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Category: public policy

Published on Leave a comment on Crumbling American Dreams

The observations in this masterfully written op-ed by Professor Robert Putnam are the reason why I developed a course on local public policy a few years ago. The op-ed is well worth your time. Here is an excerpt from the very poignant conclusion:

The crumbling of the American dream is a purple problem, obscured by solely red or solely blue lenses. Its economic and cultural roots are entangled, a mixture of government, private sector, community and personal failings. But the deepest root is our radically shriveled sense of “we.” 

Cue the Lorax.

Published on Leave a comment on The Need for Efficient Public Institutions

I'll score this column by David Brooks, "Midlife Crisis Economics" as a win.  His thesis:

In the progressive era, the economy was in its adolescence and the task was to control it. Today the economy is middle-aged; the task is to rejuvenate it. 

He offers three pieces of evidence, which I'll summarize as:

  1. Our economy is not prone to creating jobs as much as it is to boosting productivity to grow without rapid job creation.
  2. Our government today has the tools to confront social challenges, but it lacks the institutional effectiveness to make progress against them.
  3. Our moral culture has deteriorated, requiring government institutions to carry a larger burden than in prior eras.

I think he is correct on all three.  You can read and judge for yourself.  The one that offers the most straightforward opportunities for better public policy is #2.  He mentions specifically:

The United States spends far more on education than any other nation, with paltry results. It spends far more on health care, again, with paltry results. It spends so much on poverty programs that if we just took that money and handed poor people checks, we would virtually eliminate poverty overnight.

Spending a lot to achieve paltry results is inefficiency on a large scale.  These three issues (and one other) -- health, education, the environment, and poverty -- are the big issues in domestic public policy.  More and more, they appear to be ones that our political system is incapable of handling.

There will always be an element of each one that remains in the public realm.  Our political system is set up for a split-the-difference approach among two factions that share a common belief that the policy outcomes should be improved.  That approach has broken down (and, in prior posts, I have laid the blame on the political right's connectedness problem.)  In its absence, the quality of the public institutions that are invariably tasked with addressing them has declined, leading to the inefficiency that Brooks is observing.

Published on Leave a comment on If This Meltdown Were a Movie

Ben Bernanke would be played by Harvey Keitel, reprising his role as Winston Wolf if we're lucky or Victor the Cleaner if we're not.

The responsibility for this financial meltdown does not rest with him. It was his predecessor, Alan Greenspan, whose stewardship of monetary policy set the stage for the debt-laced consumption rampage of the American consumer and the leverage-soaked financial carnival of mortgage lenders and investment bankers. (If you're keeping score at home, Greenspan still doesn't get it.) Based on his performance so far, I'm nominating Ben Bernanke to the All-Madden team of central bankers.

Bernanke has two broad categories of options:

1) Damned if He Doesn't

Bear Stearns just collapsed--it cannot pay its creditors. What was a liability to Bear Stearns was an asset to some other investor. That asset now has no value. If the other investor was also a financial institution, then it has fewer assets relative to its liabilities and is now less solvent. It may not be able to pay all of its creditors. And so on, all through the leveraged financial sector.

The Fed can act to prevent or mitigate this cascade. Looking at the prospect of contagion, the Fed has acted on two fronts. It has lowered short-term interest rates to prop of asset values across the economy. As discounting for risk has increased, discounting for time has decreased. The Fed has also intervened in specific episodes, directly backstopping private actors like JP Morgan who have stepped in to assume the liabilities of the likes of Bear Stearns.

Bernanke can't sit idly while large financial institutions crumble. There is a perception, if not the reality, of too much collateral damage in the process.

2) Damned if He Does

The Fed is supposed to be the economy's lender of last resort. If a solvent but illiquid bank needs short-term cash and cannot find it on the private market, the Fed should make credit available. Without this backstop, financial institutions would be less willing to take leveraged positions in support of beneficial economic activity.

But sometimes financial institutions take these leveraged positions in support of exceedingly risky activities. This is particularly true when they hold a put option to sell the activity to someone else if its value falls. Any intervention by the Fed extends that put option to would-be speculators, if not today, then certainly in the future.

You can call this Samwick's Law if you like:

If an institution is deemed too big to fail, then it is only a matter of time before it finds a way to get big and fail.

When you provide insurance against outcomes that a financial institution cannot control, you distort incentives on the activities it can control. Specifically, they take on more risk. To address the immediate problem, Bernanke invites the next one. Snotty bloggers two or five or ten years from now may be hanging the next crisis--runaway inflation, a persistent liquidity trap, even more spectacular bubbles in financial markets--around Ben's neck.

The task of finding the least worst way to do the wrong thing is a thankless one, but Bernanke is persevering admirably. Let's see what he does at 2:15 today.

Published on Leave a comment on Life is unfair, and so is the bailout

My commentary on the Bear Stearns bailout aired on NPR's Marketplace this evening. Here's the teaser:

The collapse of Bear Stearns prompted the Fed to once again cut interest rates. Commentator and economist Andrew Samwick says whether you call it a bailout or a rescue, all Americans have a stake in the outcome.

And here's an excerpt:

Two questions immediately come to mind: Is this fair, and should we care? The question of fairness is easier to answer -- of course it isn't fair. Bear Stearns' fall from grace was its own fault. It was the high-wire act in a leverage-soaked financial carnival.

And yet those in the corridors of power have intervened on the perpetrators' behalf. Some people call this "socialism for the rich." Even that's too generous -- under socialism, the rich would be paying higher taxes during the boom times. No, "fairness" is not a word that describes this bailout.

So life is unfair... Does that mean we should care?

Enjoy!

Published on Leave a comment on Bair 1, Abernathy 0

We'll give FDIC Chairman Sheila Bair credit for this bit of lonely prudence in a financial sector gone mad:

"There are significant uncertainties regarding our projections, and given the challenges facing the banking industry and the likelihood of more bank failures, I believe preparedness should be our overriding concern," said Sheila C. Bair, FDIC Chairman. "Because we are anticipating more difficult times, it would be prudent to continue to build the deposit insurance fund at the pace allowed by the current rates and the remaining credits. As we build up the insurance fund, banks and thrifts should be taking steps to bolster their capital and reserves.

This was her very sensible justification of the FDIC's board's decision to keep the assessment rates charged to insured banks and savings associations unchanged for 2008. And into the fray jumps Wayne Abernathy, now the executive vice president at the American Bankers Association, who is quoted as follows:

The decision today could mean that as much as $20 billion or more of bank services will now not be available to invest in new jobs and new businesses this year, precisely when new jobs and new business investments are most needed.

So, according to this logic, it makes sense to blame the FDIC for its prudence rather than the worst offenders represented by the ABA for their recklessness for the absence of $20 billion dollars from the banking system in the near term.

It is amazing what a change of employer and address can do.

Published on Leave a comment on Governor Spitzer, We Hardly Knew You

My first reaction to the news of Eliot Spitzer's demise was that I felt bad for his three daughters, for reasons discussed here. My second reaction was that I felt bad for his wife for having to stand there and face the public glare as well. I presume that she did that for her daughters if not for her husband. It is the adultery embedded in the transaction, particularly by a father of teenage daughters in the public eye, that most disturbs me.

But that's a personal judgment and a matter that may be relevant in a divorce proceeding. It doesn't necessarily have to guide public policy. What of the transaction itself, if it did not involve adultery? For a public official, the big danger is that Spitzer's desire to keep the activity secret would subject him to blackmail by those in on the secret. With the secret out in the open, there's no longer any danger in that happening, even if he hadn't resigned. Perhaps we need a disclosure policy for elected officials?

What of the transaction itself, if it did not involve adultery or a public official? Now we get to find out whether I'm a libertarian or not, I suppose. Here is a libertarian's case in defense of legalized prostitution. Here's another defense of legalized prostitution based on strengthening the legal status of women who currently engage in illegal prostitution.

What does the economist in me say? Despite the rather high price paid by Governor Spitzer ($4300 per hour), prostitution--particularly if legalized--lowers the cost to the man of obtaining more and more varied sexual activity from women. Who is made better off by this change in price?

  • Men who partake of prostitutes (buyers).
  • Women who engage voluntarily in prostitution but not other types of sex (sellers).
  • Men who do not partake of prostitutes but who face less competition in finding sexual partners from the men who are now content with prostitutes (buyers of substitutes).

Who is made worse off?

  • Women who do not engage in prostitution (sellers of substitutes)

The last one is a pecuniary externality. Though not a threat to economic efficiency, I'm not enough of a libertarian to ignore it.

Published on Leave a comment on Gridlock on Electric Highways

When I suggested the need for a capital budget, these were the sort of problems I wanted to avoid (this one in my own backyard):

CONCORD, N.H.—Northern New England is turning to the sun, wind and waste wood for clean, renewable power, but there's a serious problem: the threat of gridlock on electricity "highways."

A prime example is New Hampshire's northern Coos County, where there are proposals to build renewable energy plants with roughly 460 megawatts of capacity -- two-thirds of the proposed renewable projects in the state -- to run over a transmission line that can only handle 100 megawatts.

The bottleneck is in Whitefield, the end of a transmission loop that runs through Berlin and Lost Nation.

Projects are approved on a first-come, first-served basis, and the first in line, Noble Environmental Power, stands ready to claim the entire 100 megawatts in 2009 for a wind park. That will leave the other proposals to wither and die if investors, electricity consumers or the government don't spend $200 million to upgrade 100 miles of line.

Even if the money were available now, the upgrade could take six years to complete, presenting investors with another hurdle -- time.

Last month, backers of a proposed 70-megawatt biomass plant in Groveton announced they had had enough, at least for now. Joshua Levine, project developer for Tamarack Energy, a partner in North Country Renewable Energy's plant, said the project is on hold despite the $1 million already spent on it.

The plant would burn wood chips, low-grade wood from logging operations and other clean wood readily available in the economically stressed region.

If we intend to bring new sources on line, we need to upgrade capacity. It's crazy to have $150 billion for economic stimulus on things we don't need and yet be cash starved on projects for which we've articulated a need.

Published on Leave a comment on Ethics Reform in Louisiana

The most interesting excerpt of a very interesting tale of Louisiana politics in today's New York Times:

In a town where legislators have been known to proclaim paid-for meals a principal draw to public service, this was an especially unpopular move. Last week, State Representative Charmaine L. Marchand of the Lower Ninth Ward in New Orleans said the limit would force her and her colleagues to dine at Taco Bell, and urged that it be pushed to $75 per person, to give them “wiggle room.”

No public groundswell took up her cause, and the $50 limit held.

Read the whole thing, and hope for more good things from Governor Jindal.

Published on Leave a comment on Take Your Plan Administrator to Court

Carrie Johnson reports in today's Washington Post on the Supreme Court's latest pension ruling:

The Supreme Court handed workers a major victory yesterday by allowing them to sue over mismanagement of their 401(k) retirement accounts, in which more than 50 million employees have invested nearly $3 trillion.

The unanimous holding reverses a lower court decision that had barred individuals from suing over losses related to mistakes and misconduct, and thus had insulated employers from lawsuits even as more U.S. workers came to rely on the savings accounts to help fund their retirements.

[...]

Yesterday's decision will allow James LaRue to proceed with a case against his former employer, DeWolff, Boberg & Associates, over $150,000 in losses he claims he suffered after the Texas management consultancy failed to act on instructions to shift his retirement savings when the stock market hit turbulence more than six years ago.

In a telephone interview, LaRue, 47, criticized his former company for being "nonresponsive" when he asked to transfer his money from stocks into cash as the Internet bubble burst and the market plunged after the Sept. 11, 2001, terror attacks. LaRue, now a self-employed consultant to manufacturing and telecommunications companies, said his former colleagues at DeWolff Boberg were "hiding under the law."

Seems like a reasonable step forward--LaRue should get his day in court. The reaction from businesses are predictable:

Business advocates predicted the ruling would unleash a raft of lawsuits by employees, particularly as stock market volatility once again is causing havoc with investment accounts.

"Ultimately, employers aren't going to sponsor plans if they're going to be sued every time they make an innocent mistake," said Thomas Gies, a Washington lawyer who defended the consulting firm, which denies any wrongdoing.

Even innocent mistakes have consequences, and the entity that makes the mistake should pay to fix it. If an employer cannot sponsor a plan without making multiple innocent mistakes, then that employer should not sponsor a plan. The defense against lawsuits is to have clear procedures and to stick to them.