Radio commentary, March 12, 2009
More of the same, more or less. The economy continues to stink, and not just in the U.S. German industrial production is in a freefall. In fact, the European economy looks to be declining faster than ours. Yet most European governments are showing little interest in bigger stimulus programs, despite U.S. pressure to step up.
U.S. imperial power
We’ll see how long that resistance continues. Chrystia Freeland had an interesting piece (“Salvation, like the sin, will emerge from the US”) in the Financial Times on Thursday arguing that even though this economic crisis originated in the U.S., and looks like it might end up with Asia gaining relative to the U.S., at least in economic terms, there’s unlikely to be any serious challenge to American political leadership—or imperial power, if you prefer the older language, which I do—in the coming years. The European Union has no political coherence, and has been engaging in some pretty heavy infighting about how to handle this economic crisis, and whether to bail out the Eastern portion of the continent, whose economies are in miserable shape. Meanwhile, the U.S. is under energetic new leadership—not what I’d like to see, of course, but there’s no denying the force of Barack Obama’s intelligence and political skill. And despite being the origin of the global crisis, and despite the need to borrow trillions of dollars to bail out the financial sector and stimulate the economy, there’s no sign of global investors shunning U.S. Treasury bonds. That could all change, but obituaries for American political dominance are looking premature.
Corruptions of empire
That’s not to say that the Obama team is firing on all cylinders. In fact, they’re having a hard time even finding enough people to work for them. The Washington Post reported earlier this week that one reason the Treasury can’t find good candidates is that no financial types want to sell their assets at current depressed prices. Now I’m not so sure that the best place to look for good people to save and then renovate the financial system is on Wall Street. But the contrast with the New Deal era is pretty remarkable. Then, the Roosevelt administration was chock full of talented people willing to work for next to nothing. Not now.
No doubt there are many reasons for this. Of course, the crisis was much greater then this it is now—about three times greater, you might say. But also, the intellectual and political environment in the decades leading up to the 1930s depression was a lot livelier than the past couple of decades have been here. Our present ruling elite looks mentally incompetent and morally corrupt, driven almost entirely by the accumulation of money. Sure, it’s been that way for a long time. But it seems more that way than it was in the past.
Geithner wrecked Indonesia
Along those lines: I’ve been pretty critical of Treasury Secretary Tim Geithner ever since he was nominated for the position. His closeness to Wall Street during the bubble, while he was president of the Federal Reserve Bank of New York, cast his qualifications for the job into doubt from the beginning. His invovlement in the disastrous AIG bailout and the disastrous decision to let Lehman Brothers go under reinforced those doubts. And now we have fresh reason to think that he might be exactly the wrong guy for the job.
In a speech in Sydney last week, reported in the Sydney Morning Herald, former Australian finance minister and prime minister Paul Keating blamed Geithner for engineering “the biggest fall in GDP in the 20th century.” Geithner’s unlucky victim was Indonesia, during the Asian crisis of 1997–98. Then he was the official in the U.S. Treasury responsible for drawing up the IMF adjustment program for that country. According to Keating’s analysis, he misread the problem as a current account issue and not a capital account one. That is, Geithner diagnosed the region’s problem as being similar to Latin America’s in the 1980s and Mexico’s in 1994: large government and current account deficits that could be cured, though quite painfully for the local economies, through conventional austerity measures, along with an IMF loan to tide the unlucky recipient country over.
(Keating, though rude of speech, isn’t all that unorthodox a guy economically speaking, so he’s a lot more friendly to the IMF than I’d be. But let’s leave that aside and savor his critique of the man a friend likes to call Timmee!!)
But, as Keating points out, Indonesia’s public finances were in fine shape. The problem was a great inflow of hot money from abroad that had quickly turned tail and left. The result was an asset bubble followed by a rapid asset deflation. Geithner’s prescription, a standard austerity program (higher interest rates along with budget cuts) was exactly wrong: it crashed Indonesia’s economy, and destroyed the IMF’s credibility in Asia. That wreckage encouraged China to “self-insure” its economy against disaster by building up huge foreign currency reserves—huge wads of dollars they could draw on in a crisis rather than being forced to approach the IMF. That hoard is a crucial part of the massive imbalances plaguing the world financial system today. Among other things, it helped fund the U.S. credit bubble, and the rest is a very unpleasant history.
Cap ‘n’ trade: who pays?
In other news, the Congressional Budget Office is out with a new analysis of the distributional effects of a cap-and-trade scheme for carbon emissions. Under cap and trade systems of the sort the Obama administration is proposing, the government auctions off the right to emit carbon into the atmosphere. To continue pumping greenhouse gases, utilities, factories, refineries, and the like would have to buy up sufficient permits from the gov. Over time, the allowable amounts would dimish, forcing a decline in the level of carbon emissions. That’s the cap part. Polluters who got their emissions down below their allowed levels could then sell their surplus rights to dirtier entities. That’s the trade part. The EU is already doing something like this. It’s a favorite approach of market-loving types.
There are problems with these schemes. A very significant one is that prices of carbon rights tend to be very volatile, booming in good times and crashing in bad ones, making it very difficult for companies to plan over the long term. A much neater approach would be to tax carbon at a rate that rises over time.
In any case, the point of either a carbon tax or a cap and trade system is to raise the price of carbon-based fuels over time, forcing conservation and substitution. There’s no easy way around that. Fossil fuels are too cheap to be compatible with life on earth, and that has to change. That’s where the CBO’s distributional analysis comes in. The poorer you are, the larger a percentage of your budget goes to energy. For example, the poorest fifth of U.S. households spends 21% of their income on gas and utilities; those in the middle fifth, about half as much, 9%; and the richest, half as much again, just 4%. Obviously, any serious price increase would hit the poorest the hardest.
So any scheme to raise the price of fuel has to address that—has to, unless it’s designed by very cruel people. The best way to do this would be through tax rebates, structured so that the poorer you are, the bigger your rebate. We shall see if Congress and the administration do anything like that, or if they take the cruel approach.
Americans can’t stop believing
And, finally, the results of some polling and focus group research commissioned by the Economic Mobility Project of the Pew Charitable Trusts. Faith in American specialness looks unshaken. Despite the current crisis, almost one in five Americans—79% to be precise—believes that it’s still possible to get ahead in this economy. Nearly three-quarters—72%—think they’ll be better off in ten years. African Americans are actually more optimistic than Hispanics, who are in turn more optimistic than whites. How about that? And almost two in three—62%—think their kids will be better off than they are. By a 50 point margin—71 to 51—Americans think that personal attributes, like hard work, are more important to mobility than external conditions, like the state of the economy. And only very small minorities, in the 15% range, believe that race and gender have significant impacts on mobility. By a 10-point margin, 46 to 36, Americans think that government hurts mobility more than it helps. And by a 50-point margin, 71 to 21, Americans think it’s more important to give people opportunity than to reduce inequality.
Many of these beliefs are at odds with the facts. In fact, some of the polling reveals that: when asked specific questions, like how easy it will be for their kids to achieve the “American dream,” or how hard it is to start poor and end rich, the answers are more in line with reality. (Thanks to SA for pointing this out.) Only about one in three Americans does better than his or her parents. And race and gender are extremely important influences on outcomes. But these headline results reveal bedrock beliefs that do a lot to influence how people think and vote, regardless of what they know in the backs of their minds. Mere factual refutation won’t do much to change them.