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October 7, 2009

Economist's View - 4 new articles

"The State Put Railways on the Map"

UK Transport Secretary Andrew Adonis argues that Britain needs state-facilitated investment in high-speed rail:

The state put railways on the map, Review, by Andrew Adonis, Financial Times: [Review of Blood, Iron & Gold: How the Railways Transformed the World, by Christian Wolmar] High-speed rail, largely the preserve of Japan and France until the 1990s, is sweeping across Europe and Asia. ... Even the US, where passenger rail has almost died, is planning a high-speed line between Los Angeles and San Francisco.
The technology is developing fast. Within five years 400km/hr is likely to be practical... This high-speed revolution makes Christian Wolmar's superb new history of the world's railways timely. ...
Wolmar relates the story of the first global rail revolution, which began with the Liverpool and Manchester Railway in 1830. The pace of change was astonishing. Within 15 years, the modern railway map of Britain had taken shape...; by 1850 virtually every country with aspirations to modernity was following suit.
Between 1830 and 1900 a million kilometres of railway were built worldwide. In Wolmar's words, between the first and last quarters of the 19th century "the railways transformed the world from one where most people barely travelled beyond their village or nearest market town to one where it became possible to cross continents in days rather than months. Their development created a vast manufacturing industry that ensured the Industrial Revolution would affect the lives of virtually everyone on the planet. Everything from holidays to suburban sprawl and fresh milk to mail order was made possible."
Wolmar dismisses the notion that 19th and early 20th-century railways were simply a private-sector affair. Abraham Lincoln, a pro-railway lawyer before becoming US president, was the transcontinental railroad's most fervent advocate. Driving the Pacific Railroad Act through Congress in 1862 to make possible the 1,780 mile line, he endowed it with tens of millions of taxpayer dollars in loans, grants and land.
Similarly, as chairman of the state committee on the Siberian railroad, Tsar Nicholas II oversaw the construction of the 6,200 mile Trans-Siberian railway. Bismarck and Clemenceau both started to nationalise their respective railways in the 1870s. Cecil Rhodes, Kitchener, Hitler, Mussolini, Stalin and Mao also have notable parts in the story. So does the Emperor of Japan..., and Lord Dalhousie, the British Viceroy of India... So much for private enterprise. ...
For Britain, it is a tale of grandeur and decline. Until the 1870s there was hardly a railway development in the world without British engineers and equipment, an extraordinary half-century of technological supremacy. All the more odd, then, that the UK should have stood largely apart from high-speed rail. Elsewhere, like the first rail revolution, it is mostly state-facilitated. ... To catch up, Britain needs a strong governmental lead.

"The Struggle Ahead"

Robert Solow on the need for further stimulus, the need to shift demand from consumption to investment, and the need for a new macroeconomics:

3 Questions: Robert Solow on the struggle ahead, MIT News: Economist Robert Solow's seminal work in the 1950s and 1960s showed how new technologies create a large portion of economic growth, an achievement for which he was awarded the 1987 Nobel Prize in Economics. With the economy seemingly in need of a technological boost again, the emeritus Institute Professor sat down with MIT News for a talk in his office this week.
Q. What is your assessment of the economy now, and where is it going? A. Forecasting is hard and dangerous, and I don't do it. But it appears that the worst of the recession is over. However, the economy will be getting better slowly. And saying the economy is getting better is not the same thing as saying the economy is doing well. Real GDP fell by about 3.5 percent during the recession. But capacity increased 2.5 percent. We were producing 6 percent less than we knew how to produce. That gap has to narrow to reduce unemployment. If we rely only on the normal self-curing powers of a market economy, it may take until late in 2010 or early 2011 before we reduce that gap. So for that reason we should not rule out further stimulus in the next six to nine months. It's not easy because we have this enormous deficit. But we should recognize that even if the economy improves on its own, it won't do very much.
I had hoped that President Obama at the beginning of his term, while his popularity was at its highest, would have taken a very strong line. I don't think he could have asked for $1.4 trillion in stimulus, but he could have had a slightly bigger and better package, had he bullied a little bit more. If Obama or [David] Axelrod were to reply, "Boy, are you naïve," about the politics, I don't think I could have answered that. I'm just saying what I think God would have done if God were making these decisions. Congress falls well short of God. Q. Your research made clear how much technology can contribute to economic growth. To what extent might we see technology driving growth now? A. I actually think the situation of the economy calls for a surge in technologically oriented investment. We have to expect consumer spending to be weak in our economy, not just for six months, but for the next few years. It will not be as strong a driving force as it has been the past several years. Something has to take its place. Government spending can't, since government will have a hard time financing the inevitable deficits and is not in a position to aggressively increase its deficit spending. That leaves two sources of expenditure to replace the pullback of consumers. One of those is net exports. That's a long story. The other is business investment. We need business investment to support the economy. We have every reason to want to divert our resources toward secure and renewable sources of energy, new materials and environmental improvement. It's our job, a place like MIT, to produce those new technologies, then it's the job of private industry to grab them, but I also think it's the job of the federal government to shift incentives, from incentives to consume more to incentives to invest more. Obama ran on this kind of platform, and if he can put some money behind that fundamentally correct view, he might generate something. It's going to take more than that to replace 5 percent of GDP, but that would be a neat place to start. Q. In 2005 you wrote that you were "disaffected" by the "assumptions and methods" of macroeconomics. There has been a lot of debate about this subject in the last month. What is your assessment of the state of macroeconomics now? A. The disaffection I expressed is still my assessment. The beast [the economic crisis] expressed the same disaffection in 2007 and 2008, and the currently fashionable way of doing macroeconomics in the profession literally had nothing to offer in response. The problem as I have thought about it is that currently fashionable macroeconomics likes to formulate things in a way that inevitably endows the economy with more coherence and purpose than we have any right to assume. I certainly hope this is obvious enough to the younger people in the profession, the graduate students and even junior faculty. I expect there will be a revival of doing macroeconomics that does not push that kind of coherence on aggregate economic behavior. Which is not to say that some individuals don't behave in a coherent way, but the system does not translate that behavior into something like a super-individual.

A Tax Credit to Encourage Hiring?

Would a tax credit for businesses that create new jobs be enough to turn the employment picture around?:

Support Builds for Tax Credit to Encourage Hiring, by Catherine Rampell, Ny Times: The idea of a tax credit for companies that create new jobs, something the federal government has not tried since the 1970s, is gaining support among economists and ... has some bipartisan appeal...
One version of the approach, to be unveiled next week by the Economic Policy Institute,... would give employers a two-year tax credit if they increased the size of their work force or added significant hours of work (for example, making a part-time worker full time). ...
"It's beautiful if it can be timed at a dire moment like this, when unemployment is way too high and appears to be going somewhat higher," said Mr. Phelps, an economics professor at Columbia, lamenting that the president dropped it from the $787 billion stimulus plan approved in February. "But it's a pity that this wasn't done a year ago." ...
The federal government last tried this measure in 1977-78. During that period, employment — which had been soft from the 1973-75 recession — climbed at a record pace. The creation of one out of three jobs that was awarded the credit then was attributed directly to the policy. But the permanence of those jobs was less clear, and some dispute how many of those positions would have been created eventually anyway. ...
Timothy J. Bartik, a senior economist at the Upjohn Institute for Employment Research who is working on the draft with John H. Bishop of Cornell, estimates that it would cost about $20,000 for each job created. ... The authors estimate their proposal could create more than two million jobs in the first year. ...
An American Economic Review study has suggested that the 1970s policy was responsible for adding about 700,000 of the 2.1 million jobs that were awarded the credit. This may sound modest, but if accurate, economists say it would make this proposal a successful and relatively cheap way of creating jobs.
Advocates argue that such incentives would be more effective this time around not only because of design, but also because of timing. In 1977, hiring was already on the upswing, whereas economists expect today's job market to decline a bit more and then stagnate for months.
"Now is a better time than '77 was because we're closer to the bottom of a recession," said Daniel S. Hamermesh, an economics professor at the University of Texas, Austin, who helped create the 1970s plan. "This could help an uptick proceed more rapidly."
But critics of the idea argue that businesses hire based on actual demand for their products, and a minor subsidy for adding an employee will not make up for the collapse in demand across the broader economy. ...
Barack Obama ... proposed a job creation tax credit during his presidential campaign, and then in discussions for the stimulus package. The proposal was eventually killed because of concerns that employers would exploit the tax credit. For example, companies might close and reopen, claiming credit for all their "new" employees.
Even advocates acknowledge that, as with any tax incentive, employers and their accountants will take advantage of loopholes. But they argue that with strong rules ... the proposal could minimize such abuse. ...

It's worth a try, but just because both sides might agree doesn't mean it will be enough on its own to solve the employment problem. To have a chance of doing that, I think a policy like this needs to be combined with demand-side policies that create the need for more workers, the tax credit alone won't be enough. So yes, let's try this, but let's use it in addition to rather than a substitute for additional stimulus measures (which are being called other things for political reasons) that directly increase the demand for workers.

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