Paul Krugman and Robert Barro have both responded to my column accusing them of putting politics first. Paul wonders what has happened to me. Continue reading "Dismal science, revisited"

The Obama administration knows that the politics of its new Financial Stability Plan is even more difficult than the economics—which is saying something. The country detests the Troubled Asset Relief Programme, now recast and renamed, regarding it as a vastly expensive rescue of the people who caused the crisis. Tim Geithner acknowledged this on Tuesday. The administration had to improve and expand the programme, while persuading voters that costs will be controlled and that the villains will be punished. The goals are complicated, and the result is a bit of a mess.

The caps on pay of banking executives announced earlier, though far milder than taxpayers have been led to think, are part of the strategy. The new plan, which will use Treasury money to seed new commitments from the private sector and the Federal Reserve, also has politics much in mind. Some $350bn remains unspent in the TARP. The idea is to use it to mobilise new Fed lending and private participation in the resolution of toxic assets. This way the $350bn might be stretched to $2,000bn and up with no need for new Congressional approval.

The plan is anything but finished. Mr Geithner announced principles that will guide it, nothing resembling  a worked-out scheme.

The Fed side is reasonably straightforward. It involves expanding an existing programme, the Term Asset-backed Securities Loan Facility, which lends to investors in securitised car, student and credit-card loans. The scope of the TALF will be widened. The Treasury will put some more money in, shielding the Fed from the first layer of risk. Whether this will be enough to protect the Fed’s balance sheet remains to be seen.

The other main innovation is the plan to create a public-private fund to acquire bad assets. This raises many more questions than the expanded TALF. What terms and conditions will the Treasury offer its private partners in the venture? There are plenty of bad assets out there already for investors willing to buy them. The new inducement seems to be guarantees. The Treasury can stretch the TARP money a long way by guaranteeing the bad assets: this could certainly draw in lots of new private capital. It would also leave taxpayers on the hook for potentially very large sums if things do not work out as intended.

Mr Geithner did not go into that, or explain how taxpayers would participate in the upside if things go well. Despite the insistence on transparency, one wonders if investors will be offered a better deal than taxpayers will be led to think. More forthright approaches—including nationalisation—might end up costing taxpayers less, but the administration has apparently decided that they would be much harder to sell. And Mr Geithner’s assurance that his scheme will “help provide a market mechanism for valuing assets” is puzzling. The terms of the guarantees or subsidies attached to the toxic assets will decide what they are worth—and what this new plan, once it has been worked out, is really going to cost.

I used to have no time for the idea that economists never agree, so economics must be a bogus science and a waste of time. Of course economists disagree, I would say. Economics is difficult, and by its nature cannot be as clear-cut as the physical sciences. But it strives to meet the most rigorous standards of evidence-gathering and scientific method. As long as it remains aware of its own limits, one should not mock the discipline for aiming high.

Economists are right to disagree. This does not stop them improving public policy or raising the standard of discussion inside and outside the profession. Judge them by those standards, I used to say.

As a lapsed member of the guild – I had a spell as an economist in the British civil service – I have a lingering sentimental attachment. But my earlier confidence that economists are not wasting their own and everybody else’s time is diminishing. Are the leaders of the profession measuring up to the standards I just mentioned? Are they helping to improve policy, or raise the standard of public understanding? You could easily argue the opposite.

The remainder of the article can be read here. Please post comments here.

My new column for National Journal attacks the Buy America language in the fiscal stimulus bills [the link expires in two weeks].

During the past few months, as the severity of the recession has become clearer, drawing parallels with the Depression of the 1930s has been a staple of economic commentary. Rightly so: This may yet turn out to be the worst economic setback for 70 years, and the Great Depression says something about how bad things can get if governments fail to respond quickly and about the need to learn from history.

Speaking of that, remember Smoot-Hawley? One can overstate its role, no doubt–it did not actually cause the Depression–but most economists, I think it fair to say, believe that the effort in the 1930s to boost domestic output by restricting imports made things worse. The collapse of world trade, and hence global output, was helped along by deliberate policies in the United States and abroad, as governments tried to keep employment high at home by shifting unemployment overseas. In the end, everybody was worse off.

I had thought this lesson had sunk in. Smoot-Hawley is a byword for economic incompetence and illiteracy. In a global slowdown, “Beggar thy neighbor” is a formula for disaster. Who dissents? The issue, I had supposed, arouses no controversy–causing far less disagreement than how to mend the banking system; less than whether a big fiscal stimulus is needed to revive demand; and less than whether tax cuts or increases in public spending are the best way to stimulate. Yet both the House and the Senate have drafted stimulus bills that include protectionist “Buy American” language. The spirit of Smoot-Hawley lives.

You can read the rest here.

I thought his statement was good.

We all need to take responsibility. And this includes executives at major financial firms who turned to the American people, hat in hand, when they were in trouble, even as they paid themselves customary lavish bonuses. As I said last week, this is the height of irresponsibility. It’s shameful. And that’s exactly the kind of disregard of the costs and consequences of their actions that brought about this crisis: a culture of narrow self-interest and short-term gain at the expense of everything else.

This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success. And we certainly believe that success should be rewarded. But what gets people upset — and rightfully so — are executives being rewarded for failure, especially when those rewards are subsidized by U.S. taxpayers, many of whom are having a tough time themselves.

For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis isn’t just bad taste — it’s bad strategy — and I will not tolerate it as President. We’re going to be demanding some restraint in exchange for federal aid — so that when firms seek new federal dollars, we won’t find them up to the same old tricks.

As part of the reforms we’re announcing today, top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000 — a fraction of the salaries that have been reported recently. And if these executives receive any additional compensation, it will come in the form of stock that can’t be paid up until taxpayers are paid back for their assistance.

Companies receiving federal aid are going to have to disclose publicly all the perks and luxuries bestowed upon senior executives, and provide an explanation to the taxpayers and to shareholders as to why these expenses are justified. And we’re putting a stop to these kinds of massive severance packages we’ve all read about with disgust; we’re taking the air out of golden parachutes.

Shame about “taking the air out of golden parachutes”–not quite right. But now that taxpayers are shareholders, I think the substance is hard to quarrel with. And I liked the “This is America” paragraph, which I think judges the country’s mood very well. This indeed is not about disparaging wealth or pay for performance, but about curbing rewards for failure, something Wall Street seems incapable of doing for itself. Quite where this policy goes beyond the short term, we shall see. (As this FT editorial argues, some broader questions need to be addressed.) But an immediate political necessity had to be confronted and it has been.

If he now kills the Buy American provision in the fiscal stimulus, I will be even more impressed.

This is a book that might have passed me by if the Cato Institute hadn’t invited me on to a panel today to talk about it. Subtitled “Notes on the State of Cyberspace”, it is a quirky and improbable work, and evidently a labour of love: reflections on Jeffersonian ideas of freedom interwoven with an essay on the law, culture and politics of the internet. A difficult book to summarise, but a remarkably successful one, I think. I loved it.

The moose in the title is the preserved animal, seven feet tall at the shoulder, that Jefferson had shipped over to Paris when he lived there to rebut the popular notion that the New World’s creatures were smaller than (thus inferior to) their Old European counterparts. I refute it thus. Jefferson had seemingly limitless intellectual interests, but was much preoccupied with the awesome spaces beyond the frontier. The moose was partly meant to jolt his European visitors into thinking about the limitless possibilities of the new. To start with, Post wants to do something similar for modern readers: look at the internet afresh, and be amazed.

The book then thinks through Jefferson’s ideas about law and the prospects for an “extended republic” of free self-governing societies, and finds applications to the internet. What would Jefferson have made of it all? Seeing the questions reframed in this way is enlightening. Post, a law professor at Temple University, has classical liberal leanings, but doesn’t offer cut-and-dried answers to questions about privacy, anonymity, free speech, private and public regulation, and all the other legal and political issues that cyberlaw specialists engage with, but he gets you thinking about them in a new way. I recommend this strange and absorbing book very warmly.

Here is a fuller review.

The Buy America provisions in the House stimulus bill were bad enough. The Senate version threatens to make them even worse, extending them from government purchases of steel to government purchases of all manufactures. These measures are possibly illegal in international law, flatly contradict a commitment that the US made at the G20 summit in November, and (most important) are likely to hurt the economy more than help it. Is this the new spirit of US multilateralism? Smoot Hawley, anyone?

Read the analysis by Gary Hufbauer and Jeff Schott of the Peterson Institute.

Based on economic and legal analysis, the authors conclude that the Buy American provisions would violate US trade obligations and damage the United States’ reputation, with very little impact on US jobs. They estimate that the additional US steel production fostered by the Buy American provisions will amount to around 0.5 million metric tons. This in turn translates into a gain in steel industry employment equal to roughly 1,000 jobs. The job impact is small because steel is very capital intensive. In the giant US economy, with a labor force of roughly 140 million people, 1,000 jobs more or less is a rounding error. On balance the Buy American provisions could well cost jobs if other countries emulate US policies or retaliate against them. Most importantly, the Buy American provisions contradict the G-20 commitment not to implement new protectionist measures—a commitment that was designed to forestall a rush of “beggar-thy-neighbor” policies.

What should be done? The best result would be to simply delete the Buy American provision in the House-Senate conference. Next best would be to keep the House version, applying the Buy American restriction only to iron and steel, but stating explicitly—in either the statutory text or in the legislative history—that the public interest waiver is intended to be used to avoid violations of US trade obligations. The third option is a presidential statement—preferably before legislation is finalized—that the United States will respect its international obligations when it applies the Buy American provisions.

The withdrawal of Tom Daschle’s nomination to head Health and Human Services is a serious setback. This was an Obama appointment I had liked very much, because Daschle untypically combines real expertise on health policy with years of Congressional experience. I had also liked the way Obama had named him top White House adviser on health as well as head of the lead agency–thus avoiding the problem of overlapping or ambiguous authority that one sees developing in economic and foreign policy. Daschle, it seemed to me, was the very man to get things done. Perhaps he is out altogether; perhaps he will be retained as an adviser, and will have to work with whoever gets the job he wanted. In either case, not good.

The New York Times’s hard line may have had something to do with it. The paper had also rounded on Tim Geithner, as you may recall, but in that case did not explicitly call for the nominee to be ditched.

Another unhelpful development, from Daschle’s point of view: this morning Nancy Killefer withdrew as a candidate for a top job at OMB and “chief performance officer” for the administration–citing tax issues concerning her domestic help. (She is a finance expert who had led an effort to modernise the IRS in the Clinton administration. Subsequently, as a member of the IRS oversight board, she called for more to be spent on bringing cases against high-income tax cheats.) One oddity here is that her seemingly trivial tax issue has been public for weeks. Perhaps there was more.

The problems of Democrats and their difficulty over paying taxes have become the most memorable theme of this transition. The jokes write themselves and much of the derision is well-deserved. But I’m dismayed by Daschle’s downfall.