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November 28, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: The Secret of Our Non-Success

Posted: 22 Oct 2012 12:33 AM PDT

One of these recessions is not like the others:

The Secret of Our Non-Success, by Paul Krugman, Commentary, NY Times: The U.S. economy finally seems to be recovering in earnest... But the news is good, not great — it will still take years to restore full employment...
Why is recovery from a financial crisis slow? Financial crises are preceded by credit bubbles; when those bubbles burst, many families and/or companies are left with high levels of debt, which force them to slash their spending. This slashed spending, in turn, depresses the economy...
And the usual response to recession, cutting interest rates to encourage spending, isn't adequate. Many families simply can't spend more, and interest rates can be cut only so far — namely, to zero but not below.
Does this mean that nothing can be done to avoid a protracted slump after a financial crisis? No, it just means that you have to do more than just cut interest rates. In particular, what the economy really needs ... is a temporary increase in government spending, to sustain employment while the private sector repairs its balance sheet. And the Obama administration did some of that, blunting the severity of the financial crisis. Unfortunately, the stimulus was both too small and too short-lived, partly because of administration errors but mainly because of scorched-earth Republican obstruction.
Which brings us to the politics.
Over the past few months advisers to the Romney campaign have mounted a furious assault on the notion that financial-crisis recessions are different. For example,... former Senator Phil Gramm and Columbia's R. Glenn Hubbard published an op-ed article claiming that we should be having a recovery comparable to the bounceback from the 1981-2 recession, while a white paper from Romney advisers argues that the only thing preventing a rip-roaring boom is the uncertainty created by President Obama.
Obviously, Republicans like claiming that it's all Mr. Obama's fault... But ... the Romney team is willfully, nakedly, distorting the record, leading Ms. Reinhart and Mr. Rogoff — who aren't affiliated with either campaign — to protest against "gross misinterpretations of the facts." And this should worry you.
Look, economics isn't as much of a science as we'd like. But when there's overwhelming evidence for an economic proposition ... we have the right to expect politicians and their advisers to respect that evidence. Otherwise, they'll end up making policy based on fantasies rather than grappling with reality.
And once politicians start refusing to acknowledge inconvenient facts, where does it stop? Why, the next thing you know Republicans will start rejecting the overwhelming evidence for man-made climate change. Oh, wait.

Links for 10-22-2012

Posted: 22 Oct 2012 12:15 AM PDT

Stavins: Cap-and-Trade, Carbon Taxes, and My Neighbor’s Lovely Lawn

Posted: 21 Oct 2012 12:07 PM PDT

Speaking of externalities associated with energy use, Robert Stavins throws cold water on "current enthusiasm about carbon taxes in the academic and broader policy-wonk community":

Cap-and-Trade, Carbon Taxes, and My Neighbor's Lovely Lawn, by Robert Stavins: conclusion in 1998 strongly favored a market-based carbon policy, but was somewhat neutral between carbon taxes and cap-and-trade. Indeed, at that time and for the subsequent eight years or so, I remained agnostic regarding what I viewed as the trade-offs between cap-and-trade and carbon taxes. What happened to change that? Three words: The Hamilton Project.
...In 2007, the Project's leadership asked me to write a paper proposing a U.S. CO2 cap-and-trade system. ... The Hamilton Project leaders said ... they wanted me to make the best case I could for cap-and-trade, not a balanced investigation of the two policy instruments. Someone else would be commissioned to write a proposal for a carbon tax. (That turned out to be Professor Gilbert Metcalf of Tufts University ... who did a splendid job!) Thus, I was made into an advocate for cap-and-trade. It's as simple as that. ...
In principle, both carbon taxes and cap-and-trade can achieve cost-effective reductions, and – depending upon design — the distributional consequences of the two approaches can be the same. But the key difference is that political pressures on a carbon tax system will most likely lead to exemptions of sectors and firms, which reduces environmental effectiveness and drives up costs, as some low-cost emission reduction opportunities are left off the table. But political pressures on a cap-and-trade system lead to different allocations of the free allowances, which affect distribution, but not environmental effectiveness, and not cost-effectiveness.
I concluded that proponents of carbon taxes worried about the propensity of political processes under a cap-and-trade system to compensate sectors through free allowance allocations, but a carbon tax would be sensitive to the same political pressures, and should be expected to succumb in ways that are ultimately more harmful: reducing environmental achievement and driving up costs.
Of course, such positive political economy arguments look much less compelling in the wake of the defeat of cap-and-trade legislation in the U.S. Congress and its successful demonization by conservatives as "cap-and-tax."
A Political Opening for Carbon Taxes?
Does the defeat of cap-and-trade in the U.S. Congress, the obvious unwillingness of the Obama White House to utter the phrase in public, and the outspoken opposition to cap-and-trade by Republican Presidential candidate Mitt Romney indicate that there is a new opening for serious consideration of a carbon-tax approach to meaningful CO2 emissions reductions?

First of all, there surely is such an opening in the policy wonk world. Economists and others in academia, including important Republican economists such as Harvard's Greg Mankiw and Columbia's Glenn Hubbard, remain enthusiastic supporters of a national carbon tax. And a much-publicized meeting in July at the American Enterprise Institute in Washington, D.C. brought together a broad spectrum of Washington groups – ranging from Public Citizen to the R Street Institute – to talk about alternative paths forward for national climate policy. Reportedly, much of the discussion focused on carbon taxes.

Clearly, this "opening" is being embraced with enthusiasm in the policy wonk world. But what about in the real political world? The good news is that a carbon tax is not "cap-and-trade." ... But if conservatives were able to tarnish cap-and-trade as "cap-and-tax," it surely will be considerably easier to label a tax – as a tax! Also, note that Romney's stated opposition and Obama's silence extend beyond disdain for cap-and-trade per se. Rather, they cover all carbon-pricing regimes.
So as a possible new front in the climate policy wars, I remain very skeptical that an explicit carbon tax proposal will gain favor in Washington, no matter what the outcome of the election. ...
I would personally be delighted if a carbon tax were politically feasible in the United States, or were to become politically feasible in the future. But I'm forced to conclude that much of the current enthusiasm about carbon taxes in the academic and broader policy-wonk community in the wake of the defeat of cap-and-trade is – for the time being, at least – largely a manifestation of the grass looking greener across the street.

'Reducing Oil Imports'

Posted: 21 Oct 2012 10:23 AM PDT

Jim Hamilton:

Reducing oil imports, by Jim Hamilton: ...In 2011, the U.S. imported $462 billion of petroleum and petroleum products, or more than a billion dollars every day (see BEA Table 4.2.5). The fact that we import goods from other countries is not a problem per se. Standard economic theory teaches that if the U.S. imports some goods and exports others, the country overall will be richer than in the absence of trade, because the value of what we gain in imports is higher to us than the value of what we sell as exports. But in the current U.S. situation, our oil imports aren't balanced by other exports. Last year the U.S. spent $568 billion more on imported goods and services than we sold to other countries, with petroleum imports accounting for more than 80% of the total current account deficit
When we import more than we export, we have to pay for the difference either by selling off some of our assets or by borrowing more from foreigners. Notwithstanding, running a current account deficit could still be a way to make the country richer. If we use the imported goods and borrowed funds to invest in productive capital and useful infrastructure, we should have plenty of future resources to pay back all that we borrowed, with more left over for ourselves. In such a case, a big current account deficit could still be a win-win situation.
But what if we're not investing, and are just using the imports and foreign borrowing to enjoy a temporarily higher standard of living, leaving it to the future to pay the bills? That, too, could be economically optimal if what we most value as a nation is having more consumption spending right now.
But I'm not convinced that's the future that most Americans want. ...
I agree with the position taken by both President Obama and Governor Romney that presidential decisions need to encourage more oil production in the United States.
However, I would add that policies that discourage U.S. consumption of petroleum would also achieve the same goal. For example, trying to make more use of our natural gas resources for transportation is an idea that should appeal to Americans on both sides of the political spectrum. ...
I retain the hope that, whoever wins the election, they might seize the opportunity to move the country in a more positive direction by focusing on some goals and strategies on which both political parties should be able to agree.
Increasing U.S. oil production and decreasing U.S. oil consumption should be two such goals.

I see more difference between the candidates on the drill versus conserve continuum, and I'd guess I tilt more toward the conservation/find new energy sources end of the spectrum than he does. In addition, I wish the externalities associated with energy use and the need to use some form of regulation to reduce them (e.g. carbon tax, cap and trade, etc.) -- regulation that should discourage consumption -- had been mentioned (a point where the two parties clearly differ -- it matters who is elected).

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