This site has moved to
The posts below are backup copies from the new site.

December 15, 2009

Latest Posts from Economist's View

Latest Posts from Economist's View

"Financing the Fight against Climate Change"

Posted: 15 Dec 2009 01:17 AM PST

Climate talks are stalled. Developing countries want help paying for policies to reduce greenhouse emissions, but the amount they are asking for is more than developed countries are likely to agree to. Is there any way to end the impasse?:

Only Private Sector Can Meet Finance Demands of Developing Countries, by Robert Stavins: Things are getting hot here in Copenhagen. ... This afternoon, the main session of the talks was suspended, following protests led by African countries, which accused the industrialized countries of trying to wreck the existing Kyoto Protocol.  At the heart of the controversy is the "finance question," as it's called here, with the developing countries asking for more than $100 billion to $200 billion annually to pay for their carbon mitigation and climate change adaptation through 2050! ...
I maintain that it is inconceivable that the governments of the industrialized world, including the United States, will come up with sufficient foreign aid to satisfy the demands for financial transfers being made by the developing countries in Copenhagen.  However, governments can — through the right domestic and international policy arrangements — provide key incentives for the private sector to provide the needed finance through foreign direct investments.
For example, if the cap-and-trade systems which are emerging throughout the industrialized world as the favored domestic approach to reducing CO2 and other greenhouse gas emissions are linked together through the existing, common emission-reduction-credit system, namely the Clean Development Mechanism (CDM), then powerful incentives can be created for carbon-friendly private investment in the developing world.
Clearly the CDM, as it currently stands, cannot live up to this promise, but with appropriate reforms there is significant potential.  ... Such private finance stands a much greater chance than government aid of being efficiently employed, that is, targeted to reducing emissions, rather than spent by poor nations on other (possibly meritorious) purposes.  So, all in all, the job can be done, and governments have an important role, but as facilitators, not providers, of finance.  This should be the focus of the discussion here in Copenhagen.

George Soros has an idea for "a special green fund serving the developing world":

Financing the Fight against Climate Change, by George Soros, Commentary, Project Syndicate: It is now generally agreed that the developed countries will have to make a substantial financial contribution to enable the developing world to deal with climate change. ...
The developed countries are reluctant to make additional financial commitments. They have just experienced a significant jump in their national debts... It looks like they will be able to cobble together a "fast-start" fund of $10 billion a year for the next few years... This is unlikely to satisfy the developing countries.
I believe that this amount could be at least doubled and assured for a longer time span. Developed countries' governments are laboring under the misapprehension that funding must come from their national budgets. But that is not the case. They have the money already. It is lying idle in their reserve accounts at the International Monetary Fund. Spending it would not add to any country's fiscal deficit. ...
In September 2009, the IMF distributed to its members $283 billion worth of Special Drawing Rights... Of the $283 billion..., more than $150 billion went to the 15 largest developed economies. These SDRs will sit largely untouched in the reserve accounts of these countries, which don't really need any additional reserves.
I propose that the developed countries – in addition to establishing a fast-start fund of $10 billion a year – band together and lend $100 billion dollars worth of these SDRs for 25 years to a special green fund serving the developing world. ... I further propose that member countries agree to use the IMF's gold reserves to guarantee the interest payments and repayment of the principal. The IMF owns a lot of gold – more than 100 million ounces – and it is on the books at historical cost. ...
This means that the developed countries that lend the SDRs would incur no interest expense and no responsibility for repayment. ... [D]eveloping countries ought to embrace my proposal. ... All that is lacking is the political will. The mere fact that tapping SDRs requires Congressional approval in the US ensures that nothing will happen without public pressure – including pressure from the developing countries. Yet it could make the difference between success and failure in Copenhagen.

I'll be surprised if this finds political support.

The financial crisis shows how difficult it is to move politicians to action before they can see a problem clearly. Economists can warn about delays in the recovery of employment far in advance and call for policy to offset it, but until the delayed recovery can be seen clearly in the employment data, political action is extremely unlikely. Unfortunately, by that time, it's generally too late to be of much to help. I expect climate change legislation will be the same. Nothing of real significance will happen until the the problem is undeniable, until the costs are large, clear, and evident, but by the time hockey stick hits politicians over the head, it may be too late.

[See also The US is on Board from Hillary Clinton.]

links for 2009-12-14

Posted: 14 Dec 2009 11:02 PM PST

Obama Says Banks Should Lend More

Posted: 14 Dec 2009 02:34 PM PST

Obama tells bankers they should lend more to small businesses and homeowners:

Obama Tells Bankers That Lending Can Spur Economy, by Helene Cooper and Javier Hernandez, NY Times: President Obama pressured the heads of the nation's biggest banks on Monday to take "extraordinary" steps to revive lending for small businesses and homeowners, drawing a firm commitment from one large bank to make more loans and vaguer assurances from others.
Meeting with executives from 13 financial institutions, Mr. Obama sent a clear message that the industry had a responsibility to help nurse the economy back to health and do more to create jobs in return for the bailout last year that kept Wall Street and the banking system afloat.
But ... Mr. Obama also confronted the limits of his power to jawbone the industry. ... The heads of three of the biggest firms — Goldman Sachs, Morgan Stanley and Citigroup — did not even make it to the White House meeting in person, having waited until Monday morning to travel to Washington and then being held up by fog.
"America's banks received extraordinary assistance from American taxpayers to rebuild their industry," Mr. Obama said in remarks after a midday meeting with bankers at the White House. "Now that they're back on their feet we expect an extraordinary commitment from them to help rebuild our economy." ...
Bank of America said after the meeting that it would increase lending to small and mid-sized businesses by $5 billion next year over what it lent to them in 2009.
Speaking outside the White House, Richard K. Davis, the chief executive of U.S. Bancorp,... said financial institutions would re-examine small business loans that had been denied, but he cautioned that banks had a responsibility to carefully evaluate the qualifications of each client. "We simply want to assure that we make qualified loans," he said. ...
The tone for the White House meeting with the bankers was set Sunday night when CBS's "60 Minutes" broadcast an interview in which Mr. Obama said "I did not run for office to be helping out a bunch of fat cat bankers on Wall Street." ...
"We have to get them off the sidelines and get them to play a more active role in our economic recovery," Rahm Emanuel, the White House chief of staff, said on Sunday. "They play an essential role in helping the economy grow."

There are hurdles to get over on both the demand and supply side of the equation. Because of the recession, the demand for loans for new investment and for other purposes is down, but when firms do apply for credit, they are less likely to get it because banks assess credit worthiness partly based upon current economic conditions. The poor state of the economy has led them to conclude that many loans that might be made in better times are too risky to make right now

On the demand side, tax cuts and other incentives would help, but the supply of credit has to be addressed too. Yes, there's plenty of liquidity available, bank vaults are overrun with funds, but banks are reluctant to lend in this environment (particularly small and medium sized banks who face lots of uncertainty over their exposure to commercial real estate loans that may or may not be paid off). A solution to this is for the government to insure the loans in some way through tax write-offs, direct loss sharing, subsides, etc., there are lots of ways to do this, but it's hard to imagine anything like this happening in the present political environment, and the desirability of encouraging risky loans as a solution to our problems is questionable in any case (the money may be better spent on public projects with a high social return). However, if the government wants to encourage more lending in the private sector, something along these lines will need to be done. I don't see how speeches and meetings with bank executives asking them to lend more will do much to solve the problems, particularly the problems at smaller banks.

"We Project a $242 Billion Surplus for Medicare by 2020, Not a Deficit"

Posted: 14 Dec 2009 01:41 PM PST

Does health care spending pay for itself, at least in part, by increasing economic growth? When older people are healthier, they work longer and contribute more to taxes, and they consume less health care. According to this research, both of these effects are missing from standard estimates of the growth in health care costs such as those produced by the CBO, and including them -- essentially doing dynamic scoring -- makes a big difference:

Study shows health care spending spurs economic growth, EurekAlert: As the national discussion of health care focuses on costs, a new study from North Carolina State University shows that it might be more accurate to think of health care spending as an investment that can spur economic growth. The study also shows that government projections of health care costs and financing may be unduly pessimistic.
"Health care spending should be viewed as an investment in future capital, contributing to a productive workforce, rather than merely as an expenditure," says Dr. Al Headen, associate professor of economics at NC State and a co-author of a paper appearing in the Dec. 15 issue of Proceedings of the National Academy of Sciences. The paper was co-authored by researchers from Duke University, Brigham Young University and the National Council of Spinal Cord Injury Association.
People are living longer, Headen says, and are retaining their ability to be productive members of society – they are able to work, pay taxes, consume goods and go on vacation. "But a lot of projections by the government of the future work force are not accounting for improved health and productivity of older Americans. People will be paying into government programs, such as Medicare, for a longer time – while simultaneously delaying the point where they need to draw on those programs. Our research suggests that if the government's projections had accounted for this improved productivity, those projections would have been less pessimistic."
For example, the researchers found the Congressional Budget Office's (CBO) projected costs for Medicare and Medicaid from 1994-2004 to be substantially overestimated. In 1994, CBO projections of Medicare expenditures for 2004 for persons 65 and older were $361 billion, but the actual 2004 expenditure was only $268 billion – an error of 35 percent.
"Our projections adjust for improved quality of health and functioning, indicated by declines in disability among the 65 and older age group from 1994 to 2004 in data from the National Long Term Care Surveys linked to Medicare files," Headen says. "Our health quality adjusted Medicare expenditures projection over the same decade covered by the CBO projections is $253 billion, an error of 5.6 percent. Thus, the projection error rate for the CBO, which did not adjust for improvement in the quality of health and functioning among elders, was over six times larger than the projection error rate that explicitly adjusted for improvement in the quality of health and functioning among elders."
One implication of the study's findings, Headen says, is that "some programs that the government has said will be in deficit in the near future may actually have a surplus, once you account for improved health and productivity. For example, we project a $242 billion surplus for Medicare by 2020, not a deficit.
"Spending on health care productivity, biomedical research and universal health care should be considered an investment that will eventually lead to increased economic growth," Headen says. "Improvements in human capital related to health are important, and need to be accounted for when doing projections of costs and benefits related to health care."

Health Care Reform Runs into Trouble

Posted: 14 Dec 2009 12:49 PM PST

I've never liked Joe Lieberman.

No comments: