Ten Economics Pieces Worth Reading: February 3, 2010
1) Paul Krugman (January 10, 2009): Romer and Bernstein on stimulus:
Christina Romer and Jared Bernstein have put out the official (?) Obama estimates of what the American Recovery and Reinvestment Plan would accomplish.... This looks like an estimate from the Obama team itself saying — as best as I can figure it out — that the plan would close only around a third of the output gap over the next two years.... [T]he estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am. Bottom line: even if I use the Romer-Bernstein estimates instead of my own — there really isn’t much difference — this plan looks too weak.
2) Martin Wolf: What the world must do to sustain its convalescence:
The biggest challenges, then, are political. The world’s leaders showed an impressive ability to deal with the crisis. The will to co-operate last year, seen not least in the rise of the G20, was remarkable. But such co-operation becomes far more difficult as we return to politics as usual, particularly given high unemployment and deep political divisions inside the US, still the world’s hegemonic power. The European Union remains ineffective. Indeed, the inability of the eurozone to address the fact that the periphery cannot escape from its fiscal trap without strong expansion in demand at the core is proof of that. China, too, is inward-looking. Mr Zhu promised rebalancing. But is that going to happen after today’s stimulus measures are withdrawn?
We have a globalised economy, but politics remains local. In times of crisis, the pressure to look after the former dominates the latter. But now we face a different task: that of convalescence and the associated return to politics as usual. Nobody can imagine that managing this transition will prove easy. But, as the global balance of power continues to shift year by year, the challenge must be met. If it is not, the global economy and global co-operation might yet founder. This is my principal lesson from Davos.
3) Bob Williams: Obama Expands the Baseline—Again:
President Obama broke new ground last year by presenting a budget that assumed changes in the tax law as part of his baseline. Because no one wants to see the Bush tax cuts disappear as scheduled next year or the estate tax go after mere millionaires or the AMT hit a third of all taxpayers, his 2010 budget simply assumed that 2009 tax rules would become permanent and ignored the cost of forgone revenue. That made some sense, given that Congress would never allow all of the tax cuts to disappear or the AMT to affect so many of their constituents. Building those provisions permanently into the baseline only recognized reality, making budget projections both more reasonable—and more drenched in red ink.
This year the president has taken his baseline approach a step further in a way that makes much less sense. His 2011 budget baseline assumes that two provisions of last year’s stimulus bill—expansions of the child tax credit and the earned income credit—become permanent.... (I found this only when TPC colleague Elaine Maag pointed out footnote 5 on page 170 of Analytical Perspectives. Talk about burying the news.) Although I happen to think both provisions make sense, they don’t belong in the baseline until Congress makes them permanent. The 2010 Green Book is a little more transparent but not much. A footnote to the table of contents and a closing sentence in the appendix reveal the secret. We all know that we face rough budget times ahead with huge deficits stretching on forever. Dealing with that situation is not made easier by relabeling tax changes to shield them from view.
4) Andrew Kramer: The Evolution of Russia, as Seen From McDonald’s:
Viktor A. Semenov was growing lettuce on a collective farm outside Moscow in 1990 when a representative of McDonald’s stopped by. The company had just opened a restaurant. Could he sell it a few boxes of lettuce each week? Mr. Semenov’s assistant turned it down. One restaurant was too small an order. “I said, ‘My friend! You see how many McDonald’s there are in the West?’ ” Mr. Semenov recalled recently. “I said, ‘Sell them lettuce at any price. It’s our new strategy.’ ” With that, Mr. Semenov started a company that has all but cornered the market on packaged fresh vegetables in Russia.
With a buy-one-get-one-free deal on hamburgers and a traditional Russian accordion band, McDonald’s celebrated on Monday the 20th anniversary of the opening of its first store in the Soviet Union, a restaurant that drew long lines. But the company celebrated a different milestone earlier this year by outsourcing the last product — hamburger buns — it had made at a proprietary factory outside Moscow called McComplex. It was built before the chain opened its first restaurant. Nearly everywhere else, McDonald’s buys ingredients, rather than making its own. But in the Soviet Union, there simply were no private businesses to supply the 300 or so distinct ingredients needed by a McDonald’s outlet. Everything — from frozen French fries to pie filling — had to be made from scratch at a sprawling factory.
McDonald’s is always a good lens through which to view the 118 or so countries where it operates. In the 20 years since McDonald’s arrived in Russia, enough private enterprises have sprung up to supply nearly every ingredient needed to operate one of its restaurants. Today, private businesses in Russia supply 80 percent of the ingredients in a McDonald’s, a reversal from the ratio when it opened in 1990 and 80 percent of ingredients were imported...
5) James Kwak: Budget Sense and Nonsense:
The fiscal situation is actually very simple. The budget was in surplus when President Clinton left office, although there was already the prospect of budget-busting Medicare deficits in the long-term future. The 2001 and 2003 Bush tax cuts and the unfunded Medicare prescription drug benefit created the large deficits of the Bush era. (The Iraq and Afghanistan wars didn’t help, but it’s not fair to blame those entirely on the Republicans; plenty of Democrats went along.) Then the financial crisis and the resulting recession blew a huge hole in government tax revenues, creating the current spike in deficits; that spike was exacerbated by the stimulus package, which most but not all economists would consider a sensible response to a major recession. (According to an earlier analysis by David Leonhardt, the projected average fiscal balance for the years 2009-2012 has changed, since Clinton left office, from an $846 surplus to a $1,215 billion deficit. The biggest lumps are $673 billion in Bush administration policies and $664 billion in the costs of the financial crisis and recession, including bailout costs.)
Yet somehow the Republicans have tried–successfully!–to spin our current and projected deficits as the result of “more government spending,” putting the Democrats on the defensive. And unfortunately, the result is the Obama administration buying into the Republican attack line–that government spending must be reduced. How else to explain the three-year spending freeze, which is mainly symbolic and a little bit destructive?
6) GRAPH OF THE DAY:
7) BEST THING I HAVE READ TODAY: Tim Harford: Opportunity costs, again:
I have not had time to read much of The End of Influence: What Happens When Other Countries Have the Money by Brad DeLong and Stephen Cohen. It’s a slim book and probably a good read for people interested in the political impact of economic change. I was slightly discouraged by the authors’ apparent reluctance to define what they mean by “when other countries have the money”. (I hope that Brad DeLong one day finds the time to publish his unfinished opus, “Slouching Towards Utopia” - early drafts circulated a decade ago and were brilliant.)
8) SECOND STUPIDEST THING I HAVE READ TODAY: You know, before they were on the New York Times op-ed page, Ross Douthat and David Brooks frequently wrote stuff that was worth reading. Even John Tierney wrote some stuff worth reading before he was on the Times op-ed page. Since then? Nada. Why would make a very good cultural studies dissertation. Today it is David Brooks, and I am going to outsource the critique to Matthew Yglesias:
Matthew Yglesias: The “I’ve Got Mine” Generation:
One of the oddities of the current political dynamic is that the largest slice of our government’s domestic spending goes to programs for old people, but old people have a marked tendency to vote for the party of tax cuts and benefit reductions. David Brooks thinks we can resolve this problem through a sudden outbreak of selflessness on the part of seniors:
Spontaneous social movements can make the unthinkable thinkable, and they can do it quickly. It now seems clear that the only way the U.S. is going to avoid an economic crisis is if the oldsters take it upon themselves to arise and force change. The young lack the political power. Only the old can lead a generativity revolution — millions of people demanding changes in health care spending and the retirement age to make life better for their grandchildren. It may seem unrealistic — to expect a generation to organize around the cause of nonselfishness. But in the private sphere, you see it every day. Old people now have the time, the energy and, with the Internet, the tools to organize...
As is often the case, actual Republican members of congress have a less edifying perspective than Brooks’ but perhaps a better sense of hardball politics. Thus when you look at Jeb Hensarling’s proposal for drastic cuts in Social Security benefits or Paul Ryan’s plan to pair drastic Social Security cuts with drastic Medicare cuts you’ll see that there’s a trick—none of it applies to anyone who’s 55 or older today. The basic idea is to take the GOP old white people base and insulate them from cuts. The under 55 crowd will still have to pay the taxes to finance their benefits, but we ourselves won’t get the benefits...
9) STUPIDEST THING I HAVE READ TODAY: via John Holbo, who comments "To judge from this interview with Zizek in The Times of India, they were right the first time," Slavoj Zizek:
First they called me a joker, now I am a dangerous thinker:
Q: How can you dismiss Buddhism so easily? It’s the fastest growing religion in the world.
Zizek: In the West, Buddhism is the new predominant ideology. Things are so unstable and confusing that with one speculation you can lose billions of dollars in a minute. The only thing that can explain this is Buddhism which says that everything is an appearance. That’s why the Dalai Lama is so popular in Hollywood.
Q: You have also been critical of Gandhi. You have called him violent. Why?
Zizek: It’s crucial to see violence which is done repeatedly to keep the things the way they are. In that sense, Gandhi was more violent than Hitler.
10) HOISTED FROM THE ARCHIVES: DeLong (2000): What Happened to the Phillips Curve?:
[T]ruth be told, the Phillips Curve has not worked well outside America. Economists Doug Staiger, Mark Watson, and Jim Stock pointed out in the Journal of Economic Perspectives that even in the United States the Phillips Curve relationship was never as strong or as good at forecasting inflation as was taught in intermediate macroeconomics. And only in the United States has there been a relatively stable natural rate of unemployment to serve as a reliable indicator of when demand pressure is about to raise inflation. Elsewhere the causes of rising inflation have always been too complex to be summarized by simply comparing unemployment to even a semi-stable "natural rate." Thus perhaps the surprising thing is not that Phillips Curve-based forecasts of inflation have gone awry in the past half decade. Perhaps the surprising thing is that the complicated economic processes determining changes in inflation could be summarized for so long by such a simple relationship as the standard Phillips Curve. In any event one thing is very clear: the simple theory of the relation between inflation and unemployment that economists have peddled for a quarter century no longer works; if economists are to be of any use, they need to come up with a better - and in all likelihood more sophisticated - approach to understanding why inflation rises.
