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June 1, 2009

Economist's View - 5 new articles

Reich: What is the Purpose of the Bailout?

I should let Robert Reich finish his conversation on the future of American workers and car companies:

The Future of Manufacturing, GM, and American Workers (Part III), by Robert Reich: ...US taxpayers who have forked out more than $60 billion to buy [GM]. But why would US taxpayers want to own today's GM? Surely not because the shares promise a high return when the economy turns up. GM has been on a downward slide for years..., it seems doubtful that taxpayers will even be repaid our $60 billion. But getting repaid cannot be the main goal of the bail-out. Presumably, the reason is to serve some larger public purpose. But the goal is not obvious.

It cannot be to preserve GM jobs, because the US Treasury has signaled GM must slim to get the cash. ... Plans call for laying off another 18,000 U.S. workers by the end of 2010.

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganization under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars. Congress has already given auto makers money to do this. Besides, the Treasury has said it has no interest in ... telling the industry what cars to make.

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60 billion than to buy GM? The funds would be better spent helping the Midwest diversify away from cars... And eventually, for the reasons stated in Parts I and II of this series, diversify away from manufacturing assembly. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

But US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. ...

So the Obama administration is ... is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

Behind all of this is a growing public fear, of which GM's demise is a small but telling part. Half a century ago, the prosperity of America's middle class was one of democratic capitalism's greatest triumphs. ...

But starting three decades ago, these trends have been turned upside down. Middle-class jobs that do not need a college degree are disappearing. Job security is all but gone. And the nation is more unequal. GM in its heyday was the model of economic security and widening prosperity. Its decline has mirrored the disappearance of both.

Middle-class taxpayers worry they cannot afford to bail out companies like GM. Yet they worry they cannot afford to lose their jobs. ...[W]hat has been bad for GM has been bad for much of America. The answer is not to bail out GM. It is to smooth the way to a new, post-manufacturing economy.

Paul Krugman: Reagan Did It

"Reagan's biggest legacy":

Reagan Did It, by Paul Krugman, Commentary, NY Times: "This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. ... All in all, I think we hit the jackpot." So declared Ronald Reagan in 1982, as he signed the Garn-St. Germain Depository Institutions Act.

He was, as it happened, wrong about solving the problems of the thrifts. On the contrary, the bill turned the modest-sized troubles of savings-and-loan institutions into an utter catastrophe. But he was right about the legislation's significance. And as for that jackpot — well, it finally came more than 25 years later, in the form of the worst economic crisis since the Great Depression.

For the more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn ... took place ... during the Reagan years. ...

Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980. But indebtedness began rising under Reagan... The increase in public debt was, however, dwarfed by the rise in private debt, made possible by financial deregulation. The change in America's financial rules was Reagan's biggest legacy. And it's the gift that keeps on taking.

The immediate effect of Garn-St. Germain, as I said, was to turn the thrifts from a problem into a catastrophe. The ... fact is that deregulation in effect gave the industry — whose deposits were federally insured — a license to gamble with taxpayers' money, at best, or simply to loot it, at worst. By the time the government closed the books..., taxpayers had lost $130 billion, back when that was a lot of money.

But there was also a longer-term effect. Reagan ... essentially ended New Deal restrictions on mortgage lending ... that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.

These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped. ...

We weren't always a nation of big debts and low savings: in the 1970s Americans saved almost 10 percent of their income... It was only after the Reagan deregulation that thrift gradually disappeared..., culminating in the near-zero savings rate ... on the eve of the great crisis. ...

All this, we were assured, was a good thing: sure, Americans were piling up debt,... but their finances looked fine once you took into account the rising values of their houses and their stock portfolios. Oops.

Now, the proximate causes of today's economic crisis lie in events that took place long after Reagan... — in the global savings glut..., and in the giant housing bubble that savings glut helped inflate.

But it was the explosion of debt over the previous quarter-century that made the U.S. economy so vulnerable. Overstretched borrowers were bound to start defaulting in large numbers once the housing bubble burst and unemployment began to rise.

These defaults in turn wreaked havoc with a financial system that — also mainly thanks to Reagan-era deregulation — took on too much risk with too little capital.

There's plenty of blame to go around... But the prime villains behind the mess we're in were Reagan and his circle of advisers — men who forgot the lessons of America's last great financial crisis, and condemned the rest of us to repeat it.

Reich: The Future of Manufacturing, GM, and American Workers

In this discussion, Robert Reich defines the term "symbolic analyst""

A growing percent of every consumer dollar goes to people who analyze, manipulate, innovate and create. These people are responsible for research and development, design and engineering. Or for high-level sales, marketing and advertising. They're composers, writers and producers. They're lawyers, journalists, doctors and management consultants. I call this "symbolic analytic" work because most of it has to do with analyzing, manipulating and communicating through numbers, shapes, words, ideas.

He continues:

The Future of Manufacturing, GM, and American Workers (Part II), by Robert Reich: Symbolic analysts have been hit by the current downturn, just as everyone else has. But over the long term, symbolic analysts will do just fine – as long as they stay away from job functions that are becoming routinized. ... The global market gives them more potential customers for their insights.

To be sure, symbolic analysts are popping up all over the world. ... But apart from recessions, demand for symbolic analysts in the U.S. will continue to grow faster than the supply. ... In decades to come, nations with the highest percentages of their working populations able to do symbolic-analytic tasks will have the highest standard of living and be the most competitive internationally.

America's biggest challenge is to educate more of our people sufficiently to excel at such tasks. We do remarkably well with the children from relatively affluent families. ... But we're in danger of losing ground because too many of our kids, especially those from lower-middle class and poor families, can't get the foundational education they need. The consequence is a yawning gap in income and wealth which continues to widen. More and more of our working people finds themselves in the local service economy -- in hotels, hospitals, restaurant chains, and big-box retailers -- earning low wages with little or no benefits. Unions could help raise their wages... A higher minimum wage and larger Earned Income Tax Credit could help as well. Not all of our young people can or should receive a four-year college degree, but we can do far better for them than we're doing now. At the least, every young person should have access...

Some argue that ... we need more manufacturing in the U.S. ..., that ... the market is fallible,... that ... sometimes we need to consider what's good for our economy and society as a whole regardless of where the market may lead us. But that's exactly where I depart from those who believe we need to protect or bring back traditional manufacturing in the United States. To do so would be enormously costly. I just don't get how those costs can possibly be justified.

Feldstein Hates Cap and Trade

Marty Feldstein doesn't like the cap and trade legislation:

Cap-and-Trade: All Cost, No Benefit, by Martin Feldstein, Commentary, Washington Post: The Obama administration and congressional Democrats have proposed a major cap-and-trade system aimed at reducing carbon dioxide emissions. ... But... The proposed legislation would have a trivially small effect on global warming while imposing substantial costs on all American households. And to get political support in key states, the legislation would abandon the auctioning of permits in favor of giving permits to selected corporations.

The leading legislative proposal, the Waxman-Markey bill that was recently passed out of the House Energy and Commerce Committee, would reduce allowable CO2 emissions to 83 percent of the 2005 level by 2020, then gradually decrease the amount further. ...

The Congressional Budget Office recently estimated that the resulting increases in consumer prices needed to achieve a 15 percent CO2 reduction -- slightly less than the Waxman-Markey target -- would raise the cost of living of a typical household by $1,600 a year. ... The future cost to the typical household would rise significantly as the government reduces the total allowable amount of CO2.

Americans should ask themselves whether this annual tax of $1,600-plus per family is justified by the very small resulting decline in global CO2. Since the U.S. share of global CO2 production is now less than 25 percent..., a 15 percent fall in U.S. CO2 output would lower global CO2 output by less than 4 percent. ... The U.S. should wait until there is a global agreement on CO2 that includes China and India before committing to costly reductions in the United States.

The CBO estimates that the sale of the permits for a 15 percent CO2 reduction would raise revenue of about $80 billion a year over the next decade. It is remarkable, then, that the Waxman-Markey bill would give away some 85 percent of the permits over the next 20 years to various businesses instead of selling them at auction. ...[b]y giving them away the government would not collect the revenue that could, at least in principle, be used to offset some of the higher cost to households. ...

In my judgment, the proposed cap-and-trade system would be a costly policy that would penalize Americans with little effect on global warming. The proposal to give away most of the permits only makes a bad idea worse. ...

Here more from on the $1,600 figure:

Testifying before the House Subcommittee on Income Security and Family Support in March, Terry M. Dinan, a senior adviser for the nonpartisan Congressional Budget Office, conceded that ... a 15 percent cut in CO2 emissions could run the average household about $1,600... The range: $700 for the average household in the lowest one-fifth of all households, according to income, to nearly $2,200 for households in the highest quintile. But the CBO's estimate did not include "any benefits to households from lessening climate change." And the CBO also concluded that cost increases for some families, at least, could be offset if revenues from the allowances were returned to consumers. ...Dinan said that a 2000 CBO study "concluded that lower-income households could be better off as a result of the policy (even without including any benefits from reducing climate change) if the government chose to sell the allowances and use the revenue to pay an equal lump-sum rebate to every household..."

And ... analyses of the impacts of the Waxman-Markey bill have varied as well. ... An EPA analysis of the draft version found that "[t]he cap & trade policy has a relatively modest impact on U.S. consumers assuming the bulk of revenues from the program are returned to household[s]," and it estimates the average cost per household to be between $98 and $140 per year. ...

Four percent is a start, it's a moral obligation in any case, we don't yet know for sure what the tax rebate structure will look like, and it would give us more leverage to induce other countries to do the same (e.g. Brad Plumer says "Several experts have told me that China is taking global warming seriously in part because they're worried about ... retaliation—so why not keep up that friendly pressure?").

Update: I should have noted Feldstein's past support for tradeable gas rights.

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