay. Mr Feldstein writes:
But unlike reductions in care achieved by government rationing, individuals with different preferences about health and about risk could buy the care that best suits their preferences. While we all want better health, the different choices that people make about such things as smoking, weight and exercise show that there are substantial differences in the priority that different people attach to health.
Certainly, preferences regarding the level of health insurance to carry vary, as do preferences for overall healthiness, as revealed by choices about things like smoking and diet. But to what extent are lifesaving treatments had or not had on the basis of preference? What about costly but effective therapies for chronic conditions?
The nub of the matter is this—government can afford to provide basic coverage to everyone, but it can't afford to provide every treatment everyone may want to everyone who wants it. It must therefore decide how to limit its expenses, and it can leave open the option of using a private practitioner to those who are denied care based on a cost-benefit analysis. Or government can provide coverage to no one, and those who cannot afford a treatment—effective or not—will go without. Those people will be just as fine as they'd be with treatment in some cases, they'll suffer in others, and occasionally they'll die because they couldn't afford coverage.
That's the nub of it, really. Faced with the prospect of a plan that provides effective treatments to everyone but forces people who want relatively ineffective treatments to pay for them on the private market, Mr Feldstein says he'd prefer a system where people who are unable to afford effective treatments don't get them, calling concern for those unable to pay for treatments "misplaced egalitarianism".
It's all well and good to let the market allocate televisions. Many people live happy lives without televisions, and lack of a television hasn't ever killed anyone. Attempting to provide a basic level of access to television to every American would be misplaced egalitarianism. I would have thought Mr Feldstein could understand the ways in which the market for televisions is different from that for health insurance.

I've discussed rationing via price and other mechanisms previously, (e.g. here), so let me instead try to characterize the political debate on this topic with an overly simplified example. We can, very roughly, break down medical costs as:

total medical costs = (cost per person)*(number of people covered)

The cost per person can be broken into two components:

cost per person = (number of procedures per person)*(cost per procedure)

The number of procedures per person is intended as a rough proxy for the level of care each person receives (i.e. the quality of care, and it includes all aspects of a particular procedure, including prescription drugs). Putting these together gives:

total medical costs = (cost per procedure)*(procedures per person)*(number of people covered)

The Republican attacks are, essentially:

Democrats intend or will be forced to reduce costs by reducing the number of people covered (perhaps focusing on the elderly) and by reducing procedures per person (i.e. a lower level of care on average). Dramatic tax increases may be needed as well.

The Democrat's response runs along the following lines:

That's a fabrication. There's no intent to reduce the number of people covered or to reduce the level/quality of care. In fact, the number of people covered must rise to achieve universal coverage, and procedures per person, i.e. the level of care, will only fall to the extent that procedures with little or no benefit are eliminated. The number of procedures (i.e. the quality  of care) will, if anything, go up.

To achieve the goal of universal coverage while controlling costs, it is necessary that costs per person fall. However, this will not be achieved through rationing care. Instead, costs per person will be reduced by lowering the cost per procedure (through lower administrative costs, increased competition, lower drug costs, etc.) and by eliminating unnecessary procedures. Additional revenue may also be used to broaden coverage. Cross-country studies indicate that the reduction in costs per person needed to provide universal coverage without reducing the level of care is achievable.

The goal of Democrats is to lower costs without sacrificing the quality of care (which will allow coverage to be expanded). Whether that's achievable or not is a legitimate point to debate, I think the experience in other countries suggests there's quite a bit of excess in the system that can be removed without affecting the quality of care people receive, but accusing Democrats of intending to cut the quality of care or to ration care within particular segments of the population (or overall) mischaracterizes what they are trying to achieve.

Wednesday, August 19, 2009

Notes on Co-Ops

Some very rough notes on co-ops I jotted down just before a radio interview yesterday. The main questions I was interested in addressing were the feasibility of co-ops, whether they would lower costs, and whether co-ops would broaden coverage so that it is practically universal. This was a last minute effort, and likely incomplete, so please don't hesitate to add to the list in comments:

1. Co-ops are not very well defined.

2. It is not clear that Co-ops will lower costs. For one, you need at least 500,000 members to have enough bargaining power to matter, and even then it just puts you on an even keel with existing companies. That isn't enough bargaining power to lower costs. Also, will co-ops lower administrative costs? Probably not much.

3. Some reports say the plan would come with 6 billion in start-up funds. But there are still large barriers to entry.

4. This was an eye opener. Blue Cross-Blue Shield, which already has substantial market share in some areas (e.g. 90%), is a non-profit and would likely qualify as a co-op. Though they would likely come under some new regulations in terms of who they must cover if they did change to a co-op, as well as other restrictions, it doesn't seem like this would bring about much change.

5. Some states already allow co-ops, e.g. Iowa, and they have not generally been successful.

6. On coverage, how will that work? Will these co-ops be like Savings and Loans (to which they are often compared) where membership is restricted to certain groups, or will they be forced to provide insurance to anyone who wants it? If so, how do you stop firms from subtly using non-price mechanisms to discourage high cost patients from joining? Exactly how coverage will be regulated is vague in the reports I read, though perhaps there's an actual proposal somewhere that is more informative.

7. Republicans won't support this either, so why are we bothering with it?

[Update: Tyler Cowen asks What are health care co-ops?]

Monday, August 17, 2009

"Public Option versus Co-ops: The Market Test"

What do prediction and financial markets have to say about the prospect of dropping the public option and replacing it with health care co-ops? Arin Dube has an answer (which is a follow-up to this post):

Public Option versus “Co-ops”: The Market Test, by Arin Dube: President Obama says he is serious about making sure we have a competitive alternative to the private health insurance companies to drive down costs. However, he is now apparently open to the idea of “health co-operatives” that will be regional purchasing pools operating independently of the federal government.  How well will these co-ops achieve his stated goals?  To assess this, we can start with his own words and those of his subordinates.  Well, to be precise, how various investors reacted to these words.

Exhibit A

Exhibit A shows how investors in the Intrade prediction market reacted to signals from the Obama administration on Sunday August 16 that they are willing to ditch the public health insurance option. In the market’s assessment, the likelihood of a federally administered health plan passing fell from around 35% to around 20%, the biggest one-day drop since the prediction market started in June.

So as the public option’s condition went to critical, and “co-ops” started looking increasingly likely, how did investors in the top 4 private health insurance companies react? As exhibit B shows, champagne bottles were popped.

Exhibit B

On a day when the broader stock market took a hit (dropping 2.2% at the time of writing), these four companies with a combined market cap of $80 billion saw their prices rise an average of  3%.  Actually, if you dot the i’s and cross the t’s in calculating “abnormal returns”** for these four companies, it comes to be 5.8%.  All in all, statements by the Obama administration over the weekend helped investors of private health insurance markets make around $4.6 billion.

So, as the market’s assessed likelihood of the public option passing dropped by 15 percentage points, share prices rose by around 6 percentage. If you are willing to extrapolate based on this event, going from a public option to “co-ops” would be worth around 40% of the value of these companies, or around $32 billion.  This is similar to the results from my previous analysis of how market reacted to announcements by members of the Senate Finance Committee.

President Obama may have harsh words for the insurance companies. But those are not the words investors in these companies are paying attention to. They are paying attention to whether President Obama will sign a bill with vague “co-ops” or demand a public option. And the reaction by these investors bodes poorly for “co-ops” fulfilling their role as a serious competitive alternative to private insurance companies.


** Abnormal returns are calculated as [Raw Return] – beta * [Index Return]. Betas for AET, UNH, WLP and CI are 1.3, 1.14, 1.15 and 1.88 respectively (from Google Finance).

Arindrajit Dube is an economist at UC Berkeley Institute for Research on Labor and Employment who is joining the Department of Economics at the University of Massachusetts, Amherst. His work focuses on labor and health economics topics, as well as political economy.

"The Public Option as a Signal"

More from Paul Krugman on the public option:

The public option as a signal, by Paul Krugman: Look, it is possible to have universal care without a public option; Switzerland does. But there are some good reasons for the prominence of the public option in our debate.

One is substantive: to have a workable system without the public option, you need to have effective regulation of the insurers. Given the realities of our money-dominated politics, you really have to worry whether that can be done — which is a reason to have a more or less automatic mechanism for disciplining the industry.

The second is what the option debate says about Obama.

If progressives had real trust in Obama’s commitment to doing the right thing, the administration would have broad leeway to do deals. But the president doesn’t command that kind of trust.

Partly it’s a matter of style — as many people have noted, he has been weirdly reluctant to make the moral case for universal care, weirdly unable to show passion on the issue, weirdly diffident even about the blatant lies from the right. Partly it’s a spillover from his other policies: by appointing an economic team that’s Rubin redux, by taking such a kindly attitude to the banks, he has squandered a lot of progressive enthusiasm.

Add in the dealmaking as part of the health care process itself, and progressives can be forgiven for having the impression that Obama (a) takes them for granted (b) is way too easily rolled by the other side.

So progressives have their backs up over one provision in health care reform that’s easy to monitor. The public option has become not so much a symbol as a signal, a test of whether Obama is really the progressive activists thought they were backing.

And the bizarre thing is that the administration doesn’t seem to get that.

I think there's another factor as well. It's not just that Democrats don't trust Obama's commitment to progressive issues, and it's not simply a matter of style, or a spillover from other appointments, though I do agree these are issues. It's also the sense that the same old right-wing crazies are driving the public debate to a much greater extent than is justified by the last election. This was supposed to be a new era, one where progressive ideas would dominate public policy, not an era where a false charge of "death panels" would dominate the public discourse, and certainly not an era where misrepresentations from the far right extreme would cause the public option to be dropped from the legislation.

Whether the administration simply does not have the political power, lacks sufficient will, doesn't understand the political significance, or what, it's hard for supporters to watch the same political game unfold once again in what was supposed to be a new era in progressive politics. It's a frustrating slap in the face for progressives who support the administration, and it's the sense of powerless against the right-wing false message machine that is driving that frustration.

The administration needs to take a stand against something important - and win. And not just for what is signals to supporters. Compromise will never appease the crazies on the right, strength is the only way to beat them.

Update: Robert Reich isn't ready to give up on the public option:

The Public Option's Last Stand, and the Public's, by Robert Reich: I would have preferred a single payer system like Medicare, but became convinced earlier this year that a public, Medicare-like optional plan was just about as much as was politically possible. Now the White House is stepping back even from the public option...
Without a public, Medicare-like option, health care reform is a bandaid for a system in critical condition. There's no way to push private insurers to become more efficient and provide better value to Americans without being forced to compete with a public option. And there's no way to get overall health-care costs down without a public option that has the authority and scale to negotiate lower costs with pharmaceutical companies, doctors, hospitals, and other providers -- thereby opening the way for private insurers to do the same.
It's been clear from the start that the private insurers and other parts of the medical-industrial complex have hated the idea of the public option, for precisely these reasons. A public option would cut deeply into their current profits. That's why they've been willing to spend a fortune on lobbyists, threaten and intimidate legislators and ordinary Americans, and even rattle Obama's cage to the point where the Administration is about to give up on it.
The White House wonders why there hasn't been more support for universal health care coming from progressives, grass-roots Democrats, and Independents. I'll tell you why. It's because the White House has never made an explicit commitment to a public option. ... If Obama tells Senate Democrats he will not sign a healthcare reform bill without a public option, there will be enough votes in the United States Senate for a public option.
I urge you to make it absolutely clear to everyone you know, everyone who cares about universal health care and what it will mean to our country, that the bill must contain a real public option. Tell that to your representatives in Congress. Tell that to the White House. If you are receiving piles of emails from the Obama email system asking you to click in favor of health care, do not do so unless or until you know it has a clear public option. Do not send money unless or until the White House makes clear its support for a public option.

This isn't just Obama's test. It's our test.

I'm not sure this is the place for the administration to take a stand, perhaps it is, but I am sure that they need to take stand on something. Let me ask a question. Can you articulate with a simple statement what the administration's primary goal for health care reform is? Is it to make coverage universal? To control costs and reduce future deficits? To stop the insurance companies from taking advantage of people who already have coverage? All of the above? Something else? I don't think you can take a solid stand on the issues until you've clearly articulated the main goal, and that has not been done. I suspect that the goals will be defined after reform is passed - if it is - and the goals will be defined as whatever they were able to get. We got the main things we were after we will be told, whether that is true or not. But if, in the end, reform is mostly cosmetic, I don't think that strategy will work.

To say that your goal is whatever you can achieve, whatever that is, would be fine if what is possible is independent of how clearly and forcefully the administration articulates its goals, but what can be achieved is not independent of the administration's articulation of its goals. When the goals are vague, it allows the other side to define reform, and do so on their terms and with their terminology, and that limits the possibilities that are available, perhaps fatally.

Friday, August 14, 2009

Stavins: Waxman-Markey is Not a Massive Corporate Give-Away

This is a follow-up to the recent discussion between Brad DeLong and Greg Mankiw on the effects of giving away rather than auctioning carbon permits under a cap and trade system (see, e.g., here, here, here, and here). Mankiw begins with the premise that:

Rather than auctioning the carbon allowances, the bill that recently passed the House would give most of them away to powerful special interests.

But is it correct to classify the program as "giving most of them away to powerful special interests"? Here's Harvard's Robert Stavins who knows a thing or two about this topic. He notes that "it is remarkable (and unfortunate) how misleading so much of the coverage has been of the issues and the numbers surrounding the proposed allowance allocation." He also says that "we should be honest that the legislation, for all its flaws, is by no means the 'massive corporate give-away' that it has been labeled.  On the contrary, 80% of the value of allowances accrue to consumers and public purposes":

The Wonderful Politics of Cap-and-Trade: A Closer Look at Waxman-Markey, by Robert Stavins: ...Now, let’s go back to the hand-wringing in the press and blogosphere about the so-called massive political “give-away” of allowances.  Perhaps unintentionally, there has been some misleading press coverage, suggesting that up to 75% or 80% of the allowances are given away to private industry as a windfall over the life of the program, 2012-2050 (in contrast with the 100% auction originally favored by President Obama).
Given the nature of the allowance allocation in the Waxman-Markey legislation, the best way to assess its implications is not as “free allocation” versus “auction,” but rather in terms of who is the ultimate beneficiary of each element of the allocation and auction, that is, how the value of the allowances is allocated.  On closer inspection, it turns out that many of the elements of the apparently free allocation accrue to consumers and public purposes, not private industry.

Continue reading "Stavins: Waxman-Markey is Not a Massive Corporate Give-Away" »

Tuesday, July 28, 2009

Where are the Technocratic Institutions?

Brad DeLong wonders why the response to the financial crisis hasn't included technocratic institutions to limit executive power:

Conservative Interventionism, by J. Bradford DeLong, Commentary, Project Syndicate: At this stage in the worldwide fight against depression, it is useful to stop and consider just how conservative the policies implemented by the world’s central banks, treasuries, and government budget offices have been. Almost everything that they have done – spending increases, tax cuts, bank recapitalisation, purchases of risky assets,... and ... money-supply expansions – has followed a policy path that is nearly 200 years old...

The place to start is 1825, when panicked investors wanted their money invested in safe cash rather than risky enterprises. Robert Banks Jenkinson, Second Earl of Liverpool and First Lord of the Treasury for King George IV, begged Cornelius Buller, Governor of the Bank of England, to act to prevent financial-asset prices from collapsing. “We believe in a market economy,” Lord Liverpool’s reasoning went, “but not when the prices a market economy produces lead to mass unemployment on the streets of London, Bristol, Liverpool, and Manchester.”

The Bank of England acted: it intervened in the market and bought bonds for cash, pushing up the prices of financial assets and expanding the money supply. It loaned on little collateral to shaky banks. It announced its intention to stabilize the market – and that bearish speculators should beware.

Ever since, whenever governments largely ... let financial markets work their way out of a panic out by themselves – 1873 and 1929 in the United States come to mind – things turned out badly. But whenever government stepped in or deputized a private investment bank to support the market, things appear to have gone far less badly. ... [F]ew modern governments are now willing to let financial market heal themselves. To do so would be a truly radical step indeed. The Obama administration and other central bankers and fiscal authorities around the globe are thus, in a sense, acting very conservatively... I ... am somewhat reluctant to second-guess them.  ...

Nevertheless, I do have one big question. The US government especially, but other governments as well, have gotten themselves deeply involved in industrial and financial policy during this crisis. They have done this without constructing technocratic institutions like the 1930’s Reconstruction Finance Corporation and the 1990’s RTC, which played major roles in allowing earlier episodes of extraordinary government intervention into the industrial and financial ... economy ... without an overwhelming degree of corruption and rent seeking. The discretionary power of executives, in past crises, was curbed by new interventionist institutions constructed on the fly by legislative action.

That is how America’s founders ... envisioned that things would work. They were suspicious of executive power, and thought that the president should have rather less discretionary power than the various King Georges of the time. ...

So I wonder: why didn’t the US Congress follow the RFC/RTC model when authorising George W. Bush’s and Barack Obama’s industrial and financial policies? Why haven’t the technocratic institutions that we do have, like the IMF, been given a broader role in this crisis? And what can we do to rebuild international financial-management institutions on the fly to make them the best possible?

Thursday, July 23, 2009

"Carbon Sequestration from Forestry and Agriculture"

Michael Roberts responds to Rob Stavins post on the potential benefits from sequestering carbon:

Carbon sequestration from forestry and agriculture, Greed, Green, and Grains: Rob Stavins writes about curbing potential climate change by sequestering carbon rather than, or in addition to, reducing emissions from fossil fuel consumption. Stavins focuses mainly on preserving and increasing forest coverage. There are two good reasons for this focus: (1) deforestation is responsible for about 20% of CO2 emissions worldwide and (2) preventing deforestation and planting new forests appear to be low-cost ways of reducing total emissions.

Within the Waxman-Markey bill, CO2 emissions can be offset from agriculture and forestry activities. I'm not convinced much sequestration gains are to be had from agriculture. But farmer interests smell an opportunity, and with 80 years of rent-seeking under their collective belts, they are quite good at capitalizing on them. Under the bill (at least some versions of it) USDA will run the offset program, not EPA. That's probably essential given political constraints.

Some environmentalists smell a rat in the offset provision. They seem to see offsets as a loophole to avoid actual emissions reductions. There may be some truth to this.

My view is a little different (see earlier post). The problem is that by restricting emissions from carbon-based fuels and ultimately increasing the price of energy, there will be increased demand for other resources, including those from agriculture and forestry. Instead of using oil and gas people will use wood and ethanol. If carbon emissions from wood and ethanol are not counted they will be under-priced in a cap-and-trade world. Besides wood and ethanol, there are surely a zillion other indirect market implications we are unlikely to imagine.

So, in the end, we must at least try to count all the carbon. Otherwise we'll be squeezing a balloon--reducing emissions in one part of the global economy just to have them pop out somewhere else. It's not much different from having cap-and-trade in the U.S. and then buying Chinese goods produced using their uncapped carbon emissions. Eventually, we'll need to get China, India, and the rest of the developing world on board. Everyone knows this. But not everyone seems to recognize that we need to count all the carbon.

An offset policy doesn't capture these indirect effects. Even a painfully complicated offset policy that attempts to trace market impacts far and wide to make sure they are "additive." Even if there are no offsets, energy price changes will shift demand for all kinds of resources, from firewood to ethanol, all which affect the carbon balance.

I don't think many are yet willing to seriously consider the difficulty of this problem. It almost surely won't get into the first bill. But sooner or later we'll see fewer emission reductions than we expected. Maybe then we'll start counting all the carbon. Hopefully it won't be too late.

Reliable and transparent measurement of carbon emissions and sequestrations from forestry and agriculture will be key. While current [proposed] offset policies may do little in the way of actually influencing the carbon balance, they will spur research and debate about measurement issues. That's a good first step.

In comments to this post, Richard Serlin adds:

A fascinating and potentially very powerful idea for ramping this up greatly is genetically engineered super carbon eating trees. The best short article I've been able to find so far on this is a recent New York Times guest column by science journalist Oliver Morton.

Tuesday, July 21, 2009

Should Carbon be Sequestered?

Robert Stavins explains why he believes that biological carbon sequestration should be part of U.S. climate policy:

What Role for U.S. Carbon Sequestration?, by Robert Stavins: With the development of climate legislation proceeding in the U.S. Senate, a key question is whether the United States can cost-effectively reduce a significant share of its contributions to increased atmospheric CO2 concentrations through forest-based carbon sequestration.  Should biological carbon sequestration be part of the domestic portfolio of compliance activities?

Continue reading "Should Carbon be Sequestered?" »

Sunday, July 19, 2009

"The Most Misunderstood Man in America"

Michael Hirsh wonders why the Obama administration hasn't consulted Joe Stiglitz more often on economic policy issues, and suggests the answer is an ongoing feud with Larry Summers:

The Most Misunderstood Man in America, by Michael Hirsh, Newsweek: ...Even in the contentious world of economics, [Joe Stiglitz] is considered somewhat prickly. And while he may be a Nobel laureate, in Washington he's seen as just another economic critic—and not always a welcome one. Few Americans recognize his name... Yet Stiglitz's work is cited by more economists than anyone else's in the world... And when he goes abroad—to Europe, Asia, and Latin America—he is received like a superstar, a modern-day oracle. ...

Stiglitz is perhaps best known for his unrelenting assault on an idea that has dominated the global landscape since Ronald Reagan: that markets work well on their own and governments should stay out of the way. ... The subprime-mortgage disaster was almost tailor-made evidence that financial markets often fail without rigorous government supervision, Stiglitz and his allies say.

The work that won Stiglitz the Nobel in 2001 showed how "imperfect" information that is unequally shared by participants in a transaction can make markets go haywire, giving unfair advantage to one party. The subprime scandal was all about people who knew a lot—like mortgage lenders and Wall Street derivatives traders—exploiting people who had less information... As Stiglitz puts it: "Globalization opened up opportunities to find new people to exploit their ignorance. And we found them." ... The solution, Stiglitz says, is to ... develop a balance between market-driven economies—which he favors—and government oversight.

Stiglitz has warned for years that pro-market zeal would cause a global financial meltdown very much like the one that gripped the world last year. ... Since at least 1990, Stiglitz has talked about the risks of securitizing mortgages, questioning whether markets and authorities would grow careless "about the importance of screening loan applicants." ...

To his critics—and there are many—Stiglitz is a self-aggrandizing rock-thrower. ... Stiglitz's defenders say one possible explanation for his outsider status in Washington is his ongoing rivalry with Summers. ... Since the early '90s, when Summers was a senior Treasury official and Stiglitz was on the Council of Economic Advisers, the two have engaged in fierce policy debates. The first fight was over the Clinton administration's efforts to pry open emerging financial markets, such as South Korea's. Stiglitz argued there wasn't good evidence that liberalizing poorly regulated Third World markets would make any one more prosperous; Summers wanted them open to U.S. firms.

The differences between them grew bitter in the late 1990s, when Stiglitz was chief economist for the World Bank and took issue with the way Treasury Secretary Robert Rubin, and Summers, who was then deputy secretary, were handling the Asian "contagion" financial collapse. After World Bank president James Wolfensohn declined to reappoint him in 1999, Stiglitz became convinced that Summers was behind the slight. Summers denies this...

Despite the Obama team's occasional efforts to reach out to him, Stiglitz remains deeply unhappy about the administration's approach to the financial crisis. Rather than breaking up or restructuring the big banks that failed, "the Obama administration has actually expanded the notion of 'too big to fail,' " he says. ...

Today, settled as a professor at Columbia, Stiglitz occasionally finds himself welcomed in the nation's capital, though usually at the other end of Pennsylvania Avenue, to testify before Congress. While he had no great desire to go back into government, friends say he was deeply disappointed when an offer didn't come from Obama last fall. Not surprisingly, Stiglitz believes his old rival was behind it, though Summers denies this. ... Stiglitz may a prophet without much honor in Washington, but he seems to be determined to keep the prophecies coming.

This isn't the first time Michael Hirsh has written about this. Though the question has changed from "why didn't Obama appoint Stiglitz to a key position within the administration" to "why doesn't the administration consult Stiglitz more often on economic policy issues," last December he made most of the same points:

OK, enough with the Obamamania already. I have a major bone to pick with our all-praised president-elect. Where, Mr. Obama, is Joseph Stiglitz? Most pundits have pretty much gone ga-ga over your economic team: The brilliant Larry Summers... The judicious Tim Geithner... The august Paul Volcker... But lost amid the cascades of ticker tape is the fact that, astonishingly, you didn't hire the one expert who's been right about the financial crisis all along—and whose Nobel Prize-winning ideas will probably be most central to fixing the global economy.

This is not speculation. A source close to Stiglitz told me Thursday that the Columbia University economist has been left out in the cold, even though he was expecting at least an offer. ...

Stiglitz, more than anyone on the Washington scene, was the biggest fly in the ointment of "free-market fundamentalism" pressed on the world in the '90s by Summers, Geithner and their mentor, former Treasury secretary Robert Rubin—advice that has now contributed to the worst financial crisis since the Great Depression. ... Sure, I know the rap on Stiglitz:... he's too often "off the reservation," won't stay on the message, and doesn't play well with others—especially Summers. (Summers is said to have pressured former World Bank president Jim Wolfensohn to fire Stiglitz in the '90s...) Unquestionably, Stiglitz has occasionally gone overboard in his criticisms... But Obama has made a point of declaring that he wants dissonant voices in his administration. So why not Joe Stiglitz?

I can understand not offering Stiglitz a key position within the administration, he might not always stay on message and that scares the political managers (though the fact that they accepted Summers undercuts the argument that they wanted to avoid people who are potentially politically explosive, though perhaps they'd agree to one, but not two, and Summers was the one). But in the first article Stiglitz is quoted as saying that "We've talked one or two times," and it's harder to understand why the administration hasn't consulted him more often on economic policy issues.

Update: Paul Krugman:

Morning Joe: I think this Michael Hirsch piece on Joe Stiglitz somewhat misses the point.

Yes, Joe should be playing a bigger role — he’s an insanely great economist, in ways you can’t really appreciate unless you’re deep into the field. I’d say that he’s more his generation’s Paul Samuelson than its John Maynard Keynes: as with Great Paul, almost every time you dig into some sub-field of economics — finance, imperfect competition, health care — you find that much of the work rests on a seminal Stiglitz paper.

But the larger story is the absence of a progressive-economist wing. A lot of people supported Obama over Clinton in the primaries because they thought Clinton would bring back the Rubin team; and what Obama has done is … bring back the Rubin team. Even the advisory council, which is supposed to bring in skeptical views, does so by bringing in, um, Marty Feldstein.

The point is that even if you think the leftish wing of economics doesn’t have all the answers, you’d expect some people from that wing to be at the table. Yet I don’t see Larry Mishel, or Jamie Galbraith … Jared Bernstein is it.

Joe Stiglitz stands out because in addition to being on the progressive wing, he’s also, as I said, a giant among academic economists. But I think the real story is more about excluded points of view than excluded people.

Wednesday, July 15, 2009

Thomas Schelling on Climate Change

Conor Clarke interviews Thomas Schelling on the implementation of climate change policy (the excerpts run across several questions):

An Interview With Thomas Schelling, Part Two, by Conor Clarke: This is the second part of my interview with Nobel Prize-winning economist Thomas Schelling. Part one is here. In this part we talk very generally about climate change...

...It's not obvious that averting global climate change is in the rational self-interest of anyone ... alive today. The serious consequences probably won't occur until 2080 or 2100 or thereafter..., [and] those consequences are going to be distributed in a radically uneven way. The northwest of the United States might actually benefit. So how does a negotiation process work? How does a generation today negotiate on behalf of future generations? And how do we negotiate when the costs are distributed so unevenly?

Well I do think that one of the difficulties is that most of the beneficiaries aren't yet born. More than that: Most of the beneficiaries will be born in ... the developing world. By 2080 or 2100 five-sixths of the population, at least, will be in places like China, India, Indonesia, Africa and so forth. And what I don't know is whether Americans are really willing to understand that and do anything for the benefit of the unborn Chinese.

It's a tough sell. And probably you have to find ways to exaggerate the threat. And you can in fact find ways to make the threat serious. I think there's a significant likelihood of a kind of a runaway release of carbon and methane ... that will create a huge multiplier effect, and it could become very serious. ...

If I were to come clean to the American public I would say that, except for a very low probability of a very bad result -- which is the disintegration of the West Antarctic ice sheet, which would put Washington DC under water -- we are probably going to outgrow any vulnerability we have to climate change. ... You know, very little of the US economy is susceptible to climate. All of agriculture is less than 3% of our gross product. Forestry may be endangered. Fisheries may be endangered. But recreation might actually benefit!

So if we can double our GDP in the next 70 or 80 years,... -- even if we lose 10% of our GDP from climate change -- we're still ahead so much that the effect of climate change wouldn't be noticed. But it would be pretty disastrous in a lot of the less developed parts of the world. And that's why I think it's crucially important not to demand anything of China, India and so forth that will significantly impede their economic progress. ...

[I]f the developed countries ... are really serious, they'll tell India and China and Brazil, "we're going to provide enormous assistance to help reduce your dependence on fossil fuels. And we don't expect you to pay for it yourselves. We will pay for it because we're rich and you're not." ...

But while people talk about this..., nobody that I know of is thinking about how in the world you organize so that the rich countries can agree what you do with the poor. You need to know who divides the money, and who the monitors is. We're going to need a whole new set of institutions...

It's very hard to get Americans to engage in what they think will be suffering not just for the polar bears but for the poor around the world who will indeed suffer if they can't outgrow their vulnerability to climate change. ...

I think you have to realize that most people have very strong moral feelings. I think in a lot of cases they're misdirected. I wish moral feelings about a two-month old fetus were attached to hungry children in Africa. But I think people have very strong moral feelings. In fact, I'm always amazed by the number of people who at least pretend they're worried about the polar bears.

And one thing that I think ought to help but doesn't is that -- and my impression is that maybe this is slightly changing -- the organized churches in America don't take seriously preserving the heritage that God gave us. ... I get no impression that Protestants and Catholics are sermonizing on the importance of preserving the bounty of the earth, the richness of the species, or preserving the planet as we would like to know it. ... I think the churches don't realize that they could have a potent effect in not letting so much of gods legacy -- in terms of flora and fauna -- be destroyed by climate change.

But I tend to be rather pessimistic. I sometimes wish that we could have, over the next five or ten years, a lot of horrid things happening -- you know, like tornadoes in the Midwest and so forth -- that would get people very concerned about climate change. But I don't think that's going to happen.

Exaggerating the threat won't help. When people find out that you are doing that -- and they will at some point -- you lose credibility and end up further behind than when you started. Also, though this is a bit picky -- this qualification is often omitted to simplify the discussion -- the costs are not fully captured by the loss of GDP. If, for example, some species become extinct due to climate change, that is only included in the costs to the extent that it lowers the output of goods and services. But our concerns are broader than that. Finally, I don't think we should, even just sometimes, wish that horrid things would happen to people no matter how much good might come of it. There are better ways to get there.