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    Wednesday
    03Feb2010

    Is there going to be an economic recovery, or is this the new normal?

    DateWednesday, February 3, 2010 at 09:15PM

    I was born before WWII, and now is the first time it has ever occurred to me that we are in a recession from which we might not recover for a generation or more. I won't go into the reasons for my pessimism here, although I have written about some of them in previous posts. I write now only to report this recent insight and to point out that whether one assumes recovery or stasis should lead to profoundly different economic policy choices.

    If we can have a recovery and resume economic growth and generalized prosperity in the near future, then it behooves us to use government fiscal policy aggressively and continue to keep money cheap to stimulate a recovery as rapidly as possible. The deficit accumulated to do that will be a much better thing to leave to the next generations than several unnecessary years—or a decade, or a generation—of stagnation, high unemployment, missed opportunities for education and career-building, declining international influence, etc., etc.

    On the other hand, if this is the new normal, and we can't jump start the economy to perform like it did in the late 1990s, say, and we can't avoid a long period of high unemployment, stagnant family incomes, and declining prices—in other words, a lost decade or generation—then it would be better to start making now the painful adjustments that would be required to survive long-term in that environment. In this scenario, any stimulus money would add to the deficit but would have no expansionary effect. There would be not only smaller federal, state, and local government budgets, but smaller household budgets too. Infrastructure could not be expanded, properly maintained or replaced. Investment abroad might be more profitable than here. Funding for education would continue to decline, increasing the opportunity gap between rich and poor. The safety net for society's least vulnerable would be underfunded. Social Security benefits might have to be reduced, but there would be no employer-sponsored or private replacement—people would just have less to live on when they retire, if they can afford to retire at all. Net job creation would slow and could become negative. The average age of the population would increase as immigration of younger workers slowed and perhaps reversed, exacerbating the Social Security funding problem. The professional, managerial, and small business owner class could not avoid being sucked into this downward spiral, because the vast majority of their revenues come exclusively from what the others in their class and the 5/6 of American workers who are not bosses have available to spend. Real estate and other asset values would decline, and imported goods would become more expensive.

    On this cusp of history, what we assume about the future may change what actually happens, which makes a wrong choice all the more perilous. If it is possible to pull out of the Great Recession only with aggressive stimulation, then doing too little or adopting policies appropriate for long-term stagnation might well foreclose the sunny path and assure the dark one. The Obama Administration seems to have chosen not to chose—it will not propose aggressive stimulation to help end the Great Recession, and it will not propose the painful policies that would be appropriate for long-term stagnation. We wait.

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    Friday
    29Jan2010

    Citizens United is bad law—the right to speak is not the right to be heard

    DateFriday, January 29, 2010 at 11:20PM

    I've read all the opinions in Citizens United but have never read any of the earlier law on campaign finance reform and no authorities in recent years on free speech.  So, although I think I sorta understand where we are, I don't know much about how we got here, which means I can't say if Citizens United added a little or a lot to the power of money in politics.  Ezra Klein says here that big corporations already have so much political power and so many ways to influence elections that Citizens United won't change much. 

    Regardless of how we got here, it seems to me that policy-wise we're in a bad place and that a plain reading of the Constitution would allow much more regulation of elections and the political process.  Perhaps we got here by confusing the right to speak freely and the right to be heard. 

    It seems to me the core of the free speech guarantee is that the government cannot censor what we wish to say or punish us for what we said, with some very limited exceptions.  When we're engaging in political speech, we are even entitled to speak recklessly without fear of punishment, and perhaps even with malice (not sure about that) about public officials and candidates.  That seems to me a very big deal, and a precious right, but it's not the same as the right to make oneself heard— heard at all, or especially heard endlessly, noisily, ubiquitously, and exclusively. 

    The doctrine that there can be no limit on one's right to spend money to make oneself heard is, of course, not about speech but about being heard—a right not explicitly guaranteed in the Constitution (unless you own a media outlet) but one that can of course be implied.  If there is an unfettered right to spend to be heard, isn't it a Constitutional problem that no media outlet is required to take your money and lend you its megaphone.  Even the fairness doctrine that gave all but "fringe" opinions a right to equal time on the "public" airways has been abrogated, apparently with no Constitutional fuss.  There are other obvious Constitutional limitations on the right to make oneself heard, including protecting the right of others to conduct orderly meetings, to be free of breaches of the peace, and not to have electioneering close to voting booths.  Even public agencies, Congress, and the Supreme Court itself limit who will be permitted to address them and for how many minutes they may be heard.  If those limitations on the right to be heard in those parts of the political process are Constitutional, what's so wrong with similar orderly regulation of the right to be heard in other parts of the political process? 

    How is it that we got to this place where, in political campaigns one is Constitutionally entitled to be heard everywhere to the maximum possible extent until one runs out of money?  We've been told this has something to do with the "marketplace of ideas," in which, theoretically, after full exposure to all ideas and vigorous debate, the people decide which ideas are good and useful and which are bad and are rejected.  But that Darwinian debate cannot occur if the useful ideas cannot actually get into the marketplace at all, or once there they are overwhelmed and drowned out by unlimited spending on behalf of other, perhaps terrible, ideas.  Making money the surrogate for ideas, debate, and consideration has gotten us too close to the original meaning of "marketplace," in my opinion.

    The doctrine that one may be heard as much, and only as much, as he can afford and, if he chooses, can effectively drown out the chances of everybody else to be heard skews who and what will be heard toward the status quo of entrenched interests and away from new ideas, change, and "creative destruction" in the economy.  Whenever there is a proposal to change the law, the entrenched interests pop up to defend the status quo—they know whom to lobby and how, they are often already organized in groups, and most importantly they have the cash flow from existing enterprises to "make themselves heard."  It may well be that the proposed change would create new opportunities that others would seize to make the world a better place, but those "persons" aren't organized, have no cash flow, and may not even exist.  Similarly, 100 million citizens each of whose pockets will be picked to the extent of $100 per year can't effectively oppose legislation that would do that, but a banking, telecom, or other industry that would share the resulting $10 billion of annual revenue will surely be heard—and surely knows which candidates to support with "independent" TV ads.  I don't think it's any accident that the five most "conservative" justices were the majority in Citizens United. 

    I assume all these arguments have been made, and made better, but were rejected by the Supremes.  Perhaps after several personnel changes, such arguments could find some favor and political money could be reasonably regulated.  Until then, my best idea is public financing of campaigns in such lavish amounts that nobody, or hardly anybody, will turn down the public money and spend his/her own.  That would be expensive, but not nearly so costly as letting entrenched interests buy and run our governments. 

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    Friday
    29Jan2010

    State of the Union, Part 3—Obama’s grossly inadequate economic proposals

    DateFriday, January 29, 2010 at 11:24AM

    In Part 1, I pointed to the disconnect between the President's vivid and dystopian description or our economic problems and his timid proposals to fix them. In Part 2, I quoted from his State of the Union address and then posted some charts and graphs to show that he does not overstate our problems, which are deep and structural as well as cyclical. However, there is nothing extraordinary, either in type or scale, about the proposed action plan in the State of the Union address. Every one of his proposals is one that has been proposed and/or adopted in response to prior "ordinary" recessions or just as preferred polices in the absence of a recession.

    Furthermore, some of Obama's proposals are inconsistent with each other. For example, he wants to spend federal money to promote basic research, infrastructure construction, and education, and increase tax credits and deductions for various things while freezing for three years discretionary federal spending. Some of his proposals are mere goals that seem unattainable, for example the goal of doubling exports in five years, which trade experts say would require doing things that we have been unable to accomplish for decades—things like getting China to float its currency exchange rate.

    Here's the President's full list. I challenge readers to explain how any part of this program—or the whole program—can be an adequate response to the problems he described and which do actually exist. To me it seems the President is just unwilling to make a break with past economic policies. He wants us to keep doing the same things that led to our problems and hope the outcomes will be different on his watch.

    • Help (in some unspecified way) community banks increase lending to small businesses
    • Give a tax credit to any of one million small businesses that hire new workers or raise wages
    • Eliminated capital gains taxation on small business investment
    • Provide an investment tax credit to any business for investments in new plant and equipment
    • Undertake modern infrastructure projects like high-speed rail
    • Build clean energy facilities
    • Give rebates to Americans who make their homes more energy efficient
    • Slash tax breaks for companies that ship our jobs overseas, and give tax breaks to companies that create jobs here
    • "Lay a new foundation for long-term economic growth"
    • "Serious financial reform," including making sure consumers and middle-class families have the information they need to make financial decisions and preventing financial institutions from taking excessive risks
    • Increase government funding of basic research in clean energy, cures for disease, and other fields ripe for innovation
    • Build a new generation of nuclear power plants
    • Open new areas for offshore oil and gas development
    • Invest in biofuels and clean coal technologies
    • Adopt legislation that makes clean energy more profitable and dirty energy less profitable
    • Set a goal of doubling exports over the next five years by launching a National Export Initiative that will help farmers and small businesses increase their exports and loosen national security-based export controls over high-tech products
    • Enforce existing trade agreements when trading partners cheat
    • Press forward with the Doha Round and other trade liberalization agreements, particularly with South Korea, Panama, and Columbia
    • Invest in the skills and education of our people by targeting federal funds to reform primary and secondary schools to raise achievement levels, "revitalize" community colleges, increase Pell Grants and provide tax credits for the families of college students, and forgive part of the student loans of those that go into public service
    • Increase the child care tax credit
    • Make it easier for middle-class people to start retirement accounts with expanded tax credits
    • Push up housing prices by making it easier for to finance and refinance at lower rates
    • Adopt the pending healthcare reform legislation
    • Freeze "non-essential" discretionary federal government spending for three years, starting in 2011
    • Create a bi-partisan commission to make recommendations for balancing the federal budget over the long term
    • Congress should re-adopt the pay-as-you-go rules it had in the 1990s
    • Congress should do more "earmark reform"
    AuthorSkeptic | CommentPost a Comment | Print ArticlePrint Article
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    Friday
    29Jan2010

    State of the Union, Part 2—The Great Recession is far worse than any other post-war recession, and there are big underlying long-term problems.

    DateFriday, January 29, 2010 at 10:05AM

    In Part 1, I pointed to the disconnect between the President's vivid and dystopian description or our economic problems and his timid proposals to fix them. Here I quote from his State of the Union address and then post some charts and graphs to show that he does not overstate our problems. In Part 3, I'll post a list of Obama's proposals.

    "One year ago, I took office amid two wars, an economy rocked by a severe recession, a financial system on the verge of collapse, and a government deeply in debt. Experts from across the political spectrum warned that if we did not act we might face a second depression. So we acted—immediately and aggressively. And one year later, the worst of the storm has passed.

    "But the devastation remains. One in 10 Americans still cannot find work. Many businesses have shuttered. Home values have declined. Small towns and rural communities have been hit especially hard. And for those who'd already known poverty, life has become that much harder.

    "The recession also compounded the burdens that America's families have been dealing with for decades—the burden of working harder and longer for less; of being unable to save enough to retire or help kids with college.

    . . . .

    "So we face big and difficult challenges."

    . . . .

    "We can't afford another so-called economic "expansion" like the one from the last decade—what some call the "lost decade"—where jobs grew more slowly than during any prior expansion; where the income of the average American household declined while the cost of health care and tuition reached record highs; where prosperity was build on a housing bubble and financial speculation."

    . . . .

    You see, Washington has been telling us to wait for decades, even as the problems have grown worse. Meanwhile, China is not waiting to revamp its economy. Germany is not waiting. India is not waiting. These nations—they're not standing still. These nations are playing for second place. They're putting more emphasis on math and science. They're rebuilding infrastructure. They're making serious investments in clean energy because they want those jobs. Well, I do not accept second place for the United States of America.

    Obama is certainly correct that the unemployment problem has no post-WWII precedent, according to these charts from A Historical Look at Labor Markets During Recessions, by staff of the Federal Reserve Bank of Dallas. The unemployment rate has risen faster than in any other post-WWII recession and is well above the worst of those recessions, which was 1973.

    Unemployment rate in the Great Recession rising faster and higher than in any other post-WWII recession 

    Total civilian employment has declined more deeply and continued longer than in any other post-WWII recession.

    Total civilian employment falling much more in the Great Recession than in any other post-WWII recession

    Only in the Great Recession and in the recession of 2001 has the civilian labor force, which tends to grow with population growth, actually shrunk—this is caused by people staying in school, going back to school, or simply abandoning efforts to find work (in which case they are not counted as being in the labor force or "unemployed").

    Total civilian labor force declining faster and deeper in the Great Recession than in any other post-WWII recession

    And here is Catherine Rampell on NYT's Economix blog showing the inexorable upward trend in the proportion of job losses that are permanently lost, not just temporary layoffs. In the Great Recession, for the first time ever, over half of the jobs shed are gone forever. How will those be replaced? 

    Percent of unemployed persons by reason, permanent discharge, temporary layoff, resignations, re-entrants to labor force, and new entrants to labor force, from 1967 through 2009

    Obama is also correct that American families have been working longer and earning less for decades. Inflation-adjusted wages for the 5/6 of American workers who are not bosses are below where they were in 1973.

    From 1947 to 1973 real average hourly wage of production workers rose 2.2 percent annually to about $18 per hour in 2009 dollars and then declined to about $16 from the early 1980s to 1997 and stayed below $18 for 35 years until it spiked to just over $18 in late 2008

    AuthorSkeptic | CommentPost a Comment | Print ArticlePrint Article
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    Friday
    29Jan2010

    State of the Union, Part 1—Obama sees extraordinary economic problems but proposes only ordinary solutions.

    DateFriday, January 29, 2010 at 08:57AM

    In his State of the Union address to the Congress this week, President Obama compared our economic challenges today to the perils we faced after the defeat of the Union at Bull Run, WWII hanging in the balance as our landings in Normandy faltered, the stock market crash in 1929, and the beatings of civil rights marchers on Bloody Sunday, all times when—

    the future was anything but certain. . . . Again, we are tested. And again, we must answer history's call.

    He goes on to say—

    We can't afford another so-called economic "expansion" like the one from the last decade—what some call the "lost decade"—where jobs grew more slowly than during any prior expansion; where the income of the average American household declined while the cost of health care and tuition reached record highs; where prosperity was build on a housing bubble and financial speculation.

    With such language, the President came down on the pessimistic side of the debate whether the Great Recession is just another ordinary business cycle recession that will fix itself if left alone or if there is a "structural problem" that drives a long-term downward trend. Yet every one of his policy proposals is one that has been proposed and/or adopted in response to prior "ordinary" recessions or just as preferred polices in the absence of any economic recession. There is nothing extraordinary, either in type or scale, about his proposed action plan.

    In effect, the captain of our ship of state has gotten on the horn and told us we've struck an iceberg and are in danger of sinking, but his call to action is all about deck chairs. And it's really worse than that. Some proposals are inconsistent with each other, e.g., he wants to spend federal money to promote basic research, infrastructure construction, education, and increase tax credits and deductions for various things while freezing for three years discretionary federal spending. And some of his proposals are mere goals that seem unattainable, for example the goal of doubling exports in five years, which trade experts say would require doing things that we have been unable to accomplish for decades—things like getting China to float its exchange rate.

    Having proposed such a timid action plan, Obama has to hope—and we have to hope—that our underlying economic problems are not nearly as great as he said. Unfortunately, I think they are that great. Part 2 goes into that.

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    Tuesday
    12Jan2010

    How long does it take to change conventional wisdom?

    DateTuesday, January 12, 2010 at 03:48PM

    It is often said that conventional wisdom doesn't change until those to whom it is truth die off. John Maynard Keynes said that after age 25 or 30 people seldom change their understanding of how economies work. So I guess that gives entrenched economic beliefs a life expectancy of about two generations. I'm interested in that process.

    It was about a year before books about the sub-prime mortgage meltdown began to come out. Before that, people trying to understand what went wrong and what to do about it had only fragments of information in the form of personal communications, newspaper and magazine articles, and blog posts. It took a lot of time-consuming work to interview the people who were there, read the documents, organize the information, weigh the evidence, and finally write a satisfactory and understandable explanation that encompassed something like the whole interconnected picture. Only then, with a viable competing narrative available, can the old conventional wisdom about the proper relationship of Wall Street, government, shadow banks, markets, derivatives, etc. even start to be displaced. Will it go quickly from here? I doubt it.

    Another interesting evolution is the New York Times editorial board position on globalization, which went from "embracing" globalization as essential to growth in America 30 months ago to today's assessment that globalization is deeply damaging to America. I wish I knew what they said to each other about this issue, and what evidence (I assume it was evidence, but may have been something else) changed their minds. I don't, but here's the documentation of the evolution.

    As recently as July 2007, the New York Times editorial page was telling us to "embrace" globalization:

    [F]or American incomes to keep growing, the nation needs to embrace globalization, not turn against it.

    Only 13 months later, and in the midst of the Great Recession, the "embrace" was gone and the NYT editorial included globalization in a list of factors inhibiting middle-class prosperity:

    There are multiple reasons why Americans are working harder and not getting ahead, including a weak labor movement, globalization, technological change and a slowdown in educational attainment.

    Today, the NYT editorial page says straight out that the variety of globalization we actually have is deeply damaging to America and many other nations. NYT's only prescription is for China to change policies that have been central to its worldview for two decades or more, so it's not rejecting globalization altogether but only saying the way it's been working is bad. Still that's a pretty big change.

    If China continues its beggar-thy-neighbor currency policy, it will make it even harder for countries and the global economy to revive. As overextended governments wind down their fiscal stimulus, many economies will have to rely on exports as a crucial source of demand while their consumers restructure their sorry personal finances.

    This task is made much more difficult if China is flooding the world with cheap goods. China's exports rebounded sharply in December after more than a year of decline. Its trade surplus — after falling last year — is expected to rebound sharply in 2010.

    There are healthier strategies for China to follow. In particular, it could deploy some of its mountainous reserves at home to pay for long-neglected social spending: on health care, education and pensions. This would provide substantial economic stimulus and improve the lives of its people.

    If it sticks to its cheap-renminbi guns, however, it is bound to draw a protectionist response. The Obama administration already has caved to political demands and slapped exceptional tariffs on Chinese tires and antidumping duties on steel pipes. Congress has been uncharacteristically quiet, but patience is wearing thin in Washington and everywhere.

    India has filed a stack of trade complaints against China. And the Asia-Pacific Economic Cooperation forum recently urged the adoption of "market-oriented exchange rates" for Asian currencies, a reference to China's manipulation.

    A trade war with China would be disastrous and bound to escalate around the world. Restraint is needed. But we fear no one is going to feel restrained if China doesn't change its strategy.

    When a guardian and purveyor of conventional wisdom as powerful as NYT changes its institutional view, that's significant, but what are the next steps in the process of changing minds, and how long will it be before responsive policy changes in Washington are possible? And, of course, I'm very curious about what caused the NYT to change its collective mind.

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    Friday
    08Jan2010

    Shouting at the deaf

    DateFriday, January 8, 2010 at 05:32PM

    Yesterday I described Marxist economists as one of several groups that predicted the financial crisis and pointed out that Marxists do not think about policy prescriptions to prevent, ameliorate, or recover from such crises because their belief system assumes our economic system is inherently unsustainable and will collapse and be replaced. They say a crisis proves their fundamental beliefs and brings us another step closer to the inevitable.

    Today, in an exchange with some folks who seem to be strict anti-government free-marketeers, I realized they too are uninterested in policy prescriptions to prevent, ameliorate, or recover from crises because their belief system assumes that whatever happens in a totally unregulated market system is the very best possible result by their only criterion—it is the result of a free market system. If the results seem bad by some econometric or human measure, that can't be considered because they know free markets produce the most "efficient" results, and any undesirable effects must be due to government interference.

    Both groups are functionally deaf (and illiterate too) to discussions about making governments and markets work better, and it's no use shouting. Now that I've taken the trouble to write that down, it seems too obvious to waste electrons on. But how does one communicate effectively with ideologues?

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    Friday
    08Jan2010

    Tough financial system regulation is wise policy—and it’s good politics.

    DateFriday, January 8, 2010 at 10:30AM

    This assessment by Paul Krugman sounds right to me:

    Let me conclude with a political note. The main reason for reform is to serve the nation. If we don't get major financial reform now, we're laying the foundations for the next crisis. But there are also political reasons to act.

    For there's a populist rage building in this country, and President Obama's kid-gloves treatment of the bankers has put Democrats on the wrong side of this rage. If Congressional Democrats don't take a tough line with the banks in the months ahead, they will pay a big price in November.

      Read PK's whole column.

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    Thursday
    07Jan2010

    Five heterodox groups of economists who should be brought out from under the shadow of the orthodox economists who have no answers for financial crises

    DateThursday, January 7, 2010 at 04:54PM

    If you are as interested as I am in the fact that the most prestigious groups of economists were totally surprised by the recent financial meltdown, have no models or theory to explain it after the fact, and are continuing their virtual reality games as though nothing happened, you'll want to read this paper by Jamie Galbraith in the NEA Higher Education Journal. My summary:

    While the two mainstream schools, Chicago (or freshwater or neoclassicists) vs. MIT (or saltwater or new Keynesians), have contended vigorously with each other over details, they remain united in a commitment to an all-encompassing theory expressed in mathematics.  They are in the same "gentlemen's club" in which nobody loses face for predicting things that don't happen, failing to predict things that do happen, or maintaining positions that outsiders can clearly see are goofy. Galbraith describes five heterodox groups that did predict the recent crisis and similar crises in the past and says we would be better off if they had more resources and influence.

    The hoariest are the "American Marxists" who believe the economic system is fundamentally flawed by conflicting power relationships and that its eventual collapse will be triggered by one of several events (they don't all agree on the specific type) like a collapse in the dollar, accumulating current account deficits, overextension of debt in the financial system, etc. Since these economists are "habitual Cassandras" and are uninterested in policy adjustments for what they think is a unsalvageable system, it's hard to see how they are helpful, but they did predict the financial crisis.

    Dean Baker and others have predicted asset bubbles by observing large deviations from their means of relationships such as P/E ratios, home ownership prices to rents, etc. Critics complain that it relies on the assumption that the chosen relationship will revert to a mean not because there is a theoretical reason why it should but only because it always did in the past. The lack of theory is troubling to other economists, but these folks were right about the financial crisis and have a methodology that predicts reasonably well the sizes of adjustments.

    Another group in Cambridge (UK) and the Levy Economics Institute studies relationships in the National Income and Product Accounts (which generate GDP) and argue, with some theoretical underpinnings, that large increases or decreases in Consumption, Private Investment, Government Spending, or Net Exports must induce opposite changes in certain other accounts and that at some point these shifts are unsustainable and must reverse. They too were right about the financial crisis.

    Hyman Minsky and his followers like Barkley Rosser and Ping Chen developed a theory that stability in markets breeds instability and that self-generated boom-bust cycles are inevitable unless government intervenes to prevent hedging, which normally morphs into speculation (the obvious need to refinance in the future), from passing into the Ponzi phase (where ever-increasing amounts will have to be refinanced). This group warned against the policies of Alan Greenspan and Larry Summers that not only facilitated but actively encouraged what was obvious Ponzi financing, and they predicted the financial crisis.

    The economics of John Kenneth Galbraith in The New Industrial State (1967) sought to focus less on markets and more on institutions (big corporations, labor unions, governments, etc.) and how those institutions function internally and in relation to each other. The mainstream economists hated and marginalized it. Jamie Galbraith followed this tradition in The Predator State (2008), arguing that after about 1970 there was a withering of internal controls in corporations, less governmental oversight, and other pressures that led to managements running amok, often blindly. As several financial crises (S&L, Dot.com, Enron/Worldcom, Sub-prime) were autopsied, a lack of control and irresponsible behavior is at the center of all. Other economists studying these institutional dynamics have pointed out recurrent patterns not only of irresponsibility and chaos but of fraud and looting and warned of recurrences if the institutions were not reformed. This group also predicted the financial crisis.

    Finally, Galbraith argues that the "gentlemen's club" must be circumvented by university administrators, foundations, students, and others outside the mainstream economics departments to create academic space and public visibility for these versions of economics.

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    Wednesday
    06Jan2010

    The Copenhagen meeting on global climate change failed in part because economists’ blather about “efficiency” distracts from the real issues. 

    DateWednesday, January 6, 2010 at 05:35PM

    After the failure in Copenhagen to reach an agreement to save the planet, pundits are grappling with the question, "Now what?" Typical are this op ed by Joe Stiglitz and this post by Robert Stavins. I react below to Stiglitz's (perfectly mainstream) suggestion that we proceed by getting every nation to adopt the same "carbon price" (whether by taxes, tradeable permits, or otherwise), and he suggests $80 per ton of CO2. Essentially, I'm saying—for the nth time—that economists don't understand the real world.

    In addition to the very real political problems, there is a very practical problem that I guess is too mundane and simple for the pundits, economists, and other policy experts to discuss: At no point in time can there be a single carbon price that makes sense for both coal and petroleum. A carbon price that will kill off coal entirely will make no noticeable dent in petroleum consumption, and we need to reduce both dramatically. Here's the arithmetic.

    According to EPA (see Figure ES-6), combustion of fossil fuels in the electricity generation and transportation sectors accounted for 62% of all US CO2 emissions in 2006. (Industry was 19%, and agriculture, commercial and residential were all single digits.) Electricity generation is overwhelmingly a coal problem—accounting for 83% of CO2 emissions from this sector. A ton of typical steam coal contains about 1400 lbs. of carbon, which will turn into 5,133 lbs. (2.57 tons) of CO2. If CO2 is assessed at $80 per ton, the price of a ton of coal would increase by $205. Since the national average coal price was $31.26 in 2008 (EIA link), that price increase would cause electricity generators to close their coal-fired plants as soon as possible and switch to natural gas, renewables, and (maybe) nuclear.

    In contrast, $80 per ton for CO2 would raise the price of gasoline by only $0.80 per gallon (a gallon of gasoline generates ~20 lbs. or 1/100 of a ton of CO2). Obviously, that won't discourage use of highway fuels very much even though it would cost $110 billion per year in the aggregate. (EIA says US gasoline consumption is 138 billion gallons per year.) That's almost $1,000 per family per year and almost as much as the AIG bailout, and there's no substantial benefit. According to CBO, even a CO2 price of $191 per ton would not significantly reduce US gasoline consumption, in the short term or the long term, leaving its current 28% contribution to CO2 emissions to continue unabated.

    Economists are guilty of setting a "perfect" efficient market-based system at war with "pretty good" solutions for the CO2 emissions problems. The most affordable solution for petroleum is CAFÉ standards (but if we make them as stringent as we need to, we'll have too much refining capacity, not a congenial thought for those still in my former industry). The most affordable and politically possible way to deal with coal may be to buy the mines and turn them into parks because anything else that comes close to making coal uneconomical will result in massive, protracted litigation about compensation for a "regulatory taking." The whole legislative conversation about markets, offsets (preserving rain forests, etc.), and carbon capture and sequestration ("CCS") grows out of the fantasy that we can achieve adequate CO2 emissions reductions without shutting down all coal mines and closing many refineries. We can't. Deal with it.

    A version of this post appears as a comment on Mark Thoma's blog here.

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    Saturday
    02Jan2010

    Will we bring back manufacturing or outsource innovation too?  

    DateSaturday, January 2, 2010 at 02:48PM

    Innovation must be located near manufacturing because so much of innovation is learning from and improving manufacturing, according to GE CEO Jeffrey Immelt on this CNBC forum, The Future of "Made in the USA." Others who understand the innovation process have made the same point. I think I first heard it about 30 years ago from Donald Firth after he left the UK's National Engineering Laboratory in Glasgow. This directly contradicts the naïve view that the US can be the global center of high-skill, high-pay "innovation" jobs and that it makes economic sense for low-skill routine manufacturing jobs to go to Asia. In reality, China can do everything the US can do to assemble the best and brightest in innovation centers, but increasingly only the Chinese can locate them near manufacturing centers.

    During and after WWII, the US government provided numerous substantial financial incentives for innovation (favorable tax treatment, government contracts, grants to higher education, etc.), and the many resulting innovations created whole new industries and millions of jobs in the US. However, Government subsidies for innovation make much less sense now—and perhaps make no economic sense at all—because now the odds are that most of the jobs resulting from future US innovations will be created in Asia instead of here. This means that nations like China can get much more bang for their innovation subsidy bucks than can the US because a much higher proportion of the benefits will be in China.

    Bad as that is, we're helping our competitor nations by educating more of their students and fewer of our own in America's best universities, and not many of them plan to stay here. Those who still believe the world sees the US as the land of opportunity should recalibrate. A survey of 1,224 foreign nationals from India, China, and Western Europe studying at U.S. universities and colleges - or who had graduated by the end of the 2008 academic year - primarily in engineering, business and economics, computer science and biological sciences, funded by the Ewing Marion Kaufman Foundation and reported here, found:

    Just 7 percent of Chinese students and 25 percent of Indian students surveyed said the best days for the United States economy lie ahead.

    Approximately 74 percent of Chinese students and 86 percent of Indian students said their home countries' economies will grow faster in the future than they have in the past decade.

    Most foreign students said innovation will occur faster over the next 25 years in India and China than in the United States.

    Some 76 percent of Chinese students and almost 84 percent of Indian students said it would be difficult to find a job in their field in the United States.

    While 58 percent of Indian, 54 percent of Chinese and 40 percent of European students want to stay in the United States for a few years after graduation, only 6 percent of Indian students, 10 percent of Chinese students and 15 percent of European students said they wanted to remain permanently.

    Circling back to Jeffrey Immelt, under his leadership GE has located its clean coal technology global innovation center in China. My advice to American teenagers who want to achieve big things in science or engineering: Become fluent in Mandarin and accept the idea of being part of privileged technocratic class in a politically oppressively and highly-polluted nation.

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    Saturday
    02Jan2010

    Is Wall Street too politically powerful to regulate?

    DateSaturday, January 2, 2010 at 11:15AM

    Justin Fox, Time's Curious Capitalist, summarizes several other posts on the lobbying agenda of Wall Street and who is doing their bidding and why.

    Barry Ritholtz has a good summing-up of a new paper (pdf) by three IMF economists on the link between lobbying and risk-taking by lenders. The gist: Firms that made the riskiest loans spend the most on lobbying Congress. And what were their lobbying aims?

    • prevent any tightening of lending laws that reduce the benefits of short-termist strategies over long-term profits;

    • allow systematic underestimation of default probabilities by overoptimistic bankers;

    • not just to originate loans that carry more risk, but to convince legislators that such lending is prudent;

    • to thwart bills aimed at lax lending standards and riskier loans;

    • to tighten regulations that restrict entry by others preventing competition;

    • to have a higher probability of receiving preferential treatment in a crisis.

    The Huffington Post also has an epic new examination of what it calls "the cash committee"—the House Committee on Financial Services. The gist is that the committee's Democratic ranks are heavy on  moderate-to-conservative first- and second-termers that House leadership put on the committee so they could raise lots of money from financial interests, thus increasing their chances of getting reelected but decreasing the committee's chances of passing meaningful financial reform. The general takeaway here is that Congress is a bit, ahem, compromised when it comes to dealing with the financial sector. It's compromised in dealing with lots of other industries too, of course, but the finance-insurance-real-estate crowd is bigger and richer than any other industry, plus it just caused the worst economic downturn since the Depression. Those who would address the financial problems of the past few years with better laws and regulations (a group of which I am a member) have a big problem when the rulemakers are captured not just by the industry they regulate but the dodgiest parts of that industry.

    The linked HuffPo piece gives examples of how the junior members of "Barney Frank's Committee" are frustrating his efforts to enact legislation that actually changes the legal environment for the financial industry.

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    Tuesday
    29Dec2009

    Obama’s poker play in Afghanistan: Raise, fold, or call?

    DateTuesday, December 29, 2009 at 05:03PM

    Using a poker analogy, Rory Stewart argues persuasively that Obama has rejected advice to fold and cut our losses in Afghanistan as well as advice to raise the bet in a bold effort to win a larger victory, and has decided instead to stay in the game at minimum cost. Stewart parses Obama's December 1, 2009 speech at West Point to show that he has definitively rejected the goal of winning a counterinsurgency campaign and the minimum of 600,000 troops that US military doctrine would require to accomplish that. He has also rejected withdrawal. He has instead decided on a strategy of just staying in the game, perhaps for decades, and having a sufficient presence to influence events in Afghanistan and the region and, hopefully, to avert the worst possible outcomes but not to control them. Stewart generally approves but thinks Obama could have explained it better. Here is part of Stewart's explanation:

    But perhaps even more importantly, defining a more moderate and limited strategy gives him leverage over his own generals. By refusing to endorse or use the language of counterinsurgency in the speech, he escapes their doctrinal logic. By no longer committing the US to defeating the Taliban or state-building, he dramatically reduces the objectives and the costs of the mission. By talking about costs, the fragility of public support, and other priorities, he reminds the generals why this surge must be the last. All of this serves to "cap" the troop increases at current levels and provide the justification for beginning to reduce numbers in 2011.

    But the brilliance of its moderate arguments cannot overcome that statement about withdrawal. With seven words, "our troops will begin to come home," he loses leverage over the Taliban, as well as leverage he had gained over Karzai and the generals. It is a cautious, lawyerly statement, expressed again as "[we will] begin the transfer of our forces out of Afghanistan in July of 2011." It sets no final exit date or numbers. But the Afghan students who were watching the speech with me ignored these nuances and saw it only as departure.

    This may be fatal for Obama's ambition to "open the door" to the Taliban. The lighter, more political, and less but still robust militarized presence that his argument implies could facilitate a deal with the Taliban, if it appeared semi-permanent. As the President asserted, the Taliban are not that strong. They have nothing like the strength or appeal that they had in 1995. They cannot take the capital, let alone recapture the country. There is strong opposition to their presence, particularly in the center and the north of the country. Their only hope is to negotiate. But the Taliban need to acknowledge this. And the only way they will is if they believe that we are not going to allow the Kabul government to collapse.

    Afghanistan has been above all a project not of force but of patience. It would take decades before Afghanistan achieved the political cohesion, stability, wealth, government structures, or even basic education levels of Pakistan. A political settlement requires a reasonably strong permanent government. The best argument against the surge, therefore, was never that a US operation without an adequate Afghan government partner would be unable to defeat the Taliban—though it won't. Nor that the attempt to strengthen the US campaign will intensify resistance, though it may. Nor because such a deployment of over 100,000 troops at a cost of perhaps $100 billion a year would be completely disproportional to the US's limited strategic interests and moral obligation in Afghanistan—though that too is true.

    Instead, Obama should not have requested more troops because doing so intensifies opposition to the war in the US and Europe and accelerates the pace of withdrawal demanded by political pressures at home. To keep domestic consent for a long engagement we need to limit troop numbers and in particular limit our casualties. The surge is a Mephistophelian bargain, in which the President has gained force but lost time.

    What can now be done to salvage the administration's position? Obama has acquired leverage over the generals and some support from the public by making it clear that he will not increase troop strength further. He has gained leverage over Karzai by showing that he has options other than investing in Afghanistan. Now he needs to regain leverage over the Taliban by showing them that he is not about to abandon Afghanistan and that their best option is to negotiate. In short, he needs to follow his argument for a call strategy to its conclusion. The date of withdrawal should be recast as a time for reduction to a lighter, more sustainable, and more permanent presence. This is what the administration began to do in the days following the speech. As National Security Adviser General James Jones said, "That date is a 'ramp' rather than a cliff." And as Hillary Clinton said in her congressional testimony on December 3, their real aim should be to "develop a long-term sustainable relationship with Afghanistan and Pakistan so that we do not repeat the mistakes of the past, primarily our abandonment of that region."

    A more realistic, affordable, and therefore sustainable presence would not make Afghanistan stable or predictable. It would be merely a small if necessary part of an Afghan political strategy. The US and its allies would only moderate, influence, and fund a strategy shaped and led by Afghans themselves. The aim would be to knit together different Afghan interests and allegiances sensitively enough to avoid alienating independent local groups, consistently enough to regain their trust, and robustly enough to restore the security and justice that Afghans demand and deserve from a national government.

    Except for the two "surges" approved by Obama this year, which will double the US troop presence in Afghanistan, Obama has adopted what I perceive to have been George W. Bush's actual strategy there (as distinguished from his rhetorical pretensions to "victory" with inadequate resources). It is also apparently not far different from what VP Biden urged. While it is possible that this strategy can have some beneficial effects in the region, it seems that the presence of Western troops there will continuously inflame Islamists and thereby increase our exposure to terrorist attacks at home, as Stewart seems to acknowledge. I recommend the whole article, which is a very plausible explanation of where we're headed.

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    Friday
    25Dec2009

    The minimum medical loss ratio provision in the healthcare bills will raise healthcare prices.

    DateFriday, December 25, 2009 at 11:01AM

    The pending bills would require for-profit insurers to have medical loss ratios of at least 80% of premium revenues (Senate bill) or 85% (House bill) or rebate premiums to policy holders to achieve those ratios. This is being promoted by the Democrats as a way to rein in spiraling healthcare costs, but there is concern that insurers might evade the limits with accounting tricks and by neutering the necessary regulations. Kaiser Health News has a good summary here. The much more serious problem is that such provisions eliminate the incentive for insurers to grind down provider costs, and insurers are the only institutions in position to do that.

    According to the KHN story, health insurers now pay out between 80% and 90% of premium revenues to reimburse providers for services rendered to policy holders—i.e., the "medical loss ratio." The rest of the revenue goes to the costs of running the insurance business (selling, underwriting, claims processing, general administration, executive salaries, rent, etc.) and returns to capital (interest and profit). One of the things an insurer can do now to increase profits, is to renegotiate its deals with healthcare providers to lower reimbursement rates, while keeping premiums the same; reduced reimbursements go straight to the insurer's bottom line. However, if the insurer's medical loss ratio is at the legal minimum, grinding provider prices would reduce the insurer's profits because its revenues would be reduced by rebates to policy holders. On the other hand, if the insurer in this legal situation eliminated costs of negotiating reimbursement rates, those cost savings would go to the bottom line.

    It's possible that a law will set the minimum medical loss ratio so low that it won't affect insurance company behavior at all, but if the law does affect behavior it will be in the opposite direction from what healthcare consumers want. Naturally, some version of this law will pass because rising healthcare prices are wanted by everybody who can afford a Washington lobbyist. The healthcare system is broken, and so is the political system.

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    Monday
    21Dec2009

    Ending the filibuster on the Senate “reform” bill is a victory for the healthcare industry.

    DateMonday, December 21, 2009 at 10:36AM

    The Obama Administration and Congressional leadership are claiming an historic victory in passing a cloture motion on the Senate bill, but it looks to me like the Administration and Congress lost every important negotiation with the healthcare industry, if indeed there ever was a serious effort to rein it in. Stock prices for the Health Care sector rose more in the last three months—when these "negotiations" were going on—than any other sector of the economy.

    Current Sector Weighting Performance & Percentages*

    Sector

    Actual Market Weighting

    1 Day Perfor mance

    1 Week Perfor mance

    1 Month Perfor mance

    3 Month Perfor mance

    YTD Perfor mance

    1 Year Perfor mance

    Telecommunication Services

    2.75%

    0.22%

    -2.32%

    4.59%

    4.36%

    2.20%

    3.53%

    Utilities

    3.80%

    0.45%

    -0.51%

    6.98%

    5.67%

    9.61%

    10.25%

    Consumer Staples

    10.91%

    -0.30%

    -2.05%

    -2.05%

    3.76%

    11.42%

    12.22%

    Energy

    11.34%

    0.28%

    0.30%

    -4.50%

    1.36%

    11.30%

    14.20%

    Financials

    14.93%

    1.39%

    -0.92%

    -4.98%

    -6.17%

    16.62%

    15.83%

    Health Care

    12.72%

    0.26%

    -0.25%

    2.70%

    7.83%

    17.55%

    19.67%

    Industrials

    10.98%

    -0.19%

    -0.63%

    -0.02%

    2.38%

    19.96%

    21.46%

    Consumer Discretionary

    10.09%

    0.53%

    0.04%

    1.65%

    6.36%

    39.94%

    38.09%

    Materials

    3.88%

    0.09%

    -0.91%

    -2.88%

    0.39%

    42.99%

    38.67%

    Information Technology

    18.61%

    1.56%

    1.05%

    0.43%

    7.44%

    56.99%

    56.89%

    * Performance: END OF DAY DATA, AS OF 12/18/09  4:00 PM ET. Sector Weighting: AS OF 12/16/09  4:00 PM ET. Downloaded from Fidelity 12/21/09.

    Joe Scarborough and others make the same point here.

    UPDATE 12/21/09 AT 1:30 P.M.:  Today was the first trading day after the Senate cloture vote.  While the S&P 500 index rose 1.05%, the five largest health insurance companies racked up these gains:  UnitedHealth Group, 2.00%; Wellpoint, 2.92%; Aetna, 4.71%; Humana, 3.47%; and Cigna, 3.94%.  If we ever get the reform we need, those numbers will move the other way. 

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    Wednesday
    16Dec2009

    Can reducing deforestation really save the planet?

    DateWednesday, December 16, 2009 at 11:34AM

    One of the climate protection initiatives being discussed in Copenhagen is "reducing emissions from deforestation and degradation in developing countries" ("REDD"). In fact, Obama endorsed the concept in Oslo last week, according to this report from Climate Progress:

    President Barack Obama "made his first public intervention in the Copenhagen climate summit" by supporting the Norway-Brazil plan to allow rich countries to fund the protection of rainforests. "I am very impressed," Obama said after accepting the Nobel Peace Prize, "with the model that has been built between Norway and Brazil that allows for effective monitoring and ensures that we are making progress in avoiding deforestation of the Amazon."

    The Union of Concerned Scientists has a very helpful discussion of important REDD concepts such as stocks vs. flows of CO2, additionality, leakage, carbon market offsets, and national baselines. It concludes by saying that, as a practical matter, REDD can only work if operated at a national level, with a national emissions baseline, effective monitoring, and demonstrated reduction of emissions at the national level. Not only are those requirements likely to overwhelm the institutional competence and integrity of developing nations, but it doesn't deal with the problem that deforestation effectively controlled in one participating nation may "leak" into a non-participating nation.

    The same Climate Progress post goes on to report some possible progress in monitoring technology:

    International approval for the Norway-Brazil proposal for a Reducing Emissions from Deforestation and Degradation (REDD) mechanism still has a ways to go, especially as targets for reductions of deforestation have not yet been determined. In a possible breakthrough for the integrity of such programs, Google presented tools for the accurate monitoring of the rates of deforestation via climate satellite data.

    But today's news on the institutional side is not good:

    In Copenhagen, officials from China and India have vowed to reduce carbon intensity, while other fast-developing countries like Brazil and South Africa also have taken pledges to reduce carbon. But they are fiercely protecting the right to make those goals voluntary -- or at least not subject to any penalties if they do go under review.

    REDD is of great interest in industrialized nations because of the prospect that emitters there can defer or avoid emissions reductions by buying REDD "offsets," and financial institutions are very eager to participate in those transactions. I see a big risk that the US and Europe will eventually agree to a program that serves these business interests and does not actually protect the climate.

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    Monday
    14Dec2009

    Ahead of Paul Krugman this time

    DateMonday, December 14, 2009 at 01:20PM

    What took Paul Krugman ten years to figure out became clear to me in less than two years (but he's still smarter than I am):

    When I first began writing for The Times, I was naïve about many things. But my biggest misconception was this: I actually believed that influential people could be moved by evidence, that they would change their views if events completely refuted their beliefs.

    PK gives credit to Upton Sinclair for observing that “It is difficult to get a man to understand something when his salary depends on his not understanding it.”  Salary, campaign contributions, tribal status, etc.

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    Monday
    14Dec2009

    A legal education is a poor investment.

    DateMonday, December 14, 2009 at 12:03PM

    It isn't just that recent law school graduates have had trouble finding jobs because of The Great Recession, law schools have become so expensive that a law degree is now a poor investment economically, according to this National Law Journal article. "A J.D. used to mean a first-class seat on the gravy train. Now? Not so much."

    In fact, law school is always a bad choice from an investment perspective, according to a research paper titled "Mamas Don't Let Your Babies Grow Up To Be…Lawyers."

    Herwig Schlunk, a professor at Vanderbilt University Law School, performed an investment analysis of the value of a law degree, taking into account the cost of legal education, the opportunity cost of not going directly into the work force and earning potential. He developed hypothetical scenarios for three student types: one who attends a second- or third-tier school with a 10% chance of landing a job at a major law firm, another who attends a low-first- or high-second-tier school and has 50% chance at a major law firm job, and a student with good grades at a top law school with a 90% change of landing a job at a big firm. He calculated that the net law school investment for those students ranges from $201,000 to $280,000, between tuition and lost wages.

    Using what he termed a somewhat conservative calculation, Schlunk determined that the second- or third-tier student would need to earn a starting salary of just below $80,000 to justify the expense of law school. The middle of the road student would need about $113,000, while the top student would need to earn $150,000 out of law school. Schlunk calculated that the students actually can expect to earn starting salaries of $65,000, $105,000 and $145,000, respectively — a poor investment in all three cases.

    Schlunk noted that his calculations were based on data gathered before the economic downturn, meaning that law school likely is a worse investment for his hypothetical students than he initially concluded.

    I'm surprised that the financial analysis produces such a bleak result, but it supports my general thesis that we should be thinking much more critically about the economic effects of education than is typical in public discourse. The conventional wisdom seems to be that every dollar spent on education builds "human capital" that automatically creates well-paying domestic jobs and cannot result in so many educated people that their wages are bid down. This is wrong in so many ways.

    A lack of educational achievement in America has not been one of the reasons for the economic stagnation that began in 1973. We have many, many college graduates working in jobs for which no college is required. Having a broadly well-educated population has not been a substantial cause of economic boom times when we have had them; rather education becomes more affordable during boom times, and much of education is a luxury consumer good instead of "capital" in an economic sense. Certain kinds of education seem to contribute greatly to innovation that drives economic growth, and other kinds of education are totally useless in that regard; so, to the extent we are using education as a growth strategy, we need to be specific about that. There is no level of education or professional degree that is immune from the forces of supply and demand; if we have too many lawyers, civil engineers, or teachers, their incomes will get bid down by market forces, and some of them will have to take work for which they are over qualified. Projections of the kinds of jobs that will exist in the future America do not require a dramatic increase in the general educational level (or a lot more lawyers). We need a good education system, just as we need a good transportation system, a good telecommunications system, a good justice system, etc., in order to have a good environment for private enterprise. But that's all those things do—create a good environment—and robust growth will still elude us so long as it is more profitable to invest and create jobs offshore than here. The naive expectation that education will automatically solve our jobs and growth problems keeps us from focusing on policy changes that actually could solve those problems. For other posts on education go here.

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    Saturday
    12Dec2009

    Whether you’re for globalization or against it, don’t imagine that it’s inevitable or irreversible.

    DateSaturday, December 12, 2009 at 05:58PM

    One of the arguments made in favor of policies to facilitate globalization is that globalization is inevitable. One may resist only temporarily and incompletely before being overwhelmed, perhaps catastrophically, by the irresistible economic forces that must ultimately result in a single integrated world market system, is the more complete, but usually implicit, statement of the argument. To the contrary, Daniel Little discusses here several books on the history of transnational economic integration which remind us that these processes have ebbed and flowed considerably over the centuries.

    Little includes the following quotation from Immanuel Wallerstein, The Modern World-System: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century (1974):

    One of the persisting themes of the history of the modern world is the seesaw between "nationalism" and "internationalism." I do not refer to the ideological seesaw ... but to the organizational one.  At some points in time the major economic and political institutions are geared to operating in the international arena and feel that local interests are tied in some immediate way to developments elsewhere in the world.  At other points of time, the social actors tend to engage their efforts locally, tend to see the reinforcement of state boundaries as primary, and move toward a relative indifference about events beyond them. (147)

    For a more current effort to describe globalization, Little introduces Saskia Sassen, A Sociology of Globalization (2007) and makes this assessment:

    Sassen makes an important point about international economic power that has a Wallerstein-like feel to it but that would probably not have been true in 1700 or 1970. This is her view that there has been an important process of "de-nationalization" that has removed traditional powers of the state and placed them in the scope of international economic and finance institutions that are significantly controlled by large economic actors and firms. We sometimes refer to this process as one of "liberalization"; Sassen makes the point that the construction of the new supra-national regulatory regimes is an extended historical process that can be studied in detail.  She refers to the result of this process as the global corporate economy.  One of Wallerstein's key arguments is that nations in the periphery were dominated and controlled by an economic system run by European nations. Sassen argues for the reality of a world system of regulatory arrangements that subordinates the sovereignty of even previously hegemonic nations to a non-democratic set of institutions and rules that implicitly favor one set of economic actors over others.  But Sassen's inference from this fact about international economic power is less about north-south exploitation and more about the rising likelihood of global exploitation of all ordinary citizens by powerful extra-national economic forces that are beyond the reach of democratic processes (what she refers to as the "democratic deficit").

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    Saturday
    12Dec2009

    Why Social Security needs restructuring and Medicare doesn’t

    DateSaturday, December 12, 2009 at 11:05AM

    I think I've got the answer to why the Right wants to privatize, downsize, revamp, or even eliminate the Social Security system but seldom inveighs against Medicare, which is in much, much worse shape actuarially. Both programs benefit an almost identical group of seniors, but in addition to that constituency Medicare benefits healthcare providers and insurers who have real political power—on display now in the pending healthcare "reform" legislation.

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