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June 1, 2010

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"A Political Economy Moment"

Posted: 01 Jun 2010 12:42 AM PDT

Peter Dorman argues that economic policy is determined by economic and political interests rather than academic argument, and that this can explain the reason that governments are adopting the views of the inflation and deficit hawks. That is, "economic orthodoxy is regaining control over policy because it reflects the outlook of those who occupy the upper reaches of government and business":

A Political Economy Moment, EconoSpeak: This is a critical moment for economic policy in the industrialized countries. After a year and a half of emergency rescue, with large fiscal deficits and rock-bottom interest rates, governments are beginning to pull back. Especially in countries with large current account deficits, stimulus spending is being withdrawn, and central banks are under pressure to begin raising rates and tightening money. The threat of deflation and cascading insolvencies in the financial system are so yesterday; today's threat is said to be inflation and sovereign default.

If you survey the center-to-left economics blogs, including this one—economists who see the world at least in part through Keynesian eyes—you will find howls of protest. It is simply irrational, we say, to allow this slump to run its course. There is no threat of inflation at all, which is actually a problem, since a bit of inflation would be medicine against effectively high nominal interest rates at the zero lower bound. And every indication is that the recovery under way owes its feeble pulse to the lingering effects of last year's stimulus.

But is this just a problem of economic analysis? Is it only that New, Post and other Keynesians haven't been persuasive enough? Does economic argument and evidence drive policy?

In a sense yes: those who make the decisions summon economic arguments to justify their actions. But who gets to make the decisions and what arguments they find appealing is not the outcome of academic seminars. What got us into this mess in the first place, and what now threatens to throw us back into the maelstrom, is the political hegemony of the "finance perspective", the interests and outlook of those whose main concern is maximizing (and now simply protecting) the value of their financial assets.

Within the world of elite interests, this is almost a mass constituency. While the bulk of such assets are held by an infinitesimal few, perhaps the top 10-20% of the population in the industrialized countries have significant financial wealth and actively monitor their returns. Their understanding of how economies work and what priorities policy-makers should adhere to follow from their personal position. Inflation is a constant threat to asset-holders. They fear the laxity of central banks as well as the buildup of government debt, which can serve as an incentive to future inflation. They want their portfolios to have a component of absolutely risk-free government securities, and the very whisper of sovereign default chills them to the core. They believe in the inherent reasonableness of financial markets and believe that anyone who wishes to borrow from them should demonstrate their prudence and fiscal rectitude. They were willing to relax their principles temporarily during the panic, but now that they have caught their breath they want to see a return to "sound" practices. Governments will bend to their wishes not because they have better arguments, but because they hold power.

Don't get me wrong. I am not making the crude claim that policy is driven directly by interests. In fact, I believe that, if they get their way, holders of financial assets will suffer along with the rest of us. (Not as much, of course: succumbing to a haircut because of debt deflation cannot be compared to losing one's job and not being able to meet basic needs.) The process is more complicated: where one sits in society and the kinds of problems one typically has to solve leads to a way of thinking, and this manner of thinking then informs politics. For centuries, the finance perspective has played a central role in economic theorizing, and there is ordinarily a body of research to support it. What I am proposing is this: economic orthodoxy is regaining control over policy because it reflects the outlook of those who occupy the upper reaches of government and business.

Up to this point, the Great Economic Event we are passing through has not caused even a hint of political realignment, and that is why policy is returning to the old normal.

links for 2010-05-31

Posted: 31 May 2010 11:04 PM PDT

Is the "Billionaire Boys Club" Good for Education?

Posted: 31 May 2010 05:31 PM PDT

David Warsh says Obama is making a big mistake pushing ahead with education reform based upon an approach that Republicans "have championed so strongly in the past":

In the Thrall of the Billionaire Boys Club, by David Warsh: It has the potential to become Barack Obama's Vietnam. Not the Gulf oil spill, serious though that is. Nor Afghanistan. Other people's mistakes are one thing. The ones that haunt forever are the ones you make yourself. I mean the system of public education.
Remember the recipe for a policy disaster? Start with a handful of policy intellectuals confronting a stubborn problem, in love with a Big Idea. Fold in a bunch of ambitious Ivy League kids who don't speak the local language. Churn up enthusiasm for the program in the gullible national press – and get ready for a decade of really bad news. Take a look at David Halberstam's Vietnam classic The Best and the Brightest, if you need to refresh your memory. Or just think back on the run-up to the war in Iraq.
My jaw dropped last week when I picked up The New York Times Magazine and turned to its cover story "The Teachers' Unions' Last Stand: How Obama's Race to the Top could revolutionize Public Education," by Steven Brill. In 8,000 breathless words, Brill described "a movement spreading across the country to hold public school teachers accountable by compensating, promoting, and even removing them according to the results they produce in class, as measured in part by student test scores."
That means getting rid of pay and job protection based on seniority, breaking up the teachers' unions, and starting a lot of new charter schools. True, Brill notes, these are initiatives historically associated with the Republican Party, but Obama "really does seem to be a new kind of Democrat." By adopting a "Nixon-to-China approach," the president and his lieutenants can hope to get "some, probably many" Democratic votes, "while winning support from Republicans on an issue they have championed so strongly in the past that taking a flat-out anti-Obama approach would be especially awkward."
Making it happen, says Brill, "is a network of reformers dedicated to overhauling public education in the United States." ...
As I read along in the Times Magazine, I wondered what Brill was doing writing about efforts to reform the public schools. A serial entrepreneur, he founded the monthly American Lawyer in 1979, the much less successful Brill's Content in 1998 (the self-styled media watchdog folded in 2001), and has been involved in a variety of publishing ventures since. Deerfield Academy, Yale College, Yale Law: he has no background in public education. Indeed it was clear from the article that he didn't know much about the classroom. The key difference between public schools and charter schools – the latter can exclude or fire troublesome kids – goes altogether unmentioned.
Then,... it dawned on me... I realized that Brill goes to parties with the people he was writing about – with Michael Bloomberg, New York City's billionaire mayor, with Joel Klein, the former antitrust chief at the Justice Department whom Bloomberg appointed to run the city's schools, and with Mrs. Tisch, the chancellor of the New York State Board of Regents...
Brill's Times Magazine story is an anomaly, interesting mainly for its cheerleading being so completely over the top. Not since Judith Miller built her case for Saddam Hussein's weapons of mass destruction has there been anything like it in the Times. (But then the Sunday magazine often seems to operate in a world of its own.) It will be interesting to see if Clark Hoyt, the newspaper's public editor, takes a look. ...
I'm no expert on public education either, but I know an expert when I see one. Diane Ravitch has been the nation's preeminent historian of education since her book The Troubled Crusade: American Education 1945-1980 appeared in 1983. She served as assistant secretary of education under George H. W. Bush. For forty years she has pondered each new proposal for restructuring schools as it has come along, often with considerable sympathy: vouchers, charter schools, curriculum reform, standardized testing, punitive teacher accountability.

In her new book, The Death and Life of the Great American School System: How Testing and Choice are Undermining Education, Ravitch describes the evidence that has changed her views of strategies that once seemed promising to her. (Her title's echo of Jane Jacobs' great 1961 book on urban life is intentional: she began her career in Manhattan in 1968, at a time when Jacobs was leading her epic battle against highway-planner Robert Moses.) The nostrums that school districts, Congress, and federal officials are pursuing, that mega-rich foundations are supporting, that editorial boards are applauding, are mistaken, she says, fundamentally flawed because they are built on a market metaphor. Schools don't work like businesses, she says Public education should be preserved "because it is so intimately connected to our concepts of citizenship and democracy and to the promise of American life." ...

Ravitch is especially good on the influence of what she calls the "Billionaire Boy's Club" – the Bill and Melinda Gates Foundation (the Microsoft fortune), the Walton Family Foundation (Wal-Mart), and the Eli and Edythe Broad Foundation (home-building and finance) – that have eclipsed the older foundations long associated with education policy (Ford, Rockefeller, Carnegie and Annenberg) as the powerful big givers. Sometimes described as "venture philanthropies" or exponents of "philanthrocapitalism," meaning their methods are borrowed from start-up finance and management, the Gates, Walton and Broad foundations see their grants as investments, designed to produce measurable results. And though they preach accountability to teachers, they receive relatively little scrutiny themselves – or even much dissent, given the power of their interlocking grants to exclude critics. All that money buys a lot of silence, Ravitch says, not to mention admiring friends. The Teach for America program, with its youthful cadre of 24,000 veterans, in one of the fruits of philanthrocapitalism; the Race to the Top is another.
The situation is alarming. Not only is the federal government about to administer a hammer-blow to the basic principles of public education through its competitive grant program; over the next few months, hundreds of thousands of public school teachers are scheduled to be laid off, as well, thanks to state and local budgets that have been stretched to the breaking point by falling tax revenue and rising unemployment claims. Christina Romer, chair of the Council of Economic Advisers, last week estimated that perhaps as many as one out fifteen teachers would receive a pink slip unless Congress extended the emergency aid that so far has saved more than 400,000 teaching positions. No soap, apparently. House leaders, worried about soaring levels of public debt, instead cut back sharply on the extension.
It is not too late for the administration to gradually change its stance on public education. Obama and David Axelrod should take out some old Time and Life magazines, compare them to Brill's Times Magazine article, and reflect on how the media pranced as Presidents Kennedy and Johnson blundered into Vietnam. They should read and discuss Diane Ravitch's book. They should think long and hard about whether they are going to let Arne Duncan and his whiz kids put Obama's presidency in greater peril than the Deepwater Horizon ever could.

"Why Obama Should Put BP Under Temporary Receivership"

Posted: 31 May 2010 04:05 PM PDT

Robert Reich says the federal government should take over BP until the oil leak in the gulf is stopped:

Why Obama Should Put BP Under Temporary Receivership, by Robert Reich: It's time for the federal government to put BP under temporary receivership, which gives the government authority to take over BP's operations in the Gulf of Mexico until the gusher is stopped. This is the only way the public know what's going on, be confident enough resources are being put to stopping the gusher, ensure BP's strategy is correct, know the government has enough clout to force BP to use a different one if necessary, and be sure the President is ultimately in charge.
If the government can take over giant global insurer AIG and the auto giant General Motors and replace their CEOs, in order to keep them financially solvent, it should be able to put BP's north American operations into temporary receivership in order to stop one of the worst environmental disasters in U.S. history.
The Obama administration keeps saying BP is in charge because BP has the equipment and expertise necessary to do what's necessary. But under temporary receivership, BP would continue to have the equipment and expertise. The only difference: the firm would unambiguously be working in the public's interest. As it is now, BP continues to be responsible primarily to its shareholders, not to the American public. ...
Five reasons for taking such action:

1. We are not getting the truth from BP. BP has continuously and dramatically understated size of gusher. ... Government must be clearly in charge of getting all the facts, not waiting for what BP decides to disclose and when.
2. We have no way to be sure BP is devoting enough resources to stopping the gusher. BP is now saying it has no immediate way to stop up the well until August, when a new "relief" well will reach the gushing well bore... August? If government were in direct control of BP's north American assets, it would be able to devote whatever of those assets are necessary to stopping up the well right away.
3. BP's new strategy for stopping the gusher is highly risky. It wants to sever the leaking pipe cleanly from atop the failed blowout preventer, and then install a new cap so the escaping oil can be pumped up to a ship on the surface. But scientists say that could result in an even bigger volume of oil – as much as 20 percent more — gushing from the well. At least under government receivership, public officials would be directly accountable for weighing the advantages and disadvantages of such a strategy. ...
4.  Right now, the U.S. government has no authority to force BP to adopt a different strategy. ... The President needs legal authority to order BP to protect the United States.
5. The President is not legally in charge. As long as BP is not under the direct control of the government he has no direct line of authority, and responsibility is totally confused. ...
The President should temporarily take over BP's Gulf operations. We have a national emergency on our hands. No president would allow a nuclear reactor owned by a private for-profit company to melt down in the United States while remaining under the direct control of that company. The meltdown in the Gulf is the environmental equivalent.

I've wondered if BP's attempts to close off the leak also try to preserve the ability to tap the well again in the future. Are there other things that could be tried that might work better, but make it impossible to use the well again (and hence are last resort measures from the company's point of view, but no the public's)? Perhaps that's not the case, I don't have enough technical expertise to assess the options, maybe the public relations fallout, prospects of fines, lawsuits, etc., make the company do all it can to stop the leak in any case. But it's hard not to wonder given the present structure of responsibility for stopping the leak (including limits on financial responsibility). If the government were to takeover until the leak is stopped, this worry would be lessened (as would others).

However, if the administration does take over, then it will also take over responsibility for what happens. If the well continues to leak until August, and if the administration has taken BP into receivership, the administration will take the direct blame. It has that problem now, of course, the blame will be there in any case, but presently BP absorbs some of the fallout from the failed attempts to plug the leak and the administration can at least try to deflect some of the blame in BP's direction. If the administration takes over, it also takes full responsibility from that point forward, and it's not clear they want that, especially given the present prospects for stopping the leak (though, again, do we know the full spectrum of options, no matter how costly they are?).

So, in general, it's unlikely that an administration will want to take over a company when the problems are particularly hard to solve. It will take over when quick victory is assured, but why take the political risk when the problems are really hard? Better to blame the company.

I'm struggling a bit with this one. I am not very comfortable recommending a take over. I don't feel like I've thought it through enough to call for a government take over of BP, such take overs should be last ditch measures to prevent severe damage (which may justify a takeover in this case). They should not become government habits. I'd prefer that the prospects of charges for damages, fines from the EPA, lawsuits from people whose livelihood depends upon the fisheries, and so on give BP an unambiguous incentive to stop the leak as soon as possible, that its life would be just as threatened as the life in the gulf is threatened if the leak is not plugged relatively soon. There would still be a need for strict government oversight, and it would be important that the government have the authority to force or prevent certain actions and to force disclosure of information. But at least I'd be more sure that the company is doing everything it possibly can -- devoting every possible resource (and asking for government help if more resources are needed) -- to getting this fixed as soon as possible. However, it's not at all clear that the company has these incentives, and even if it did, I would still have doubts about its actions.

Again, maybe all that can be done is being done, but I'd be more confident that's the case if the company faced more consequences than it appears that it will, and if the company itself wasn't running the show and determining, at least to some extent, what I do and don't know about its options and actions.

No matter who is technically in control of the company, i.e. receivership or not, the one thing that is needed is for the government to have the authority it needs to force the company to fully disclose all the information it has about the leak, and about how to stop it. It also needs to be able to force the company to take particular actions to stop the leak even if the actions demand so many resources it results in the company going bankrupt. This is where the case for a take over seems to be the most compelling to me. Suppose that two strategies for stopping the leak exist, one that will work with near certainty and costs 1 billion, another that may or may not work that costs 200 million. If the company can adopt the 1 billion dollar strategy only by liquidating its business, but can possibly survive trying the 200 million method, it may waste valuable time trying the riskier strategy first, especially if it doesn't face the full costs of the damage it is causing (because there are externalities, or because there are legal limits on the damages it has to pay). If the potential damages are well in excess of 1 billion, enough to make the 1 billion dollar attempt the only logical choice from society's perspective, then the government should step in and force the company to finance the higher cost method of stopping the leak even if it means the company must liquidate itself. (If, say, the company only has 800 million in assets, then it can't choose the less risky option in any case. Here the government could force liquidation, and then add the extra 200 million needed to ensure the leak is stopped and the greater than 1 billion dollars saving in environmental damage is realized.)

I'm obviously unsettled on this one (and talking without enough thought behind it). Maybe you can help in comments?

Measuring Poverty

Posted: 31 May 2010 11:07 AM PDT

I'm surprised to see Greg Mankiw endorsing Robert Samuelson's column about measuring poverty (or at least pointing to it without comment as though he endorses it). Apparently Samuelson is worried that the new measurements might cause us to give more help to the poor. I guess in his view, the poor are getting all the help they need, but that's not how I see it.

Dean Baker responds to Samuelson:

Robert Samuelson's Cellphone Standard of Living, by Dean Baker: Robert Samuelson invokes the cellphone standard of living in his column today which complains about the Obama administration's adoption of a new measure of poverty as an alternative to the official standard. The administration will use both.
Samuelson argues that we have failed to pick up all the gains for the poor over the last four decades noting, among other things, that 48 percent of poor households own cellphones. Needless to say, the reduction in price of many products in recent decades has made them accessible in ways that would not have been possible in the recent past, but it is not clear how much this tells us about living standards.
In China, there are more than 600 million cell phones in use. This means that roughly the same percentage of people in China have cell phones as do poor people in the United States. China's per capita income on a purchasing power parity basis is less than one-sixth as high as per capita income in the United States. By Samuelson's cell phone standard of living the average person in China has the same standard of living as do poor people in the United States.
There are a couple of other points worth noting about Samuleson's diatribe. The Obama administration did not just invent the measure that Samuelson denounces as a "propaganda device." This is a measure developed by the National Academies of Science based on research by many of the country's leading poverty experts. It is fine to criticize the measure, but Samuelson should have at least noted its origins.
Finally, Samuelson reports on research from the American Enterprise Institute (AEI) that shows that spending on the poor from all sources may be as much as double their reported income. It is worth noting that much of this spending involves Medicaid expenditures...

I think it's pretty slimy to act like the new measure is an invention of the Obama administration that will be used to implement a political agenda. Complaints about the existing measure are long-standing, and there was considerable pressure on George Bush to change the measure. But since it might have shown an increase in poverty -- something his administration wanted to avoid -- he refused. If you want an example of political manipulation, that was it. The Bush administration refused to use more accurate statistics because it might reflect poorly (pun intended) on the administration. And he wasn't the only president to make this choice. The problems with the measure have been evident for the last four decades, and this is the first president willing to consider making a new measure official:

Where's the Poverty Line?: ...So why hasn't such an important statistic been updated...? The answer is politics. ... the poverty indicator, unlike many other economic statistics, is not under the jurisdiction of an authoritative statistical agency like the Bureau of Economic Analysis or the Bureau of Labor Statistics. Instead, it resides in perhaps the most political place of all: the office of the president. And during the last four decades, no president of either party has wanted to draw attention to [the] statistic ..., especially if updating it might cause the number of people regarded as living in poverty to increase. ...

Samuelson doesn't tell us that other presidents have refused to update the measure (and why), instead he makes it seem like this is an invention of the current administration. He says:

The new indicator is a "propaganda device" to promote income redistribution by showing that poverty is stubborn or increasing, says the Heritage Foundation's Robert Rector. He has a point.

The propaganda device is Samuelson's column, not the adoption of the new poverty measure. The current administration's willingness to consider updating the measure should bring Samuelson's respect if he had something other than a political agenda as the goal of the column

Here's another reaction:

You can't be poor if you own a cellphone, by Jamelle Bouie: Robert Samuelson invokes a familiar canard in his column complaining about the Obama administration's choice to use a new definition of poverty developed by the National Academies of Science:

The official poverty measure obscures this by counting only pre-tax cash income and ignoring other sources of support. ... Although many poor live hand-to-mouth, they've participated in rising living standards. In 2005, 91 percent had microwaves, 79 percent air conditioning and 48 percent cellphones. [Emphasis mine]

With microwaves, air conditioning and cell phones, it's clear that poor people aren't nearly as poor as we think they are! I mean, it's not as if poverty is concentrated in the nation's two warmest regions — the South and the West — where air conditioning is a necessity, and it's not as if cell phones are a cheaper alternative to landlines, and critical to navigating the world of low-wage service jobs. I guess you could call microwaves luxuries, but even that's ignoring the fact that the are for more likely to consume frozen and prepared foods that need microwaving.

So in Samuelson's column, what you have is another attempt to minimize the actual poverty of poor people by pointing to items that are actually necessary to surviving in low-wage service economy. Indeed, by the end of the piece, Samuelson is a step away from lamenting that the new poverty measures will force the government to do more to combat poverty, as if what we do now is adequate. Of course, given Samuelson's routine Hooverism — "deficits are more important than everything else!" — and his disdain for Social Security and Medicare, I guess I shouldn't be surprised.

Let's move on to more accurate assessments of the new measure. Here's a report from Nancy Folbre, someone who doesn't come to the problem with Samuelson's biases, on the new measure:

A Rich New Poverty Measure, by Nancy Folbre: The Census Bureau recently announced plans to develop a new Supplemental Poverty Measure (S.P.M.), also referred to as a Supplemental Income Poverty Measure (SIPM). ...
Most of us dislike the official poverty lines used to determine who, exactly, qualifies as poor. Most of us can recite at least five reasons why these measures (based on a mid-1960s assessment of the costs of a minimal food budget) are narrow, out of date and downright misleading.
Most of us can also expound on how current methods of measuring poverty make it difficult, if not impossible, to accurately assess the impact of anti-poverty policies.
Food assistance administered through the Supplemental Nutritional Assistance Program (SNAP) has been a mainstay of our safety net during the current recession. But since food stamps are not income, they don't show up in our income-based poverty measures.
The Earned Income Tax Credit (E.I.T.C.) is our largest cash-assistance program other than unemployment insurance in this recession. Our poverty measures are based on pre-tax, rather than after-tax, income. So, by definition, the E.I.T.C. does not reduce poverty.
It's hard to find anyone more passionate about these inconsistencies than Professor Timothy Smeeding, current director of the Institute for Research on Poverty at the University of Wisconsin. ... He is thrilled that the new measure will take near-cash benefits and taxes into account to supplement conventional poverty measures.
He emphasizes its other innovations: poverty thresholds will be linked to accurate measures of expenditures on food, shelter, clothing and utilities, rather than just food. It will subtract some work-related costs, such as the child-care expenditures of employed parents, to better capture disposable income.
Professor Smeeding concedes that the measure has some kinks in it that will need to be worked out, including better estimates of out-of-pocket health care expenses and differences in regional costs of living.
I'm worried about other factors that affect family living standards, like the costs and benefits of unpaid care of dependents.
Curious about other criticisms, I reached out to Shawn Fremstad of the Center for Economic and Policy Research, also on his way to the discussion at the Brookings Institution.
In his view, the SIPM sets its thresholds too low, excluding many struggling families from the category of poverty. Mr. Fremstad also warns that adopting the new measure by itself could sideline efforts to develop more complete measures of basic economic security that would include consideration of family wealth as well as income.

I'm not yet sure where I stand. As Professor Smeeding reminded me, the perfect can be the enemy of the good. This new measure, whatever its limitations, represents a rich addition to our statistical infrastructure. ...

Samuelson objects to the use of relative poverty measures. He wants an absolute standard. So long as people aren't starving in the streets and have clothes to wear, no matter how ragged, they are not poor.

It's true people don't literally starve on the streets anymore, but is that our goal as a society? I think a relative standard that says that people who, because of their incomes, cannot participate fully in society are poor. A child getting enough to eat, and with clothes to wear, who cannot afford the toys needed to be part of the group of kids in the neighborhood is socially isolated and socially disadvantaged (we don't want to play at your house because you don't have a TV, you can't come with us because you don't have a bike, you didn't get my text message about baseball practice being moved?, etc., etc., etc.). Giving people, children in particular, what they need to participate in the society around them is an important element of how successful they will be in the future. It helps to determine their ability to give back to society as fully participating adults.

Why do people like Samuelson object to helping the poor (in a relative poverty sense)? I think it's partly because they fail to recognize the social roots of poverty. They assume it is the poor's own fault that they ended up that way. They made bad choices, and that fact that they are barely getting by, the fact that their kids that will remain socially isolated, is the price that must be paid for those bad choices. If we bail them out like a big bank, how will they ever learn life's lessons?

The answer is that they know life's lessons all too well, certainly better than the Samuelsons of the world. Most of the poor are working poor, many working more than one job just to get by. To refuse to help the hardest working among us, those who toil at or near poverty to give the rest of us the products and services we desire at very low prices, is unconscionable.

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