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May 6, 2009

Economist's View - 4 new articles

Some Strings Attached

Timothy Geithner is changing the rules for financial firms that receive government assistance:

All the Strings'"> Geithner: If You Want to Cut the Strings, You Need to Cut All the Strings, by Mathew Yglesias: Here's some good news from the Treasury Department. I've been complaining for a while that a number of financial institutions seem inclined to repay their TARP money, and then proclaim themselves free from government meddling, all the while taking advantage of a plethora of other emergency support programs that the government has put into place. Now Tim Geithner is saying, rightly, that a bank that wants to repay its TARP money also needs to cut itself off from the "guarantee of debt issuance offered by the Federal Deposit Insurance Corp."

That's the right thing to do. Now the next question becomes one of credibility. The official thinking is that the explicit FDIC guarantee lets banks borrow much more cheaply than they otherwise might. A truly healthy bank can repay its TARP money and cut itself off from the guarantee while paying little price, because a healthy bank won't need an explicit guarantee to borrow pretty cheaply. But under the current circumstances, is the idea that the government would let a non-guaranteed bank fail and default on its loans really credible?

Consistency in policy is important. When policy is changed unpredictably, it creates uncertainty among firms and households, and that uncertainty can cause reduce or distort economic activity.

Both the Fed and the Treasury have had to alter policy mid course, more so for the Treasury, and that has brought justifiable criticism. It's as though policymakers didn't think the chess game through very many moves ahead, and as the game has unfolded they've been forced to alter their strategy in response. To some extent, policy has appeared ad hoc, developed on the fly as events present themselves to policymakers.

But let me offer some defense of this behavior, and even argue that it can be helpful in some cases.

First, I can't very well criticize policymakers for not putting policies into place fast enough and at the same time criticize them for not closing every possible loophole. If you are trying to put policies in place quickly, then you probably won't think of everything you might have discovered if you'd had the luxury of taking your time. I think policymakers can be rightly criticized for not having plans ready in advance. But given that no such plans existed, the polices that were rushed into place were going to have shortcomings that policymakers would have to deal with down the road.

Second, policymakers will never be able to think of everything, even with the luxury of as much time as they need. They may be able to think the chess game through several steps ahead, but they probably won't be able to think of every possible contingency or play by the opposition.

But what they can do is convey the spirit of the policy and make very clear the types of behaviors they are trying to prevent. And they should also make it clear that should firms that try to bypass the regulations with clever strategies exploiting loopholes in the legislation, those loopholes will be closed immediately in keeping with the spirit of the legislation. If firms know that these avenues will be closed, and if they see that firms that try to engage in this type of behavior are stopped from doing so by policymakers, and that it is therefore costly for them to even try, they won't be (as) tempted to use complicated strategies to bypass the spirit of the legislation.

Policy uncertainty is bad when the changes are ad hoc and cannot be anticipated, but not all mid course corrections to policy come under this heading. In the case just described, given that firms know the intent of the regulations they are under, the response of policymakers can be fully anticipated if they try to subvert the intent of the regulation (firms who are uncertain could ask policymakers if a particular behavior would be frowned upon).

Whether or not the actions described above come under this heading of simply closing off activities that violate the spirit of the rules can be debated, but I'd argue that the change in policy does fit into this framework and is therefore a justifiable correction.

The Social Security Obsession

Something to keep an eye on, the "Very Serious People" inside the beltway are at it again:

Lawmakers Seeking Consensus On Social Security Overhaul, by Lori Montgomery, Washington Post: Key lawmakers from both parties have held tentative talks about overhauling the Social Security system, and Congress could turn its attention to the federal retirement program as soon as this fall if a bipartisan consensus emerges...

So far, Democrats have found a willing partner in the Senate, where Sen. Lindsey O. Graham (R-S.C.) has stated his desire to work with President Obama to make changes to keep Social Security solvent. ... Graham said yesterday that he has spoken to Hoyer and Sen. Richard J. Durbin of Illinois, the second-ranking Senate Democrat, about the issue and that he stands ready "as a Republican to more than meet the president in the middle."

"I know what it takes to get a solution," Graham said. "I think we can get double-digit Republican support for a reasonable compromise. But the key to this, at the end of the day, is presidential leadership."

Graham ... sketched out a plan that would include lower benefits for wealthy Americans, a higher retirement age and additional revenues. With the stock market devastated by the recession, the traditional Republican option of diverting Social Security taxes to new private retirement accounts is, he said, "off the table." ...

Hoyer is expected to sketch out a similar plan in a speech today... According to an advance copy of the speech, Hoyer will suggest that Congress could approve "more revenues," "restrain the growth of benefits, particularly for higher-income workers," "and/or we can raise the retirement age, recognizing that our life expectancy is higher today."

"What is missing here is not ideas -- it is political will," the speech says. ...

"Right now energy and health-care bills are the major focus," Hoyer said. But if those issues are finished by the August break, he said, "we could start focusing on . . . Social Security early this fall." ...

"At the end of the day, most Americans would embrace a balanced solution that did not require Draconian impact. They are ready to make some hard decisions for the benefit of future generations," Graham said. "If there were ever a time to do it, it's now."

Remember that the "Beltway obsession with Social Security reflects ideology and fashion, not the real problems facing America." They may think that they can wait until health care reform is completed before turning to this issue, but if they continue to have these meetings and push this agenda, there's a good chance Social Security will become a bargaining chip during the health care debate. However, trading Social Security against health care is not an outcome I'd like to see. There is no pressing need to modify the Social Security program, fairly minor changes will solve whatever problems the program has, and there are many other possible tradeoffs within the budget that could fund a new health care system (on both the revenue and spending sides). But I'm sure conservatives would love the chance to pit these two porgrams against each other as part of the health care reform process.

"The Vortex of Vacuousness"

Bill Easterly says "you might find this entertaining":

The vortex of vacuousness, by William Easterly: A tragic law of global poverty is that the efforts of many well-meaning and accomplished people somehow get sucked down into meaningless activities and empty rhetoric.

Yesterday's Wall Street Journal carried an oped by uber-heavyweights Madeline Albright and Colin Powell about how we should not forget about the world's poor during the crisis. Their solution – another summit! Addressing the previously unappreciated shortage of summits by the UN, the World Bank, the International Monetary Fund, the G-7, the G-20, U2, and Bob Geldof, there is a two day summit starting today of something called the Initiative for Global Development (IGD) National Summit 2009 in Washington DC.

The closest thing to novelty about this summit is that the IGD includes (and was started by) leading business executives, some of whom apparently want to learn from diplomats and aid bureaucrats how to make compassionate statements about global poverty with no content. So Carly Fiorina on the IGD website proclaims "Reducing global poverty is in our nation's best interest, and a sustained collaboration between the private sector and the government is needed in this regard." (Presumably she had to be a tad more specific to get things done at HP.)

The IGD has been around since 2003, and includes a lineup of really big names from the worlds of business, government, and aid. Chairpersons Albright and Powell were able to distill all of this experience and talent in their signature Journal oped yesterday into new ideas like "we have to focus our efforts where they can have maximum impact, and draw on the strengths of the public and private sectors alike."

(Maybe we should subject this statement to the NOT test for meaningful content we discussed in a previous blog post: Briefly consider whether there is anyone arguing "we need to focus our efforts where they can have MINIMUM impact, and draw on the WEAKNESSES of the public and private sectors alike.")

The IGD helpfully provided Aid Watch some background materials on the 2009 Summit, which has the subtitle "Business leaders advance a bold strategy to reduce global poverty." They acknowledge the critical need for foreign aid reform, so "Congress and the administration should work together to define a coherent strategy for U.S. foreign assistance and streamline its implementation." (Reader exercise: apply the NOT test to this statement.) They only get a bit more specific when they endorse the ritual call for a doubling of foreign aid.

Something that sounds slightly more promising is that the IGD summit invited some 20 African CEOs of private businesses. Let's hope they can get the things that real businessmen want, new deals and investments, in return for being subjected to two days of summiteering. Maybe a few CEOs at IGD are starting to get a glimmer of insight – business leaders should not imitate aid bureaucrats, it should be the other way around.

Leaving aid to the goodwill of corporate America is not going to work. Things are better than they were with the last administration, but we still need more leadership from the new administration on this issue, and the US needs to step up to the plate and quit shirking its obligations in this area. The politics of foreign aid aren't great during a recession, sending money overseas when there is unemployment and other problems at home isn't popular. That's why leadership is important, to explain why it's often in our best interest to help, and to explain that even if it doesn't provide net domestic benefits to the US, it's the right and compassionate thing to do.

links for 2009-05-06

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