demandside

Then we consider briefly the question of crowding out.  Whether crowding out is a real problem with big new government spending.  Here we get an assist from Economist’s View blooger Mark Thoma

And finally we get Tom Brokaw to ask whether everything has to come from the deficit in order to be stimulus.

And we’ll throw in idiot of the week, with Alexis Glick of Fox Business Network reporting on her conversation with Minnesota Governor Tim Pawlenty and other things.

First, Nassim Taleb, author of the Black Swan and other work displaying the lethal blindness of the quantitative risk management tools that led the big financial houses to their doom.  And ours too.  Appearing with Charlie Rose

TALEB

They seem to be having fun.  We offer this because Taleb has been right in the past, not because we ascribe to either his or Roubini’s most dire predictions.  We at Demand Side have confidence in the efficacy of policy and further confidence that this president is the most economically sophisticated person we’ve had in the White House since at least John Kennedy, maybe in American history.

But now the object of public spending

Public Goods

Public goods — roads, schools, police, health care, water and sewer, national defense and so on — have two primary characteristics:

1. They are not depletable and
2. They are not excludable

This is true to a greater or lesser degree depending on the good in question.  But it is always true to a degree great enough that the private market — which depends on exclusivity, in particular, for its transaction event — is not a good producer of these goods.

Not being depletable or excludable does not mean public goods are not valuable.  Far from it.  They are the core and frame of any society.  In fact, these goods may have value of an immense size.  We could go into that forever.  The point here is that the monetary value of public goods is much lower than the market value they might have.  They are taken into statistics as the cost of production.  The market value or societal value is often much higher.  What is the value of infrastructure which allows the continuation of the planet as inhabitable for humans.

Economic gains from public goods are widely shared with the private sector.  The value of property along a light rail line may, as in a recent Chicago illustration, increase in a multiple of the cost of building the line.  The public agency pays for construction from taxes.  The private actors, businesses and property owners and others, collect the difference.  And this is true elsewhere — in education for example, where employers and workers and communities and families share a big value above and beyond the cost of producing that education.

And at the same time, with a nod to the man who remembers yesterday but who must deal with tomorrow, producing those public goods adds to aggregate demand, perhaps counteracting contraction in private goods, perhaps encourage business investment and consumer spending from increasing employment, perhaps moving aggregate demand upward.

Let’s throw in today’s idiot of the week, Alexis Glick, appearing with Tom Ashbrook on On Point.

GLICK

Poor Ms. Glick has a difficult time ascribing blame here.  And it looks like the collapse of the free market system will need Henry Paulson to become a Democrat.  No wonder there is a bit of a hands off approach in cooperating with the Administration.  I suppose with enough spin Karl Rove could somehow make Bush and Pelosi co-conspirators in the whole mess.  This demands some responsibility from the media.  And if Ms. Glick is the media …. I don’t know.

I do know the federal government is not broke when there is a 15 trillion dollar economy generating tax revenue.  The price of the government’s bonds, even with the funny business by Bernanke displays that a good part of the investment community is not worried about the government’s being broke.  The Republican Party is indeed the party of Hoover.

Now, in a similar vein, the problem of crowding out.

Mark Thoma Economist’s view

The Bottom Line

Let us summarize what we have learned so far about the crowding-out controversy.

• The basic argument of the crowding-out hypothesis is sound: Unless the economy produces enough additional saving, more government borrowing will force out some private borrowers, who are discouraged by the higher interest rates. This process will reduce investment spending and cancel out some of the expansionary effects of higher government spending.

• But crowding out is rarely strong enough to cancel out the entire expansionary thrust of government spending. Some net stimulus to the economy remains.

• If deficit spending induces substantial GDP growth, then the crowding-in effect will lead to more saving-perhaps so much more that private industry can borrow more than it did previously, despite the increase in government borrowing.

• The crowding-out effect is likely to dominate in the long run or when the economy is operating near full employment. The crowding-in effect is likely to dominate in the short run, especially when the economy has a great deal of slack.

• Surpluses have just the opposite effects. When slack exists, they are likely to slow growth by reducing aggregate demand. But in the long run, budget surpluses are likely to foster capital formation and speed up growth.

Crowding out is the least of our worries.

• In the case of government investment now, in a downturn, it is only sucking up the additional savings of a newly chastened consumer. That is, it is only balancing the contractionary effect of a newly lowered consumption function.
• Second, absent government investment and economic growth, there is no private investment to crowd out. I realize this is suggested in the position above, but the private investment will not appear absent government impetus. It will not appear spontaneously. The point of the liquidity trap is that investment does not depend on the cheapness of money, but on the prospect of profit. No demand, no profit. “How’s business?” does not refer to how cheap money is, but to demand.
• Third, it matters very much what investment is undertaken now, and it is investment in public goods that is required. Instead of fleets of BMWs we need roads, for example.  It seems to me a very good case could be made that by direct and intentional policy, the Bush-Greenspan supply side plan was to crowd out needed public investment with excessively large and unneeded housing and other consumer goods.
• Fourth, private investment is not separate from public investment. There is plenty of profit for Catipillar or GE within the government’s spending, and there is no doubt plenty of investment in plant and equipment that will be occasioned by big infrastructure investment.

TAXES as FUNDING

Use Brokaw

Explicit in Jamie Galbraith’s commentary on the need for stimulus from the government we read last week was the need to use the federal deficit to boost aggregate demand.

Elsewhere you will here it even more baldly:  “The federal deficit is the only source of increasing demand, or stimulus,”

The original Obama economic plan through the campaign involved increasing taxes on the top five percent of American incomes.  This would reduce the deficit and would not reduce the effect of stimulus spending.  The marginal rate is proposed to go from 35 to 38 or 39 percent.  This three or four percent of income over two hundred fifty thousand dollars is almost certainly being saved in one form or another by these people in the current downturn.  Subtracting from the savings of the rich is not subtracting from any spending or if it does, that spending is minimal.

You have heard us repeat something along the lines of Tom Brokaw’s plaint, that gasoline is too cheap and a hefty tax on it would not only be a way of incorporating some of the environmental costs, but could also be the source of a lot of funding for infrastructure.  Obama in this interview protested that people are in bad shape and need every break they can get.  We disagree.

Higher gas prices will be a burden, but also an incentive to use more fuel-efficient transportation.  The SUVs are already back on the road.  A gas tax can be phased in five cents at a time.  Getting it on the books sets the incentives for the future, and the funding for the future.

In both these cases, the Obama camp defers, we think, not to the economics of it, but the politics.  They will need the good will of every voter, the rich and influential and the driver who got caught with a new SUV in the summer of 2007

And there are simple regulatory changes.  California’s clean air standards were a model.  Simply requiring automobiles to produce less pollution to be eligible to join the California market produced billions in new technology.

Energy efficiency in buildings pays for itself in a matter of a few years.  It is a no-brainer economically.  It ought to be mandated and could even include the financing mechanism to get from here to there so the average customer is not out of pocket.  This is producing jobs now from energy savings later and creating the facilities and supply lines for a necessary industry to planetary survival.

This is not World War II, when public spending generated private incomes that needed to essentially be suppressed by taxation or borrowing to avoid inflationary stresses.  Neither is it a situation where public spending will crowd out private investment.  One of the necessary and desirable outcomes, in fact, is to stimulate consumer spending and private investment.  The fact is, however, that consumers and businesses tend not to save in a downturn.  It is just as legitimate economically to access this savings by taxation as it is by borrowing, and in the long term it is much more stable.

I believe there will be a snap-back of economic activity as soon as it becomes apparent that the Obama approach is going to work.  A tremendous amount of instability lies underneath the ice of the current situation.  It will be very good to have as balanced a balance sheet as possible when we come out of this economic winter.  Having energy taxes and higher marginal income tax rates on the books will be much more convenient than trying to institute them in a period of volatile interest rates and wild movements in currency values.

That said, the politics of the matter is beyond me.  Obviously you can have the best policy imaginable, but if you cannot get it implemented, it is useless.