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September 28, 2009

Economist's View - 5 new articles

"Crowding In"

Paul Krugman on Crowding In:

I'm at two deficit conferences Wednesday ... on what to do about the deficit,...[and] why we need to run deficits now. I'm trying to organize my thoughts...
Why, exactly, do we think that budget deficits are a bad thing? The textbook answer identifies two reasons — two ways in which budget deficits now make us worse off in the future. They are:
(1) The fiscal burden: deficits now mean higher debt later, which will have to be serviced, and that means higher taxes and/or less spending on other, presumably desirable things.
(2) Crowding out: when it runs deficits, the government competes with the private sector for funds, so deficits crowd out private investment, which reduces potential growth
All this makes sense under normal conditions. But right now we're not living under normal conditions. We're in a situation in which the economy is deeply depressed, and monetary policy — the usual line of defense against recession — is hard up against the zero-interest-rate bound. This weakens argument (1) — and it actually reverses argument (2).
On argument (1): it's still true that an increase in government spending raises future debt. But not one for one: because higher spending raises GDP, it leads to higher revenue, which offsets a significant fraction of the initial outlay. A back-of-the-envelope calculation suggests something like a 40 percent offset is plausible, so fiscal stimulus only costs 60 percent of what it costs.
But the really dramatic difference is for argument (2). Under the kind of conditions we're now facing, the main determinant of business investment is the state of the economy, as evidenced by the plunge in investment shown in the figure. This, in turn, means that anything that improves the state of the economy, including fiscal stimulus, leads to more investment, and hence raises the economy's future potential.
That is, under current conditions deficit spending doesn't lead to crowding out — it leads to crowding in. In fact, you could argue that the worst thing we can do for future generations is NOT to run sufficiently large deficits right now.
Things won't always work this way. Eventually we'll emerge from the liquidity trap, and the normal rules of economic prudence will reassert themselves. But we are not there, or anywhere close to there, right now.

Let me also suggest: Crowding-Out and Crowding-In. Here's the bottom line:

...Let us summarize what we have learned ... about the crowding-out controversy.

• The basic argument of the crowding-out hypothesis is sound: Unless the economy produces enough additional saving, more government borrowing will force out some private borrowers, who are discouraged by the higher interest rates. This process will reduce investment spending and cancel out some of the expansionary effects of higher government spending.

• But crowding out is rarely strong enough to cancel out the entire expansionary thrust of government spending. Some net stimulus to the economy remains.

• If deficit spending induces substantial GOP growth, then the crowding-in effect will lead to more saving-perhaps so much more that private industry can borrow more than it did previously, despite the increase in government borrowing.

• The crowding-out effect is likely to dominate in the long run or when the economy is operating near full employment. The crowding-in effect is likely to dominate in the short run, especially when the economy has a great deal of slack.

• Surpluses have just the opposite effects. When slack exists, they are likely to slow growth by reducing aggregate demand. But in the long run, budget surpluses are likely to foster capital formation and speed up growth.

And finally, see also ZIRP Deficits cause Crowding In of Investment, by reducing Deflation.

"The Public Option Lives On"

Robert Reich says of the public option for health care insurance, "yes we can," even if it means overriding the promises of the person identified with the phrase:

The Public Option Lives On, by Robert Reich: Tomorrow (Tuesday) is a critical day in the saga of the public option. Democrats Charles Schumer ... and Jay Rockefeller ... are introducing an amendment to include the public option in the bill to be reported out by the Senate Finance Committee -- the committee anointed by the White House as its favored vehicle for getting health care reform.
Before you read another word, call and email the Senate offices of Democrats Max Baucus (Montana), Tom Carper (Delaware), Robert Menendez (New Jersey), Kent Conrad (North Dakota), and Ben Nelson (Florida) -- telling them you want them to vote in favor of the public option amendment. And get everyone you know in these states to do the same. Hell, you might as well phone and email Republican Olympia Snowe (Maine) and make the same pitch.

Background: Every dollar squeezed out of Big Pharma and Big Insurance is a dollar less that you'll have to pay ... to cover healthcare costs. The two most direct ways to squeeze future profits are allowing Medicare to use its huge bargaining leverage to negotiate lower drug prices, and creating a public insurance option to compete with private insurers...

But last January, the White House made a Faustian bargain with Big Pharma and Big Insurance, essentially scuttling both of these profit-squeezing mechanisms in return for these industries' agreement not to oppose healthcare legislation with platoons of lobbyists and millions of dollars of TV ads, and Pharma's willingness to cut drug prices by some $80 billion over the next ten years. The White House promised these industries they'd come out way ahead -- getting tens of millions of new customers who'd be buying private health insurance policies and thereby paying for an almost endless supply of new drugs. Healthcare reform would be, in short, a bonanza.
Big Pharma and Big Insurance have so far delivered on their side of the deal. In fact, Big Pharma has shelled out $120 million in advertisements in favor of reform. Now the White House is delivering on its side.
Last Thursday, for example, the Senate Finance Committee rejected Ben Nelson's amendment to require Big Pharma to give some $160 billion in discounts to Medicare -- thereby reducing the bonanza Pharma would reap from the healthcare bill. Not surprisingly, all Republicans voted against the amendment. But it was defeated only because Dems Baucus, Carper, and Menendez voted with the Republicans.
Carper later explained ... why he voted with the Republicans. The amendment, he said, would "undermine our ability to pass" health care reform, because the White House had made a deal with Big Pharma ... and White House officials had told him "a deal is a deal." The Times described the vote as a "big victory" for the White House.
Schumer voted for the amendment. He said he was "not at the table" when the White House and Big Pharma made their deal so didn't feel bound by it. But even if he had been at the table, he wouldn't be bound. No member of the Senate is bound to a deal made between industry and the White House. Congress is a separate branch of government.
Big Pharma and big insurance hate the public insurance option even more than they hate big Medicare discounts. And although the President has sounded as if he would welcome it, political operatives in the White House have quietly reassured the industries that it won't be included in the final bill. ...
But the public option lives on, nonetheless. It's still in the Senate Health, Education, Labor, and Pension bill. It still headlines the House bills, and Speaker Nancy Pelosi says she's still committed to it. The latest Times/CBS poll shows 65 percent of the public in favor of it.
Now, Schumer and Rockefeller are introducing a public option amendment in the Senate Finance Committee. Carper, Menendez, Baucus, and other Dems on the Committee should vote for it, or be forced to pay a price if they don't.

Paul Krugman: Cassandras of Climate

Why aren't people getting hot under the collar about climate change?:

Cassandras of Climate, by Paul Krugman, Commentary, NY Times: Every once in a while I feel despair over the fate of the planet. If you've been following climate science, you know what I mean: the sense that we're hurtling toward catastrophe but nobody wants to hear about it or do anything to avert it.
And here's the thing: I'm not engaging in hyperbole. These days, dire warnings aren't the delusional raving of cranks. They're what come out of the most widely respected climate models... The prognosis for the planet has gotten much, much worse in just the last few years.
What's driving this new pessimism? Partly it's the fact that some predicted changes, like a decline in Arctic Sea ice, are happening much faster than expected. Partly it's growing evidence that feedback loops amplifying the effects of man-made greenhouse gas emissions are stronger than previously realized. For example,... global warming will cause the tundra to thaw, releasing carbon dioxide, which will cause even more warming, but new research shows far more carbon dioxide locked in the permafrost than previously thought, which means a much bigger feedback effect.
The result of all this is that climate scientists have, en masse, become Cassandras — gifted with the ability to prophesy future disasters, but cursed with the inability to get anyone to believe them.
And we're not just talking about disasters in the distant future... The really big rise in global temperature probably won't take place until the second half of this century, but there will be plenty of damage long before then.
For example, one 2007 paper in the journal Science ... reports "a broad consensus among climate models" that a permanent drought, bringing Dust Bowl-type conditions, "will become the new climatology of the American Southwest within a time frame of years to decades." ...
In a rational world, then, the looming climate disaster would be our dominant political and policy concern. But it manifestly isn't. Why not?
Part of the answer is that it's hard to keep peoples' attention focused. Weather fluctuates..., any year with record heat is normally followed by a number of cooler years...
But the larger reason we're ignoring climate change is that Al Gore was right: This truth is just too inconvenient. Responding to climate change with the vigor that the threat deserves would not, contrary to legend, be devastating for the economy as a whole. But it would shuffle the economic deck, hurting some powerful vested interests even as it created new economic opportunities. And the industries of the past have armies of lobbyists in place...; the industries of the future don't.
Nor is it just a matter of vested interests. It's also a matter of vested ideas. For three decades the dominant political ideology in America has extolled private enterprise and denigrated government, but climate change ... can only be addressed through government action. And rather than concede the limits of their philosophy, many on the right have chosen to deny that the problem exists.
So here we are, with the greatest challenge facing mankind on the back burner, at best, as a policy issue. I'm not, by the way, saying that the Obama administration was wrong to push health care first. It was necessary to show voters a tangible achievement before next November. But climate change legislation had better be next.
And as I pointed out in my last column, we can afford to do this..., economic modelers have been reaching consensus ... that the costs of emission control are lower than many feared.
So the time for action is now. O.K., strictly speaking it's long past. But better late than never.

Stiglitz Interview

James Surowiecki interviews Joseph Stiglitz about "the mishandling of the financial crisis, the relationship between government and markets, and the future of capitalism around the world."

links for 2009-09-27

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