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September 13, 2012

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Latest Posts from Economist's View


The Campaign Trail: No Help for the Unemployed

Posted: 11 Sep 2012 12:34 AM PDT

A new column:

 The Campaign Trail: No Help for the Unemployed

The unemployed have, it appears, been hiding from politicians.

'Significantly More Negligence Than Has Been Disclosed'

Posted: 11 Sep 2012 12:30 AM PDT

"Bin Laden was merely pretending to be planning an attack to distract the administration from Saddam Hussein, whom the neoconservatives saw as a greater threat":

The Deafness Before the Storm, by Kurt Eichenwald, NY Times: It was perhaps the most famous presidential briefing in history.
On Aug. 6, 2001, President George W. Bush received a classified review of the threats posed by Osama bin Laden and his terrorist network, Al Qaeda. That morning's "presidential daily brief" — the top-secret document prepared by America's intelligence agencies — featured the now-infamous heading: "Bin Laden Determined to Strike in U.S." A few weeks later, on 9/11, Al Qaeda accomplished that goal.
On April 10, 2004, the Bush White House declassified that daily brief — and only that daily brief — in response to pressure from the 9/11 Commission... Administration officials dismissed the document's significance, saying that, despite the jaw-dropping headline, it was only an assessment of Al Qaeda's history, not a warning of the impending attack. While some critics considered that claim absurd, a close reading of the brief showed that the argument had some validity.
That is, unless it was read in conjunction with the daily briefs preceding Aug. 6, the ones the Bush administration would not release. While those documents are still not public, I have read excerpts from many of them, along with other recently declassified records, and come to an inescapable conclusion: the administration's reaction to what Mr. Bush was told in the weeks before that infamous briefing reflected significantly more negligence than has been disclosed. ...
The direct warnings to Mr. Bush about the possibility of a Qaeda attack began in the spring of 2001. By May 1, the Central Intelligence Agency told the White House of a report that "a group presently in the United States" was planning a terrorist operation. Weeks later, on June 22, the daily brief reported that Qaeda strikes could be "imminent," although intelligence suggested the time frame was flexible.
But some in the administration considered the warning to be just bluster. An intelligence official and a member of the Bush administration both told me in interviews that the neoconservative leaders who had recently assumed power at the Pentagon were warning the White House that the C.I.A. had been fooled; according to this theory, Bin Laden was merely pretending to be planning an attack to distract the administration from Saddam Hussein, whom the neoconservatives saw as a greater threat. ... In response, the C.I.A. prepared an analysis that all but pleaded with the White House to accept that the danger from Bin Laden was real. ... And the C.I.A. repeated the warnings... Yet, the White House failed to take significant action. ...

Wind Power

Posted: 11 Sep 2012 12:24 AM PDT

Is wind power the answer?:

Wind could meet many times world's total power demand by 2030, researchers say, EurekAlert: In a new study, researchers at Stanford University's School of Engineering and the University of Delaware developed the most sophisticated weather model available to show that not only is there plenty of wind over land and near to shore to provide half the world's power, but there is enough to exceed total demand by several times if need be...
The new paper contradicts two earlier studies that said wind potential falls far short of the aggressive goal because each turbine steals too much wind energy from other turbines, and that turbines introduce harmful climate consequences that would negate some of the positive aspects of renewable wind energy. ...
Among the most promising things the researchers learned is that there is a lot of potential in the wind — hundreds of terawatts. At some point, however, the return on building new turbines plateaus, reaching a level in which no additional energy can be extracted even with the installation of more turbines.
"Each turbine reduces the amount of energy available for others," Archer said. The reduction, however, becomes significant only when large numbers of turbines are installed, many more than would ever be needed.
"And that's the point that was very important for us to find," Archer said. ...
"We're not saying, 'Put turbines everywhere,' but we have shown that there is no fundamental barrier to obtaining half or even several times the world's all-purpose power from wind by 2030. The potential is there, if we can build enough turbines," said Jacobson.
Knowing that the potential exists, the researchers turned their attention to how many turbines would be needed to meet half the world's power demand — about 5.75 terawatts — in a 2030 clean-energy economy. ...
Archer and Jacobson showed that four million, five-megawatt turbines operating at a height of 100 meters could supply as much 7.5 terawatts of power — well more than half the world's all-purpose power demand — without significant negative affect on the climate.  ...
In terms of surface area, Jacobson and Archer would site half the four million turbines over water. The remaining two million would require a little more than one-half of one percent of the Earth's land surface — about half the area of the State of Alaska. However, virtually none of this area would be used solely for wind, but could serve dual purposes as open space, farmland, ranchland, or wildlife preserve.
Rather than put all the turbines in a single location, Archer and Jacobson say it is best and most efficient to spread out wind farms in high-wind sites across the globe — the Gobi Desert, the American plains and the Sahara for example.
"The careful siting of wind farms will minimize costs and the overall impacts of a global wind infrastructure on the environment," said Jacobson. "But, as these results suggest, the saturation of wind power availability will not limit a clean-energy economy."

[Brad Plumer has more.]

Links for 09-11-2012

Posted: 11 Sep 2012 12:06 AM PDT

Gordon: Is US Economic Growth Over?

Posted: 10 Sep 2012 06:16 PM PDT

Robert Gordon is "deliberately provocative" (I'm an optimist):

Is US economic growth over? Faltering innovation confronts the six, by Robert J. Gordon, Vox EU: Global growth is slowing – especially in advanced-technology economies. This column argues that regardless of cyclical trends, long term economic growth may grind to a halt. Two and a half centuries of rising per-capita incomes could well turn out to be a unique episode in human history.

It is time to raise basic questions about the process of economic growth, especially the assumption – nearly universal since Solow's seminal contributions of the 1950s (Solow 1953) – that economic growth is a continuous process that will persist forever.

  • There was virtually no growth before 1750;
  • There is no guarantee that growth will continue indefinitely.

This column introduces my CEPR Policy Insight, which argues in detail that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history (Gordon 2012).

The data I use only concern the US and view the future from 2007 while pretending that the financial crisis did not happen. The focus is on per-capita real GDP growth in the frontier country since 1300, the UK until 1906 and the US afterwards. Growth in the frontier economy gradually accelerated after 1750, reached a peak in the middle of the 20th century, and it has been slowing since. The paper is about 'how much further could the frontier growth rate decline?'

Growth: The long view

Figure 1 takes the history of economic growth back to the year 1300. Clearly there was almost no growth through 1700, then a gradually accelerating rate of growth. The blue line in Figure 1 represents growth in the frontier country – the US after 1906 and Britain before because 1906 seems to be the consensus of modern growth data for the cutover.

The key point is the big peak in US growth between 1928 and 1950, the years that span the Great Depression and WWII. Leaving aside the debate about what could have caused a concentration of economic growth in a period dislocated by depression and war, the remaining conclusion of Figure 1 is that growth has steadily declined in each interval plotted since 1950.

Figure 1. Growth in real GDP per capita, 1300-2100

Gordon1

The paper is deliberately provocative and suggests not just that economic growth was a one-time thing centered on 1750-2050, but also that because there was no growth before 1750, there might conceivably be no growth after 2050 or 2100. The process of innovation may be battering its head against the wall of diminishing returns. Indeed, this is already evident in much of the innovation sector.

To taunt critics Figure 2 superimposes on the actual growth record a green line that starts at zero growth in 1300, peaks in the middle of the 20th century, and then floats down to 0.2% by 2100. Figure 3 translates the growth rates into levels.

  • Before 1800, it took centuries to double income per capita;
  • Between 1929 and 1957, US incomes doubled in only 28 years;
  • Between 1957 and 1988, doubling took 31 years.
  • The pessimistic view adopted here suggests that it may take almost a century for income per capita to double between 2007 and 2100.

Figure 2. Growth in real GDP per capita, with actual and hypothetical paths

Gordon2

Figure 3. Actual and hypothetical levels of GDP per capita, 1300-2100

Gordon3

Phases of growth

The analysis in my paper links periods of slow and rapid growth to the timing of the three industrial revolutions:

  • IR #1 (steam, railroads) from 1750 to 1830;
  • IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900; and
  • IR #3 (computers, the web, mobile phones) from 1960 to present.

It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972.

Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once – urbanization, transportation speed, the freedom of women from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.

Figure 4 translates the abstraction about the three industrial revolutions into the data on US growth in labor productivity over selected intervals in the postwar era.

Figure 4. Average growth rates of US labor productivity over selected intervals, 1891-2012

Gordon4

  • The ongoing benefits of IR #2 maintained rapid productivity growth through 1972.

Then diminishing returns set in – air conditioning was here and the interstate highways had been largely completed. The US entered the "dismal age" of slow productivity growth between 1972 and 1996. After being the mysterious 'Missing in Action' component of growth, computers and their brethren the internet and world wide web, pushed the growth of productivity in Figure 4 upwards, but only for the eight years 1996-2004.

  • IR #3 appears to have lasted only eight years, compared to the conjectural 100 years for IR #2.
  • Since 2004 productivity growth has been almost as slow as in the previous dismal period of 1972-96.

Inventions are not all created equal

The paper explains this history by a simple proposition. The great inventions of IR #2 were just more important than anything that has happened since. The speed of transportation was increased from that of the 'hoof and sail' to the Boeing 707. The temperature of a room was wildly variable in the 19th century but by now is a uniform 70 degrees year round. The transition from rural to urban in the US could only happen once. Only once could electricity be invented and create rapid transit, machine tools, consumer appliances, and the entire electricity-dependent set of entertainment devices from the radio to the TV to the internet and its multiple spin-offs such as the iPod, iPhone, and iPad.

The loss of the impetus of IR #2 inventions makes a big difference in the future of human wellbeing. Figure 5 shows that if the 1948-72 productivity trend had continued, the level of productivity would have been 69% above what would have occurred if the 1972-96 trend had continued. The actual outcome shown in Figure 5 is that the benefits of actual productivity from the IR #3 internet revolution only closed 9% of the 69% gap created by the end of the IR #2 inventions.

Figure 5. US labor productivity from 1948 to 2012, with trend growth rates over selected intervals

Gordon5

Even if innovation were to continue into the future at the rate of the two decades before 2007, the US faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9% annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. A provocative 'exercise in subtraction' suggests that future growth in consumption per capita for the bottom 99% of the income distribution could fall below 0.5% per year for an extended period of decades.
The exercise in subtraction is shown in Figure 6, but this is just a suggestion. All the numbers could be altered, but the big point is that each of these subtractions is a number, whether 0.05 or 0.1, or 0.2, that reduces the future growth of consumption per capita for the bottom 99% of US households.

Figure 6. Exercise in subtraction: Components of growth, from 1987 to 2007

Gordon6

Concluding remarks
This paper is deliberately provocative. The numbers in the 'exercise in subtraction' have been chosen to reduce growth to that of the UK for 1300-1700. The outcome may turn out to be much better than that. But the point of this article is that it is likely to be much worse than any epoch of US growth since the civil war.
References
Gordon, Robert (2012). 'Is US economic growth over? Faltering innovation confronts the six headwinds', CEPR Policy Insight No 63.
Solow, Robert (1956). "A Contribution to the Theory of Economic Growth". Quarterly Journal of Economics 70 (1): 65–94 [3].

'Mitt Romney and America’s Four Deficits'

Posted: 10 Sep 2012 10:59 AM PDT

Laura Tyson on the Romney-Ryan budget proposals:

Mitt Romney and America's Four Deficits, by Laura Tyson, Commentary, Project Syndicate: The United States is beset by four deficits: a fiscal deficit, a jobs deficit, a deficit in public investment, and an opportunity deficit. The budget proposals put forward by presidential candidate Mitt Romney and his running mate, Paul Ryan, could reduce the fiscal deficit, but ... based on what he has revealed, we know that it would increase the jobs deficit, the investment deficit, and the opportunity deficit, with negative consequences for future growth and prosperity.

Republicans on Infrastructure: We Won’t Build That

Posted: 10 Sep 2012 10:36 AM PDT

A column from two weeks ago (new one tomorrow):

We Won't Build That, by Mark Thoma: Once the Republican National Convention in Tampa Bay, Florida ends, all eyes will turn to this year's Federal Reserve conference in Jackson Hole, Wyoming. At the 2010 conference, Chairman Ben Bernanke gave a speech that paved the way for a second round of quantitative easing, and this year's speech will be closely watched for hints that the Fed is about to ease policy further in an attempt to help the economy recover.

Discussion in the minutes from the last monetary policy meeting points in the direction of further easing, and most analysts expect that Chairman Bernanke will set the stage for further action. I hope they are correct. The unemployment rate is still far too high, there's no sign that more aggressive policy would cause inflation to become a problem, and the economy can use all the help it can get. Given the slow pace of the recovery, it's puzzling why the Fed hasn't done more to help already.

But I also worry that monetary policy has been oversold. It cannot, by itself, cure the economy's problems when the downturn is as large as the one we have experienced. In severe recessions, fiscal policy is also needed.

Presently, there are two ways that fiscal policy could be used to promote a faster recovery. The first is infrastructure spending. We cannot afford to fall behind the rest of the world in terms of our infrastructure development, but that's exactly what we are doing. At a time when interest rates are as low as we are likely to see, when labor and other costs are minimal due to lack of demand during the downturn, and when the need is so high, why aren't we making a massive investment in infrastructure, which is ultimately an investment in our future? There are many, many public investments we could make where the benefits surely exceed the costs – these are things the private sector won't do on its own even though they are highly valuable to society – so what are we waiting for?

The second thing that is needed is debt relief for households. Losses in home equity, stock investments, and job opportunities have taken a significant toll on household balance sheets. As households attempt to rebuild what has been lost, they save more and consume less and the loss of consumption is a drag on the recovery. So long as this rebuilding continues, and it can take many years to rebuild after such large losses, the economy will continue to be sluggish. Debt relief, or anything else the government can do to help households overcome their losses, would shorten the recovery.

We have used both monetary and fiscal policy to battle this recession, and without the Fed's actions to limit the downturn things would have been much worse. Fiscal policy in the form of the stimulus package, though too little, too late, and too tilted towards tax cuts, also helped to limit the damage to the economy. But when it comes to promoting a faster recovery, both monetary and fiscal policymakers have failed to do enough to help the economy return to full employment.

Which brings us back to the Republican National Convention. The economy will be the focus at the convention, and we will hear about the supposed failures of the Fed. For example, one of the biggest applause lines at Ron Paul's rally in Tampa on Sunday was that "Ben Bernanke is a traitor and dictator," and Mitt Romney has said he will replace Bernanke, presumably with someone anxious to undo the policies the Fed has put into place rather than expand upon them to promote recovery.

We will also hear claims that, despite growing evidence to the contrary, the fiscal stimulus didn't work. Criticism about the government debt will surely follow, and it will be clear that there's no room in Republican plans for infrastructure or debt relief programs to speed the recovery.

If there's any policy Republicans ought to be able to support, it's infrastructure spending. It's inherently a supply-side policy, it helps to promote future economic growth, and it's an investment with large, positive net benefits. But Republicans see a "we won't build that" approach to infrastructure spending, an approach that is harmful to our prospects for recovery and to our prospects for future economic growth, as a way to reclaim the presidency.

Romney continues to use the "you didn't build that" quote – misleadingly – to try to argue that Obama is against business, and that this is one of the key factors holding back the recovery. But the real problem has nothing to do with Obama's view of business. The real problem is the Republican's opposition to using monetary or fiscal policy to help the economy in any way, and their "we won't build that" stance on infrastructure spending is a good example of the extent to which their political aspirations stand in the way of a speedier recovery.

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