Anatole Kaletsky today argues at length what I yesterday argued very briefly on Marketplace:
Which brings us to the greatest risk facing the world economy: Mr Obama’s failure to present a credible response to the financial crisis or even to assemble a proper economic policy team. After the British Government’s leaked messages of despair about nobody answering the phone at the US Treasury in the preparations for the G20, everybody is now aware that Mr Obama has nominated only two out of 18 deputy and assistant Treasury secretaries. What is less widely recognised is that this decision-making vacuum reflects a deeply worrying feature of US economic policy.
American politicians simply don’t seem to understand the existential threat that their economy is now facing. Instead of uniting to deal with a national emergency far more threatening to their way of life than the terrorist attacks of 9/11, they have responded by dividing more sharply than ever into hostile partisan camps.
Efforts to revive economic activity and to stabilise the financial system that are clearly indispensable on the basis of any economic analysis, whether Keynesian or monetarist or plain business-sense, have been denounced on the Right for interfering with free markets and on the Left for feather-bedding bankers. Instead of rallying around in a moment of crisis, many Americans are openly expressing their hope that the new President will fail and the economy collapse. Candidates for key Treasury posts have been viciously attacked in the media and Congress for trivial tax and administrative infractions inadvertently committed many years ago or simply for having once worked on Wall Street. As a result, these jobs have become almost impossible to fill.
Mr Obama himself seems to have attached a surprisingly low priority to dealing with the financial crisis. He had, for example, selected key State Department officials, from Hillary Clinton downwards even before his inauguration. He has managed to get dozens of these confirmed by Congress in the past two months and immediately put his personal stamp on US foreign policy. Yet there has been no similar focus on creating a properly functioning economic team or launching a coherent new response to the financial crisis.
The lack of urgency, of focus and of national unity in America’s response to the financial crisis is the most surprising – and most dangerous – threat to our chances of recovery.
Kaletsky’s right that conservatives are being stupidly obstructionist, especially about necessary political appointments. But as time goes on, the inattention of the administration to the truly urgent problem facing the country and the world is flabbergasting. The economic crisis does present a window of political opportunity big enough to drive a truck through, and so it’s easy to understand why Democrats have been gleefully loading up the truck with everything they’ve ever wanted ever. But it’s really the height of irresponsibility when the circumstances demand that efforts be devoted to ensuring the window doesn’t widen to the point that the house collapses on the truck. (What is a truck doing in the house? Can you drive a truck through a window? Where is the truck going? Another house? I can haz Tom Friedman!) If Obama does not luck out (and he is nothing if not lucky) and things get a good deal worse, this early episode of rather terrifying mismanagement will not be forgotten.
Those who think this is a mere partisan talking point and amounts to the idiotic claim that it is not possible to simultaneously walk and chew gum need to back away from their own partisanship and get a little perspective. Also, they should reflect on why Obama, despite his undisputed excellence in gum-chewing, has so far done such an embarrassing job of walking.
Brad DeLong and Luigi Zingales debate it at Economist.com
DeLong’s opening statement too effectively arrays a huge amount of intellectual firepower against him. If he could persuasively cut this team of giants down to size, it would be a killer opening. But his response to the challenge he erects seems to amount to the contention that this squad of bona fide geniuses are really benighted halfwits guilty of an elementary error. That’s pretty hard to swallow. Meanwhile, Zingales handily hops over the bar he sets for himself. I liked Zingales’ analogy:
[E]ven the third interpretation of the house statement—that we should follow Keynesian prescriptions to combat the current economic crisis [the interpretation DeLong wants to defend]—is false. I am not disputing the idea that some government intervention can alleviate the current economic conditions, I am disputing that a Keynesian economic policy can do it. With a current-account deficit that in 2008 was $614 billion, a budget deficit that was $455 billion and military expenditures of $731 billion, it is hard to argue that the government is not stimulating demand sufficiently. The current crisis is not a demand crisis, it is a trust crisis. Bad corporate governance coupled with bad government policies has destroyed the financial sector, scaring investors and freezing lending. It is as if a nuclear bomb had destroyed all roads in America and we claimed that to alleviate the economic impact of such an event we should invest in banks. It is possible that eventually the effect will trickle down. But if the problem is the roads, you want to rebuild roads, not subsidise the financial sector. And if the problem is the financial sector, you want to fix this and not build roads.
So far, DeLong is getting crushed in the voting, though he’s working the audience hard in the reader comments. Is that allowed?
Also, here is Brad debating Michele Boldrin. I haven’t listened yet.
In a speech this morning (via Ezra) Obama apparently said, in response to the idea that he’s trying to do too much at once.:
President Roosevelt didn’t have the luxury of choosing between ending a depression and fighting a war. President Kennedy didn’t have the luxury of choosing between civil rights and sending us to the moon.
WTF? (1) Roosevelt probably prolonged the depression. (2) Fighting WWII was most certainly a choice, and maybe not the best one. (3) Kennedy did nothing much by way of advancing civil rights other than voting against Eisenhower’s 1957 Civil Rights Act. (4) There was no point whatsoever in going to the moon.
Obama wants us to believe that not accepting his package deal of uneccesary programs is a “luxury” we cannot afford, which is even more ridiculous than the historical examples he picked. When it comes to responding to the basis of the actual crisis and repairing the wreckage of the banking system, the adminstration seems neglectful, ineffectual, and has become the butt of jokes. Maybe that has something to do with the incredible audacity of attempting to slam through an entire presidency’s legislative agenda in two months. But I guess we don’t have the luxury of lavishing attention on the things that actually need fixing.
[U.S. Secretary of State Hillary] Clinton told young Europeans at the European Parliament that global economic turmoil provided a fresh opening. “Never waste a good crisis … Don’t waste it when it can have a very positive impact on climate change and energy security,” she said.
Damn you Milton Friedman!
So here’s the “shock doctrine” in action. “Climate change” itself is not actually a crisis that demands immediate action. And in the absence of widespread public demand for action, climate ideologues need a crisis to shove through otherwise unpopular reforms. Of course, imposing massive new taxes (whether implicit or explicit) on energy, and therefore on economic production generally, is a terrible idea during a recession from the depths of which it will take many years to recover. But who cares about restoring the average American’s standard of living? Never waste a good crisis!
Matthew Yglesias’ posts emphasizing the interconnectedness of the global economy and the need for coordination, like this one, are quite correct in pointing out that economies are not contained in little national boxes with policy levers nation-states can pull to goose aggregate demand, brake the rate of job loss, and so on at will. Indeed, having a sound sense of the extent of global economic interconectedness is tantamount to admitting rather hard limits on the ability of national monetary and fiscal interventions to fix things.
Suppose Matt is right when he says:
The economy is very global, and it’s extremely difficult to see it pulling short of a depression if the European Union and Japan are twiddling their thumbs. Beyond that, if there isn’t meaningful global coordination of stimulus efforts then protectionist pressures are going to become harder-and-harder to resist in China and the United States to prevent free riding. That, in turn, would buy some short-term assistance at the cost of really hobbling the prospects for recovery down the road.
That is to say, given globalization, effective stimulus is a lot like effective carbon-reduction policy: it requires overcoming incredibly difficult international coordination problems. One might argue that the global policy coordination problem is easier to solve if the U.S. is willing to be the first mover. But then one should also admit that the domestic efficacy of American stimulus is conditional on things beyond the control of American policymakers and that the odds of success are rather lower than most progressives have so far been willing to admit.
If I were a Democratic strategist, I would, like Matt, be broadcasting the importance of global coordination in order to prepare Americans for the possibility that domestic stimulus proves ultimately impotent in the face of a broader global decline. Democrats will then be able to say “At least we tried and it would have been worse if we hadn’t” in reply to Republicans keen to capitalize on the failure. If I were a Republican strategist, I would be pointing out how convenient it is for Democrats to have failed to mention the importance of perhaps unattainable global coordination when pushing through their plan. As it happens, I’m neither, so maybe I’m just concern trolling.
Masaru Tamamoto’s NYT op-ed is brutal:
There can be no justification for all those mostly unused airports. Or for roads that lead nowhere. Or for the finance minister who appeared to be drunk at the Group of 7 meeting this month in Rome. Our problem is so deep that it sometimes seems that no political party can tame the bureaucracy and put in place a coherent national agenda.
But what most people don’t recognize is that our crisis is not political, but psychological. After our aggression — and subsequent defeat — in World War II, safety and predictability became society’s goals. Bureaucrats rose to control the details of everyday life. We became a nation with lifetime employment, a corporate system based on stable cross-holdings of shares, and a large middle-class population in which people are equal and alike.
Conservative pundits here like to speak of this equality and sameness as being cornerstones of “Japanese” tradition. Nonsense. Throughout much of its history, Japan has had social stratification and great inequality of wealth and privilege. The “egalitarian” Japan was a creature of the 1970s, with its progressive taxation, redistribution of wealth, subsidies and the dampening of competition through regulation. This all seemed to work just fine until our asset-price bubble popped in the 1990s. Today, the hemmed-in Japanese seem satisfied with the knowledge that everyone around them is equally unhappy.
Japan desperately needs change, and this will require risk. Risk-taking is not common among the bureaucratically controlled. You won’t find many signs on Japanese beaches saying, “Swim at your own risk. No lifeguard on duty.” If that sign were to appear, many Japanese would likely ask the authorities to tell them if it is safe to swim. This same risk aversion translates into protectionism and insularity.
My greatest worry is that as we have become wealthier, we have also become more risk-averse, and that, basically, the U.S. will end up like this.
Here’s my commentary on this morning’s Marketplace.
It’s really terribly hard saying anything in 300 words. If I’d had more space I would draw out how there is no way to succeed in promoting a unifying “we’re all in it together” mood when massive government intervention has massive redistributive consequences that track basically NO ONE’s sense of fairness or desert. That’s sure to be divisive. When Obama said in the campaign he meant to “spread the wealth around,” I’m sure most people took that to mean downward redistribution meant to rectify either the unfairness of rising inequality, the unfairness of the fact that some people are struggling for no fault of their own, or both. But bailouts of all sorts–to banks, to car companies, to underwater homeowners–spreads the wealth around in an entirely different way. “Investment” in the “green economy” spreads the wealth around. Increasing the size of the military spreads the wealth around. And so on. None of this accords with any coherent notion of fairness. And the scale of Obama’s initiatives do badly unsettle the structure around which people build expectations, and that’s an independent source of unfairness. We desperately need better framework rules for both private and public finance. It would be silly to oppose serious structural reform. But what we’re getting is the kind of half-panicked, half-opportunistic myopic intervention that breeds future half-panicked, half-opportunistic intervention. That is the opposite of what we need.
I’m reprinting this in full from Chris Good at the Atlantic. Someone please tell me how this is supposed to work, even in theory. And someone please tell me how speeding up the process of picking winners doesn’t simply make well-prepared regulatory capture specialists like T. Boone Pickens (whose PR blitz seems to have worked to get him into the DoE inner circle) richer simply because they’ve got the resources to hoover up contracts.
Chu Works to Get the Green Cash Flowing
After environmentalists and mainstream politicians alike succeeded in dedicating a good chunk of President Obama’s stimulus package to green energy, Obama’s new energy secretary has been working on ways to make that happen more efficiently. Last week, Energy Secretary Steven Chu (who holds a Nobel Prize in physics) announced a slew of reforms to how the department doles out money, and a department official says more are on the way. The goal: streamlining the process so stimulus dollars can get spent sooner.
Many have posed the economic crisis as an opportunity for green revolution, and at a roundtable discussion on energy yesterday at the Newseum, the economy/energy/environment nexus was on the tip of many tongues.
“We have a plan going forward where we can reduce what could have been years down to months, and we feel very strongly that this thing will work,” Chu said of DoE spending as luminaries such as Bill Cinton, Al Gore, T. Boone Pickens, Senate Majority Leader Harry Reid, and House Speaker Nancy Pelosi listened.
Chu’s reforms include rolling appraisals of applications for loans and funding, using outside contractors to underwrite loans, more staff and resources to process applications, and simplifying application paperwork. Chu has appointed Matt Rogers, a former senior partner at consulting giant McKinsey & Company, who also worked on energy procurement reform as part of Obama’s transition team, to implement these reforms and oversee the stimulus money.
The stimulus placed $38.7 billion in the department’s hands, with heavy emphases on alternative energy, efficiency, and infrastructure modernization. DoE says it will start offering loan guarantees under stimulus provisions early this summer, and that 70 percent of the stimulus cash will be spent by the end of next year.
To hear politicians and activists talk about the timing of stimulus cash flow, “now” seems to be the only acceptable answer. A significant part of Chu’s job, so far, has been changing the way the department operates in order to make that happen.
Jeffrey Sachs’s new SciAm column titled “The Economic Need for Stable Policies, Not a Stimulus” forcefully reinforces the lesson I drew from my interviews with Prescott and Phelps. Sachs highlights:
The U.S. political-economic system gives evidence of a phenomenon known as “instrument instability.” Policy makers at the Federal Reserve and the White House are attempting to use highly imperfect monetary and fiscal policies to stabilize the national economy. The result, however, has been ever-more desperate swings in economic policies in the attempt to prevent recessions that cannot be fully eliminated.
President Barack Obama’s economic team is now calling for an unprecedented stimulus of large budget deficits and zero interest rates to counteract the recession. These policies may work in the short term but they threaten to produce still greater crises within a few years. Our recovery will be faster if short-term policies are put within a medium-term framework in which the budget credibly comes back to balance and interest rates come back to moderate sustainable levels.
Looking back to the late 1990s, there is little doubt that unduly large swings in macroeconomic policies have been a major contributor to our current crisis. …
We need to avoid reckless short-term swings in policy. Massive deficits and zero interest rates might temporarily perk up spending but at the risk of a collapsing currency, loss of confidence in the government and growing anxieties about the government’s ability to pay its debts. That outcome could frustrate rather than speed the recovery of private consumption and investment.
Most important, we should stop panicking. One of the reasons we got into this mess was the Fed’s exaggerated fear in 2002 and 2003 that the U.S. was following Japan into a decade of stagnation caused by deflation (falling prices). To avoid a deflation the Fed created a bubble. Now the bubble has burst, and we’ve ended up with the deflation we feared!
By the way, here’s my earlier post on “Managing Expectations Better.”
Prescott told me that he considers economic theory that treats the economy like a machine attached to policy levers that can be pulled to achieve the intended outcomes to be pseudoscience. He actually compared stimulus-mongering Keynesians to chemists before Dalton. (I gathered that Dalton is Robert Lucas.) Commenter Odograph gave me a bit of grief for quoting Prescott saying “Stimulus is not part of the language of economics,” when of course, as Mankiw’s poll shows, 90% of economists believe you can get a growth boost by fiscally goosing the economy when resources are underutilized. I don’t know whether Prescott agrees or not (maybe not if he really thinks you can’t surprise an economy twice). But Prescott’s general point is pretty much the same as Sachs’s here: discretionary macroeconomic policy is very likely to be self-defeating and we’d do better to concentrate on setting in place a sound structure of stable rules. When I asked what he would have advised, Prescott said he wished Obama had used his considerable political capital to form some kind of task force to very deliberatively restructure the tax system, the entitlement system, the financial system, etc., instead of pushing for a stimulus. But when the President instead uses his political capital telling people to panic, you just get more of the kind of mess Sachs describes. The government under both Bush and Obama has been giving us ridiculous fool-in-the-shower macro policy, and it really needs to stop.
I decided to ask!
I talked to Edward Prescott and Edmund Phelps the day Obama signed the stimulus into law and wrote about it in my latest column for The Week.
I’m persuaded that the general logic of Prescott and Kydland’s work on time inconsistency applies to the present situation (and I don’t think you need to accept the strict rational expectations framework to see how it applies), but I was especially taken by Phelps’ concerns about the potentially damaging effects of the stimulus on entrepreneurship and innovation. Please check it out.
Talking to these giants of macro has convinced me that we need to be talking about is how to get the institutions right and keep them stable. What the government is now doing amounts to a pretty radical restructuring of our scheme of economic institutions, but with shockingly little deliberation about or regard for the optimality or stability of the overall incentive structure. This mess was precipitated by what turned out to be a disastrously unstable alignment of incentives. That fact would seem to prescribe taking a lot of care in thinking through how various large interventions might ramify through the system before jumping in. But our government’s behavior increasingly looks a bit like a zealous small-town narcotics squad, excited by its slick new SWAT gear, that’s just kicked down the door to a meth house and has started shooting at anything that moves.