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February 8, 2013

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Latest Posts from Economist's View


Posted: 08 Feb 2013 12:24 AM PST
Now is NOT the time for austerity:
Kick That Can, by Paul Krugman, Commentary, NY Times: John Boehner, the speaker of the House, claims to be exasperated. "At some point, Washington has to deal with its spending problem," ... "I've watched them kick this can down the road for 22 years since I've been here. I've had enough of it. It's time to act." ...
While it's true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we're in, it would be irresponsible and destructive not to kick that can down the road.
Start with a basic point: Slashing government spending destroys jobs and causes the economy to shrink. This really isn't a debatable proposition... Even Republicans admit, albeit selectively, that spending cuts hurt employment. Thus John McCain warned earlier this week that the defense cuts scheduled to happen under the budget sequester would cause the loss of a million jobs. ...
Still, won't spending cuts (or tax increases) cost jobs whenever they take place, so we might as well bite the bullet now? The answer is no — given the state of our economy, this is a uniquely bad time for austerity.
One way to see this is to compare today's economic situation with ... the big winding down of military spending in the late 1980s and early 1990s, following the end of the cold war. Those spending cuts destroyed jobs... At the national level, however, the effects were softened by monetary policy...
Today, by contrast, we're still living in the aftermath of the worst financial crisis since the Great Depression, and the Fed, in its effort to fight the slump, has already cut interest rates as far as it can — basically to zero. So the Fed can't blunt the job-destroying effects of spending cuts...
The point, again, is that now is very much not the time to act; fiscal austerity should wait until the economy has recovered...
But aren't we facing a fiscal crisis? No,... medium-term forecasts, like the 10-year projections released Tuesday by the Congressional Budget Office, are distinctly not alarming. ...
Realistically, we're not going to resolve our long-run fiscal issues any time soon, which is O.K. — not ideal, but nothing terrible will happen... Meanwhile, we face the imminent threat of severe economic damage from short-term spending cuts.
So we should avoid that damage by kicking the can down the road. It's the responsible thing to do.
Posted: 08 Feb 2013 12:03 AM PST
Posted: 07 Feb 2013 02:49 PM PST
Binyamin Appelbaum:
Fed Official Sees Tension in Some Credit Markets, by Binyamin Appelbaum, NY Times: Some credit markets are showing signs of overheating as investors take larger risks in response to the persistence of low interest rates... Fed Governor Jeremy Stein, highlighted a surge in junk bond issues, the popularity of certain kinds of real estate investment trusts and shifts in bank balance sheets as areas the central bank is watching closely...
Mr. Stein gave no indication that the Fed is contemplating any change in its aggressive efforts to hold down interest rates. Rather, he described the overheating as a trend that might require a response if it intensified over the next 18 months. But the speech nonetheless underscored that the Fed increasingly regards bubbles, rather than inflation, as the most likely negative consequence of its efforts to reduce unemployment by stimulating growth. ...
Central bankers historically have been skeptical that asset bubbles can be identified or prevented from popping. Moreover, they tend to regard financial regulation as the appropriate means to prevent excessive speculation and not changes in monetary policy ... But the crisis has forced central bankers to reconsider both the importance of financial stability and the role of monetary policy. ...
And he closed on a cautionary note. "Decisions will inevitably have to be made in an environment of significant uncertainty," he said. "Waiting for decisive proof of market overheating may amount to an implicit policy of inaction on this dimension."
With fiscal policy moving in the wrong direction -- deficit reduction rather than employment enhancing stimulus, e.g. infrastructure -- if monetary policymakers begin getting skittish, then the unemployed will lose the one institution that seemed to actually care about their struggles. Not good.
[See also Paul Krugman on the limits of monetary policy in the present economic environmemnt, and why "Austerity right now is a really, really bad idea."]
Posted: 07 Feb 2013 10:54 AM PST
A plastic bag ban is going to go into effect here in Eugene, Oregon on May 1:
Reusable Grocery Bags Can Kill (Unless Washed), by Tim Taylor: One recent local environmental cause, especially popular in California, has been to ban or tax plastic grocery bags. The expressed hope is that shoppers will instead carry reusable grocery bags back and forth to the grocery store, and that plastic bags will be less likely to end up in landfills, or blowing across hillsides, or floating in water. The problem is that almost no one ever washes their reusable grocery bags. Reusuable grocery bags often carry raw meat, unseparated from other foods, and are often stored for convenience in the trunk of cars that sit outside in the sun. In short, reusuable grocery bags can be a friendly breeding environment for E. coli bacteria, which can cause severe illness and even death.

Jonathan Klick and Joshua D. Wright tell this story in "Grocery Bag Bans and Foodborne Illness," published as a research paper by the Institute for Law and Economics at the University of Pennsylvania Law School. As their primary example, they look at E. coli infections in the San Francisco County after it adopted an ordinance severely limiting the use of plastic bags by grocery stores.

As one piece of evidence, here's a figure showing the number of emergency room visits in San Francisco County related to E. coli for the 10 quarters before and after the enactment of the ordinance, where zero on the horizontal axis is the date the ordinance went into effect. (The shaded area around the line is a 95% statistical confidence interval.)  Clearly, there is a discontinuous jump in the number of emergency room visits.
For comparison, here's the same measure of emergency room visits related to E. coli infections for the other counties in the San Francisco Bay Area in the 10 quarters before and after the ordinance was enacted. These counties don't see a jump.
Klick and Wright flesh out this finding in a variety of ways. ... Overall, they find that San Francisco typically experiences about 12 deaths per year from intestinal infections, and that the restrictions on plastic bags probably let to another 5-6 deaths per year in that city--plus, of course, the personal and social costs of some dozens of additional hospitalizations. With these costs taken into account, restrictions on plastic bags stop looking like a good idea.

Of course, a possible response to this problem is to launch a public information campaign to encourage people to wash their reusable grocery bags. But that response then leads to two other issues.  First, if public information campaigns can be effective on the grocery bag issue, the campaign could simply focus on the need to dispose of plastic bags properly and recycle them where possible--without a need to ban them. The argument for an ordinance sharply limiting the use of plastic grocery bags is, in effect, based on an implicit assumption that public information campaigns about grocery bags don't work well.  Second, if reusable grocery bags are washed after each use, then any cost-benefit analysis of their use would have to take into account the costs of water and detergent use. I have no idea if these costs alone would outweigh the benefits of reusable grocery bags, but it might be a near thing.

 Like most economists, I have a mental file drawer of "good intentions aren't enough" stories. The push to ban plastic grocery bags is one more example.
Posted: 07 Feb 2013 10:05 AM PST
Jared Bernstein:
Senator John McKeynes, by Jared Bernstein: From this AM's NYT:
…the potential impact of the cuts is being cited by both parties. Senator John McCain, Republican of Arizona, said the military side alone would eliminate 350,000 jobs directly, and 650,000 more that depend on the government programs.
So, not only is this pure Keynesian analysis, but the Senator is recognizing both the direct and indirect effects of the cuts of jobs.  In other words, he's got a multiplier, and it's a big one!
I can't say how long will it be until these guys go back to saying "the government doesn't create jobs!" but until then we need to add to our working definition of a Keynesian.  It used to be "a Republican in a recession."  Now it's also "a Republican facing defense cuts."
Do you think McCain understands this inconsistency (or cares if he does)?

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