Not surprisingly Joesph Stiglitz has Some Good Ideas on How To Fix Everything

Nobel Prize laureates Joesph Stiglitz has been busy over the last two months writing about the economy. But of interest for us here, is his 'State of the Economy' piece in Vanity Fair "Reversal of Fortune." Let's break it down... Dr. Jack style.

The real meat of the essay is towards the end, but he does pick apart the policy decisions that got us into this mess. And he places much of this blame on George W. Bush. This is a tad harsh—there were fundamental policy problems prior to Bush taking office. But Stiglitz is correct to place more blame on Bush's handling of the economy (if you can call it that) than other non-critics:

...the tax cuts in 2001 and 2003 set the stage for the current crisis. They did virtually nothing to stimulate the economy, and they left the burden of keeping the economy on life support to monetary policy alone. America’s problem today is not that households consume too little; on the contrary, with a savings rate barely above zero, it is clear we consume too much. But the administration hopes to encourage our spendthrift ways.

He is on the mark with this assessment. What is happening today is a result of the spend today worry about tomorrow... tomorrow ways of the last five plus years. The Bush administration encouraged everyone to spend, spend, spend. Aside from cutting the capital gains taxes, Americans weren't encouraged to save money.

I haven't railed against it too much here, but I am against our current policies towards corn ethanol. Giving any sort of tax credits or subsideis to corn ethanol production is silly as Stigliz sums up:

Our ethanol policy is also bad for the taxpayer, bad for the environment, bad for the world and our relations with other countries, and bad in terms of inflation. It is good only for the ethanol producers and American corn farmers. It should be scrapped. We currently subsidize corn-based ethanol by almost $1 a gallon, while imposing a 54-cent-a-gallon tariff on Brazilian sugar-based ethanol. It would be hard to invent a worse policy.

And on to fixing the current housing mess:

Remember, too, that we already give big homeowner subsidies, through the tax system, to affluent families. With tax deductions, the government is paying in some states almost half of all mortgage interest and real-estate taxes. But many lower-income people, whose deductions are meaningless because their tax bill is too small, get no help. It makes much more sense to convert these tax deductions into cashable tax credits, so that the fraction of housing costs borne by the government for the poor and the rich is the same.

A ways back I was critical of the Feds handling (or lack there of) concerning inflation. Stiglitz points out that I was off base:

The standard analysis coming from financial markets these days is that inflation is the greatest threat, and therefore we need to raise interest rates and cut deficits, which will restore confidence and thereby restore the economy. This is the same bad economics that didn’t work in East Asia in 1997 and didn’t work in Russia and Brazil in 1998. Indeed, it is the same recipe prescribed by Herbert Hoover in 1929.

It is a recipe, moreover, that would be particularly hard on working people and the poor. Higher interest rates dampen inflation by cutting back so sharply on aggregate demand that the unemployment rate grows and wages fall. Eventually, prices fall, too. As noted, the cause of our inflation today is largely imported—it comes from global food and energy prices, which are hard to control. To curb inflation therefore means that the price of everything else needs to fall drastically to compensate, which means that unemployment would also have to rise drastically.

This makes total sense. Worrying about inflation during a recession or depression is silly, and when the cause of inflation is not a result of domestic economic forces, attempting to control it is only more difficult for central bankers.

Finally, like any good economist, Stigliz believes that American economic policy should follow:

Spending money on needed investments—infrastructure, education, technology—will yield double dividends. It will increase incomes today while laying the foundations for future employment and economic growth. Investments in energy efficiency will pay triple dividends—yielding environmental benefits in addition to the short- and long-run economic benefits.

If growth is the goal of capitalism, then techonology is probably the biggest force in economic expanision. And techonology and innovation comes about though strong education. We could have a debate about how big of a role the government should play in the building and maintaining infrastrucutre; but I think the government should play a bit, if not the biggest role, in infrastrcutre projects.

Anyway, I highly suggest checking out the entire essay, there are some really good ideas, sorry common sense, in there.

McCain's Energy Plan -- Part III

Part I of the analysis on energy policy – How did we get here?
Part II of the analysis on energy policy – Obama’s plan

And finally, it’s the last time I have to write about a whole bunch of bad policies ideas that would, if implemented, only make things worse. Read McCain’s proposals in his own words here.

We all heard the chorus of Republicans at their convention chanting, “Drill Baby, Drill!” The idea behind this is that drilling offshore and in Alaska will lower our need for foreign oil and at the same time bring down the price of oil (by increasing supply). But let’s clear this up right away—it won’t. While both of those statements are technically true, the impact is extremely small. First, it will take years for that oil to reach consumers and more importantly, oil is traded on worldwide market. That means that oil from Nigeria, Saudi Arabia, Venezuela, Canada, etc, is bought and sold on the same market. If U.S. production was to increase and every other country was to keep output at their current level (or at least rising with demand) then yes, the price of oil would drop. But not a lot. “Drill baby, drill!” won’t have the impact that people seem to believe it will.

This isn’t to say that drilling offshore (or in Alaska) is a bad idea or bad policy—it isn’t. And McCain does support offshore drilling. However, there are some environmental concerns and of course there is always the risk of a spill or some sort of disaster.

Let me quickly go through the rest of McCain’s energy plan.
-- Unlike Obama, McCain is against ethanol, something that not only I’m in agreement with, but the quicker this country moves away from corn based ethanol the better (for reason’s I’ll chronicle another day).

-- McCain wants to build 45 new nuclear power plants by 2030. Nuclear power is cheap. But plants are very expensive to build, so McCain would probably be offering subsidies and tax credits to companies who build nuclear plants. And then there is the issue of what to do with the nuclear waste. No one wants the waste in their back yard because it’s radioactive thus disposing of the waste has been a problem for years. Burying it usually means it ends up in the water supply. Shooting it into space is very, very expensive and a launch failure would probably be a Chernobyl like disaster. So what it really comes down to is that we haven't really figured out what to do with nuclear waste. Anyway, here is some info on what France does with all their radioactive waste.

-- McCain also favors a cap-in-trade system to lower carbon output. A cap-in-trade system is fairly simple: the government creates credits or permits that allow a certain amount of carbon usage. It then sells those permits on the market to carbon producing companies (or speculators). But many economists prefer a carbon tax, were companies are taxed at a fix rate for the carbon they produce. (again, this would be a good post a few weeks from now).

Finally, McCain didn’t want Obama to be the only one with bad energy ideas. McCain has suggested suspending the tax on fuel. (Personally, I think it should be raised). This is a horrible idea because it would manipulate the price of gas. Supply is not being increased, however suspending the tax would lower the price of gas which would encourage driving, leading to an increase in demand… which only increases the price of gas. All the while, Uncle Sam is receiving less money but the oil companies are pocketing more (since the price of gas has increased). In other words, suspending the fuel tax would increase the price of gas and make Big Oil even richer while making the U.S. government poorer.

McCain’s energy plan isn’t as bad as Obama’s, but it is not as environmentally friendly and is very short sighted. Obama’s plans, for all its faults, does look a bit towards the future. McCain’s ideas aren’t exactly fresh, and while he gets major points for being anti-corn ethanol, there also isn’t a ton to really get behind here.

Obama's Energy Plan -- Part II

Read it in Obama’s own words here. And I covered the back ground of the U.S. and energy policy yesterday.

Let’s start with the bad—Obama wants to increase the tax on oil companies and then take that money and give Americans a rebate to cover the increased costs of oil, gas, electricity, heat, air condition, etc. In theory this sounds great, a bit like Robin Hood even—the oil companies are reporting record profits, why not help out the very people they’re making their money off of?

Well here’s the catch—increasing the tax on oil companies will boost the price of production. All the oil companies will do is pass on their increased costs to the consumer AND the higher taxes will discourage investment which will lower domestic output—increasing the U.S.’ dependence on foreign oil and maybe even decreasing supply. The end result? Higher gasoline prices for consumers and the world. While in theory the government’s tax revenues should increase, Lord knows where and how that money will be spent, but if production drops eventually the increase in revenue will turn into a decrease.

Unfortunately, but not unexpectedly, Obama also supports the use of corn ethanol as an alternative fuel. At this point there is little reason to support corn ethanol—that’s a post for another day—but it’s not as efficient as other bio-fuels, it takes as much energy to produce as it saves, it uses a lot of water, and on and on.

His website also wants to put a million plug-in hybrid cars on the road by 2015. Sounds like a great idea and I’m sure GM is happy to hear that, but how will this be accomplished… well I’m not sure. He says he’ll hand out a $7,000 tax credit, but the odds of Congress approving that are pretty small. You know what, let’s give this proposal an OUTRAGEOUS CLAIM.

Is there anything good in Obama’s energy proposals? Well, he would like to raise fuel standards for cars, something that the U.S., because of the Detroit lobby, has been reluctant to do. While one could argue that the market and consumers have rejected more fuel-efficient cars for big SUVs, Greg Easterbrook wrote a very good op-ed about this very topic last summer and the relationship between building cars with better fuel-efficient and horsepower and fatal car crashes (which I can’t find but he touches on here). Sometimes it is necessary for the consumer to be regulated (Marshall Field be damned). Obama is also more likely to support and seek public transportation funding.

Although details are a bit sketchy, Obama would also like to invest about $150 billion of government money on scientific research—most of it going towards green collar jobs. Obama claims that this will create 5 million jobs, but I’m not sure were his team came up with number. Therefore I’m a bit skeptical.

Obama would like to up grade the electricity grid and make it more efficient for using renewable energy. And the same time, he wants 10% of all the U.S.’ energy to come from renewable sources by 2012. T. Boone Pickens is on board with this and it’s not a bad idea. The problem will be getting the funding—especially after the bailout and War in Iraq.

Finally, Obama does not want to drill off shore for oil, but reasons as to why this is remain unclear. Back in August he kind of sort of said he’d consider it, but that’s about it.

Overall, Obama’s energy policy leaves me with more questions than answers. Other than raising the fuel-standards for automobiles, it’s hard to find good policy in here. From a policy perspective, this is probably Obama’s weakest issue. But as you’ll see later, McCain’s isn’t much better.