Spending During a Recession

SPENDING DURING A RECESSION....Does government spending during a recession produce more than one dollar of growth for every dollar spent? Conventional Keynesian economics says yes: in a virtuous circle, that dollar will flow through to workers, who will spend it on other things, which will in turn stimulate further growth and further spending. Most of the liberal economists who write about Barack Obama's stimulus plan think that the spending portion will have a short-term multiplier of about 1.4 or so.

But apparently Robert Barro disagrees:

I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8....Wartime production siphoned off resources from other economic uses — there was a dampener, rather than a multiplier.

I'm no economist, but this sounds mighty suspicious. The whole point of stimulus spending is to temporarily raise employment during a recession. But once unemployment has been reduced below 5% or thereabouts — I think it eventually got to around 2% during World War II — then that's all she wrote. All additional government spending can do is suck resources away from private consumption, which might very well produce a net multiplier less than one. The same is true, though in less extreme form, for other wartime spending that happens when unemployment is already low.

But during a recession, when monetary policy is wrung out and there are millions of workers who aren't being utilized in the private sector? That's a different story, no? And it's pretty fundamental to the whole theory. The fact that Barro doesn't even mention this, let alone address it, gives me little confidence in the rest of his op-ed.

Via Tyler Cowen.

A Poverty Program That Works

A POVERTY PROGRAM THAT WORKS....Have you heard of the Harlem Children's Zone? I first read about it only a year or two ago, and it's a pretty fascinating anti-poverty project headed by a guy named Geoffrey Canada — one that might well be the template for Barack Obama's approach to inner-city poverty. In the current issue of MoJo, Paul Tough describes how it works:

Canada believes that many poor parents aren't doing enough to prepare their kids for school — not because they don't care, but because they simply don't know the importance of early childhood stimulation. So the Zone starts with Baby College, nine weeks of parenting classes that focus on discipline and brain development. It continues with language-intensive prekindergarten, which feeds into a rigorous K-12 charter school with an extended day and an extended year. That academic "conveyor belt," as Canada calls it, is supplemented by social programs: family counseling, a free health clinic, after-school tutoring, and a drop-in arts center for teenagers.

Canada's early childhood programs are in many ways a response to research showing that the vocabularies of poor children usually lag significantly behind those of middle-class children. At the Harlem Gems prekindergarten, I watched as the four-year-olds were bombarded with books, stories, and flash cards—including some in French. The parents were enlisted, too; one morning, I went with a few families on a field trip to a local supermarket organized by the Harlem Children's Zone. The point wasn't to learn about nutrition, but rather about language—how to fill an everyday shopping trip with the kind of nonstop chatter that has become second nature to most upper-middle-class parents, full of questions about numbers and colors and letters and names. That chatter, social scientists have shown, has a huge effect on vocabulary and reading ability. And as we walked through the aisles, those conversations were going on everywhere: Is the carrot bumpy or smooth? What color is that apple? How many should we buy?

So far, Canada's vision has yielded impressive results. Last year, the first conveyor-belt students reached the third grade and took their first statewide standardized tests. In reading, they scored above the New York City average, and in math they scored well above the state average.

Canada has gotten plenty of press already from the likes of Oprah and 60 Minutes, but our new president might be the biggest name convert of them all: Obama has proposed replicating the Harlem Children's Zone in 20 cities across the country, an investment that he thinks will cost a "few billion" dollars. For comparison, this is less than 1% of what it will take to bail out the gazillionaires of Wall Street. Read the whole piece for more.

Are We Broke Yet?

ARE WE BROKE YET?....Yesterday, Nouriel Roubini estimated that U.S. banking losses related to the financial meltdown will eventually come to about $1.8 trillion. Of this $1.1 trillion comes from loan writedowns and $700 billion comes from losses on securities. Since current total bank capitalization also amounts to about $1.8 trillion, this "leaves the U.S. banking system borderline insolvent if our loss estimates materialize."

Oddly enough, I almost find this comforting. First, since this is Roubini talking, this is probably a worst-case scenario. At least we're only borderline insolvent! Second, U.S. banks are still operationally profitable, which means that by the time all these losses are recognized the system will probably once again have a net capital position of half a trillion dollars or more. Third.....

Well, there is no third — a banking system can't survive on only a few hundred billion dollars in capitalization. This is pretty sucky news, and obviously it's suckier for some banks than for other. If Roubini is right it means the mother of all deleveragings still has a long ways to go, and if the Fed and the Treasury agree with his estimates, Citigroup and Bank of America might not have long to live.

Public Cool on Warming

PUBLIC COOL ON WARMING....Via Andrew Revkin, the latest Pew poll on priorities contains grim news for those of us who think we're rapidly destroying out planet: the public couldn't care less. Global warming, once again, ranks as the lowest priority from a list of 20, and the more general category of "protecting the environment" fell 15 percentage points from last year.

And as if that's not bad enough, Revkin also points to a new Rasmussen poll, which finds that 44% of U.S. voters don't believe humans are the cause of global warming, compared to only 41% who do. That's even worse than last year's results.

It's not surprising that public concern with the economy has risen recently, but over the past two years, as scientists and politicians have both been running around with their hair on fire, the public at large has become less concerned with global warming. Two years ago 38% thought it was an important domestic priority; today only 30% think so.

More later on the implications. But we really have some PR work to do here. Whatever it is we're doing now, it isn't working.

Memorable Lines

MEMORABLE LINES....Steve Benen on Obama's inauguration speech:

I was talking to someone last night about Barack Obama's inaugural address, with my friend criticizing it while I defended it. He challenged me to recite, from memory, one sentence — a full sentence — from the speech, just eight hours after it had been delivered. I couldn't....

Hmmm. I can: the promise to overseas thugs and dictators that "we will extend a hand if you are willing to unclench your fist." Granted, that's not a whole sentence, but neither was "the only thing we have to fear is fear itself" or "ask not what your country can do for you, ask what you can do for your country." There were some other nice lines in Obama's speech too, but that was the one that struck me as the most memorable phrase in real time, and it's still the one I remember today.

Will I still remember it in six months? No telling. I have a lousy memory. But it's still a pretty good line.

Nationalize Me!

NATIONALIZE ME!....With all the talk of bank nationalization in the air, I'd just like to point out something directly that usually gets mentioned only in passing: we've already done a whole lot of nationalizing. Even if you don't count the forced takeover and sale of outfits like Wachovia, Washington Mutual, Countrywide, IndyMac, and Bear Stearns, the fact remains that we've already nationalized three enormous financial institutions: Fannie Mae, Freddie Mac, and AIG. We just don't like to call it that.

I don't really have a point to make here aside from the fact that, in many cases, we seem to be more allergic to the word "nationalization" than to the actual fact itself. Citi and BofA would be different animals because of their size and reach, and long-term government control of such large banks remains problematic, but still: taking them over would hardly be unprecedented, even here in the United States.

And one more thing while we're on the subject: Since you, the American taxpayers, are now the owner of AIG, you're also the main sponsor of the Manchester United football club. The last time I mentioned this, the season was young and our club was mired in 14th place. But I'm happy to report that since the U.S. takeover of AIG in September, our plucky lads have been playing well and Man U now leads the Premier League. Who says nationalization is bad for business?

Too Fair

TOO FAIR....Abe Foxman on the mooted appointment of former senator George Mitchell to be Barack Obama's top diplomatic envoy to the Middle East:

"Sen. Mitchell is fair. He's been meticulously even-handed....So I'm concerned. I'm not sure the situation requires that kind of approach in the Middle East."

Quite so. But Abe: you're not supposed to say this in public.

Carbon Pricing

CARBON PRICING....Over at Gristmill, Sean Casten reports on the latest energy boondoggle in his home state:

Tenaska, an independent power company, has been seeking to build a coal plant in Illinois. The problem being of course, that new, coal-fired power plants are really, really, really, really lousy investments....So how did the Illinois legislature respond? "Clean Coal Portfolio Standards." Seriously.

Tenaska gets a long-term power contract on what would otherwise be a massive economic boondoggle. Illinois gets to increase power rates and rates of fossil extraction....And the whole thing is dressed up in an environmental cloak. Methinks the impeachment proceedings shouldn't limit themselves to the executive branch.

Now, I'm one of those odd people who thinks that looking at the plain arithmetic of something like this actually makes it easier to comprehend. Luckily, Sean provides it for the project in question (the Taylorville Energy Center), which is getting approval for a rate increase in return for plans to sequester about half of its CO2 emissions. It's a 525 MW facility that will cost $3.5 billion, so here's how the costs break down:

  • $6,666 per kW

  • Delivered power costs on the order of 20 cents/kWh

  • Total CO2 emissions of 800-1,000 lbs/MWh

So how does this work out compared to the U.S. average? Here's the answer:

  • 300-500 lb/MWh reduction in CO2 emissions

  • Offset by a $0.11/kWh rate increase

  • Simple division shows that Illinois ratepayers will subsidize this plant to the tune of $400-700 per ton of CO2 reduction

This is the kind of thing to think about when people talk about carbon taxes or cap-and-trade programs. One of the problems with pricing carbon is whether we have the political will to price it high enough to really make a difference. For example, the European ETS program, a cap-and-trade system, currently prices carbon emissions at a meager $16 per ton of CO2. And that's after four years of operation.

But compare that to what the Illinois legislature just did: they put an effective price on carbon of more than $400 per ton of CO2. If they're willing to do that — if legislatures are willing to pay rates that high — then that's the market price of carbon. The only question is whether we're willing to charge that price openly, with the carbon charge going to the public, instead of being hidden inside a complex giveaway to a favored corporation. Count me on the side of the public on this one.

Get to Work!

GET TO WORK!....Former presidential speechwriter James Fallows notes that Barack Obama has made a lot of speeches that were instantly praised as hits. But:

In many other cases, especially late in the campaign, the red-hots among his supporters thought he had "underperformed" or been "just so-so" immediately after an event, only to see the days-later and weeks-later reaction to the performance turn much more positive. The clearest example was his first debate with John McCain, where supporters thought he had missed chances to go in for the kill — but over time it was clear that he had established his steady, gravitas-worthy persona.

I think his inaugural speech will be in this second category. Now that I have a chance to look at some blog-world commentary, I see that some is underwhelmed, as after the first debate. I think that the speech was in fact very well-pitched to this moment in history and the messages Obama wants and needs to send. That is, both artful and useful.

I wouldn't say that I was "underwhelmed" by Obama's speech, but even after a night's sleep I'll stick to my initial reaction that it was fine, but not really very memorable. Still, maybe that was the point. If I had to describe the speech in a word, I'd call it "workmanlike," and maybe that's exactly what Obama wanted it to be. After all, his steady theme, both yesterday and for the past couple of months, has been that his administration will be one that buckles down and gets to work from Day 1. Memorable would have just gotten in the way.

Quote of the Day - 01.21.09

QUOTE OF THE DAY....From Tim Geithner, at his confirmation hearings today:

The tragic history of financial crises is a history of failures by governments to act with the speed and force commensurate with the severity of the crisis. If our policy response is tentative and incrementalist...then we risk greater damage to living standards, to the economy's productive potential, and to the fabric of our financial system....In a crisis of this magnitude, the most prudent course is the most forceful course.

Nationalization fans should rejoice at hearing this. More and more, that includes me, by the way. The news out of Britain is beyond grim right now, and throughout this financial crisis the U.S. has never been more than a couple of months behind the UK. If that stays the case, nationalization of at least a couple of big banks will hardly even be a debatable option a few weeks from now.