Now you see what words have done

In view of his poor health in recent years, I wasn't surprised to hear from an old friend this morning that John Martyn had died, but I was taken aback by my reaction: it moved me very much. Martyn was an extraordinarily talented singer, guitarist and composer. I have been devoted to his music since my teens. For much of that time, I listened to at least a song or two of his almost every day. Even now, 35 years on, I dare say not a week goes by without my putting on one of his records. And more often than not, when I listen to one song of his, I end up listening to many.

Continue reading "Now you see what words have done" »

Bill Easterly's new blog

I am a fan of Bill Easterly, author of "The Elusive Quest for Growth" and "The White Man's Burden". He is the most consistently interesting and provocative development economist I know. Strafing the aid industry, as he does, takes courage: it offends most right-thinking people and is apt to make you unpopular except with bigots and misanthropes (and Bill is as far removed from those last two categories as anyone could be). The great man has  just started blogging. Add "Aid Watch" to your bookmarks.

One of his first entries is about an invitation from the UNHCR to a "Refugee Run"--in Davos, if you can believe it. "Experience life as a refugee!" At first, Bill says, he thought this was a joke, as one would. I had to google for myself. Apparently, it isn't.

During the coming World Economic Forum, we will co-host a very moving event in which people "step into the shoes" of the world's 40 million refugees. For a moment in time, participants will be thrust into another environment where they face an attack from rebels, a "mine field", border corruption, language incapacity, black-marketeering and refugee camp survival. Following the event, a debrief will invite the participants to discuss the refugee situation and explore ways to assist, should they wish so. Invitations are being extended to WEF participants, Davos residents, schools, visitors, families and individuals.

I see that fewer bankers than usual are attending this year, perhaps because of all the attention being paid to corporate jets and pointless extravagance. Also, who can any longer listen deferentially to a banker's opinions? But what a missed opportunity. It could have been "A Run on the Banks"--with financiers pushed into an actual mine-field and "rebels" firing live ammunition. No idea is so good it cannot be improved on.

The CBO on the fiscal stimulus

My main reaction to the CBO's new review of the House stimulus bill (see the director's blog; a fuller version) is that the package is much smaller than previously supposed. The CBO says it would increase the budget deficit by $816 billion during  2009-2019, but by only $525 billion when it is most needed, in the remainder of fiscal 2009 and 2010. The stimulus for the rest of 2009 is put at just $169 billion. The 2009-2010 stimulus needs to be much bigger, in my view. And the ten-year stimulus should be much smaller: if you are going to look that far ahead, you should see lower spending and higher revenues relative to baseline.

A lot of the front-loading, such as it is, comes from the tax-cut provisions that many Democrats object to. Almost the whole of the ten-year tax-cut stimulus, a little over $200 billion, arrives in 2009 and 2010. If the plan relied on spending alone, barely half of the ten-year stimulus would take effect in 2009-2010.

Continue reading "The CBO on the fiscal stimulus" »

Country roads

My wife and I spent Sunday and Monday in Lost River, West Virginia, staying in a prefab cabin in the hills. I liked this interesting dwelling so much that I hesitate to post this link to the people who rent it out. The area is beautiful, all the more so with a dusting of snow. I particularly recommend Smoke Hole Canyon. It was a good place to exercise my new camera (a Canon 5D mk2, since you ask; more on that vital matter another time).

I bring this up because, I confess, the trip made me examine my current enthusisam for infrastructure spending. The United States has plenty of badly congested highways and urban roads so deeply pitted that a half-track, rather than a mere Hummer, is called for. Fixing those problems seems a good idea. But the "Robert C. Byrd Appalachian Highway System"--the signs keep announcing that--is a different proposition altogether. I don't think I have seen roads so empty since I first drove along the M62 to Hull (in its day, one of Britain's more notable roads to nowhere). Like then, I was afraid I had found my way on to a road that had not been opened to the public. I imagined road-surfacing vehicles coming towards me line abreast round the next corner (not that the M62 to Hull has any corners, now I think of it).

Mr Byrd's highways are wider than the towns they connect.  I hope the fiscal stimulus includes no further shovel-ready improvements. I could see the case for hiring people to drive around on them, though, to help visitors feel more comfortable. Plug-in hybrids, obviously.

Update:

Did I say "dusting" of snow? That is not how it looked on Tuesday morning. Remind me in future not to tempt the weather gods.

Obama needs and deserves Europe's co-operation

Concluding paragraphs from my column in today's FT:

In his very first acts [on Guantanamo and interrogation of detainees] Mr Obama has affirmed his desire to restore the country's international reputation. If polls are to be believed, the rest of the world wanted Mr Obama to win the presidency even more than Americans did. They wanted a US president to look up to and co-operate with. That is what they got. It is not too soon to see if co-operation works both ways.

Joint action will be needed in foreign and security policy, but even more urgent is the need for economic co-ordination. Much more than most Americans realise, Mr Obama needs the help of other governments on the economy. Whether the US can reflate its way out of this still-worsening recession single-handed is debatable. Beyond dispute is that the chances of success would be much improved if governments in Europe and elsewhere moved to stimulate their economies as aggressively as the US is preparing to do.

Europe, especially, continues to drag its feet on economic stimulus, even though a severe recession now threatens the whole of the eurozone. Its interest rates should be at zero with quantitative easing under way, and many countries (notably Germany) should be applying far stronger fiscal stimulus. This is in Europe's own interests - but, since it is in US interests as well, Mr Obama is entitled to press. And so he should.

The rest of the world likes Mr Obama's initiative on Guantánamo more than many Americans do. His move was correct on its merits: it was also pleasing to world opinion, and not without risk at home. Just as he has reached out to Republicans on the stimulus, in almost his first act Mr Obama has given US allies something they said they wanted. Will they reciprocate? If so, let it be sooner rather than later. If not, right at the start, the president will have learnt a useful lesson.

Why Obama must be radical

My latest column for National Journal:

One of the things the country likes best about its new president is his taste for consensus. Barack Obama campaigned as a moderate, open to the views of people who disagree with him. His appointments seem to reflect the same attitude: He has chosen mostly centrists, including many veterans of the Clinton administration, with other viewpoints represented too. In planning his fiscal stimulus, Obama made a point of reaching out to Republicans in Congress. This attitude is widely admired, but one must ask whether Obama's preference for moderation, accommodation, and consensus is what these times require.

The economy's plight is extreme. Bold and unusual remedies are needed. This necessary radicalism, if you want to call it that, is not straightforwardly partisan, to be sure. This is not a matter of listening to one particular faction and ignoring everybody else. But at the same time, you cannot get to the right policy merely by trending to the middle and splitting differences between Democrats and Republicans.

You can read the rest here [link expires in a fortnight].

Was the inauguration a coronation?

My friend Katty Kay tells the Daily Beast that the inauguration makes her feel unwell.

Why am I coming over all queasy this week? Oh, yes, it must be coronation--sorry, inauguration--week in the federation of the United States. So this is why you booted us out a couple of centuries ago. You simply replaced the pomp and ceremony of hereditary monarchy and with the pomp and ceremony of elected monarchy. OK, you didn't opt for the dynastic duo of Bush and Clinton, which really had us scratching our crowned European heads, but the fanfare with which Caroline Kennedy has entered the political picture suggests your infatuation with royal families is still not over

This week Washington feels like London in the run up to one of our own grand royal events. Hostesses twitter on the phone, or just Twitter, to woo A-list guests to pre- and post-inauguration parties. A-list guests measure their piles of invites in feet, not inches (forget the endangered rain forest, this event justifies a few more trees), while the lowly populous frets over inaugural road closures and inconvenient security measures. The problem is, you've adopted circumstance without the scandal. Our royals do it much better.

My wife drew my attention to the piece, possibly expecting me to agree with it.

Continue reading "Was the inauguration a coronation? " »

President Obama's first day

A memorable and most moving event. I don't know that I have ever seen a crowd like it. Impossible on the ground even to guess how many people were there. I see that estimates are putting the number at between one and two million. They were evidently from all over the country: this was not just a Washington thing. The mood was striking. It was joyful but not crazy (not yet anyway: the bars stay open late tonight). People looked happy and proud. When Obama gave his speech, they listened intently.

Continue reading "President Obama's first day" »

Solutions to the looming fiscal problem

My column for today's FT looks beyond the stimulus to what comes later.

It is safe to assume that in his address on Tuesday, Barack Obama will invoke the need for shared sacrifice. The idea is a banker, forgive the expression, for any inaugural, but especially now. Equally predictable is that he will develop the theme with a certain inattention to detail. It is inspiring to call for sacrifice but something of a downer to tell people too precisely what that sacrifice is going to be. Allow me to shoulder this burden.

The US economy's perilous condition calls for extreme fiscal activism. The new administration's stimulus plans are by no means over the top. If anything, a fiscal injection of $800bn over two years is too modest. But the implication of so strong a fiscal boost is a swift and severe worsening of the country's long-term fiscal position.

During his eight years in office - fat ones, for the most part, from a fiscal point of view - President George W. Bush moved the budget balance from surplus to structural deficit. Demographic and other pressures will worsen the position over the next decade or two. Now comes a fiscal expansion that will be only partly counter-cyclical: some of the new president's spending will not reverse automatically as the economy recovers. A structural deficit of the sort taking shape is unsustainable and will be corrected one way or the other - if not by a timely change in policy, then by a new and potentially even worse financial calamity.

What would it take for the milder of these alternatives to prevail? The short answer, once the economy has recovered, is this: higher taxes.

You can read the rest of it here.

Obama's people

What an extraordinarily awful bunch of portraits of "Obama's People" in the NYT's magazine. They look far worse in the actual magazine than on the website. I urge you to obtain a copy. It is a historical artifact. There is an accompanying article on the background to the project. It paraphrases Roland Barthes, as one would, but it doesn't tell me what I mainly wanted to know: which ointment did the make-up person smear on each subject before they were posed? They are shiny. They look like cadavers worked over by someone fired for incompetence by Madame Tussaud's. Many of them also appear to have been dipped from the waist down in a solution of some kind.

Night of the Living Dead isn't in it. Somebody please tell me what Larry Summers ever did to deserve this. Peter Orszag, Ken Salazar and Jim Messina, I advise you to sue. Ellen Moran is going to need counselling.

(I like the Tim Geithner, though. "Tim? Phone. It's the IRS with more questions.")

Geithner's embarrassment

My instant reaction to Tim Geithner's embarrassment over his taxes was that it would not stop the appointment going forward, but  I am beginning to wonder. The hostile editorial in the NYT certainly did not help.

As much as Mr. Obama and his team may wish it, however, the disclosures cannot be dismissed so easily, or papered over. The just-the-facts report of Mr. Geithner's tax transgressions, compiled and released by the Senate Finance Committee, paints a picture of noncompliance that is considerably more disturbing than his supporters are acknowledging...

Many people find taxes baffling, but before his job at the I.M.F, Mr. Geithner was a senior official in the Treasury Department under President Clinton, and for the past five years he has been the president of the Federal Reserve Bank of New York. With that professional profile, tax transgressions are tough to excuse.

My guess had been that Geithner would in the end be given a pass. I had supposed he made an honest mistake, and the bafflement quotient is not to be denied, such is the complexity of the system. (As the Times points out, an aggravating factor in this case was an error over "wrongly claimed expenses for sleep-away camps in calculating his dependent care tax credit". Is there a correct way to claim such expenses? What are sleep-away camps, by the way? Is there such a thing as sleep-at-home camp, even if only as a tax loophole?) But the fuss is not dying down. Geithner continues to be cruelly mocked by the television comedians--and make no mistake, they are a political force to be reckoned with.

Suppose nonetheless that he is confirmed. Even then, this little scandal worsens a problem I've mentioned before: lack of clarity over economic-policy leadership. It may be possible to devise good policy by committee, but I doubt that it is possible to explain it adequately unless you have a principal, credible spokesman. Who is that supposed to be? For the time being, presumably not the man everyone is laughing at, even if he does become Treasury Secretary. If the matter is resolved as the Obama team would wish, it still serves to subordinate (further subordinate?) Geithner to Larry Summers in the White House. Or perhaps not. As I say, lack of clarity is the issue.

The Economist on Arabs, Jews and Palestine

A word of praise for The Economist's coverage of the fighting in Gaza in the current issue. It is the magazine at its brilliant best: editorial opinion that is wise, well-informed and dispassionate, supported with excellent reporting. After reading masses of tendentious axe-grinding blather in the previous few days, how welcome this was. I would feel the same way even if I disagreed with the magazine's line, but it doubtless helps that I think it is right.

Taking Hamas down a peg is one thing. But even in the event of Israel "winning" in Gaza, a hundred years of war suggest that the Palestinians cannot be silenced by brute force. Hamas will survive, and with it that strain in Arab thinking which says that a Jewish state does not belong in the Middle East. To counter that view, Israel must show not only that it is too strong to be swept away but also that it is willing to give up the land--the West Bank, not just Gaza--where the promised Palestinian state must stand. Unless it starts doing that convincingly, at a minimum by freezing new settlement, it is Palestine's zealots who will flourish and its peacemakers who will fall back into silence. All of Israel's friends, including Barack Obama, should be telling it this.

Obama's multipliers

Like most others I take it for granted that the multiplier effect of tax cuts is weaker than that of (well-designed) increases in public spending. But the question leaves room for doubt and has not been discussed as throroughly as it should have been.

Greg Mankiw has drawn attention to an oddity in the Obama team's thinking on this. Its analysis of tax and spending multipliers, by Christina Romer (the new CEA chairman) and Jared Bernstein, comes up with numbers that reflect the consensus--but these are far less favourable to tax cuts than another recent paper by Christina Romer (with David Romer) would suggest. Much of the debate about the stimulus turns on these multipliers. Unless I've missed it, there's no reference to the discrepancy in the Romer/Bernstein paper. Also unless I've missed it, she has made no subsequent comment on the matter. It is surely worth a word of explanation from the author of the two studies.

One response suggested by others has been to say that the Romers' paper looked at "exogenous" tax changes, implying that their findings cannot be applied to a countercyclical stimulus. Greg also explains why this is an error. Looking at exogenous tax changes is a statistical technique for identifying their effect: it does not render the Romer and Romer estimates irrelevant for present purposes.

Obama's team has apparently dropped its proposed $3,000 job-creation tax break from its plan, since many Democrats found it doubly objectionable: it was a tax cut (bad) and it helped businesses (also bad). Perhaps the team should have called it a "marginal jobs subsidy" (which is what it was).  That sounds more liberal.

Obama's shot in the arm is too small

From today's FT.

Despite his clear electoral mandate and big Democratic majorities in Congress, politics is already blocking Barack Obama's efforts to deliver a fast fiscal stimulus. The country's political system was designed to force debate and delay action, and it works. Even when all of Washington agrees that speed is crucial - which it does - getting anything done is still difficult. Mr Obama has clout and his party is pretty much in control. But these factors are confounded by the sheer scale and complication of the stimulus plan.

Some of Mr Obama's team dared to hope that a stimulus bill would be on the president's desk awaiting his signature by the time of his inauguration on January 20. The new target is the President's Day recess on February 13, and Democrats in Congress no less than Republicans are warning that this will be hard to achieve. The American recovery and reinvestment plan will not move forward in one piece but will be written bit by bit in committee. House and Senate versions will have to be reconciled, more changes made and further votes taken. "Congress must work its will," says Nancy Pelosi, speaker of the House.

There is fundamental disagreement about strategy, too. In large part, this is the familiar Democratic-Republican divide over spending increases or tax cuts, Democrats preferring the former and Republicans the latter. Mr Obama is proposing a sensible compromise: an $800bn (€594bn, £527bn) two-year package, split roughly 60:40 in favour of spending increases.

Many Democrats resent the concession to Republican preferences. Many Republicans want the tax cuts to be permanent; others, having acquiesced for years in the fiscal incontinence of the Bush administration, have decided on the downslope of a severe recession to become fiscal conservatives.

That is an outrageous imposture and Democrats' exasperation is justified. In view of his party's majorities, why then does Mr Obama not simply ignore the Republicans? One reason is that the new influx of Democrats includes a draught of winners in close contests who tend more than the party average towards fiscal conservatism. Another is the lack of a filibuster-proof majority in the Senate. A third is that US public opinion is itself more centrist than the congressional Democratic leadership, and wary of vast new spending initiatives. The country has already seen hundreds of billions spent or committed to little apparent effect. There is no clamour for the next trillion.

Mr Obama's first big speech on his plan last week was mainly addressed to those concerns. He underlined the risks of doing nothing and the opportunity to boost the economy's longer-term growth by investing in new and better infrastructure. He is right to offer reassurance and to wish to keep voters onside. In this, some political cover from Republicans would be valuable and is worth a political price. Many in his party, though, still care more about punishing their opponents. Their instincts say that if the enemy likes it, the policy must be wrong. Many Republicans take the same view, of course. The consensus Mr Obama seeks will not come easily.

One can only hope that Democrats and Republicans wake up to the gravity of the situation and quickly compromise on the structure of the plan. Once they do that, they can attend to its real, as opposed to imagined, defects.

So far as the structure goes, a mix of temporary tax cuts and high-impact spending (albeit with a strong bias towards the latter) is wise, even though tax cuts, as Democrats say, most likely have a smaller total effect on aggregate demand. Since it is difficult to ramp up spending quickly on this scale without waste, you can make a good case for diversifying the bundle of measures to include some well-targeted tax relief. Why dig in on the wickedness of any and all tax cuts, except to annoy Republicans? It is childish. As for the Republicans' new access of fiscal responsibility, they should first have some shame, and then get the timing right: big fiscal stimulus this year and next, credible steps to reign back spending and borrowing beyond.

This is where the real problems with the Obama plan lie - not in its basic structure (though a clearer plan for dealing with the still mounting tide of home loan foreclosures, among other things, would not go amiss), but in its scale and in its unaddressed long-term implications.

If anything, $800bn over two years now looks too small. The recession appears to be accelerating and the shortfall in demand seems likely to be bigger than the $1,000bn in 2009 that Mr Obama mentioned in his speech last week. The implications for unemployment are correspondingly dire. A stimulus of $500bn to $750bn in 2009 should be the aim. The bigger the number, the stronger the case for including temporary tax cuts in the plan. In this respect, perhaps, a bigger stimulus would improve the prospects for a deal between the two parties.

Yet even without this necessary further stimulus, the longer-term outlook for the budget deficit is alarming. The current estimate for 2009 is $1,200bn, roughly 8 per cent of gross domestic product, not counting the new plan. In later years, on unchanged policies, an enormous deficit is projected to persist. Sooner than it thinks, Washington will have to change those policies. Otherwise, in the next iteration of this crisis, the global capital market will intervene. Plans for medium-term fiscal consolidation - higher taxes and lower spending - need to be framed now and must be made to conform to the short-term stimulus. Next week I will suggest how this can be done.

Obama's fiscal plan

Obama's speech this morning said nothing really new about what he intends. Earlier this week he said he was looking at proposals that would inject $800 billion or more into the economy over two years, a mixture of infrastructure and other spending, together with tax cuts for the low-paid and for businesses. It's bold, all right, with the CBO announcing a expected deficit of $1.2 trillion in 2009 without the new boost (and that is an underestimate in any case because of the "current law" rule under which the estimate is calculated). The speech was mainly a call to Congress for co-operation on a plan that is both very big and quickly enacted, and an effort to explain to voters why such drastic action is necessary.

I understand that some might be skeptical of this plan. Our government has already spent a good deal of money, but we haven't yet seen that translate into more jobs or higher incomes or renewed confidence in our economy. That's why the American Recovery and Reinvestment Plan won't just throw money at our problems - we'll invest in what works...

Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made transparently, and informed by independent experts wherever possible. Every American will be able to hold Washington accountable for these decisions by going online to see how and where their tax dollars are being spent. And as I announced yesterday, we will launch an unprecedented effort to eliminate unwise and unnecessary spending that has never been more unaffordable for our nation and our children's future than it is right now.

We have to make tough choices and smart investments today so that as the economy recovers, the deficit starts to come down. We cannot have a solid recovery if our people and our businesses don't have confidence that we're getting our fiscal house in order. That's why our goal is not to create a slew of new government programs, but a foundation for long-term economic growth.

That also means an economic recovery plan that is free from earmarks and pet projects. I understand that every member of Congress has ideas on how to spend money. Many of these projects are worthy, and benefit local communities. But this emergency legislation must not be the vehicle for those aspirations.

The scale if anything seems too modest. With the recession still worsening, an injection of $500 billion to $750 billion in year one looks warranted--though we might very well end up in that range by the time the deal is done. The evidence is not entirely clear cut, but most researchers find that spending increases have bigger multipliers than tax cuts, so it is right to tilt the package in that direction, as Obama intends. Finding and quickly starting enough good infrastructure projects might be a problem, but there is plenty of scope for general revenue help for the states, and for expanding and improving unemployment assistance and the food stamps program. I'd look at wage insurance as well.

Tax cuts aimed at the low paid (ie, payroll tax cuts) could be fast acting and would have a better demand multiplier than cuts in the income tax. They belong in the mix. The case for cuts in business taxes as a countercyclical measure is harder to make, though the Obama team is considering some, partly no doubt to win more Republican support for the plan in Congress. See Howard Gleckman at the Tax Policy Center. Gleckman is no more impressed with the idea of refundable tax credits for creating new jobs, also floated by the Obama team.

Refundable tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs. It is tough to see how a company that is seeing its sales slaughtered in today's recession is going to hire just because it gets a few thousand dollars per new worker from the government. Profitable firms would merely take the credit for bringing on workers they were already planning on hiring.

One of his commenters links to this paper by John Bishop at Cornell, who argues that when it was last tried, it worked well, and this time, with improvements, might work even better. Worth reading.