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April 27, 2012

Latest Posts from Economist's View


Latest Posts from Economist's View



Posted: 27 Apr 2012 12:24 AM PDT
We're "living in a world of zombie economic policies":
Death of a Fairy Tale, by Paul Krugman, Commentary, NY Times: This was the month the confidence fairy died.
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the "austerians" insisted that the reverse would happen. Why? Confidence! ... Or as I put it..., the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.
The good news is that many influential people are finally admitting that the confidence fairy was a myth. ... Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France's presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. ...
The question now is what they're going to do about it. And the answer, I fear, is: not much.
For one thing, while the austerians seem to have given up on hope, they haven't given up on fear — that is, on the claim that if we don't slash spending, even in a depressed economy, we'll turn into Greece, with sky-high borrowing costs.
Now, claims that only austerity can pacify bond markets have proved ... wrong... And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better.
But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure..., on the grounds that any relaxation of austerity would cause borrowing costs to soar.
So we're now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it's anyone's guess when this reign of error will end.
Posted: 27 Apr 2012 12:15 AM PDT
Larry Summers:
Romney's fiscal fantasy plan, by By Lawrence Summers, Commentary, Washington Post: Political arithmetic is always suspect...
This principle was aptly illustrated by the "budget analysis" Mitt Romney's chief economic adviser, Glenn Hubbard, recently put forward. In a Wall Street Journal op-ed this week, Hubbard constructs a budget plan that he imagines President Obama might propose someday, engages in a set of his own extrapolations and then makes assertions about it. He does not discuss the actual Obama plan or how it has been evaluated by the CBO. ...
The independent CBO confirms that the Obama budget would stabilize the debt as a share of the economy... Rather than criticize this approach, Hubbard ignores it — and instead chooses to invent assumptions that bear no relationship to the president's actual policies. ...
Hubbard should perhaps address some of the many gaps in Romney's plans. ... The Romney campaign has been very clear about what the former governor is promising: $5 trillion in tax cuts on top of extending the Bush tax cuts,... heavily weighted toward the country's wealthiest taxpayers. Romney himself has acknowledged the lack of details... Romney has also proposed a massive defense buildup, even while he says he will cut spending deeply enough to balance the budget. ...
This is a consequential presidential election. As the country continues to recover from the largest economic crisis in generations, we need to strengthen the job market, address big fiscal challenges and build an economy that is based on sustainable, shared economic growth. ... Obama — consistent with his obligations as president — has laid out a multiyear budget embodying his vision for the future, and it has been evaluated by independent experts. It is time for Romney to do the same.
Posted: 27 Apr 2012 12:06 AM PDT
Posted: 26 Apr 2012 01:15 PM PDT
Dani Rodrik:
Ideas over Interests, by Dani Rodrik, Commentary, Project Syndicate: The most widely held theory of politics is also the simplest: the powerful get what they want. Financial regulation is driven by the interests of banks, health policy by the interests of insurance companies, and tax policy by the interests of the rich. Those who can influence government the most ... eventually get their way.
It's the same globally. ... It is a compelling narrative... Yet this explanation is far from complete, and often misleading. ... Our interests are in fact hostage to our ideas.
So, where do those ideas come from? Policymakers ... perspectives on what is feasible and desirable are shaped by ... economists and other thought leaders... The ideas that have produced, for example, the unbridled liberalization and financial excess of the last few decades have emanated from economists...
In the aftermath of the financial crisis, it became fashionable for economists to decry the power of big banks. It is because politicians are in the pockets of financial interests, they said, that the regulatory environment allowed those interests to reap huge rewards at great social expense. But this argument conveniently overlooks the legitimizing role played by economists themselves. It was economists and their ideas that made it respectable for policymakers and regulators to believe that what is good for Wall Street is good for Main Street.
Economists love theories that place organized special interests at the root of all political evil. In the real world, they cannot wriggle so easily out of responsibility for the bad ideas that they have so often spawned. With influence must come accountability.
There are differences on these issues among economists. The fact that some ideas, e.g. that austerity is somehow expansionary, take hold while others do not has a lot to do, I think, with the interests of the powerful. So I'm not fully convinced that economists are the primary driving force. They are part of it, to be sure, but when those with the most political power promote one idea over another, it matters.
Posted: 26 Apr 2012 11:47 AM PDT
Pollution levels off the California coast have dropped significantly since the passage of the Clean Water Act (i.e., contra Repulicans, government is not always the problem):
First evaluation of the Clean Water Act's effects on coastal waters reveals major successes, EurekAlert: Landmark legislation helped clean up LA's coastal waters over the past 40 years, study indicates
Levels of copper, cadmium, lead and other metals in Southern California's coastal waters have plummeted over the past four decades, according to new research from USC.
Samples taken off the coast reveal that the waters have seen a 100-fold decrease in lead and a 400-fold decrease in copper and cadmium. Concentrations of metals in the surface waters off Los Angeles are now comparable to levels found in surface waters along a remote stretch of Mexico's Baja Peninsula.
Sergio Sañudo-Wilhelmy, who led the research team, attributed the cleaner water to sewage treatment regulations that were part of the Clean Water Act of 1972 and to the phase-out of leaded gasoline in the 1970s and 1980s. ...
Posted: 26 Apr 2012 08:15 AM PDT
Antonio Fatás:
Ideology and Facts in the Economic Policy Debate: The fact that ideology matters in the economic policy debate should not be a surprise to anyone. But the influence that ideology has has in some of the economic analysis we have seen since the beginning of the financial crisis has led to completely contradictory statements about the facts behind the causes and potential remedies to the crisis.
Via Greg Mankiw's blog I read a strong criticism of the Obama administration written by James Capretta. Quoting from his article:
When he (Obama) came into office, he favored a massive injection of new government spending into the economy in the name of "stimulus" — counter-cyclical federal activity aimed at offsetting depressed consumer demand emanating from a recession-battered private sector. The net result provides little if any boost to aggregate demand because the states — and to some extent private citizens — simply pocket the federal money and reduce their deficits and debts. Meanwhile, what federal taxpayers get is a permanent increase in the size of government.
We have all heard similar statements before which tend to be supported by references to $800 billion to $1 trillion stimulus packages and bailouts both in the US and Europe.
But have we really see an unusual expansion of government size? Quite the contrary. As I argued in a previous post, what we have seen during the current crisis is exactly the opposite. Relative to previous crisis government spending has been growing at a much slower rate this time. Paul Krugman makes an even more interesting comparison in blog, a comparison that reveals how inaccurate the above statement is. He compares government employment under the Obama administration to the Bush and Clinton administrations. The Bush administration is probably the most relevant comparison because it also started in the middle of a recession. Here is the chart from Krugman's analysis. ...
The data speaks for itself. 40 months into the Obama administration, the number of government employees (all levels of government) has gone down by 600,000. During the Bush administration the number had increased by about 700,000. A difference of 1.3 million. So where is the increase in government size? ...
[See here for another graph comparing government spending during recent recoveries.]
I don't think the evidence supports the assertion that the preponderance of the stimulus was saved rather than spent. But suppose that it was. For consumers in particular, this is a form of balance sheet repair -- they are saving to make up for losses in asset values that they were depending upon for retirement, to pay for college, and so on. Balance sheet repair does not show up in current GDP statistics, so it looks like the policy is doing nothing. But since consumers won't begin spending normally until their balance sheets are repaired, high savings allows us to exit the recession faster than otherwise (though balance sheet repair is a slow process in any case). State and local budgets --balance sheets --were also wiped out by the recession, so similar arguments can be made here. If state and local government did use this money mostly to backfill revenue losses instead of taking on new projects, that's a sign they didn't get enough help (this is also reflected in the fall in state and local employment). State and local governments have to make up for budget shortfalls somehow, and the sooner they are able to do that, the sooner the layoffs and so on stop. So although we don't see the savings component in current GDP figures, the savings allows balance sheet repair to happen faster, and that allows an earlier exit from the recession.
Again, though, there is plenty of evidence that runs counter to the claim that the stimulus did nothing. The ARRA (stimulus package) had more tax cuts than I would have preferred, and hence there was more savings and less spending than a better designed package might have produced (but the package would not have made it through Congress if it was more spending, less tax cuts). But the higher rate of saving does have benefits in a balance sheet recession.

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