The Fiscal Stimulus and Market Turnaround: 5-Year Anniversary

Commentators are taking note of the five-year anniversary of the fiscal stimulus that President Obama enacted during his first month in office.   Those who don’t like Obama are still asking “if the  fiscal stimulus was so great, why didn’t it work?”    What is the appropriate response?

Those who think that the spending increases and tax cuts were the right thing to do have given a number of responses, which sound a bit weak to me.  The first is that the stimulus wasn’t big enough.  The second was that the Great Recession would have been much worse in the absence of the stimulus, perhaps a replay of the Great Depression of the 1930s.  (The media are fond of this line of reasoning because it allows them to escape making a judgment.  They can just say “nobody knows what would have happened otherwise.”)    The third response is that the fiscal stimulus was short-lived, and in fact was reversed by the Congress by 2010.

I believe that each of these three statements is true.   But they sound weak because they look like attempts to explain away the absence of a visible positive impact.  Listening to these arguments,  one would think that no effect of the Obama stimulus could be seen by the naked eye in the U.S. economic statistics of 2009.    Nothing could be further from the truth.

Recall the timing.  Obama was sworn in on January 20, 2009. The economy and financial markets had been in freefall ever since the Lehman Brothers failure four months earlier (September 15).   The President quickly proposed the American Recovery and Reinvestment Act, got it through Congress despite strong Republican opposition, and signed it into law on February 17.

If one judges by the economic statistics, the effect could not have been much more immediate, whether the crierion is job loss, GDP, or financial market indicators.   Look at the graphs below.

The stock market, which had been falling steeply since September, hit bottom on March 9, 2009, and then started a 5-year upward trend.   The index shown in Figure 1 is the S&P 500.  The turnaround can’t be missed.  Wall Street should get ready to celebrate the anniversary on March 9.

The much-maligned TARP and bank stress-tests also played important roles, unfreezing financial markets.  Bank interest rate spreads were back to pre-Lehman levels by February 2009 and back to pre-subprime-crisis levels by June.

What about the real economy?  That is what matters, after all.   Economic  output was in veritable freefall in the last quarter of 2008: a shattering 8.3 % p.a. rate of decline (BEA).  More specifically, the maximum rate of contraction came in December 2008, according to the monthly GDP estimates from the highly respected MacroAdvisers.   (For charts in the form of growth rates, see Figures 1 and 2 ofmy post on the 3-year anniversary.)  The free-fall stopped in the first quarter of 2009.   As the GDP graph below shows, economic activity was flat, scraping along the bottom until June, after which growth resumed.   The official end  of the recession thus came in June.   Visible to the naked eye.

The rate of job loss bottomed out in March 2009.  It is there for anyone to see.   The graph shows private sector employment changes.  Thus the turnaround does not count government jobs directly created by the fiscal stimulus.  Job creation turned positive after the end of the year.  Since then, though employment gains have been much too slow, they have on average exceeded the rate during the corresponding period under George W. Bush.

Of course there are always a lot of things going on. One cannot say for sure what was the effect of the Obama stimulus. And one can debate why the pace of the expansion slowed after 2010. (My own prime culprit is the switch to fiscal austerity.)

But whether looking at indicators of economic activity, the labor market, or the financial markets, the idea that the fiscal stimulus of February 2009 had no apparent impact in the numbers is wrong.

[Comments can be posted at the Econbrowser version or in the always-lively debate at Economist’s View.]

What Do Obamacare and the EITC Have in Common with Cap-and-Trade?

My preceding blog post described how market-oriented mechanisms to address environmentally damaging emissions, particularly the cap-and-trade system for SO2 in the United States, have recently been overtaken by less efficient regulatory approaches such as renewables mandates.   One reason is that Republicans — who originally were supporters of cap-and-trade — turned against it, even demonized it.

One can draw an interesting analogy between the evolution of Republican political attitudes toward market mechanisms in the area of federal environmental regulation and hostility to the Affordable Care Act, also known as Obamacare.   The linchpin of the program is the attempt to make sure that all Americans have health insurance, via the individual mandate.  But Obamacare is a market mechanism, in that health insurers and health care providers remain private and compete against each other.

As has been pointed out countless times, this was originally a conservative approach, designed to work via the marketplace:  The alternative is to have the government either (i) directly provide the health insurance (a “single payer” system, as in Canada; or under US Medicare for that matter) or (ii) directly provide the health care itself (”socialized medicine,” as in the UK; or the US Veterans Administration hospitals).  The new approach was proposed in conservative think tanks such as the Heritage Foundation. It was enacted in Massachusetts by Republican Governor Mitt Romney. By the time President Obama adopted it, however, it had become anathema to Republicans, most of whom forgot that it had ever been their policy.

One can trace through the parallels between clean air and health care.  The market failure in the case of the environment is that pollution is what economists call an externality:  In an unregulated market, those who pollute don’t bear the cost. The market failure in the case of health care is what economists call adverse selection:  Insurers may not provide insurance, especially to patients with pre-existing conditions, if they have reason to fear that the healthy customers have already taken themselves out of the risk pool.

Government attempts to address the market failure can themselves fail.  In the case of the environment, command-and-control regulation is inefficient, discourages innovation, and can have unintended consequences.   For example, CAFÉ standards (Corporate Average Fuel Economy) were partly responsible for the rise of the SUV.  Corn ethanol mandates raised food prices and accomplished nothing for the environment.  When “New Source Review” requires that American power companies adopt the most stringent available control technology if they build a new power plant, they respond by keeping dirty old plants running as long as possible (Stavins, 2006).

In the case of health care, a national health service monopoly can forestall innovation and provide inadequate care with long waits.  In general, the best government interventions are designed to target the failure precisely – using cap-and-trade to put a price on air pollution or using the individual mandate to curtail adverse selection in health insurance — and otherwise let market forces do the rest more efficiently than bureaucrats can.

American conservatives often talk as if the alternative they would prefer is no regulation at all.  But few in fact would want to go back to the unbreathable pre-1970 air of Los Angeles, London, or Tokyo.  Even those few who might want to should recognize that most of their fellow citizens feel differently.  Political reality shows that the alternative in practice is an inefficient rent-seeking system in which solar power, corn-based ethanol, and fossil fuels all get subsidies or mandates.  Analogously, few conservatives in fact will say that they want hospital emergency rooms to turn away critically ill patients who lack health insurance.  Even for those who might want this, reality shows that the alternative in practice is hospitals that give emergency care to those who lack insurance, whether because of personal irresponsibility or for reasons beyond their control, and then pass the charges on to the rest of us.

A third example is the Earned-Income Tax Credit.  It was originally considered a conservative idea: an implementation of Milton Friedman’s proposed negative income tax, it was championed by Ronald Reagan as a pro-work market-friendly way of addressing income inequality.   President Obama proposedexpanding the EITC in his State of the Union address last month.  But conservatives, again forgetting that it was their own creation, have opposed expansion of the EITC as verboten redistribution.   So proposals to increase the minimum wage get more political traction as a way to address income inequality, even though that approach is more interventionist and less efficient.

[This is the second of a two-part post, which in turn is the extended version of an op-ed published atProject Syndicate.  Comments may be posted there; or join the debate at Economist’s View.]

IMF Reform and Isolationism in Congress

A long-awaited reform of the International Monetary Fund has now been carelessly blocked by the US Congress.   This decision is just the latest in a series of self-inflicted blows since the turn of the century that have needlessly undermined the claim of the United States to global leadership.

The IMF reform would have been an important step in updating the allocations of quotas among member countries.  From the negative congressional reaction, one might infer that the US was being asked either to contribute more money or to give up some voting power.   (Quotas allocations in the IMF determine both monetary contributions of the member states and their voting power.)  But one would then be wrong.  The agreement among the IMF members had been to allocate greater shares to China, India, Brazil and other Emerging Market countries, coming largely at the expense of European countries.  The United States was neither to pay a higher budget share nor to lose its voting weight, which has always given it a unique veto power in the institution.

The change in IMF quotas is a partial and overdue adjustment in response to the rising economic weight of the newcomers and the outdated dominance of Europe.   Voting share in the IMF is supposed to be in proportion to economic weight, not equal per capita or per country.  This acknowledgement of reality, the principle of matching the representation to the taxation, is sometimes known as the Golden Rule: “He who has the gold, rules.”  The principle is probably one of the reasons why the IMF has usually been a more effective organization than others such as the UN General Assembly.

It’s not that President Obama hasn’t tried to exercise global leadership, as just about any US president would.  He pushed for this agreement to reform the IMF at the G20 summit in Seoul in November 2010 (the first meeting of the group of leaders to have been hosted by a non-G7 country).  He prevailed despite understandable European reluctance to cede ground.

Some American congressmen may not be aware of the extent to which the IMF reform agreement represented the successful efforts of the US executive to determine the course of the international negotiations.  But then the rejection by the US Congress of an international agreement that the president had painstakingly persuaded the rest of the world to accept is not a new pattern.    It goes back a century, to the inability of President Woodrow Wilson to persuade a tragically isolationist US Congress to approve the League of Nations (1919).   Examples over the last century also include the International Trade Organization (1948), SALT II (1979), and the Kyoto Protocol (1997), among others.  A past history of trying to re-open international negotiations that the executive has already concluded is also the reason why Congress has to give President Obama trade promotion authority (that is, the usual commitment to fast-track congressional votes on trade agreements), or else our trading partners will not negotiate seriously.  This would impede ongoing talks in the Pacific, with Europe, and globally (in the venues, respectively, of the Trans-Pacific Partnership, Trans-Atlantic Trade and Investment Partnership, and the World Trade Organization).

Commentators have been warning since the 1980s that the US may lose global hegemony for economic reasons, as an effect of budget deficits, a declining share of global GDP, and the switch from net international creditor to net debtor.  One version is the historical hypothesis of imperial overstretch (Kennedy, Rise and Fall of the Great Powers, 1987).

But the main problem seems to be a lack of will rather than a lack of wallet.   Or perhaps it would be more accurate to describe the problem with US domestic politics as wild swings of the pendulum between excessive isolationism and excessive foreign intervention in reaction to short-term events, untempered by any longer term historical perspective.   After the United States lost 18 rangers in Somalia in October 1993 (Blackhawk Down), Congress became highly resistant to just about any foreign intervention, no matter how big the “bang for the buck.”   Then, after September 11, 2001, it was prepared to follow President George W. Bush into just about any military intervention, no matter how dubious the benefit or how high the cost.   The total cost of the wars in Iraq and Afghanistan has recently been estimated at $4 trillion by my colleague Linda Bilmes, co-author with Joe Stiglitz of The Three Trillion Dollar War, 2008.  (It’s not just that the wars lasted for ten years; the biggest costs of such wars come subsequently, particularly for medical care that veterans need for the rest of their lives.)  These days, the pendulum has apparently swung back to the isolationist direction once again.

One had hoped that myopic congressmen had been made aware that among the costs of the foolish US government shutdown three months ago was damage to the country’s global credibility and leadership.   Most visibly, to deal with the shutdown, the White House in October had to cancel its participation at the leaders’ summit of APEC (Asia-Pacific Economic Cooperation) in Bali and thereby stymie progress on the US-led Trans-Pacific Partnership.  It was widely reported that the Asian countries drew from Obama’s absence the conclusion that they should play ball with China instead (Drysdale, “Asia Gets on with It While America’s out of Play,” Oct. 7, 2013.)

The increasing power of China and other major emerging market countries is a reality.  It is precisely what makes it important that the United States support a greater role for these countries in international institutions such as the IMF, the G20, and APEC.

The rise of China could go well or badly for international relations.  It depends in part on whether the status quo powers make room for the newcomer (Nye, 2013).This historical pattern famously goes back to Thucydides’ description of the rising power of ancient Athens and the resulting war with Sparta (History of the Peloponnesian War).  Examples of the consequences of failing to accommodate the new arrival include the role of Germany’s rise in the origins of World War I 100 years ago (e.g., Gilpin, War and Change in International Politics, 1981).

The new Chinese President, Xi Jin Ping, has used the phrase “New Type of Great Power Relationship.” It sounds anodyne but may carry greater significance.   The phrase apparently demonstrates awareness of the historical “Thucydides trap.”  It signals China’s openness to working with other countries to avoid the tragedies of 460 BC and 1914 AD. It is only sensible to take him up on his offer and so smooth international relations into the future.

The potential for US leadership has survived remarkably well the loss of national status as an international creditor.   This has partly been a matter of luck.  In Asia, historical and territorial frictions among Japan, Korea, and China, have kept US participation far more welcome in the Pacific than it would otherwise be. Meanwhile, in Europe, fiscal follies have been even more egregious than America’s.  Asians are aware that the IMF has stretched the rules to lend into the euro crisis on a greater scale than it did during the Asia crisis of 1997-98.  They understandably feel entitled to a greater say in the running of the Fund.   But the emerging market countries have been so disunited, for example, that no two of them could come together in 2011 to support a common candidate for IMF Managing Director, notwithstanding that the three previous incumbents were European men who flamed out before completing their terms in office.  (The result was a European woman, Christine Lagarde.  She has done a good job rather than kowtowing to Europe; but that is beside the point.)

The latent demand around the globe for enlightened US leadership, which first appeared at the end of World War I, is still there.  It can survive budgetary constraints (and apparently can survive misguided military interventions).  But it cannot survive an abdication of interest on the part of the US Congress.

[This column appears at East Asia Forum. It is an extended version of an op-ed, titled “Absent America,” that appeared first at Project Syndicate.  The author would like to thank Joe Nye and Ted Truman for comments.]

Will Financial Markets Crash Before October 17, or After?

October 4 is the first Friday of the month, the day when the Bureau of Labor Statistics routinely reports the jobs numbers for the preceding month.   Is the havoc created by our current political deadlock over fiscal policy showing up as job losses?   We have no way of knowing.  On October 1 the BLS closed for business, like many other “non-essential” parts of the government.  There will be no more employment numbers until the shutdown ends.

Last week, Wall Street economic analysts responded to the usual surveys as to what they thought the upcoming employment numbers would be.   (These surveys are what the media refers to each month when they tell you that employment rose or fell “more than economists expected.”)    The median forecast in last week’s  Bloomberg survey, for example, was a prediction that the BLS would report that “Payrolls increased by 175,000,” the biggest gain in four months.   But there was no word on how many of the respondents recognized that there would in fact probably be no number at all on October 4, because the Labor Department would have been closed by the government shutdown.

It seems to me that this minor blind-spot is symbolic of a failure of Wall Street to focus adequately, until now, on the long-impending government shutdown and still-impending October 17 deadline for raising the national debt ceiling.   One reason for the lack of concern up until this point is that observers are jaded; they feel they have seen this movie before (with fiscal cliffs, sequesters, shutdowns, and ceilings); that it is “only politics;” and that Washington always averts catastrophe at the last minute. Well, maybe not this time.

Another reason is that the financial markets all summer long were busy over-reacting to developments regarding the Federal Reserve.   The stock market reached a high two weeks ago on the information, which was considered news, that monetary policy was not going to be tightened imminently after all.   Now the fixation is passing from monetary policy to fiscal policy. Not a moment too soon.

Both sides in Washington are firmly dug in, and don’t plan to back down.  If the politicians don’t get their act together  and the debt ceiling is really not raised, the results will be very bad indeed.   I actually mean “if the Republicans don’t get their act together.”  I think President Obama is fully credible when he says he will not let one faction in one party in one house of congress, in one branch of the government, threaten to blow us all  up if they don’t get their way on the Affordable Care Act.

The US has never defaulted on its obligations before.  Some continue to imagine that the government could stay within the debt ceiling but meet its obligations out of incoming tax revenue.  This is wrong.  Even if there were enough tax revenue to service the treasury debt for awhile, there would not be anywhere near enough to meet all the other legal obligations that the federal government has already incurred under the congressionally passed budget.  If the government doesn’t pay Staples the money that is owed for office supplies that it bought last month, that is a legal default just as much as if it fails to service its bonds.

Perhaps, given the desperation of the situation when the time comes, President Obama could try one of the gimmicks that have been proposed, such as minting the trillion dollar coin or taking the position that the debt ceiling violates the constitution or other laws.   These are not attractive options because they would probably provoke a constitutional crisis.   So let’s assume that he doesn’t take them.

It seems to me that this then leaves two possible outcomes: either the financial markets fall before October 17 and the Republicans respond by backing down or the financial markets fall after October 17 and the Republicans respond by backing down.   Precedents for financial markets forcing such a reversal include the delayed congressional passage of the unpopular TARP legislation in the fall of 2008 and the delayed passage of an unpopular IMF quota increase 10 years earlier.   (In the last debt ceiling showdown, in August 2011, default was avoided at the last minute;  but the stock market fell sharply anyway, when S&P for the first time ever downgraded US debt from AAA.)

After a remark by Obama about the markets yesterday, some accused him of “scare tactics,” of fanning Wall Street fears for political advantage.  The reality is almost the reverse:  if Obama thinks like a pure politician, he will let the Republican Party complete the process of committing suicide (suicide by means of binge tea partying).  The way to do this would be to wait until October 17 and let the Republicans take the blame not just for a decline in the stock market or for the inconvenience to anyone who has to deal with the government during the shutdown, but – if there is no resolution in time to raise the debt ceiling – to take the blame for the likely result: a second global financial crisis and global recession.

But that would be a very high price to pay for political advantage.  Even if the Republicans cave in within a few days after October 17, so as to avert the global recession, by then the creditworthiness of US Treasury debt will have been irreparably harmed.  My guess is that Obama thinks it would be much better for the country if the markets were to tank and the Republicans to back down before October 17 rather than after, even though the Tea Party would then live to fight another day.

[I discussed these matters this morning on BBC radio, “US Shutdown Risk to Global Economy,” and Fox Business News, “Who Will Listen to the President’s Warning to Wall Street?” Varney & Co..  One of the Fox team claimed that the stock market has usually gone up in government shutdowns.  It turned out that her statistic referred to the subsequent month;  in other words the market goes up when the shutdown is ended.  In fact it typically goes down during shutdowns, by 2 ½ % in the case of those lasting 10 days or more. It looks to me that this exchange was excluded from the segment posted on the Fox website.]

Recent Jobs & Growth Numbers: Good or Bad?

This morning’s US employment report shows that July was the 34th consecutive month of job increases.   Earlier in the week, the Commerce Department report showed that the 2nd quarter was the 16th consecutive quarter of positive GDP growth.   Of course, the growth rates in employment and income have not been anywhere near as strong as we would like, nor as strong as they could be if we had a more intelligent fiscal policy in Washington.  But the US economy is doing much better than what most other industrialized countries have been experiencing.   Many European countries haven’t even recovered from the Great Recession, with GDPs currently still below their peaks of six years ago.

US job growth has averaged 186 thousand per month over the last two years, or 167 thousand per month over the last three years.  Most people are aware of the improvement relative to the horrendous job loss during the 2008-09 recession.   But they are probably not aware of how the recent recovery record looks compared to the previous business cycle, the six years of recovery between the end of the 2001 recession and the economic peak at the end of 2007.  Job growth during those six years averaged 100 thousand per month, substantially lower than now.  The difference is even greater if one looks at private sector jobs numbers, because government employment expanded substantially under the Bush Administration whereas it has been contracting in recent years.

GDP growth has fallen well below 2% in the last three quarters.   But I think we know the reason for that:  dysfunctional fiscal policy.  Washington has been the obstacle to a normal robust recovery, through a combination of such factors as spending cuts since 2011, the expiration of the payroll tax holiday in January 2013, the sequester in March, and now business uncertainty arising from new time-bombs in the next two months, once again the needless result of partisan deadlock over passing a budget and raising the debt ceiling.  Given all that, it is surprising that private consumption and investment have held up as well as they have.

The right policy bargain, of course, is fiscal stimulus in the short term, not fiscal contraction, combined with steps today to address the entitlements problem in the long-term.   That would get us back to solid growth.  Our current pattern of pro-cyclical fiscal policy is exactly backwards.

[Comments can be posted at the Project Syndicate site or at Economist’s View.  I have been appearing on Fox Business, where Stuart Varney again today asked why we aren’t achieving high growth.  He also worries about the recent increase in part-week employment, apparently not realizing that this is an effect of the government sequester.]

Fear of Fracking: The Problem with the Precautionary Principle

An amazing thing has happened over the last five years.   Against all expectations, American emissions of carbon dioxide into the atmosphere, since peaking in 2007, have fallen by 12%, back to 1995 levels.  (As of 2012. US Energy Information Agency).   How can this be?   The United States did not ratify the Kyoto Protocol to cut emissions of greenhouse gases below 1997 levels by 2012, as Europe did.

Was the achievement a side-effect of reduced economic activity?   It is true that the US economy peaked in late 2007, the same time as emissions.   But the US recession ended in June 2009 and GDP growth since then, though inadequate, has been substantially higher than Europe’s.  Yet US emissions continued to fall, while EU emissions began to rise again after 2009 (EU).  Something else is going on.

The primary explanation, in a word, is “fracking.”   In fourteen words: the use of horizontal drilling and hydraulic fracturing to recover deposits of shale gas.

One can virtually prove that shale gas is the major factor behind the fall in US emissions.  Natural gas, especially when burnt in combined-cycle gas turbine power plants, emits only half as much greenhouse gas (GHG) as coal.   Ten years ago domestic natural gas production appeared to be reaching its limits; the industry was so sure of this that it made big investments in terminals to import Liquefied Natural Gas (LNG).  Yet the fracking revolution has increased the supply of natural gas so rapidly since then that LNG facilities are being expensively converted to export.   Clean natural gas occupies a rapidly increasing share of the generation of electric power.   It has come largely at the expense of coal’s share.  Within power generation, natural gas is up 37% since 2007, while coal is down 25%.  As a result, natural gas has drawn close to coal as the number one source of US power — unthinkable a short time ago. Renewables have been rising, but still constitute only 5% of power generation in the US.  This is less than hydroelectric and far less than nuclear, let alone coal or gas.

Meanwhile, the role of coal – the dirtiest fuel — has been rising in the energy mix of the rest of the world, not falling (IEA, Dec. 2012).  Coal’s share of power has even risen since 2010 in Europe (EC), where some countries are phasing out emission-free nuclear power and no shale gas boom has appeared.    (The trans-Atlantic comparison does not offer grounds for self-righteousness, however.   GHG emissions remain far higher in the US than in Europe.)

The advent of shale gas in the United States has had a variety of implications for the economy, national security, and the environment.  The implications are surely more good than bad.

Short-run economic advantages include job creation.   Medium-run economic advantages include the “re-shoring” of some manufacturing activities.   (It would be wrong to claim job creation as an advantage in the long-run.  Jobs that are created in the oil and gas sector would otherwise be created somewhere else.  But during the last five years of high unemployment, every new job has helped.)   Long-run advantages include reducing macroeconomic vulnerability to future global oil shocks such as those that led to serious recessions in the 1970s.

Moving beyond economics, the reduction in net energy imports is good for US national security.  What happens in the Middle East will still matter, but as oil imports fall American foreign policy will not be as constrained as in the past. US net oil imports have already fallen by half since 2007 and the downward trend is expected to continue.   In Europe, the new developments have the potential to break Russia’s troublesome stranglehold on the supply of natural gas.

That leaves the environment.  Here as well the effects on net appear beneficial.   As already noted, the substitution of natural gas in place of coal slows global climate change. Indeed the United States is now on track to meet the Obama administration’s international commitment of emissions 17% below 2005 levels by 2020.  But natural gas is also better for local air quality.  Burning coal puts sulfur dioxide, nitrous oxide, mercury and particulates into the air.

Yet it is among environmentalists that heartfelt opposition to fracking has arisen.  Why?

Environmentalists seem to have three sets of fears.  First, they worry that shale gas will displace renewable energy sources such as wind and solar power.  But the fact is that GHG emissions can’t be reduced without cutting coal emissions and that shale gas is already displacing coal in the USThis is not speculation about the future.  It has already been happening.  If renewables or fusion or something else currently unknown can take over after 2050, then great.  But we would still need natural gas as a bridge from here to there.

Put differently, if the world continues to build coal-fired power plants at the rate it has been, those plants will still be around in 2050 regardless what other technologies have become available in the meantime.  Solar power can’t stop those coal fired plants from being built today.  Natural gas can.

Cheap natural gas also helps with heating buildings and increasingly with transportation as well – particularly if electric plug-in cars become more widespread.  In overall primary energy production, natural gas at 31% has now surpassed coal, at 26%. The graph below shows the two lines crossing. (Table 1.2,  US EIA).  Solar and wind together account for only 2% of US primary energy production.

Second, environmentalists worry about local risks, especially to water supplies.  There are also fears of methane leaks and earthquake triggerings.  Such concerns cannot be dismissed.    It is not enough to proclaim that fracking should be safe if operators are responsible and regulators do their job.   One must take into account the likelihood that in some under-regulated US state someone will not act responsibly and some local water supply will get contaminated.

One lesson is that we need to maintain high-quality environmental and safety regulation, with an emphasis on enforcement, unlike the sort of lax regulation of oil drilling in the Gulf of Mexico that gave us the Deepwater Horizon explosion.  The industry should follow best practices, including making public the chemicals it uses.

But in deciding whether to allow fracking to proceed – and this is what we are talking about: France has banned it and New York state has a moratorium – one must compare the risks of fracking with the risks of the alternative.  Even if there were a serious mishap with fracking, it is unlikely that it would do more damage to health, safety and the environment than the Deepwater Horizon disaster (oil), the Fukushima catastrophe (nuclear), or coal mining tragedies that happen every year (along with lung disease, water pollution from tailings, soil erosion, and other effects of coal).

Finally, some, especially in Europe, have a fear of new and unfamiliar technologies in general.  The claim that the burden of proof lies with the innovation, rather than symmetrically with the status quo, sometimes goes under the name of the “precautionary principle.”   It helps explain the tendency to forget to compare the worst-case risks of the new technology with the known downsides of the old technologies.

One analogy is Genetically Modified Organisms (GMOs).  It is true that a fundamentally new technology tends to pose risks that are unknown.   But that is no excuse for neglecting to weigh in the balance the known risks of the existing technology.  In the case of genetically modified crops, costs of doing without them include greater need for insecticides and possible food shortages in poor countries.

But GMOs may not be a sufficiently powerful example: Europeans tend to oppose them as well.  So here is a challenge to the precautionary principle with which it is difficult to argue.   Should men worried about their virility be daring enough to try the unfamiliar new technology, Viagra?  Or should they stick with the “tried and true” traditional remedy:  powdered rhino horn?

[This is an extended version of a column at Project Syndicate. Comments can be posted there.]

Debt Ceilings, Bombs, Cliffs and the Trillion Dollar Coin

Needless to say, the US has a long-term debt problem.  The problem is long-term both in the sense that it pertains to the next several decades rather than to this year.  (Indeed, the deficit/GDP ratio has been falling since 2009, despite the weakness of the economy.)   The problem is also long-term in the sense that we have known about it for a long time; it was clear in 1991 and should still have been clear in 2001.

It should be almost as needless-to-say that the approaching debt ceiling bomb is not helpful in solving our fiscal situation, any more so than were previous standoffs:  the January 1, 2013, fiscal cliff; before that, the August 2011 debt ceiling standoff, which led Standard and Poor’s to downgrade the credit rating of US debt for the first time in history; and before that, the 1995 shutdown of the government, which largely discredited Republican House Speaker Newt Gingrich.

The current debt ceiling bomb is, of course, another attempt to hold the country hostage under threat of blowing us all up.  The conflict is usually phrased as a question of ideological polarization, a battle between fiscal conservatives and their opponents.  This familiar frame does not seem right to me.  There is in fact no correlation or consistency between the practice of federal fiscal discipline and the political rhetoric, either across states or across time.

What are the demands of the hostage-takers?   Even if there existed an explicit ransom letter detailing specific severe spending cuts, in exchange for which it credibly offered to raise the debt ceiling, President Obama’s refusal to negotiate under such conditions would be fully justified.  But the situation is worse than that.  There is no specific set of demands, and never has been.  I truly believe there does not exist any set of spending cuts that the blackmailers would accept if they came from Obama.

Remember the occasions in the past when he has announced that he will accept the Republican position on some issue, only to have his opponents switch places, saying “if you are in favor of it, we are against it”?    One example was the idea of Obamacare itself, which originally came from conservative think tanks and Mitt Romney.   Another example was the proposal for an automatic version of what in February 2010 became the Simpson-Bowles Commission.

There are only so many dollars that can be cut out of PBS and foreign aid.   If, hypothetically, Obama were to come out in support of severe cuts in agricultural supports, oil and gas subsidies, Medicare benefits and other programs, Republicans would attack him for proposing hurtful cuts. (Remember attacks on Obama’s health plan for non-existent “death panels” and fictional cuts to Medicare benefits?)  Simultaneously, Republicans would say that the cuts were not big enough.

What would be enough?   Some debt crazies have said they think it would be fine if we failed to raise the debt ceiling.  Some are crazy enough to think it is not a problem if the US government were to default on its legal obligations.  (They may not realize that defaulting on the bill for office supplies that you ordered from Staples is as bad as  missing interest payments on your debt.)  But some want to enforce a balanced budget immediately:  the refusal to allow the government to borrow any more is not just a negotiating tactic, but is the outcome they want.  This is crazy in light of the adverse economic and financial impact (which would be much worse than that of the fiscal cliff that we just dodged two weeks ago).

But the prize for ultimate insanity must go to those who want to eliminate the budget deficit rapidly and insist on doing it without raising taxes, cutting defense, or cutting programs for seniors.  These people deserve the label “deranged” because what they are demanding is for a literally false proposition to be true.  It is arithmetically impossible to eliminate the budget deficit if the cuts are to come primarily in non-defense discretionary spending.

To be very clear, I don’t think most Republicans believe all of this.  Certainly my many economist friends who are Republicans do not.  The truly “deranged” people are just a subset of the “crazy” people, who are in turn a subset of those who are unwise enough to favor the debt ceiling threat as a tactic, who are in turn a subset of the Republican Party.   The problem is that it is this minority of a minority that is holding the whole country hostage.  The size of the minority evidently shrunk after the August 2011 debt ceiling debacle, after the November 2012 election, and after the January 1 cliff.   But it still has its finger on the grenade pin.

So that leads us to the question of tactics.  A variety of stratagems have been proposed for the White House to use to defuse the bomb, if it comes to that.  These are all designed as ways that the federal government can continue to meet its legal obligations beyond March, even if the Congress doesn’t raise the debt ceiling.   While these unconventional proposals are beyond anything that would have been contemplated under normal conditions, they must be considered, in light of the correspondingly absurd situation in which the country would find itself.  If the Congress refuses to act, the White House would have to choose between two contradictory laws: the one that Congress passed to authorize spending and taxes versus the debt ceiling law that apparently prohibits the government from borrowing to make up the difference between spending and taxes.  Following the implication of the latter law would have disastrous impacts on the country and the world if obeyed.

  • Given the contradiction between the two laws, President Obama could just ignore the debt ceiling and follow the direct implications of the spending and taxation laws. I am not qualified to judge the legality of this course of action. The courts would eventually have to sort it out. The hope is that by then the Congress would have come to its senses and raised the debt limit.
  • In the meantime, the White House might try invoking the 14th Amendment, as Bill Clinton suggested at the time of the last debt ceiling standoff, in 2011.  The Amendment includes the passage “The validity of the public debt of the United States…shall not be questioned.” Again the Supreme Court would eventually have to decide the issue.
  • The Treasury could issue “IOUs” to the office supply stores, soldiers, Social Security recipients, etc. The IOUs would just be written acknowledgements of a legal fact: that the government owes these people money. Maybe the Federal Reserve could let it be known that it will honor these IOUs. (There must be something wrong with this, or somebody besides me would have proposed it already.)
  • The government writes an option to buy all its property and buildings for $1, and then sells that very valuable option to the Federal Reserve for something like its true value. This proposal has been made by the Yale constitutional expert Jack Balkin last time around, from which I infer that it is not obviously contrary to the law.
  • And finally, the most colorful of the proposals: the trillion dollar coin. The Treasury would exercise its legal authority to mint a commemorative coin made out of platinum, with a face value of $1 trillion. The Federal Reserve would then buy the coin for $ 1 trillion, allowing the Treasury to pay its obligations by drawing down its checking account at the Fed up to that amount. This proposal originated in the blogosphere and was one of those anointed by Balkin in July 2011. Paul Krugman greatly elevated its prominence by declaring his support earlier this month.

Contrary to some fears, none of these proposals need result in the money supply being any larger than it would otherwise be.  The Federal Reserve determines the money supply.  If it creates a new component of money by buying a platinum coin, a property option or IOUs, it can offset it by shrinking other components of the money supply by the same amount, leaving the total unchanged.

The Obama Administration so far is eschewing gimmicks, and is calling on the Congress to do its job in a responsible manner.  This is the right approach.

But in the event that the minority does succeed in blocking a debt increase, it may be worth turning to some legal gimmick to avert the financial and economic catastrophe.   Of the five proposals bulleted above, the platinum coin is the one that seems to have the most experts currently expressing belief in its legality.  It is certainly clever.  Unfortunately, it would probably be the worst from a political standpoint.  The reason is – I am guessing here – there is a fairly high overlap between the debt crazies (defined above) and people who have paranoid conspiracy theories that relate to the Fed, money and precious metals (especially gold, but platinum is too close for comfort). For all I know, some of these people are the same who believe that Obama was born outside the U.S.  (That would fall into the category of deranged propositions, also defined above; but there is no need for us to go there.)  When you are dealing with a crazy person, it is best to avoid anything that would pour gasoline on the flames of his paranoia.  We actually want to win back some of those people who are merely misguided but not really insane.  After all, just getting past the current debt cliff wouldn’t solve the problem, with sequester and shutdown deadlines also looming.   So I’d go for some other legal gimmick, one that would be less likely to feed the paranoia and more likely to continuing chipping away at popular support for the extremists.

[I have been interviewed this week on the trillion dollar coin by Boston magazine and radio station WGBH.]

Economists Polled On Pre-Election Economy

A survey of economists is published in the November 2012 issue of Foreign Policy.  One question was whether we thought that the US unemployment rate would dip below 8.0% before the election.   When the FPconducted the poll at the end of the summer, unemployment was 8.1-8.2%.  Now it’s 7.8%.  Only 8% of the respondents said “yes.”   (I was one.  I basically just extrapolated the trend of the last two years.)

My fellow economists choose defense and agricultural subsidies as the two categories of US federal spending that they think the best to cut.  They rate the euro crisis as the greatest threat to the world economy now and are particularly worried about Spain.

For a slideshow presentation of the results, see “The FP Survey: The Economy.”   Or in a magazine format:  “If we’re ever going to get out of this slump, what will it take?  We asked more than 60 leading economists to tell us.”

Also, here is a recent poll from The Economist, asking similar questions of NBER and NABE economists:   “Asking the Experts,” Oct. 6.

Sinners, Red States, Blue States

Mitt Romney, presidential candidate, said in now-infamous comments that 47% of the American electorate is dependent on the federal government, that he will never be able to teach them to take personal responsibility for their lives, and that they are certain to vote for Barack Obama in November.   He continues a tradition in his party that goes back at least three decades:  building political campaigns around the proposition that folks in the heartland exhibit the American virtues of self sufficiency and personal responsibility and the implication that other, more urban, regions display decadent social values and dependency on government.

It is a good general rule to judge individuals on their own merits and not on the supposed attributes of the racial, socioeconomic or geographic groups to which they belong. Cultural generalizations are dangerous.   But since questions have been raised, the fearless social scientist will not shrink from confronting them.  Are residents of “red states,” who tend to vote Republican, indeed more likely to take responsibility for their personal behavior than those who live in “blue states” and tend to vote Democratic?

Inspired by the role that religion plays in the red-state view of the world, I will organize the investigation in terms of the Seven Deadly Sins:   Greed, Gluttony, Lust, Sloth, Wrath, and so on.  We will see that measures of these “sins,” state-by-state, bear a statistical relationship with voting patterns – but not the relationship that many assume.  (For data sources and econometric details, see the statistical appendix at my website.)

1) Greed

The red states receive more federal spending, relative to taxes, than the blue states, as I wrote in a 2010 blog post.  Updated data show that the pattern continues.  Those who claim to be fiscally conservative are the ones who in truth tend to feed the most voraciously at the federal trough. Alaskans are the most dependent on the federal government, receiving $7,448 in spending (net of taxes) per capita.  New England, the Mid-Atlantic States, Minnesota and Illinois are the biggest net givers.  Regarding Romney’s specific  ”47%” allegation: the states with high percentages of people who pay no income tax tend to vote Republican, not Democratic.

Figure 1 shows on the horizontal axis each state’s receipt of spending by the federal government, net of tax payments, per capita.  The vertical axis shows the ratio of Democratic to Republican votes state by state, in the last three presidential elections.    The red states (low in the graph) tend to be on the receiving end (high spending).  The blue states (high in the graph) constitute a majority of the ones that foot the bill (positive contributions to the nationwide kitty).  The relationship is highly significant statistically.

Figure 1:  Federal Spending Received minus Taxes Paid, among Blue vs. Red States
(Average of votes in 2000, 2004 and 2008 presidential elections)  Click here for larger image.

2) Gluttony

States where residents suffer more from obesity, in part because they have worse eating habits, tend to vote Republican, as I showed in a blog post last June.  To illustrate, a mere 1 percentage point decrease in a state’s obesity rate is associated on average with an estimated increase in the ratio of Democratic to Republican voters from 1.00 to 1.07.  The relationship is highly significant statistically.   (Figure 2.)

Fig.2: Obesity (% of population) Click for larger image     Fig.3: Fitness Index  Click for larger image

3) Sloth

States where residents get less physical exercise tend to vote Republican.  (Figure 10d in appendix.) The relationship is highly significant statistically.    Figure 3 combines physical exercise and lack of obesity into a single index of physical fitness.

In his recent book, Coming Apart, Charles Murray argues that those who live in the “super-zip codes” – the areas with high education levels, like Belmont, Massachusetts  – have maintained traditional American values of hard work, while those who live elsewhere show “crashing” rates of industriousness.   He writes that those who live in areas with less education have been leaving the labor force for years, often falsely claiming disability. They “goof off,” “sleeping and watching television” (p.180-181).  Those that remain employed have reduced the length of their work-week and their dedication to their jobs, at the same time that those living in the super-zip codes have increased theirs (p.176-77).  Some academic researchers and news media fear accusations of liberal bias if they talk about such things.  AEI scholar Murray may be immune from this fear: he is well-known as a conservative/libertarian whose earlier book The Bell Curve dealt with black-white differences in test achievement.  (The statistics in his recent book look at whites alone, so as to control for race.)

4) Lust

Sex is interesting.  Red states residents buy more online adult entertainment, according to a 2009 study in the Journal of Economic Perspectives by Benjamin Edelman.   Notwithstanding proclamations about the importance of pre-marital chastity, evidence suggests that young people in red states do have sex before marriage.  It is less likely to be safe sex than among those in blue states.   States that vote Republican have higher birth rates among 15-17-year-old girls, as Figure 4 shows.   Again, the difference is highly significant statistically.    They also have higher rates of the sexually-transmitted disease Chlamydia .  (This difference, unlike the others, is not statistically significant at the aggregate state level; but it is when combined into an overall measure of unsafe sex.)

Apparently the gap between what they say and what they do is particularly wide for teen-agers who describe themselves as evangelical Christians.  According to research by Mark Regnerus, a sociologist at the University of Texas, Austin, white evangelical adolescents usually state a belief in pre-marital abstinence — 74 per cent — but in fact are surprisingly active sexually, compared to mainline Protestants and Jews who do not tend to state such a belief.  When the evangelicals do engage in sex, they are less likely to use protection than others.  The gap between word and deed is strikingly high for the millions of teenagers who take a formal pledge to remain celibate until marriage, typically in a ring ceremony, according to a New Yorker article by Margaret Talbott (”Red Sex, Blue Sex“).  The majority of them, though holding out for awhile, “end up having sex before marriage, and not usually with their future spouse.”   Two other sociologists, Peter Bearman (Columbia University) and Hannah Bruckner (Yale) find a positive correlation between the abstinence pledge and Sexually Transmitted Disease (STD).  Pledgers are less likely to use a condom if and when they first have sex and overall are slightly more likely to contract a STD.  (Under George W. Bush, the federal government subsidized such abstinence pledge program despite their questionable effectiveness.)


Fig.4: Teen pregnancy rates  Click for larger image Fig.5: Firearms Assaults  Click for larger image

5) Wrath

Nobody is surprised to hear that red states have higher rates of gun ownership than blue states.  But there is an important distinction between those who use guns responsibly and those who do not.   The data show that ¾ of the states with high rates of firearms assaults vote Republican.  (Figure 5.)   The regression is statistically significant.

6) Drunkenness

People who drink too much endanger themselves and endanger others as well.  You guessed it: States with high rates of fatal accidents from drunk driving tend to vote Republican (Figure 6).     Statistically significant.


Fig.6: Drunk driving fatalities  Click for larger image Fig.7: Smoking rates  Click for larger image  

7) Smoking

Finally, states with high rates of smoking vote Republican too, as Figure 7 illustrates.   Again, the relationship is highly significant statistically.

Many of the Seven Deadly Sins can indeed be deadly.  It is particularly striking that the states where the most residents exhibit behavior that endangers their health and that of others – with many of these unhealthy people later free-riding on their fellow citizens when they show up uninsured in the hospital emergency room – are also the states where congressmen tended to vote against the Affordable Care Act (Obamacare) in 2010.  This risky behavior includes poor physical fitness (as measured by rates of obesity, lack of exercise, and poor diet), careless sexual behavior (as measured by rates of teen pregnancy and Chlamydia), smoking, drunk-driving (as reflected in fatalities) and irresponsible use of guns (as reflected in armed assaults).

Each obese American incurs medical costs 42%  higher than those of normal weight.  Often others are stuck with the bill, if the patient has not been able to get health insurance because of a weight problem.  These people are free-riders on the health care system even if they don’t want to be.   The individual mandate of Obamacare was designed to fix this free-riding problem and re-establish personal responsibility.  Yet congressmen in states with high rates of obesity or other health risk factors voted against the legislation.  (See my blogpost or an op-ed on Obamacare for the evidence.)

Utah is the most conspicuous outlier in most of these relationships.  It has a high population of Mormons. Apparently they follow the strictures of their religion more closely than those of other religious denominations.  (Could this be why evangelicals tend to resent Mormons so much, according to opinion polls?)   But Utah notwithstanding, the relationships hold on average.

The five most “red” states are Wyoming, Oklahoma, Utah, Idaho, and Alaska.  The five most “blue” are New York, Massachusetts, Rhode Island, Vermont and Hawaii.   The average score of the five reddest states is worse in each category than the average score of the five bluest states: more obesity, smoking, Chlamydia, teenage pregnancy, drunk driving fatalities, and firearms assaults.  In the latter three of those measures, the “reckless” shares of the population are almost twice as high among the first five states as among the last five.  While we are at it, we might as well acknowledge that the red state populations also tend to be less educated and more prone to divorce.

There you have it, the surprising statistics.  ”Let he who is without sin cast the first stone.”

[This article draws in part on an op-ed concerning Obamacare in the Christian Science Monitor and another concerning Romney’s “47%” remarks at Project Syndicate.    VoxEU also has a version.   Details on data and computations are available in a posted statistical appendix.]

The Unemployment Rate and Private Job Growth

Once again this morning, the BLS employment release tells conflicting stories depending on whether one looks at the unemployment rate or job growth.   The U.S. unemployment rate fell from 8.3% in July to 8.1% in August, continuing the gradual three-year downward trend (from its 2009 peak at 10 %).     Political economy equations often say that the direction of movement of the unemployment rate in the period preceding a presidential election is the main economic determinant of whether the incumbent is re-elected.

“Are we better off than we were four years ago?”   Yes.   If the criterion is to be a narrow unemployment comparison, and one counts from the month following the day Obama took the oath of office, then we are now at a lower unemployment rate.   But that is very simple-minded as a criterion.   (Look at GDP.  Better yet look at how the free-fall turned around  and the recession ended within his first 5 months.)

Employment growth is the more important statistic, to evaluate the progress of the economic recovery.  Here today’s BLS report was disappointing: only 96,000 jobs created.    The jobs number climbs into six digits if one looks at private sector employment growth.

By the way, am I the only one who sees a general bias toward negativity in the media?   When the unemployment number looks bad and job creation looks good, like a month ago, the newspapers seem to headline the former.   When the unemployment rate looks good and employment disappoints, as this time around, they tend to focus on the latter.  The TV shows do the same (including those on which I appear).

In any case, as always, one should look at a longer run trend.   The fact is that private sector job growth has been running at an annual rate of 162,000 per month over the last two years.    This is far greater than the rate during the Bush Administration even if one looks only at the years in between the Bush recessions of 2001 and 2008  (83,000 per month, on average, from November 2001 to December 2007.)   It is not enough.  For example it is much less than the rate during the Clinton Administration, month in, month out (218,000 private sector jobs created per month, on average).  But it is a big improvement over where we were.

On the subject of Bill Clinton.  His speech to the Democratic Convention  Wednesday night again demonstrated his unique ability to explain wonkish policy details in a folksy way.    This included pointing out the statistics on private sector job creation under Democratic presidents since 1961 compared to Republican Presidents.   The rate has been just over twice as great.   Thus the current Obama-Bush comparison continues a half-century tradition.

The point about private sector job expansion looking better than overall employment growth is of course what Obama was trying to say in June when he made his unfortunately worded statement that “the private sector is doing fine.”   He quickly retracted that language, which was the right thing to do.  But the point still needs to be made.

Why look at private sector jobs, instead of total jobs?    I have a feeling that this is a Republican way of looking at things.  The Republicans don’t seem to believe there is anything amiss if a million public sector workers lose their jobs.  (Which is what has happened over the last year:  934,000.)    Teachers, firefighters, construction workers…   Apparently those don’t  count as real jobs because they are in the public sector.    That would explain the Republican congressional opposition to Obama’s initial fiscal stimulus in 2009 (the one that ended the recession) and their more successful subsequent attempts to block Obama’s job proposals.

So maybe we should be looking at total employment after all, rather than private employment.  Or even focusing on the underemployed and discouraged workers.  But these are all reasons why we need to resume enacting the policies that Obama has been trying to enact.