Wine, Physics, and Song

I get annoyed by blogs that are mostly just links to other people’s stuff… but I had to link this great post from Brad DeLong on his inside view of the 1994 debacle in health care…

I”ve been wondering for the last few weeks or months… why can’t Obama be more like LBJ?  Still, everyone has to operate from their own strengths… he may yet pull off health care reform in his own style, and for those who care about the horse-race aspect of this (and I certainly do inasmuch as it affects the Democrats’ chances in the next two elections): by now, anything decent (or even apparently decent) by way of a health care bill will be viewed as a victory for Obama.

I’m worried, though, that although there are apparently European models for well-functioning healthcare that don’t involve a public option, they involve nongovernmental nonprofit entities, or high levels of regulation.   Such models may be very difficult to replicate in this country where they may be easily co-opted or weakened by the money and influence big insurance can put behind things, and by the continual possibility of politically motivated medldling/sabotage.  Ironically, I fear our politics and culture may make a public option more workable than a semiprivate one.

In an LA times editorial, Niall Ferguson augments his Feb. 2 Financial Times piece, which I commented on earlier, with much more explicit Keynes-bashing and fiscal-stimulus-dissing.  This time, Brad’s on the case.

Long Treasury yields did rise a bit (roughly from just under 3, to just over 3.5, percent over the last few weeks), and there was similar if less pronounced movement across the longer end of the curve, so maybe we shouldn’t count on financing the whole stimulus at todays low rates—though I couldn’t tell you if this is a response to the clear likelihood of a stimulus package, which I would have thought would have been priced in for a while now.  But if we’re getting output closer to potential, sooner, with the stimulus, we’re increasing the overall stream of real output that the Treasury will have avaible to tax to pay these things back—increased indebtedness being met with increased debt-servicing capability.  Maybe not one-for-one, although that cuddly, big-eyed multiplier sure helps.  The cuddly reference:  “Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian “multiplier effect” — which holds that a dollar spent by the government begets more than a dollar’s worth of additional economic output — like an old teddy bear.”—Ferguson from the LA Times piece.)  Among the most multiplier-besotted economists would seem to be Paul Krugman;  here is a fairly random sample of him failing to anticipate the current crisis (you can go back much further with him on the dangers — and let’s not forget, the existence — of the housing bubble).  As for regression to childhood, there seems to be a more serious epidemic among some (but far from all!) politically conservative economists, of regression to being macroeconomically unborn.  What’s Ferguson’s argument here: If they teach it in Econ 1 in every halfway respectable university in the country, there can’t be anything to it?

Niall Ferguson seems to agree with Paul Krugman and the Axis of Smart on nationalizing, er, sorry, recapitalizing the banks:

“First, banks that are de facto insolvent need to be restructured – a word that is preferable to the old-fashioned “nationalisation”. Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalisation after losses have meaningfully been written down. Bond­holders may have to accept either a debt-for-equity swap or a 20 per cent “haircut” (a reduction in the value of their bonds) – a disappointment, no doubt, but nothing compared with the losses when Lehman went under.”

He even cites the Swedish case as a sensible model while, of course, noting the need to avoid “the nightmare of a state-dominated financial sector”.  I don’t think Larry Summers will let that come to pass… let’s just hope the soon-to-be-announced overhaul of the rescue package for financial institutions involves an effective temporary takeover, if perhaps in some form of —voting, please— preferred equity stake by the government, rather than the perhaps more efficient outright purchase of the big banks on the open market.

Now, where does Ferguson think the money for this takeover and recapitalization will come from, if not government borrowing?   Substituting government debt for private may indeed stimulate demand, through the wealth effect and lower debt servicing costs, especially because the government can borrow at bargain-basement rates right now, so even if the–somewhat, but only somewhat, mythical—rational taxpaying consumer is factoring in the need for higher taxes in the future to pay this off, it’s a net gain.  Of course, if the rational taxpaying consumer is a Keynesian and believes output will be closer to potential because of this stimulus, the anticipation of the higher lifetime income stream that will generate is still more impetus to spend—an argument that applies to government-expenditure-based stimulus, too.

Forcing renegotiation of mortgages, and the making of new mortgages, at lower rates is another interesting idea of Ferguson’s;  noises from the Obama administration suggest they may have something in mind along these lines—and with the noise about helping out homebuyers coming from Republicans in Congress, maybe there could even be bipartisan support.  (Naah, they’ll back off on principle.)

But what about the rest of Ferguson’s piece:

“…the western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Worst of all are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt.

The US could end up running a deficit of more than 10 per cent of gross domestic product this year (adding the cost of the stimulus package to the Congressional Budget Office’s optimistic 8.3 per cent forecast). Today’s born-again Keynesians seem to have forgotten that their prescription of a deficit-financed fiscal stimulus stood the best chance of working in a more or less closed economy. But this is a globalised world, where unco-ordinated profligacy by national governments is more likely to generate bond market and currency market volatility than a return to growth.”

Well, the last bit sounds more like an argument for the US providing leadership in co-ordinated, global fiscal stimulus policy than for giving up on stimulus.  (It’s also the argument for buy-domestic provisions in stimulus plans, though that’s definitely a second-best option to co-ordinated, unrestricted stimulus, and perhpas somewhat silly in that much of what a stimulus package will get spent on will be nontraded goods in any case—although some good public transportation infrastructure would be highly welcome, and might well involve a lot of European-made equipment.)

It’s hard to think of a better time than now, with the lowest borrowing rates in years available to the US Treasury, to make some serious public investments.   So Ferguson’s ideas on the financial sector and mortgage loans seem reasonable, and may well provide fiscal stimulus themselves, but his argument against government expenditure for additional stimulus seems weak.  Co-ordinated profligacy with your restructuring, anyone?