Anti-stimulus sentiment ran high in the comments section of my (qualified) defense of the Obama Administration’s economic policy. I encourage the skeptics to check out this article from Richard Posner, which mounts a limited defense of Keynesian policies in an economic downturn.

“If anyone tries to tell you that uncertainty about climate change is a reason for inaction, he’s either a fool or a scoundrel. Probably a bit of both.” ~ Mark Kleiman

Kleiman makes a number of assumptions in his piece before reaching this one.  He assumes some hypothetical climate change statistics and then assumes that because he has made such a speculation that the policy going forward should be precautionary against said speculative fiction.  But simply because Mark Kleiman says that we might see an 8 degree (C) increase in temperature by 2100 does not make it so.

Writes Kleiman:

Ordinarily, it is the proponents of action who bear the burden of persuasion.  But in this case political inaction means, in effect, licensing a massive gamble, though no individual chooses to make it. Rather, the gamble would be the outcome of billions of uncoordinated self-interested decisions: precisely the sort of process that, in the absence of external costs, leads to efficient outcomes.  But none of the arguments for the freedom of economic activity applies to activities with huge, indirect, deferred, and diffuse external costs:  by contrast with Adam Smith’s baker, there is simply no “invisible hand” mechanism that directs private action in such a situation in the direction of the public interest.

Actually, just like with any free market, climate change will respond to market pressures coupled with government incentives.  Rising fuel costs will reduce the amount of fuel used and the less people drive and fewer things are shipped via truck and freighter, the lower our CO2 emissions will be.  The government can invest in mass transit to help ease in a different norm for transportation as traditional fuel, and therefore traditional means of travel, becomes more and more prohibitively expensive.  Private innovators can be allowed to come up with the next revolutionary inventions in renewable energy and green transportation.  The government can issue tax credits to innovators and consumers who participate in the green revolution.  They can also provide more grants to college students pursuing science and engineering degrees.

These are positive steps rather than punitive ones.  The punitive measures should be directed at individual players – polluters and industries which have the largest hand in producing emissions.  Cap and trade is too broad and too subject to capture to be effective.  Targeting specific polluters makes more sense, while nudging normal Americans toward a different energy and transportation model in the future. [Read more →]

Riffing off my last post, I’d like to take on two thoughts.  First, here’s Yglesias: [Read more →]

Via Sociological Images is this pretty awesome “pro-capitalist” propaganda cartoon from 1948:

The Miller Center of Public Affairs (my employer) is holding a conference on the 20th anniversary of the fall of the Berlin Wall, and as such, I spent most of my Monday night at a work-related dinner with prominent IR scholars and Cold War historians.  Most of the folks at my table taught at large universities, and unsurprisingly, they spent a fair amount of time discussing/complaining about how hard it is to really make undergraduates understand the fear and paranoia that defined the early Cold War era.  Although they generally agreed that it was an exercise in futility (my protests didn’t really have an impact), the professor sitting next to me did acknowledge that he had found some success by simply giving his students a brief economic history of the Soviet Union, from its creation in the early 1920s to the end of the Second World War.  As the professor explained it, if you do that, it’s actually very easy to see why U.S. policymakers were terrified of the Soviet system and it’s implications for the rest of the world.

In less than a generation, the Soviet Union – formerly a poor, agrarian society – ballooned into an industrial powerhouse with the military might to successfully stop* what was then the most well-equipped and well-led army on the planet.  What’s more, the Soviet Union’s command economy didn’t seem to have a negative impact on growth rates.  Indeed, the Soviet economy grew briskly for a good portion of the early post-war period, convincing many American elites – even industrialists – that at least for developing countries, the Soviet approach had real merit**.  This is why you see cartoons like the one above – at the time, most of the available evidence supported the idea that the Soviet system was a reasonable alternative.  And since the Western world was only a few years removed from the almost total collapse of capitalism (as well as the prospect of left-wing revolution) it was important to impress upon people the benefits of capitalism and the deficiencies of Soviet-style command economics.

*Americans mythologize the Second World War in such a way as to almost completely discount the contributions of the Soviets/Russians.  In fact, calling them “contributions” doesn’t come close to doing the Russians Soviets justice; Germany unleashed the vast majority of its military might against the Soviet Union, sending nearly 80 percent of its combat divisions to rampage across Russia.  The Soviet Union fought and destroyed the vast majority of said divisions – 4.3 million German soldiers were killed or wounded on the Eastern Front – at an unfathomable cost to itself.  Wikipedia puts Soviet military casualties at approximately 10.5 million and Soviet civilian casualties (within postwar borders) at 15.7 million.  Or, put another way, if the Soviet Union hadn’t joined the war effort, its safe to assume that most of Western Europe would have ended up as part of a greater Germany.

**There is a reason why large, developing countries like China and India aligned themselves with the Soviet Union – the command and control thing really did seem to work.

Update: Edited for clarity.

Matt Yglesias is in Denmark.  I can sort of travel vicariously by blogging about Denmark as well, so here we go….  Not surprisingly, the Danes have very high taxes:

The overwhelming fact about Danish public policy is that taxes in Denmark are really high. There’s a substantial VAT and also a substantial income tax. You pay taxes to buy a car, and you pay higher taxes for heavy cars. Gasoline taxes are high (gas costs almost $7.50 a gallon) as are taxes on electricity, which account for more than half the cost of electricity to consumers. In exchange for all this, the Danes have basically achieved all the stuff progressives say they want. The country is rich, clean, and highly egalitarian. The high taxes finance generous public services, and the high levels of expenditure allow the country to do without a lot of extraneous business regulation which helps keep the place economically dynamic. According to surveys, the people are all very happy, which is exactly what you would expect from a very rich, very egalitarian society. And as this trip has emphasized, they do it all while doing much less polluting than Americans do, despite a higher average material standard of living [....]

All of which is just to emphasize a point I’ve been making a lot over the past few months: there’s no way to have a progressive renaissance in the United States unless progressives find some politically feasible way of directly making the case that higher taxes for better services can be a good trade. And it’s worth trying to be honest about this. The other American journalists I’m traveling with, all lefty environmentalist types, can’t stop complaining about how expensive basic consumer goods are here. And it’s true, stuff’s expensive! But college and preschool and doctors and hospitals are all free, and the carbon emissions are low. This is, I think, a good trade but it really is a trade. Low taxes plus cheap dirty energy and large numbers of poor people will give you cheaper restaurants.

Interestingly enough, they also have very low unemployment – current estimates place it at about 3.7%, while popular support for free trade and globalization is at a staggering 76%.  In many other ways, the Danish economy differs from our own.  It’s more unionized, but it’s also much easier for employers to fire their employees.  While the tax burden is much higher, corporate taxes and capital gains taxes are much lower than in the United States.  All in all, it’s not a bad system for a globalized world.  Fewer state intrusions into the economy is a pretty good trade-off for higher income taxes, especially when safety nets are as strong as they are in Denmark.  A higher percentage of Danes are in the work force than Americans, so the social welfare system they’ve erected doesn’t seem to be a disincentive to find work.

Of course, one assumption we have to make is that the Danish government is very good at spending the revenue they receive – perhaps a good deal better than we are.  Before you can really approach increased government spending on social services, you have to make sure you’re doing it in a sustainable fashion.  America, for whatever reason, seems particularly bad at effectively managing its spending, and the system is rife with waste.  Simply raising income taxes and throwing more money at our many programs may end up having very little effect, simply because so much of that money would simply evaporate into the ether.  Many of the problems we face require structural, not just financial, fixes, and unless you tackle that first, all the funding in the world won’t change a thing. [Read more →]

Responding to Ross Douthat’s latest column, Jamelle raises an interesting question:

And finally, I wonder how Douthat explains away Northern Europe’s high economic growth rates and robust welfare states?

I’m no economist, but I think this has something to do with the fact that government in Northern Europe, while large, is effectively limited and rather efficient. Denmark, for example, enjoys low trade barriers, a largely unrestricted labor market, and excellent protections for civil liberties. If I thought Obama was about to embark on the Denmark-ization of America, I’d probably be a lot more sanguine about the next four to eight years. Instead, our European trajectory seems to point south, with trade barriers slapped on as a sop to political constituencies, a health care reform package that hinges on subsidizing massive insurance corporations (regulatory capture, anyone?), and a stimulus bill that handed out goodies to just about every special interest imaginable. In other words, our political future looks more Mediterranean than Scandinavian, which should worry just about anyone familiar with Greek, Italian or Spanish politics.

Jamelle persuasively argues that taxation can be effective at reducing income inequality, but that’s only one half of the equation. The point of redistributive taxation isn’t to soak the rich – raising taxes, after all, imposes economic penalties. The larger goal is to improve the lot of poor and middle class citizens through redistributive programs. If the effectiveness of those programs is compromised by the Democratic Party’s core constituencies – teacher unions, the pro-immigration lobby – then perhaps it’s time to reconsider the scope of the Left’s political ambitions. This, to me, is one of Douthat’s better arguments, and I’m not sure that Jamelle has refuted it yet. If we are going to tax only to spend irresponsibly, I’d rather not tax at all.

Richard Posner has an interesting essay on John Maynard Keynes in The New Republic.  I’m still trying to untangle all the various ideas and contradictions implicit in this economic downturn.  There are many competing visions which all have merit.  That the stimulus and bailouts seem to have helped, I think is true, but what and who they have helped is another question.  Whether they will do much for working (or unemployed) Americans is harder to say.

Consumer debt is high, and with plummeting home values, rising unemployment, and falling wages, the road to recovery is hardly obvious.  We may be in something of a balance-sheet recession, but I think it goes beyond that, and it’s made all the worse by the housing burst.  As consumer spending continues to fall – due both to people hoarding over uncertainty, to lost equity, and to people paying down personal debt – so does employment.  As employment falls uncertainty rises, consumer spending drops off, and we find ourselves in a spiral.  Decreased spending leads to higher unemployment leads to decreased spending and so on and so forth.  Furloughs and wage cuts force people to limit spending, which leads to more furloughs, more wage cuts, and increased unemployment.  It goes on and on.

At this point, Keynes would argue that the government should intervene – that it should replace consumer spending with government spending in order to keep employment numbers high.  When the spiral is ended, and spending and employment have returned to normal levels then the government will have served its purpose.  Business as usual can resume.

As Posner writes:

[Read more →]

One of the nice things about transitioning out of academic life and into professional life (if only temporarily) is that I suddenly have a surfeit of leisure time, and among other things, I’m using that time to catch up on a pretty substantial backlog of reading.  This is all by way of saying that I just finished economist Robert Frank’s 2007 book Falling Behind: How Income Equality Hurts the Middle Class.  Frank’s main point is that relative deprivation leads to “positional arms races, where Person A attempts to improve their positional status through greater consumption, which in turn, leads Person B to do the same, resulting in an equilibrium where relative status remains stable, although absolute status might be higher.

What’s more, this is all exacerbated by the tremendous income inequality of the last twenty years; the consumption of the richest Americans sets the standard for the next level of income earners, and so on and so forth.  But, because incomes have stagnated for the middle-class, this pattern leaves many middle-income families struggling to acquire positional goods (larger homes, for instance) at the cost of more valuable non-positional goods (in terms of psychological well-being), like leisure time or time spent with family.

Anyway, in the course of making this point, Frank makes a really insightful point about the bizarre way in which we talk about taxation:

Why doesn’t the average voter realize that if we elect a Congress that raises taxes to fund basic public services, the extra tax burden won’t be very painful?  After all, a direct consequence of the tax increase will be an across-the-board reduction in consumption, one result of which should be, according to my argument, that the consumption context will shift, so families won’t feel that they need to spend as much as before.

This makes intuitive sense to me.  If your taxes are raised to pay for better schools across-the-board, then there’s a good chance that you’ll feel less inclined to purchase an expensive house in a good neighborhood with good schools.  After all, you’ll have access to a comparable school in a cheaper neighborhood.  You can even extend this observation to things that don’t directly relate to positional goods: on average, poorly maintained roads add an additional $335 to the annual cost of owning a car.  In all likelihood, that is far more expensive than a small tax increase to pay for regular road maintenance.

Sure, Americans enjoy relatively lower “official” taxes, but those is more than offset by the exorbitant “hidden taxes” that are the result of underinvestment in public goods.  The income that doesn’t go to Uncle Sam goes toward repairing a blown tire or, since we’re on the topic, paying absurdly high health insurance premiums.  Yes, you could say that paying an auto mechanic or a health insurance company benefits the economy, and you’d be right.  But my hunch is that the positive economic impact of lower health care costs facilitated by health care reform, or fewer lost wages resulting from regular road maintenance (among other things) is far greater than the alternative.

This is all to say that Democrats would have a hell of a lot more success in selling policies that require tax increases if they took the time to emphasize that most Americans are already paying more than they would pay under a new system.  If voters understood that basic fact, then we might be able to lower – if even slightly – the huge barriers to raising adequate revenue.

“POPULIST, n. A fossil patriot of the early agricultural period, found in the old red soapstone underlying Kansas; characterized by an uncommon spread of ear, which some naturalists contend gave him the power of flight, though Professors Morse and Whitney, pursuing independent lines of thought, have ingeniously pointed out that had he possessed it he would have gone elsewhere. In the picturesque speech of his period, some fragments of which have come down to us, he was known as “The Matter with Kansas.””

~Ambrose Bierce

[updated]

General Motors, recently back from the brink of financial ruin, is now ramping up production of 60,000 new vehicles; recalling some 1,350 laid-off workers; and giving overtime to over 10,000 current employees.  And it’s all thanks to Uncle Sam’s Cash for Clunkers program.  In an economy as shaky as this one, with job numbers that seem increasingly bad, this is good news right?

Maybe.

Though I can hardly begrudge someone their job, especially during a recession, I think any time private-sector jobs are resurrected through the voodoo of government subsidies there is real cause for concern.  These programs are bandages only, and do nothing to address the cause of the wound itself.

G.M. and other auto-makers did not have to actually do anything to experience this sudden recovery.  They didn’t need to lower the prices on existing vehicles or renegotiate wages with the autoworkers unions or fire management and bring in new blood.  They didn’t even create a better product.  They just sat back and reaped the benefits of a resurgence of populist sentiment, happy to let the government do the work of the market.

But what will happen when the subsidies end, and management, the unions, and shareholders all discover that their business is one built on sand?  What happens when it turns out this sudden uptick in demand was just an illusion? [Read more →]

Matt Yglesias points us to this chart, which is depressing enough on its own:

Then, both he and Kevin Drum, go on to point out that job losses are likely going to be long-term.

Drum writes:

I don’t want to push this theme too far because I haven’t yet done the work to really get a reliable sense of what’s going on.  But I wonder, when this recession is finally over, if we’re going to find ourselves in a European-esque mode with a large and growing population that’s almost continually unemployed or, at best, underemployed.

I posed this question to some friends the other night over beers: If immigration restrictions between the U.S. and the E.U. were lifted entirely, what would happen? [Read more →]

“By treating any and all social safety nets as irreversible steps on the Road to Serfdom, we allow liberals and progressives to shape those policies in ways that are inefficient, ineffective, and overbroad – even though Adam Smith, Hayek himself, and Friedman each advocated for a form of social safety net, demonstrating that social safety nets can be consistent with libertarianism.” ~ Mark Thompson

“I actually think a certain fusion of the best of 20th Century classical/market liberalism and welfare liberalism is the best political philosophy.  I also think it may be possible to persuade many other people of this, and that they will find it attractive.”  ~ Will Wilkinson

In many discussions I have with liberals there is this common refrain – if there are safety nets, then it isn’t libertarianism. Or it isn’t conservatism – or whatever.  The perception of libertarian economic thought (or modern conservative or classical liberal economics in general) is that it is simply against any implementation of the welfare state.  I know for a long time I was very critical of libertarian economic ideas because I felt that they were:

• A) too impractical or too difficult to implement in our particular system of governance (required purity, etc.) or
• B) did not pay enough heed to the importance of safety nets, or
• C) that they ignored moral and ethical implications leveled by anti-consumerist, protectionists, and others skeptical of free trade and capitalism.

I have been largely disabused of these notions through various debates here at the League, though I still think that the political process we face makes limiting government very difficult and that too much cultural emphasis on profits, consumption, and so forth is socially detrimental.  There is still a need to apply cultural pressure to help Americans see themselves as citizens and neighbors (and fathers and friends, etc.) rather than as merely “consumers.”

I think government can work, but it is naturally inclined to not work very well, and seems to stop functioning by degrees the fewer its limitations and the greater its scope.  This is why, in theory at least, a local government completely corrupt with unlimited power within its small sphere is far worse than a big federal government well-restricted by a savvy constitution and responsible lawmakers.  “Big” and “small” are irrelevant terms compared to “limited” and “unlimited.”  Then again, this is also why local governments are generally more adept at running such things as schools and libraries. [Read more →]

The Wall Street Journal lists them so you don’t have to (with oddly tiny pictures and even more oddly cramped descriptions.  It’s almost as though whoever designed the slideshow was working on a very small screen, or actually loathes economics blogs and is doing their damndest to make it hard for us to get through the presentation….) Any other econobloggers we should be reading?