Game theory and auto subsidies
One thing here is that as best I can tell none of the five countries – US, Japan, Germany, France, Korea – with substantial auto industries are willing to let their national favorites fail. And yet there seems to be substantial global overcapacity in car manufacturing. If a few of the existing firms are allowed to fail, then the survivors will be in good shape. But if nobody fails, then all the firms worldwide will be left suffering because of overcapacity problems, all potentially drawing bailouts and subsidies indefinitely.
Here is more.
Sentences to ponder
Recent data suggests that many borrowers who received help with mortgage modifications earlier this year tended to re-default on their payments, a top U.S. banking regulator said on Monday.
"The results, I confess, were somewhat surprising, and not in a good way," said John Dugan, head of the U.S. Office of the Comptroller of the Currency, in prepared remarks for a U.S. housing forum.
"Put simply, it shows that over half of mortgage modifications seemed not to be working after six months," he said.
Here is more. I thank Brad W. for the pointer.
Infrastructure: Roads and The Smart Grid
The first thing people think about when someone says "infrastructure" is roads and bridges. That’s unfortunate because we already spend over $100 billion a year on transportation infrastructure and the truth is we don’t need that much more. Peter Orzag, President-Elect Obama’s choice for OMB estimated – when Director of the CBO – that an additional $20 billion in spending, mostly to maintain current transportation infrastructure, would achieve 83% of the net benefits to be had from more transportation infrastructure spending. Moreover, in many cases, congestion pricing would be both greener and more efficient than greater spending. A better program would be to follow Germany and several innovative state programs to get congestion pricing using GPS technology up and running, especially for trucks.
Even more valuable than transportation infrastructure would be greater investment in electricity infrastructure, a smart grid. Consider that in 2003 a massive, widespread, power outage threw 50 million people in the Northeastern states and Ontario, Canada out of power – disrupting lives and the economy. Why did this happen? Because of a failure to "trim trees" in Eastlake, Ohio – now that’s a dumb grid. And remember that only a few years earlier, the most innovative, high-tech industries in the world were shut down by blackouts caused by our primitive electricity grid. Overall, blackouts cost the U.S. on the order of $100 billion a year.
The smart gird is a not one idea but many technologies such as real-time pricing (smart meters), superconductive smart cable, and plug-n-play architecture that combine to produce a grid that is decentralized, self-healing, robust, and smart for both producers and consumers. Decentralized power, for example, makes it easier to isolate problems, "route" power to different areas, and maintain robustness in the face of falling trees and other problems. Plug and play architecture means that new technologies such as electric cars can be automatically used as both consumers and producers (via storage) of electricity, as needed, on the fly. Plug-n-play, the open-source of electricity infrastructure, will also open the field of electricity generation and storage to far greater innovation than is possible now.
Useful references include the Department of Energy’s somewhat breathless introduction for the layperson, The Smart Grid, The National Energy Technology Laboratory’s The Modern Grid Strategy, the Smart Grid newsletter and papers by Kiesling and also Dismukes in Electric Choices (a book I had a hand in).
The smart grid did not receive prominent attention in Obama’s infrastructure speech but the campaign called for matching grants to investment in smart grid technology and support for smart meters and real-time pricing. An investment tax credit for smart grid technologies and more foresighted regulation (price regulation has limited investment in needed infrastructure) could encourage the construction of much-needed electricity infrastructure while maintaining private investment incentives and promoting innovation.
Where have the graduate students gone?
Applications to take the GRE are down and that means the number of graduate students is unlikely to rise, in contrast to the traditional pattern of greater graduate school attendance during recessions. Here are a few hypotheses:
Stewart has several theories about why declines may be taking place
this year, despite historic trends. She said it was possible, as ETS
officials suggested, that the credit crunch was making it more
difficult for students to borrow – or that hearing about the crunch
discouraged some from trying. In that same vein, she said that with
many colleges and universities announcing budget cuts, many departments
may not have the same levels of funds to offer in fellowship support.In addition, she said that while economic uncertainty in the past
has prompted some people to decide to improve their skills so they can
seek better jobs, the turmoil is so great this year that “no one will
leave a job if they have a job – they think the risk is too much to
take.”Stewart also stressed that just because the surge in interest in
graduate school has not happened this year doesn’t mean it won’t start.
Many people these days are experiencing “freezing behavior” where they
are so uncertain about their next move and the state of the economy
that they aren’t making any changes, she noted. “It could be that this
has created a temporary pause where we would have normally seen a flow
to graduate school. That the flow hasn’t started doesn’t mean it won’t.”
I opt for paragraph #2. How about all of you? Are you in this position yourselves?
Assorted links
Brad DeLong on Larry White
…our models for why the risk discount has taken such a huge upward leap in the past year and a half are little better than simple handwaving and just-so stories. Our current financial crisis remains largely a mystery: a $2 trillion impulse in lost value of securitized mortgages has set in motion a financial accelerator that we do not understand at any deep level that has led to ten times the total losses in financial wealth of the impulse.
Thus my dissatisfaction with Larry White’s piece: he talks only about the impulse, while it is the propagation mechanism-the financial accelerator-that is the important part of the story. $2 trillion shocks to global wealth do, after all, happen every several years, everytime there is a recession or a big rise in the prices of natural resources. But financial distress of the magnitude we see today happens once a century. Since the Bank of England developed its lender of last resort doctrine in the 1830s, we have only had two episodes this bad: the Great Depression and today.
Here is the whole essay, interesting throughout. Brad is also blogging parts of the General Theory over at delong.typepad.com.
Addendum: Arnold comments; I think Brad’s short essay is so far the single best thing written on the crisis.
Paul Krugman’s Nobel lecture and slides
Today’s New York Times
One headline reads:
Detroit Bailout is to Bring on U.S. Oversight
The other reads:
In Hard Times, Russia Moves to Reclaim Private Industries
The Russian automobile sector, however, appears to be booming and it is not mentioned as a candidate for nationalization.
By the way, here is Paul Krugman, apparently saying we need to accept the disappearance of the U.S. auto industry. I am happy to see this point but I am also a little confused and unfortunately the press report is incomplete; he cites economic geography so does he think the Toyota plant in Kentucky will have to shut down?
I thank Andres Sawicki for the pointer.
Portable fiscal policy question multi-pak
When assessing any proposed fiscal stimulus, ask yourself the following questions:
1. Will more debt ruin my country and cause its economy to crumble or explode?
2. Is this project worth doing in its own right?
3. Will more than 53 percent or more of the expenditures come on-line in the next nine months?
4. Will the program actually target unemployed resources?
5. Has fiscal policy already acted to protect previously planned levels of state and local expenditure?
If the answer to #1 is no, proceed if you can either answer "yes" to #2 or if you can answer "yes" to #3-5 together. On related issues, here is a very good piece by Hall and Woodward.
General Theory, chapters one and two
I am repeatedly struck by Keynes’s skill as a literary stylist. Usually this praise is denied the General Theory but I consider the book his Finnegans Wake; the most difficult passages are often the most charming but of course they are not for everyone.
I see three main themes in the book as a whole:
1. Income effects are more important than substitution effects.
2. Expectations matter.
3. The private and social returns to liquidity are very different.
#1
(as applied to macro) and #3 were most original in his time. The book
as a whole circles around these themes and repeats them in varying
combinations, not always coherently or consistently. You could also
add the claims that 4. monetary factors render a "natural rate of
interest" problematic and 5. labor markets are special. Chapter two is
essentially about #1 and #5.
Keynes did go beyond the classics,
even if he did often caricature them. (Keynes is brilliant as a
historian of thought when praising but almost always wrong when
criticizing.) Since Keynes never gives us a truly coherent model —
not even verbally — it is easy to pick holes in the GT.
Keynes had so many exciting new ideas that he never decided what his
main point was or exactly under which conditions it would hold.
Much
of chapter two is devoted to establishing the proposition that workers
cannot in any direct way choose a lower real wage. For Keynes nominal
wage flexibility doesn’t solve the
main problem. If nominal wages fall across the board in an economy,
prices will fall and real wages will remain high. Unemployment will
continue while the economy enters a downward spiral. I’ve already
discussed that point here but to sum up my view Keynes is presenting a special case not a general case.
p.9 puts forward a version of the doctrine of money illusion.
p.15
defines involuntary unemployment, namely if the economy can be inflated
into a higher level of employment. This pragmatic definition reflects
that Keynes was never sure why workers minded inflation, and a cut in
the real wage, less than they minded a cut in the nominal wage. But
that is one of his behavioral postulates and it has survived into macro
to this day.
The "neo-Keynesian" models are not so loyal to Keynes. Keynes held sticky nominal wages to be a policy prescription, but not necessarily a good description of the world.
Chapters
one and two are stunning, as they announce that we are now living on a
different economic terrain. But we’ve yet to see whether the main
arguments are truly sound.
On Thursday we’ll be doing chapters
three and four — be ready! And I encourage other bloggers to follow
along and offer their own commentaries.
Apologies for the double post
Typepad won’t let us erase the bottom (duplicated) entry on Keynes, as it no longer shows up on our screen of posts. The top entry will accept comments, the bottom one won’t, so stick with the top entry. We are still bugging them for better service.
Non-Sequitur of the Day
Mr. Obama also responded to criticism of waste and inefficiency in such
programs by promising new spending rules, like a requirement that
states act quickly to invest in roads and bridges or sacrifice federal
money.
From the NYTimes.
“Inside the influential new world of econoblogging”
Here is the very good Boston Globe article, which focuses mostly on the financial crisis. Excerpt:
In a sense, economics was a field made for blogging: Its ideas advance
by disputatious back-and-forth, and not surprisingly these professors
took to gently (or not so gently) mocking one another's writings, even
engaging in lengthy arguments that stretched out over days, if not
weeks.
And:
"Any major blogger who makes a mistake is corrected in five minutes,"
says Cowen. Yves Smith agrees: "It's a version of the Wikipedia effect,
with people correcting each other."
Addendum: Our apologies, typepad comments are down for this entry (only). I have to run out this moment but I'll set up at least a temporary fix for tomorrow's Keynes symposium, part I. What typepad is doing is trying to switch to a new system. Every time they switch it turns off comments for some bloggers (but not all). They switch back to the old system and comments are fine again but a few days later they try out the new system again, etc. Sorry! They really do need to get this problem solved.
Obama’s fiscal stimulus: some details
I was surprised to read the first plank of Obama’s proposed stimulus:
First, we will launch a massive effort to make public buildings more
energy-efficient. Our government now pays the highest energy bill in
the world. We need to change that. We need to upgrade our federal
buildings by replacing old heating systems and installing efficient
light bulbs. That won’t just save you, the American taxpayer, billions
of dollars each year. It will put people back to work.
Maybe that is deliberately unglamorous but I was expecting a more dramatic first punch. Here, by the way, are some simple arguments for energy-efficient buildings. My Google search doesn’t yield much useful, however, in the way of critical analysis. (Any leads, readers?) And surely ten years from now our government still will have the highest energy bills in the world, unless the goal is to grow so slowly that the Chinese government will pass us.
Oddly the two goals of the plan — saving dollars and creating jobs — often stand in tension. Let’s say we could heat all those buildings for a dollar: how many jobs would that create? Is the goal to "spend less" or to "spend more"? The mere fact that you can write in the comments section: "Spend more today to spend less tomorrow!" does not convince me.
The second plank of the program is more roads and bridges, which for better or worse you can consider the opposite of a carbon tax. How quickly can that money be spent anyway? The plan mandates quick spending of the transferred funds. But maybe state and local governments will hold off on some currently planned expenditures (which is contractionary) so they can be ready to spend immediately once they receive their "use it or lose it" allocations. Has anyone thought that problem through?
The third plank is upgrading school buildings. ???????????????? Maybe this is Obama’s attempt to mimic ditch-digging, under the unassailable banner of "education," but again how quickly can these projects come on-line? I call this one total waste and an outright mistake.
The fourth plank is extending the information superhighway. Maybe, but isn’t human capital the real constraint at current margins?
The fifth plank is internet-connected hospitals and electronic medical records. Those are good ideas but I don’t see how they contribute to economic recovery. Basically you either force or pay medical care providers to do it and for sure health care is not the ailing sector.
The bottom line: When it comes to fiscal policy, many projects are not very good. Most projects take a long time to come on-line. The fiscal stimulus should, most of all, be directed at an effective marginal incentive scheme to keep up state and local spending. I am still enthusiastic about Obama’s economic team, but I am starting to worry a little. How many of these expenditures actually help needy people? How many actually will help the economy? In fairness to Obama this was a radio address, and thus hardly the setting for meaty analysis, but still I am a little underwhelmed.
What I’ve Been Reading
1. Stephen Schwartz, The Other Islam: Sufism and the Road to Global Harmony. Islamic theology is a reading interest of mine and I don’t mean the stuff that the terrorists promote. This book is not a comprehensive introduction to Sufism but it is interesting throughout and most of all excellent on the sadly neglected topic of Albanian Bektashi theology.
2. Alexander Dolgin, The Economics of Symbolic Exchange. A long, sprawling, and often creative and interesting overview of cultural economics, especially as it relates to issues of symbolic goods.
3. Michael Bérubé, Life as We Know It: A Father, A Family, and an Exceptional Child. About the author’s Down syndrome child; this is a very good book and it is also conceptual, not your usual concrete-bound memoir.
4. Heraldo Muñoz, The Dictator’s Shadow: Life Under Augusto Pinochet. This book fills in a lot of back detail about the Pinochet years. It is not perfect, but it is far more objective and useful than I had been expecting, especially given that the author was persecuted by Pinochet.
5. Elena Ferrante, The Lost Daughter. Translated from the Italian, this short novel is one of my favorite fictional works of the year; it is a favorite of Bookslut (and others) as well.
6. Speaking of Bookslut, Jessica Crispin’s favorite fiction book of the year was the Hungarian Metropole, by Ferenc Karinthy. I read it some time ago and inexplicably forgot to mention it. The feel is Kafkaesque and the premise is that a man wakes up in a world where suddenly he cannot understand any of the languages being spoken and has no way of communicating with anybody.