mattlantz

The Krugman Rule

1. Paul Krugman is right

2. If you think Paul Krugman is wrong, see 1.

The problem is that it’s not clear what Mr. Obama can do about this prospect. Conventional wisdom in Washington seems to have congealed around the view that budget deficits preclude any further fiscal stimulus — a view that’s all wrong on the economics, but that doesn’t seem to matter. Meanwhile, the Democratic base, so energized last year, has lost much of its passion, at least partly because the administration’s soft-touch approach to Wall Street has seemed to many like a betrayal of their ideals.

The president, then, having failed to exploit his early opportunities, is pinned down in his too-small beachhead.

If the Democrats lose badly in the midterms, the talking heads will say that Mr. Obama tried to do too much, this is a center-right nation, and so on. But the truth is that Mr. Obama put his agenda at risk by doing too little. The fateful decision, early this year, to go for economic half-measures may haunt Democrats for years to come.

A Little on Public Goods and How They Benefit the Rich

From Mark Thoma's blog:

Something quick between classes - Jean-Paul Fitoussi says "Don't hold your breath" waiting for those who have found success within the free exchange system to acknowledge it was the result of more than their own meritorious achievement:

Clash of autonomy and interdependence, by Jean-Paul Fitoussi, Commentary, Project Syndicate: The bailout of the financial system was a bizarre moment in economic history, for it benefited those who benefited most from the markets’ “irrational exuberance” — the bosses of financial firms.
Before the crisis hit, however, redistribution of wealth (and the tax and social security payments that make it possible) was considered the biggest obstacle to economic efficiency. Indeed, the values of solidarity had given way to those of individual “merit”, judged by the size of one’s paycheck.

The paradox is that a part of this evolution may be attributable to two positive factors: the slow work of democracy, which liberates individuals but at the same time leaves them more isolated; and the development of a welfare system that shares risks and makes individuals more autonomous.

With this isolation and autonomy, people increasingly tend to believe, for better or for worse, that they alone are responsible for their own fate.
Here lies the conundrum. An individual is free and autonomous only because of the collective decisions taken after democratic debate, notably those decisions that guarantee each person access to public goods such as education, healthcare, etc.

Some sense of social solidarity may remain, but it is so abstract that those for whom the wheel of fortune has spun so favorably feel little debt. They believe that they owe their status purely to merit, not to the collective efforts — state-funded schools, universities, etc. — that enabled them to realize their potential. ...
The central place where this self-(over)evaluation meets the fewest obstacles is the financial market. ... Of course, when the crisis hit, financial institutions were the first to argue that autonomy was unrealistic, and that we are all interdependent. After all, why else should taxpayers agree to rescue them?

But now these same institutions are deciding that they want to go their own way again. ... Dismissing the risks that taxpayers incurred, financial institutions used the bailout to restore profitability and are now reverting to their old habits...

No one should be surprised about this. ... The bailout of banks led to a wave of mergers. If they were already too big to fail, what should we now say when banks are even bigger? Their market power has increased, yet they know they incur no risk, owing to the aggravated systemic impact of their potential bankruptcy. Moreover... Working in so uncompetitive a market is a real stroke of luck. I do not know many businessmen who would not take advantage of this; to be honest, I do not know any.

The free-market doctrine, which has become almost a religion, reinforced this belief: markets are efficient, and if they pay me so much..., it is because my own efficiency warrants it. I also participate indirectly and abstractly in forging the common good, by creating value through my work, and I am rewarded for it.
But suddenly the system collapses, the creation of value turns into destruction and parallel universes collide ... with autonomy becoming (for the brief moment of the bailout at least) interdependence. ...
Eyes are opened... The crisis reminds us what each person owes to others, highlighting an ethical truth that we were quick to forget: the rich benefit more than the poor from their cooperation with other members of society.

Two conclusions can be drawn from all this.

The first is that we all owe at least some of our success to others, given the public goods that society provides. This calls for more modesty and restraint in determining the highest salaries, not for moral reasons but for the sustainability of the system.

The second conclusion is that the most privileged classes, which have benefited the most from the solidarity of others, notably the poor, can no longer deny the latter’s contributions. But don’t hold your breath waiting for them to agree.

Why more stimuls makes sense

I love Brad DeLong's Krugman rule:

Rule #1. Paul Krugman is always right

Rule #2. If you think Paul Krugman is wrong, see Rule #1

Paul Krugman in today's NYT column on why we need more stimulus:

Indeed, the administration’s own economic projection — a projection that takes into account the extra jobs the administration says its policies will create — is that the unemployment rate, which was below 5 percent just two years ago, will average 9.8 percent in 2010, 8.6 percent in 2011, and 7.7 percent in 2012.

This should not be considered an acceptable outlook. For one thing, it implies an enormous amount of suffering over the next few years. Moreover, unemployment that remains that high, that long, will cast long shadows over America’s future.

Anyone who thinks that we’re doing enough to create jobs should read a new report from John Irons of the Economic Policy Institute, which describes the “scarring” that’s likely to result from sustained high unemployment. Among other things, Mr. Irons points out that sustained unemployment on the scale now being predicted would lead to a huge rise in child poverty — and that there’s overwhelming evidence that children who grow up in poverty are alarmingly likely to lead blighted lives.

These human costs should be our main concern, but the dollars and cents implications are also dire. Projections by the Congressional Budget Office, for example, imply that over the period from 2010 to 2013 — that is, not counting the losses we’ve already suffered — the “output gap,” the difference between the amount the economy could have produced and the amount it actually produces, will be more than $2 trillion. That’s trillions of dollars of productive potential going to waste.

Wait. It gets worse. A new report from the International Monetary Fund shows that the kind of recession we’ve had, a recession caused by a financial crisis, often leads to long-term damage to a country’s growth prospects. “The path of output tends to be depressed substantially and persistently following banking crises.”

 

Worrying About Budget Deficits is Wrong at This Stage

Worrying about deficits was wrong when it was done by FDR in the mid-1930's and its wrong today.  A paper explaining why by Thomas Palley at New America Foundation:

The fiscal austerity program is rooted in wrong-headed economic analysis. It was the wrong economic agenda before the economic crisis, and it is even more wrong in light of the deep economic weaknesses the crisis has revealed.

Not only is fiscal austerity the wrong economic agenda, it is also the wrong political agenda. At a time when the nation is trying to recover from three decades of laissez-faire excess, the fiscal austerity agenda revives neo-liberal anti-government sentiment by presenting profligate government as the problem. The real problem is flawed market arrangements that have promoted income inequality and financial excess that has undermined shared prosperity and can no longer deliver growth.

Cheney was Right

...deficits don't matter.  He's batting 1 for 1 trillion then. 

I don't know enough about economics to know if this is right, but it sounds good to me.  From Marshall Auerback at The Big Picture:

To the extent that government spending is being used to prop up these economic zombies, I sympathize with the prevailing orthodoxy about wastage of our money.  However, the fasct remains  that the principle opposition to increased government spending is predicated on the simplistic notions about  fiscal activism. We need to get past the deficit myths and wrongheaded notions of “national solvency” so that we can move forward in other areas.  In the words of economist Bill Mitchell of the University of Newcastle, Australia:

“Within a modern monetary economy, as a matter of national accounting, the sovereign government deficit (surplus) equals the non-government surplus (deficit)…In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.  The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.”

The Crisis of Public Management

A good opinion piece on the failure of the US government in recent years, from Scientific American:

I just copied in the whole piece.

The crisis of American governance goes much deeper than political divisions and ideology. The U.S. is in a crisis of policy implementation. Not only are Americans deeply divided on what to do about health care, budget deficits, financial markets, climatechange and more, but government is also failing to execute settled policies effectively. Management systems linking government, business and civil society need urgent repair.

The recent systems failures are legion and notorious. The 9/11 attacks might well have been prevented if the FBI and the intelligence agencies had cooperated more effectively in early 2001 when they were receiving various signals of a possible terrorist attack. Hurricane Katrina caused mass devastation and loss of life because recommendations to bolster the levees shielding New Orleans and other protective measures were neglected for decades despite urgent expert warnings, and because the federal emergency relief effort failed completely after the storm. To this day, reconstruction efforts in New Orleans are paralyzed and many poor communities there have been abandoned. The U.S. occupation of Iraq was marked by massive and shocking corruption, incompetence, and implementation failures by U.S. agencies. 

On the economic front, the current financial crisis is a remarkable systems failure. Government regulatory agencies completely dropped the ball while overseeing the surge of several dangerous financial instruments, especially sub-prime mortgages, collateralized debt obligations (CDOs), and credit default swaps (CDSs). The supply of CDSs in particular soared from nearly zero in 2000 to an estimated $60 trillion in 2008 with almost no regulatory attention. These unregulated CDSs underpinned the reckless lending that eventually burst in the Great Crash of 2008.
 
The list, alas, goes on and on. Military procurement systems are, according to retired military leaders, so broken that they now jeopardize national security: the U.S. is buying armaments that are overpriced, unneeded and technically defective armaments. Our system for financing the costly federal health care system subsidizes the overuse of advanced technologies while underfinancing highly effective and lower-cost public health measures. Public construction systems are failing to keep up with urgent national needs. Roads, bridges, rail, water and sewerage systems and many dams are in dangerous disrepair around the country; large sections of New Orleans remain wrecked and highly vulnerable; and even ground zero of 9/11 remains a hole in the ground because of endless bickering. Similarly, despite nearly a decade of planning, the government has failed to build and test even a single coal-fired power plant that captures and sequesters its carbon dioxide. This so-called Future-Gen project, vital for the transition to a low-carbon economy, has still not been launched.

We need a better scientific understanding of these pervasive systems failures. It is wrong to think that they illustrate the inevitable failure of government. Other governments around the world more successfully manage infrastructure investments, health systems and environmental resources, apparently with greater flexibility, less corruption, lower costs and better outcomes. America should be learning from their experiences. 

Several factors are at play. A key one has been the flawed privatization of public-sector regulatory functions. Wall Street firms hold excessive sway over government regulators, so that dangerous behavior has been unconstrained. Private insurance companies and health care providers block measures to curtail the overuse of costly technologies. Private military suppliers drive the procurement of unneeded weapons systems. 

A second has been the collapse of planning functions within the federal government. A remarkable feature of the recent debates over climate change, energy systems, infrastructure rehabilitation and health care reform is the lack of detailed forward-looking government proposals and plans. The Obama administration has stated general principles (very admirable ones) but too often without clear targets and the operational strategies to achieve them. Planning has been replaced by lobbying and backroom deals in Congress that are nearly opaque to the public. 

This is a very good point, too much lobbying of special interests. This doesn't have to be inevitable:

A third, and paradoxical, factor is the chronic underfunding of government itself. It sounds like the old joke about the bad restaurant: that the food was lousy and there wasn’t enough of it. The public is wary of putting more funds into government having witnessed one public sector failure after another. Yet without investing more resources in skilled public managers in health care, energy systems, and national security, we are probably doomed to remain stuck in the hands of vested interests and lobbies. 

If Ronald Reagan were alive today, he should be ashamed.  He is the person who pushed this meme that government is always bad.  He was not a great president; he did untold damage to this country. 

Fourth, today’s challenges cut across technical specialties, government departments and public and private sectors. In health care and energy, for example, the private sector holds the key technologies but the public sector is needed to finance research and development, to regulate sustainable practices (for example, for emissions reduction and primary health standards), and to ensure access for the poor. Public health must be addressed not only through curative medical care but also through nutrition, food systems and a safer built environment. Energy systems must respect ecological as well as economic constraints. Yet our government agencies are not designed to take a holistic approach.

In short, we have arrived at a point where the challenges of sustainable development —including public health, infrastructure, energy and national security—require changes not only to policy but also to basic public management systems. In many crucial areas, tinkering will no longer suffice: we need an overhaul to regain government control over regulatory processes, reduce lobbying, restore public planning and ensure the adequate financing of skilled public managers, and align public management systems with holistic strategies.

Jim Grant - Bull-Oney

I started reading his piece in the WSJ this weekend, but had to stop.  I'm glad that David Rosenberg kept reading and de-bunked the article for me, from The Big Picture:

We noted last week that the Nikkei posted six 20%+ rallies since its bubble
burst in 1990 and no fewer than four 50%+ rallies. Indeed, you can count
423,000 rally points from all the up-days since the secular bear market began in
1990 and yet the index is down 74% since that time. So actually, there is
nothing in this flashy move off the lows in the S&P 500 that is inconsistent with
a pattern of a bear market rally — this is not the onset of a whole new
sustainable bull market. These are rallies than can only be rented, not owned,
and are purely technically-motivated and momentum-driven. They are not
premised on improved fundamentals, despite data that are skewed to the
upside by rampant government intervention. Just remember, nobody ever built
more bridges or paved more river beds to skew the economic data than the
Liberal Democratic Party (LDP) did in Japan for much of the 1990s.

Nothing Changes - Regulation Edition

From Simon Johnson at Baselinescenario.com on what will happen with financial regulation as a result of the coming G-20 and IMF meetings:

As we wade through a long line of international economic meetings – G20 ministers of financelast week, G20 heads of government in Pittsburghcoming up, IMF-World Bank governors meeting in Istanbul early October(and all the associated “deputies” meetings, where the real work goes on) – it seems fair to ask: where is regulatory reform of our financial system heading?

Long documents have been produced and official websiteshave become more organized.  Statements of principlehave been made.  And the melodrama of rival reform proposals has reared its head: continental Europeans for controlling pay vs. the US for raising capital vs. the UK not really wanting to do anything.  But what does all of this add up to, and what should we expect from the forthcoming summit sequence?

Nothing meaningful.

Uh, Oh - Green Technology Depends on Chinese Monopoly

A monopoly we helped them create back in the '90s; from Michael Perelman:

My next encounter with the rare earth problem came in David Cay Johnston’s wonderful book.  Here are my notes:

Johnston, David Cay. 2007. Free Lunch: How The Wealthiest Americans Enrich Themselves at Government Expense (And Stick You With The Bill) (New York: Portfolio).

37: “In 1982, competing groups of scientists around the world found a way to combine iron and boron with a somewhat rare earth called neodymium to make extremely powerful and lightweight magnets. These magnets quickly found a market in computer hard drives, high-quality microphones and speakers, automobile starter motors, and the guidance systems of smart bombs.”

38: “General Motors created a division to manufacture these magnets, calling it Magnequench ….  Then in 1995 the automaker decided to sell the division. Because the deal was for only $70 million it attracted little attention. The buyer was a consortium of three firms …. but the real parties behind the purchase were a pair of Chinese companies — San Huan New Material High-Tech Inc. and China National Nonferrous Metals. Both firms were partly owned by the Chinese government.  The heads of these two Chinese companies are the husbands of the first and second daughters of Deng Xiaoping, then the paramount leader.”

38: At the time, GM was trying to get a toehold in China.  One of the Goddard’s was at the time vice minister of the Chinese State Science and Technology Commission, which had the responsibility for acquiring military technology by any means.

39: The Clinton administration agreed the sale under the condition that the new owners keep the production and technology in the United States.  The new owners began to buy factories in the United States including GA Powders, an Idaho firm that used government money to develop a monopoly on the production powerful methods.  Then the Chinese company shut down American production and moved everything to China.

Is Financial Regulatory Reform Dying?

Our best chance of taming the financial landscape may be passing us by, according to Alan Blinder in the NY Times:

First, we need a systemic risk monitor or regulator. A monitor just watches risks develop and issues warnings, while a regulator is empowered to take action. In my last column, I explained the reasons for wanting a systemic risk regulator, and why the Fed should get the job.

Second, we need a new mechanism to euthanize or rehabilitate giant financial institutions whose failure could threaten the whole system. Lehmanwas put into Chapter 11, with catastrophic effects. A.I.G.was turned into an appallingly expensive ward of the state. There must be no more situations like these. As both Mr. Geithner and Ben S. Bernanke, the Fed chairman, have observed, we need a better way out.

Third, something serious must be done to tame — though not to destroy — the derivatives markets. Today, virtually all derivatives trading remains unregulated and nontransparent. Much of it also has too little capital and, at crucial times, too little collateral behind it. The Treasury’s draft legislation proposes to fix these problems by standardizing many derivatives and pushing trading into clearinghouses or organized exchanges, where more capital would be required and collateral would have to be posted often.