Matthew Yglesias's Blog, page 2260

Keynesian Lessons From Sweden

Neil Irwin did an interesting piece last week looking at lessons from Sweden about the economic recovery. What's fascinating about it is how incredibly boring it is in most respects. The 'lessons' basically all just amount to bog standard orthodox Keynesianism. Sweden's right-wing government (which of course is wildly socialistic by American standards) went in to the recession with the budget in good shape, rather than the Bush approach of tax cut-induced structural deficits and expensive wars. Then when the recession hit, Sweden has massive automatic fiscal stabilizers, and tacked on some discretionary stimulus in the form of tax cuts and infrastructure projects.

On top of that, the Swedish central bank employed highly expansionary monetary policy. It used an explicit inflation target to keep expectations anchored (the Fed let inflation expectations plummet), it dropped short-term nominal rates to zero (the Fed did the same), it did massive QE (equivalent to 25% of GDP, the Fed did 15%), and it started paying a negative interest rate on excess bank reserves (the Fed started paying a small positive rate). When the value of the krona fell, Swedish politicians didn't run around freaking out about debasing the currency, they recognized that such a currency dip can be useful in promoting a recovery. The upshot of doing a lot of expansionary policy has been a rapid economic expansion.

Note that there's no miracle here. It's not like Sweden has shot forward into some bold new era of unknown prosperity. They were plugging along before the crisis, the crisis caused output and employment to plummet, but then what all the expansionary policy did was allow for a period of rapid growth so that Sweden can catch back up to the trend. Then with that out of the way, it's time to return to normal politics where different figures have different ideas about the best long-term strategy.

The Get-Up Kids Do The GOP Field

I posited yesterday that Michele Bachmann, love her or hate her, is at least the best subject of a Get-Up Kids song out there in the GOP field. To wit, "Michele With One 'L'". Dan Munz countered that this is "not true, when you realize that 'Forgive And Forget' is about Mitt Romney's eventual nomination."

That's a mistake, I think. The Mitt Romney song is pretty clearly "Mass Pike," a bittersweet lament ("for every minute yesterday /regret reminds me anyway") for those of us who were Mitt-loving Bay State moderates back in the 2002 campaign. "Forgive and Forget" is, I posit, about Jon Huntsman ("And now I wait another year") who's merely laying the groundwork for the future. Newt Gingrich's song is, obviously, "Don't Hate Me" ("oh Amy / don't hate me / for running away from you") while Tim Pawlenty is "The Most Annoying Song" and Rick Perry is "The One You Want."

How To Philosophize With A Webcam

Inspired by Stephen Metcalf's weird Slate piece about Robert Nozick, philosophy majors turned think tank bloggers Matt Yglesias and Julian Sanchez take to the Internet to understand political philosophy:

I managed to go an hour and fifteen minutes with Julian without even putting forward my main claim. But what I wanted to say was that on the level of philosophy, I think there's very little that separates generous interpretations of all thinkers in the broad liberal tradition. All secular rationalist cosmopolitans have an enormous amount in common. The fact that secular rationalist cosmopolitans are so overwhelmingly dominant among college professors, meanwhile, tends to distract from the fact that secular rationalist cosmopolitans are actually rather thin on the ground. But if everyone on the earth accepted any of the various brands of liberal or libertarian thinking, we'd be in a much better place.

Afghan Central Bank Chief Quitting, Fears For His Life

Abdul Qadeer Fitrat, head of Afghanistan's central bank, says he's quitting and leaving the country. He has been investigating the scandals around the collapse of Kabul Bank, and says he's through with political interference and is worried that he'll be subject to violent reprisals.

Obviously this is coming after President Obama's announcement on troop levels, but I think it confirms the basic wisdom of the decision to start downshifting the size of our military presence in Afghanistan. It's no knock on America's soldiers and the officers who command them to observe that they don't have the capacity to create a functioning central bank, or a functioning political culture in which central bankers can regulate without fear of being killed by politically connected warlords. Insofar as the government of Afghanistan has problems of a technical or logistical nature, there's lots we can do to help them, including lots of things the American military can do. But these kind of fundamental political problems are beyond our capacities, and the idea that we should make an unconditional commitment of military resources to such a ramshackle government makes very little sense.

Michele With One 'L'

Say what you will about Michele Bachmann, but she's got the best Get-Up Kids Song about her of any candidate in the GOP field.

French Banks Proposing Greek Debt Extension Plan

French banks appear to be leading the charge for a plan that could let Greece not repay all the money it owes without technically "defaulting" on its debts:

As the [Greek] finance minister, Evangelos Venizelos, desperately tried to woo dissident deputies ahead of the vote on the radical €28bn (£25bn) [austerity] package, the French President, Nicolas Sarkozy, said his country's banks had agreed on a plan to reinvest a significant amount of their holdings in Greek debt.

By reinvesting in new securities over 30 years it is hoped the pressure on Greece to repay investors will ease. With €355bn, bondholders in France are more exposed to Greek debt than any other eurozone country. The announcement of the scheme helped dissipate fears that Greece was heading for default. The FTSE 100 rose 24.62 points to close at 5722.34, while the Dow Jones was up 92 points at 12,026 by lunchtime on Wall Street.

Basically, instead of paying the French banks the money that the Greek government owes them, the Greek government will give them some new longer-dated bonds. Then I guess what happens next is that French bank regulators need to pretend to believe that these new bonds constitute perfectly sound capital. The result would be a kind of immaculate default, or at least a very clever way of kicking the can down the road. But according to the FT, commercial banks of the sort making the forgiveness offer hold a relatively small share of Greece's total outstanding debt. The ECB has 14 percent and says it won't participate in a rollover. The EU and IMF have 16 percent as a result of previous interventions. And then a big 43 percent chunk is owned by miscellaneous investors including asset managers, sovereign wealth funds, and non-EU central banks.

It's Easier To Increase Potential Output When Actual Output Is Near Potential

Via Brad Delong, Jane G. Gravelle and Thomas L. Hungerford ask "Can Contractionary Fiscal Policy Be Expansionary?" (PDF) and conclude that the reverse is more likely:

The results suggest that successful fiscal adjustments (as defined by the cyclical adjustment method) occurred when the economy was at or near potential output, that is, labor and capital resources were fully employed. Unsuccessful fiscal adjustments generally occurred when actual output was below potential output. The U.S. output gap for 2011 is considerably more negative than the average output gap for all unsuccessful fiscal adjustments and even those that began when actual output was below potential output. Almost nine out of ten fiscal adjustments beginning when actual output was below potential output were unsuccessful—fiscal adjustments beginning in a slack economy (such as the current situation in the U.S.) appear to have a low probability of success.

I would suggest that there's a good general rule of thumb here. Every country, every state, and every city has some kind of efficiency-stymying policies in place. Generally speaking, changing these policies would be a good idea. By expanding potential output, you'd increase overall human welfare over the long term. And when there's a recession, people start paying more attention to the fact of poor economic performance and may get interested in these questions. But as a rule, it seems to me that it's going to be much easier to undertake efficiency-improving structural reforms when your economy is already operating at-or-near its potential. When unemployment's high, inefficiency starts to look good to people. You worry that efficiency enhancing reforms will just throw people out of work, and get into the mindset that projects should be undertaken in the most labor-intensive way possible. If you already have full employment, this whole dynamic changes. People who lose their jobs can get new ones, and the fact that if we needed fewer people to make the things we're already making that we could make even more things looks clearer.

Striking A Balance Between Local And Central Responsibility For Infrastructure Construction And Maintainence

Erin Gloria Ryan writes about an unorthodox application of the Lysistrata strategy as residents of a remote Colombian village try to get a road fixed:

Women of Barbacoas, a small town in remote southern Colombia, are using access to their nether regions as a bargaining chip in trying to sex starve the men of town and, by extension, the government into doing something about the sorry state of the road that leads from their hamlet of 40,000 people to the rest of civilization. Mudslides as a result of heavy seasonal rainfall has left the road in such a sorry state that the 35 mile journey from Barbacoas to the nearest town takes nearly 10 hours. The government has promised to fix the road, but so far has not followed through.

The tactics aside, this is a perennial problem in governance. After all, from the point of view of the central authorities, why should they really care about Barbacoas? It seems pretty clear that this road, though nice for Barbacoans, will have little practical benefit to Colombians writ large or even residents of Nariño Department as a whole. It's basically a club good for the residents of the town, so naturally it's not a high priority.

The problem is that from a social point of view, it's very inefficient to have local government units shouldering the financial responsibility for infrastructure construction. One reason has to do with balanced budget constraints. Ideally, infrastructure spending should go up during recessions and down during booms, so as to minimize crowding out of private investment, maximize countercyclical stabilization benefits, and get the best possible value for taxpayers who won't need to bid against as many private sector construction contracts. But local governments can't engage in countercyclical deficit spending, so when you task them with a responsibility they end up doing more of it during booms and less during busts. The other issue is simply that a decently sized sovereign state is going to have a much lower cost of funds than a small town, or even a large town. Bigger public entities are generally more creditworthy than smaller ones. The ideal solution probably involves some kind of federally financed pool of money from which local governments can borrow. But the dreaded "pork" for "pet projects" can also operate as a kind of workaround. Having the national government undertake projects that aren't bona fide national priorities can be a better outcome than leaving fiscally constrained municipalities to do it. That said, for pork-based infrastructure program to really work out, you'd need much better regional planning and coordination than our actual members of congress seem able to muster.

Colleges Should Focus On Teaching Students, Not Giving Them Subsidized Parking Spaces

By Matthew Cameron

Although today's New York Times was correct to point out that compared to Europe the United States is an automobile oasis, there is at least one American institution that is getting tough on car owners:

What with virtually every college's stated commitment to sustainability and (perhaps not unrelated) parking crisis, reducing the number of students who bring cars to campus is desirable to many. So colleges encourage carpooling, offer Zip Car short-term rentals, and promote bicycle use. But a small yet growing number of colleges are becoming particularly active in not only providing options beyond cars, but encouraging a car-free college experience — creating all kinds of new issues for campus officials. [...]

Predictably, there has been some resistance. "There is definitely a strong voice against having to pay to park; there's a pushback there that I think we haven't experienced in other sustainability efforts," Case said, adding that there's also a strong contingent of students who say it's about time.

The primary focus here is sustainability, and that is obviously an issue that should be of great concern for college students and other young people who are going to grow up to experience the miserable effects of global warming. But it also seems that college students and the administrators involved in crafting transportation policy finally are realizing the huge opportunity costs of car-friendly campuses.

Simply put, land is a valuable commodity and universities possess a limited amount of it. If large tracts of university-owned land must be devoted to parking lots and roads to facilitate students' automobile use, then that means less space is available for dorms and classroom buildings. This, in turn, means that as universities enroll more students in the coming years they will need to spend substantial amounts of money acquiring additional land upon which they can locate buildings. If car-owning students get their wish and are able to use parking lots and roads for free, then the costs of land acquisition most likely will be passed on through tuition and fee increases that all students will have to pay regardless of whether they own a car.

Universities are valuable institutions, so people are willing to pay a high price to attend them. The social benefits they provide also justify various forms of state subsidization, from direct institutional aid to tax deductions for private donations. To get the best return on this investment, however, it is crucial that universities' resources be channeled toward supporting their core mission – educating students.

Indianapolis Star Columnist Is Displeased To Learn That Foreigners Have Funny Names

Most people, to state the obvious, aren't Americans. And yet, in each and every NBA draft, including the one completed last week, most of the people selected are Americans who got some of their basketball training at America's colleges. But the prospect of a slighter-higher-than-usual share of non-Americans being drafted seems to have sent Indianapolis Star columnist Bob Kravitz into a flurry of despair:

There were foreign players chosen late in the second round whose names are a series of clicking noises. It was as if NBA general managers were playing some sinister sort of Scrabble game, grabbing Chukwudiebere Maduabum and Targuy Ngombo instead of the likes of Ohio State's David Lighty and Butler's Matt Howard. Ater Majok! Triple word score!

It somehow seemed disrespectful and frivolous to watch teams justify their overseas expense accounts by picking players whose scoring averages were lower than Lindsay Lohan's blood-alcohol level. I understand taking some fliers — the Spurs grabbed Manu Ginobili at No. 57 in 1999 — but Ginobili was already establishing himself as a prospect in the Italian league. Seriously, if Maduabum plays in the NBA, I will take a Rosetta Stone course to learn his language — whatever that might be.

Let's get real here. Look back at the history of the 56th draft pick. Last year it was Hamady N'diaye (who, for the record, went to Rutgers despite the funny name). Before that, Ahmad Nivins. Before that, Sasha Kaun. Late second round draft picks rarely work out. Mocking teams for picking players at that level who don't work out is nonsensical. Maduabum probably won't amount to anything, but the mere fact that Matt Howard has a nice all-American name is no reason to think his prospects are any better.

Meanwhile, I note that Maduabum is Nigerian and the Khoisian "clicking noises" languages are spoken in a whole different part of the continent. You might as well say that Ricky Rubio sounds Hungarian.