Archive for the ‘Economics’ Category
I’ve pretty much come around to the idea that doing something with taxpayer money now is better than doing nothing when it comes to the Big Three. Again, if we weren’t coasting along (or headed toward) the bottom of a vicious recession at the present moment, I’d no doubt stick with my free market instincts. But letting them slip into Chapter 7 right now strikes me as very high stakes poker. Yglesias, needless to say, is having none of it:
Part of what makes the auto bailout conversation difficult to have realistically is that this $25 billion number is hanging out there. That’s a lot of money, yes, but it’s actually a relatively small amount of money relative to the scale of the Big Three’s operations. Under the circumstances, a bailout looks a bit like a good deal.
But by the same token, I don’t see any reason to think that $25 billion would actually turn these firms around or even forestall collapse for very long. The car industry in general is in a big slump, and these companies in particular have been on a downward trajectory for a long time.
So what if they money doesn’t stave off collapse “for very long?” If it buys us only ten months it may be worth it. If it ultimately costs $75 billion (probably something under 2% of what Keynesian measures are ultimately going to cost the government over the next few years) but buys us three years, I think it will definitely be worth it. Letting all of the big three go under precipitously at the present time is extremely risky. Sure, maybe the economy would make the adjustments to post-big three life smoothly, but I’d rather not tempt fate. Nobody’s arguing we shouldn’t structure the best deal possible — one that is optimal with respect to the national interest (and that unfortunately means a lot fewer automobile-related rust belt jobs).
Handing out a million and a half pink slips in gradual fashion over the next, say, four years (even if this costs the taxpayers a lot of money), is a safer course of action than handing out two million over the next twelve months. It may be a cheaper (for us taxpayers) course of action, too, although our lack of easily observable parallel universes will make it impossible to prove either way.
I think this is basically our choice.
Megan McArldle doubts the political viability of battling climate change with carbon taxation:
The Democrats right now are divided into deficit hawks, who think that the nearly $1 trillion deficit headed down the pike means they can’t afford any big programs, and the big spenders, who say to hell with the deficit, let’s spend as much as we can to make it look like we’re really doing something. More on this later. But one wrinkle that hadn’t seemed as important as it now does is that the Democrats do not have the luxury of proposing unpassable legislation in order to look like they’re doing something. They can’t make good on Obama’s electoral promises about global warming by putting up a program the Republicans hate enough to take down, because there aren’t enough Republicans to credibly blame for the bill’s destruction. So they either have to actually pass a carbon bill that will be massively unpopular when it raises energy prices, or explain why Obama didn’t really mean it.
If the Democrats are smart, they’ll pass a carbon bill that will only gradually raise energy prices, and that won’t really kick in in a serious way for another 5-7 years. Modest rises in energy prices in the short term will not prove to be “massively unpopular” and more substantive increases — while no doubt not exactly something the public will love — will be tolerated if the economy as a whole is once again growing briskly, and median income is once again increasing, and people see real progress in developing the kind of infrastructure that helps them deal with said higher energy prices.
More troubling news on the bailout front:
U.S. banks getting more than $163 billion from the Treasury Department for new lending are on pace to pay more than half of that sum to their shareholders, with government permission, over the next three years…
Critics, including economists and members of Congress, question why banks should get government money if they already have enough money to pay dividends — or conversely, why banks that need government money are still spending so much on dividends.
“The whole purpose of the program is to increase lending and inject capital into Main Street. If the money is used for dividends, it defeats the purpose of the program,” said Sen. Charles E. Schumer (D-N.Y.), who has called for the government to require a suspension of dividend payments.
The Treasury plans to invest up to $250 billion in a wide swath of U.S. banks in return for ownership stakes, which the government will relinquish when it is repaid.
Among other restrictions, participating institutions cannot increase dividend payments without government permission. They also are barred from repurchasing stock, which increases the value of outstanding shares.
The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury’s investment over the initial three-year term.
“The terms of our capital purchase program were set to encourage participation by a broad array of financial institutions so they strengthen their financial positions,” Treasury spokeswoman Michele Davis said.
The Treasury’s approach contrasts with decisions by foreign governments, including Britain and Germany, to require banks that accept public investments to suspend dividend payments until the government is repaid. The U.S. government similarly required Chrysler to suspend its dividend payments as a condition of the government’s 1979 bailout.
Heckuva job, Paulsie.
I strongly suspect this situation directly flows from Bush-Paulson’s rudderless, schizophrenic approach to fnancial crisis strategy:
The bailout is now the hottest lobbying game in town.
Insurers, automakers and American subsidiaries of foreign banks all want the Treasury Department to cut them a piece of the largest government rescue in U.S. history.
The betting is that many with their hands out will be successful, especially with financial markets in a stomach-churning dive and predictions the economy is about to tumble into a deep recession.
These groups argue that the credit squeeze is so severe and the risks to the economy so dire that their industries need financial support as well.
The Treasury is considering requests from a variety of industries, but has not decided whether to expand the program, officials said Saturday.
Lobbying efforts are intensifying.
Sounds very unfocused, and rather depressing.
Commenting on John McCain’s enthusiastic pro-Nafta speech this week north of the border, John Ibbitson writes:
Mr. Obama, on the other hand, is a NAFTA skeptic. “NAFTA and its potential were oversold to the American people,” his website declares. “Obama will work with the leaders of Canada and Mexico to fix NAFTA so that it works for American workers.” When Austan Goolsbee, Mr. Obama’s chief economic adviser, reportedly told Canadian diplomats that Mr. Obama’s statements on NAFTA were mere campaign rhetoric, the ensuing controversy embarrassed both the candidate and the Canadian government. Mr. Obama does appear to be trying to distance himself from some of his earlier tough talk, telling Fortune magazine that some of his trade rhetoric was “overheated and amplified.” But his support for increased trade ties with Canada is lukewarm at best, and he could actually prove hostile to the bilateral trading relationship.
I think the significant majority of Canadians who feel Obama’s politics more closely match their own political ideals (and therefore are inclined to favor his candidacy over McCain’s) are right not to worry too much about the Illinois senator’s nods to the protectionists and anti-globalists in the Democratic party. Nearly all parties of the left in rich democracies count within their ranks substantial numbers of people opposed to the further integration of the global economy. And the thing is, a number of states Obama either badly wants to win (Ohio) or absolutely must win (Pennsylvania) are home to large number of culturally conservative unemployed/marginalized blue collar workers who may abandon the culturally liberal Obama if they perceive he’s an excessively enthusiastic fan of free trade.
I believe it’s clear Obama knows the path to securing the living standards of working people lies in strengthening the safety net and not in erecting barriers to trade.
This is simply American presidential politics 101. There’s no serious prospect of an Obama administration’s igniting a trade war between the US and Canada. And in the unlikely event that a President Obama were to broach the subject of labor standards and worker protections with Ottawa (over the Nafta issue), Canadians would have nothing to worry about, since any resulting action would mean it is the US that would be beefing up its standards to match the practices of the more Western European-style Canadians.
On the topic of the Obama’s and McCain’s views on taxation, Clive Crook writes:
With their fixation on the fate of the Bush tax cuts, both of them are missing the main point: comprehensive reform is needed–and needed so badly it may be unavoidable. The key is to broaden the income-tax base. Income-tax rates are moderate in the United States by international standards, but the income-tax base is narrow, so the total raised is less than you would expect. Raising significant amounts of additional revenue–which is going to be necessary, even if no new spending is undertaken–would push income-tax rates quite high. The country needs to broaden its tax base and simplify the rate structure, and much the best way to do this is as part of a thorough overhaul of the code. A lot of what should be done is neither liberal nor conservative. Ordinarily one thinks of a trade-off between equity and efficiency. At some point, those choices do have to be made, but the United States is not at that point. The current system is so inept, so complicated, and so replete with unintended consequences that it is easy to devise a win-win alternative–fairer and more conducive to growth at the same time. Yet neither Obama nor McCain gives any sign of embracing comprehensive reform. Quarreling over the fiscal legacy of the Bush administration is more to their liking. So much for post-partisan politics.
Although I couldn’t agree more that the country badly needs reform of the tax code, I strongly suspect neither Obama nor McCain is so much “missing” this point as avoiding it, for reasons of politics. Any reform of the tax code that is sufficiently radical to do any real good will require a bloody political fight.
I don’t see much prospect of any decent reform plan getting enacted under a McCain presidency, given the likely composition of the Congress (though you never know, and of course McCain has shown some proclivity for working with Democrats). I reckon Obama is the more plausible agent of change in this regard. If I were he I’d avoid getting into specifics with respect to tax reform ideas if such an agenda were part of my plans (one can only hope tax code reform is part of his plans). Obama displayed admirable unwillingness to pander to the electorate on gasoline taxes — an unwillingness that probably helped him finish off Hillary Clinton. But I don’t think he can count on a similarly happy outcome flowing from the effects of candor on the tax code in general, at least to the extent that any substantive reform cannot wholly ignore the mortgage interest deduction
McMegan ponders the sustainability of the Scandinavian welfare state:
It occurs to me that Scandinavia, with its homogeneous population, may have been spending down the accumulated social capital of its pre-welfare state society. Before the widespread welfare state, people who attempted to free ride by collecting benefit when they could be working faced both internal guilt and considerable external social pressure; the neighbors essentially functioned as the fraud police. But as the generations who grew up before the kribbe-to-grav safety net die off, and are replaced by a newer generation perfectly comfortable with broad public charity, this is clearly breaking down. Sweden’s rates of long term disability, sick leave, and so forth, are very high. The Scandinavians I know generally report that the once-famous work ethic is not really all that impressive any more, and there’s little stigma attached to malingering on long-term sick leave.
Yes, but is the Nordic system really “breaking down” just because people take advantage of its opportunities for leisure?
I was under the impression that these countries were really beginning to suffer from dismal growth and its attendant problems (worsening public sector finances, declining living standards, joblessness, etc.) in the 80s and early 90s. But I also thought that, over the last ten years or so, they had pretty much gotten their acts together, tweaked the incentives their systems create, and undertaken some non-trivial structural reforms — and that as a result they were all once again growing at a pretty decent clip. Am I wrong?
Relatedly, what I’ve often wondered is, wouldn’t the average Scandinavian who was gainfully employed enjoy a substantially higher standard of living than what who stayed home to live life on the dole? In other words, I would imagine you could structure a generous and expensive array of social programs and still have a society where nonetheless rational actors possess a strong incentive to achieve successful careers.
I think libertarian efforts to portray the Nordic countries as grim dystopian hells (not saying that’s what Megan’s doing here, by the bye) are comically handhanded. It’s plain to see these countries simply rock.