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August 20, 2011

Latest Posts from Economist's View

Latest Posts from Economist's View

"A Determined Campaign to Dismantle a Broad Societal Bargain"

Posted: 20 Aug 2011 01:08 AM PDT

 The erosion of the "grand bargain" is no accident:

The real grand bargain, coming undone, by Alexander Keyssar, Commentary, Washington Post: ...a century ago many, if not most, Americans were convinced that capitalism had to be replaced with some form of "cooperative commonwealth" — or that large corporate enterprises should be broken up or strictly regulated to ensure competition, limit the concentration of power and prevent private interests from overwhelming the public good. In the presidential election of 1912, 75 percent of the vote went to candidates who called themselves "progressive" or "socialist."
Such views, of course, were vehemently, sometimes violently, opposed by more conservative political forces. But the political pressure from anti-capitalists, anti-monopolists, populists, progressives, working-class activists and socialists led, over time, to a truly grand bargain.
The terms were straightforward if not systematically articulated. Capitalism would endure, as would almost all large corporations. ... In exchange, the federal government adopted a series of far-reaching reforms... First came the regulation of business and banking... The profit motive could not always be counted on to serve the public's welfare.
The second prong of reform was guaranteeing workers' right to form unions and engage in collective bargaining. ... The third ingredient was social insurance. ...
The regulation of business is decried now, as it was in 1880, as unwarranted interference in the workings of the market... [F]ierce attacks on unions since the 1970s contributed significantly to the sharp decline in the number of unionized workers... Meanwhile, the social safety net has frayed...
These changes have happened piecemeal. But viewed collectively, it's difficult not to see a determined campaign to dismantle a broad societal bargain that served much of the nation well for decades. ... This agenda, moreover, calls for the destruction or weakening of institutions without acknowledging (or perhaps understanding) why they came into being. ...

links for 2011-08-19

Posted: 19 Aug 2011 10:04 PM PDT

Greg Ip: The Republicans’ New Voodoo Economics?

Posted: 19 Aug 2011 05:04 PM PDT

Greg Ip:

The Republicans' new voodoo economics?, by Greg Ip, Commentary, Washington Post: When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he'd put sunglasses on the body, prop him up and hope no one noticed. It's safe to say that GOP opinions of the Fed have slipped a bit since. ...
If Republicans dislike monetary stimulus, they loathe its fiscal cousin even more... They want balanced budgets, the sooner the better. ... This, too, is at odds with the party's earlier views. The administration of George W. Bush sold its 2001 and 2003 tax cuts as Keynesian-style economic stimulus. Lawrence Lindsey, a top Bush adviser, even likened opponents of the tax cuts to President Herbert Hoover, whose obsession with balancing the budget in 1932 worsened the Great Depression.
Certainly, some of this rhetoric is just political opportunism. ... But something more fundamental is going on: The economic ideology of the Republican Party has changed in recent years... In their view, the government has no more role meddling in the business cycle than in any other market. ...
This is not to be confused with supply-side economics... The new GOP views actually have a much longer pedigree: They are rooted in an intellectual contest that raged during the 1930s and 1940s, and had long been settled by the opposing side.
Before then, orthodox economics held that the economy was self-correcting. ... The Great Depression shattered that orthodoxy, as high unemployment became entrenched... John Maynard Keynes convincingly argued that when interest rates were zero — a condition he termed a "liquidity trap" — the economy's self-correcting properties did not operate. The best solution, he argued, was a burst of public spending to restore demand and employment. ... Keynes's views ... won out and came to dominate postwar economic policy. ...
Many Republicans consider the tepid economic recovery an indictment of Keynesianism... They argue that aggressive fiscal and monetary stimulus have made things worse by generating uncertainty among firms and investors, and that austerity would put things right.
They almost surely have it wrong...

Republican Attacks on the EPA

Posted: 19 Aug 2011 10:17 AM PDT

The reasons behind the recent Republican attacks on the EPA are coming into focus:

Getting ready for a wave of coal-plant shutdowns, by Brad Plumer: Over the next 18 months, the Environmental Protection Agency will finalize a flurry of new rules to curb pollution from coal-fired power plants. Mercury, smog, ozone, greenhouse gases, water intake, coal ash—it's all getting regulated. And, not surprisingly, some lawmakers are grumbling.
Industry groups such the Edison Electric Institute, which represents investor-owned utilities, and the American Legislative Exchange Council have dubbed the coming rules "EPA's Regulatory Train Wreck." The regulations, they say, will cost utilities up to $129 billion and force them to retire one-fifth of coal capacity. Given that coal provides 45 percent of the country's power, that means higher electric bills, more blackouts and fewer jobs. The doomsday scenario has alarmed Republicans in the House, who have been scrambling to block the measures. Environmental groups retort that the rules will bring sizeable public health benefits, and that industry groups have been exaggerating the costs of environmental regulations since they were first created.
So, who's right? This month, the nonpartisan Congressional Research Service, which conducts policy research for members of Congress, has been circulating a paper that tries to calmly sort through the shouting match. ... And the upshot is that CRS is awfully skeptical of the "train wreck" predictions. ...
The CRS report doesn't try to evaluate the costs of the new rules, noting that it will depend on site-specific factors and will vary by utility and state. ... But, the report says, industry groups have almost certainly overstated the costs. ...
The CRS report also agrees with green groups that the benefits of these new rules shouldn't be downplayed. Those can be tricky to quantify, however. In one example, the EPA estimates that an air-transport rule to clamp down on smog-causing sulfur dioxide and nitrogen dioxide would help prevent 21,000 cases of bronchitis and 23,000 heart attacks, and save 36,000 lives. That's $290 billion in health benefits, compared with $2.8 billion per year in costs by 2014. "In most cases," CRS notes, "the benefits are larger."
Granted, few would expect this report to change many minds in Congress. Just 10 days ago, Michele Bachmann was on the campaign trail promising that if she becomes president, "I guarantee you the EPA will have doors locked and lights turned off, and they will only be about conservation." ...

There's a generous interpretation -- Republicans are ideologically opposed to regulation and this is consistent with their general philosophy. There's also an explanation that isn't as generous that involves using a call for free markets to do what's best for those who provide campaign cash.

I think it's hard to deny that there is market failure in the electricity generation industry. The externalities are pretty clear. If this was about making markets work, then the debate ought to be about how best to force firms to internalize all of the costs of production (and if some firms are unprofitable when they are forced to pay all costs, then that's the market speaking and Republicans ought to listen). Should we impose a tax of some sort? Should we rely upon market-based regulation, or is command and control better in this instance? Is this a case where the market failures are so small that any intervention would do more harm than good? Is there a case for self-regulation given the history in this industry? And so on.

But that's not how the debate is carried out. It seems to be more of a knee-jerk reflexive defense whenever supporter's interests are threatened in any way. Politicians in particular hide behind a call for free markets without ever explaining how letting markets be free to fail, and fail badly, is the best choice for society (not in every case, of course, there are certainly those who are ideologically consistent). That leads me to suspect that while there are certainly people on the right who are interested in using things like carbon taxes to overcome these market failures, we shouldn't underplay the extent to which the opposition to the EPA and to regulation more generally is driven by other factors.

"Awesome Wrongness"

Posted: 19 Aug 2011 08:37 AM PDT

Paul Krugman:

Awesome Wrongness: I hear that there was some action in the markets yesterday.
OK, seriously: things are looking really terrible, And crucially, they're looking terrible in the wrong way, at least if you wanted to believe that political and policy debate over the past year and a half made any sense at all. We've been utterly preoccupied with deficits, deficits, deficits; there was supposedly a crisis looming, but a crisis that would take the form of an attack by the bond vigilantes.
And here we are, with markets now deeply worried not by deficits but by stalling growth, fearing not fiscal profligacy but fiscal austerity, and with interest rates at historic lows.
Instead of turning into Greece, we've turned into Japan, except much worse. And policy is replaying 1937.
In the past, you could make excuses on the grounds of ignorance. In the 1930s they didn't have basic macroeconomics. Even in Japan in the 1990s you could argue that it took a long time to realize that the liquidity trap was a real possibility in the modern world.
But we came into this crisis with a pretty good understanding of what was at stake and pretty good analysis of the policy options — yet policy makers and, I'm sorry to say, many economists just chose to ignore all that and go with their prejudices instead.
And the worst of it is that the people who got this so wrong have not and probably won't admit to their awesome wrongness; on the contrary, they'll dig in. And the Lesser Depression will go on and on and on.

If nothing else, the idea of expansionary austerity should be discredited.

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