Category: Commentary

Doing Discounting Wrong

By James Kwak

Ezra Klein focuses on this passage from  John Judis’s review of regulatory policy in the Bush and Obama years:

“Bush stopped weighing the costs and benefits of deregulation and issued an executive order allowing OIRA to intercede before agencies made their initial proposals, thereby providing industry lobbyists with a back door to block regulations. OIRA also instructed agencies to discount the value of future lives in constructing cost-benefit analyses by 7 percent a year, so that 100 lives in 50 years would only be worth 3.39 current lives. (Such logic can be used by conservatives to argue that the present cost of regulating greenhouse gases outweighs the future benefits of stopping climate change.)”

There is a normative argument against valuing lives in cost-benefit analysis; some people think it’s just wrong. I don’t agree with that; I think that in practice, you either value lives implicitly or you do it explicitly, and so you might as well do it explicitly. And for what it’s worth, the practice of valuing lives is firmly entrenched in our legal system; the amount you pay in damages if you kill someone negligently depends primarily on that person’s future earning potential, and also on the monetary value of the benefits that other people gained from his or her life.

Continue reading “Doing Discounting Wrong” →

Greg Mankiw on the Deficit

By James Kwak

Broken record alert: Another post on the deficit ahead. Wouldn’t you rather look at funny pictures of cats? Why do I keep writing these? (Hint: The other side keeps writing them.) You have been warned.

Greg Mankiw, noted economics textbook author and former chair of Bush 43’s Council of Economic Advisers, has an op-ed on the deficit that is relatively sensible by the standards of recent debate. He points out that modest deficits can be sustainable, that taxes will probably need to go up, and that a value-added tax is a plausible option. He also points out that Obama’s projections are based on optimistic economic forecasts that very plausibly may not pan out, and that Obama’s main deficit-reduction strategy is to kick the problem over to a deficit-reduction commission, which are valid criticisms.

Unfortunately, his bottom line seems to be throwing more rocks at President Obama, under the general Republican principle that since he’s the president, everything is his fault:

“But unless the president revises his spending plans substantially, he will have no choice but to find some major source of government revenue. Ms. Pelosi’s suggestion of a VAT may be the best of a bunch of bad alternatives. Unfortunately, in this new era of responsibility, the president is not ready to face up to the long-term fiscal challenge.”

Continue reading “Greg Mankiw on the Deficit” →

Fallout From Goldman-Greece Affair Widens: Impact On The European Central Bank

By Simon Johnson

As controller of the euro, the European Central Bank (ECB) wields great power in Europe and has a wide global reach.  The race to become the ECB’s next president – with a term that starts next year – has been intense and hard fought.  The final selection is down to two men: the ultra hawkish Axel Weber, head of the Bundesbank, who sees inflation dangers at every turn; and the relatively more moderate Mario Draghi, head of the Bank of Italy, chair of the Financial Stability Board, and experienced international economic diplomat. 

Unfortunately for those hoping that Draghi could still prevail, he is also formerly senior management at Goldman Sachs and serious questions are emerging regarding what he knew and did during Goldman’s alleged “let’s help Greece circumvent EU budget rules” phase in the early 2000s.

Specifically, Draghi joined Goldman Sachs in January 2002, after a distinguished public service career – including 10 years in a key position (Director General) at the Italian Treasury.  His formal titles were Managing Director, Vice Chairman of Goldman Sachs International, and member of the “Group’s Commitment Committee”; his job, according to Goldman’s press release, was to “help the firm develop and execute business with major European corporations and with governments and government agencies worldwide.”

Did this involve Greece? Continue reading “Fallout From Goldman-Greece Affair Widens: Impact On The European Central Bank” →

Senior Goldman Adviser Criticizes Greece – Without Disclosing His Goldman Affiliation

 By Simon Johnson

Otmar Issing, a former senior European Central Bank official, came out strongly today against any kind of rescue package for Greece (FT op ed; Bloomberg report).

He hits hard to the core of the issue:

“Financial assistance for countries that violated the terms of their participation in EMU [European Monetary Union, i.e., the eurozone] would be a major blow for the credibility of the whole framework.”

Unfortunately, Mr. Issing’s article (and the subsequent coverage) neglected to mention that he is an adviser to Goldman Sachs (see also the FT archives).  This is a major issue for three reasons. Continue reading “Senior Goldman Adviser Criticizes Greece – Without Disclosing His Goldman Affiliation” →

Goldman Goes Rogue – Special European Audit To Follow

At 9:30pm on Sunday, September 21, 2008, Goldman Sachs was saved from imminent collapse by the announcement that the Federal Reserve would allow it to become a bank holding company – implying unfettered access to borrowing from the Fed and other forms of implicit government support, all of which subsequently proved most beneficial.  Officials allowed Goldman to make such an unprecedented conversion in the name of global financial stability.  (The blow-by-blow account is in Andrew Ross Sorkin’s Too Big To Fail; this is confirmed in all substantial detail by Hank Paulson’s memoir.)

We now learn – from Der Spiegel last week and today’s NYT – that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November.  These actions are fundamentally destabilizing to the global financial system, as they undermine: the eurozone area; all attempts to bring greater transparency to government accounting; and the most basic principles that underlie well-functioning markets.  When the data are all lies, the outcomes are all bad – see the subprime mortgage crisis for further detail.

A single rogue trader can bring down a bank – remember the case of Barings.  But a single rogue bank can bring down the world’s financial system.

Goldman will dismiss this as “business as usual” and, to be sure, a few phone calls around Washington will help ensure that Goldman’s primary supervisor – now the Fed – looks the other way.

But the affair is now out of Ben Bernanke’s hands, and quite far from people who are easily swayed by the White House.  It goes immediately to the European Commission, which has jurisdiction over eurozone budget issues.  Faced with enormous pressure from those eurozone countries now on the hook for saving Greece, the Commission will surely launch a special audit of Goldman and all its European clients. Continue reading “Goldman Goes Rogue – Special European Audit To Follow” →

Greece Derails – Is Europe Far Behind?

By Simon Johnson

Already facing serious difficulties – both internal and with regard to its EU partners (see our longer essay in Saturday’s WSJ) – Greece’s predicament just became substantially worse.

Speaking on national television this evening, the Greek Prime Minister – George Papandreou – lashed out at the European Union (presumably meaning mostly Germany) for creating a “psychology of looming collapse which could be self-fulfilling.”  He also implied that Greece was being treated, in some senses, like a “lab animal.”

Without doubt, EU engagement with Greece over the past week or three has not be well-managed – and the pseudo-announcement of support after the summit on Thursday was a complete amateur hour. Continue reading “Greece Derails – Is Europe Far Behind?” →

Google Buzz and Public Search Results

By James Kwak

Some law school friends and I had trouble figuring this out two nights ago when Buzz was apparently rolled out, so I thought this might be helpful. I think I got it right, but no guarantees. Note that this post is about including your profile in public search results; there is another more important privacy issue discussed here.

Continue reading “Google Buzz and Public Search Results” →

Some Survey Results

By James Kwak

Here are the results of the latest New York Times/CBS News poll. (Here’s the Times article.)  A few observations:

1. When asked what the most important problem facing the country is (question 4), here are the winners:

  • Jobs: 27%
  • Economy: 25%
  • Other: 16%
  • Health Care: 13%
  • Budget Deficit: 4%
  • DK/NA: 4%

This shows the divide between the country, which cares about jobs, and the Washington punditocracy, which cares (or professes to care) about the deficit. Now, I’m not saying that something’s actual importance is a function of its perceived importance. Governing requires doing what’s best for the country, whether or not people realize it. But neither is it true to say that Americans are overwhelmingly concerned about the deficit. They’re not. And looking at the numbers, you would think most would favor increased spending or lower taxes to create jobs. Later on, though, when given that explicit question, we find a much smaller margin (47-45) in favor of jobs. This, of course, is largely an artifact of question design, so you can argue about which design is more relevant depending on what question you’re trying to answer.

2. On questions 6-10, Obama gets positive marks for foreign policy and terrorism, but negative marks for the economy, health care, and the deficit. This is what you would expect for a Republican president, not a Democratic one (with the possible exception of the deficit question, since Democrats are still seen as big spenders, the past two administrations notwithstanding). Probably the most likely explanation is that the last three are simply things that people are unhappy about in general; also, the economy and health care are issues where Obama faces disapproval both from the right and the left, for opposite reasons. Basically, we have a centrist president.

3. Only 8% of Americans think that “most members of Congress” deserve re-election. This, it seems to me, is one of those survey results that is inherently self-defeating. All of the Republican base should be happy with Republican Congressmen for successfully fighting off the Obama agenda. Many though not all Democrats no doubt blame the last year on the Republicans and should be reasonably happy with their Congressmen. And we know the vast majority of members of the House will be returned to office. So all this means is that people have an unfocused antipathy toward Congress as an institution.

4. When you ask if “homosexuals” should be allowed to serve in the military (page 24), people are in favor 59-29. When you ask about “gay men and lesbians,” you get 70-19. (If you follow up by asking about serving “openly,” the margin falls to 44-41 and 58-28, respectively.) Words matter.

Waiting For The G7 On The Euro

By Simon Johnson

Yesterday’s announcement of European “support” for Greece was badly bungled. 

The Global Crisis Fighter’s Guide to the Galaxy clearly states that when “markets overreact… policy needs to overreact as well” (see Larry Summers’s 2000 Ely Lecture to the American Economic Assocation, American Economic Review, vol. 90, no. 2, p.11; no free link available – and yes, I know that the White House doesn’t always follow its own playbook). 

This definitely does not mean: Vague promises to provide some support in an unspecified fashion in return for some policy actions to be specified later.

Irrespective of your view on how much fiscal adjustment Greece needs vs. how much German taxpayer money it deserves (or can realistically expect), you need a different approach – much more concrete and detailed.  The only good news yesterday was that the IMF will play a slightly greater role than previously expected, but even this change was a nuance missed by everyone – and who knows where it will lead.

If the euro continues to depreciate as it has so far today, the G7 will need to weigh in. Continue reading “Waiting For The G7 On The Euro” →

The Myth of Efficiency

By James Kwak

Planet Money’s latest podcast features an interview with Matt LeBlanc, an efficiency expert. LeBlanc’s job is to observe various processes and figure out ways to make them more efficient. The idea, is that by increasing efficiency companies can save money, which ends up helping everyone through higher productivity and lower prices, even if some people get laid off along the way.

I am as much of a compulsive efficiency nerd as anyone (well, almost anyone). LeBlanc lays out his toiletries in the morning in a specific order in order to minimize transition time. When I lived in Berkeley, I figured out the fastest way to drive to school. The various possible routes were different paths through a grid that included some stop signs and some street lights; the best  route involved slowing down at one intersection, looking to see if what color the light at an intersection was, and making a decision based on that. On one of my previous blogs I wrote a post about the quickest way to get through a security line at an airport. (Tip #1: Don’t unload your bags into the plastic trays until shortly before you reach the X-ray scanner. Your bags were designed to help you carry a lot of stuff with two hands; if you unpack them early, you have to move your unpacked stuff with the same two hands. Tip #2: Put your bags through the scanner before your computer and toiletries bag; that way you can have your bags ready and waiting on the other end so you can pick up the computer and slide it into your bag in one motion.) One of my pet peeves is businesspeople who fly frequently, make faces when standing behind families in the security line, and then slow down the line themselves because they haven’t figured out how to get their stuff onto the conveyor belt immediately after the person in front of them.

Continue reading “The Myth of Efficiency” →

Is Larry Summers Getting Tougher?

Financial regulation is currently in no-man’s land, having emerged more or less intact from the House frying pan before facing the gauntlet of the Senate.

To its credit, the Obama administration has in recent weeks taken a firmer position: The excesses of the past decade have to come to an end. This was evident three weeks ago in the new proposals announced by the president to constrain the activities of large banks, which went beyond anything the Treasury Department had proposed last summer.

It was also evident in an interview that Lawrence H. Summers, the president’s chief economic counselor, gave to CNBC on Tuesday. (Ryan Grim has transcribed additional quotations.) Continue reading “Is Larry Summers Getting Tougher?” →

Robert Samuelson Again

Remind me never to open Newsweek again when I have real work to do. Robert Samuelson tries to play the tough guy yet again in his column, saying that we face either major entitlement cuts or major tax increases and we have to buck up and take it like real men. I agree that we need to do something about the long-term debt problem, and the sooner we come up with a solution the better. But this was what set me off: “There is no way to close the massive deficits without big cuts in existing government programs or stupendous tax increases.”

This leaves out the obvious and best solution: reduce the growth rate of health care costs. Democrats and Republicans differ on how to do it–the former put a large package of cost-cutting measures in the Senate version of the health care reform bill, the latter want to kill the tax exclusion for employer-sponsored health care (and some Democrats would be fine with that as well). But everyone knows that the long-term debt problem is a health care problem, we spend far more on health care than we get back in outcomes, and cutting health care cost growth is the key. If we don’t, then we’re completely screwed no matter how much we cut Medicare–someone has to pay those health care costs, and if we cut entitlements we’re just shifting the problem onto individuals. (Put another way, Medicare is largely a redistribution system–as Samuelson recognizes–and if you kill it, you haven’t done anything about the fundamental mismatch between aggregate income and aggregate health care costs.) You may prefer that politically, but it’s still not a solution.

Samuelson says, “Even with these cuts [proposed by him], future taxes would need to rise. Unless you’re confronting these issues–and Obama isn’t–you’re evading the central budget problems.” Does he not realize that health care reform was the centerpiece (now perhaps failed, but at least he tried) of Obama’s first year in office, and that Obama himself insisted that cost reduction was more important than universal coverage, to the chagrin of his own political base? Oh, wait. Samuelson doesn’t realize that health care is the central budget problem.

I’m sorry to belabor the point. You all know it. But apparently Robert Samuelson doesn’t.

By James Kwak

Bankers and Athletes, Part 2

In a recent interview with Bloomberg (Simon’s commentary here), President Obama compared bank CEOs to athletes–a analogy favored by Goldman director Bill George, among others. However, Obama got the analogy right:

“The president, speaking in an interview, said in response to a question that while $17 million is ‘an extraordinary amount of money’ for Main Street, ‘there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.'”

That is, Obama is saying that some bankers are overpaid, just like some athletes are overpaid. Maybe he read my earlier post?

Continue reading “Bankers and Athletes, Part 2” →

President Obama On CEO Compensation At Too Big To Fail Banks

Bloomberg today reports President Obama as commenting on the $17 million bonus for Jamie Dimon of JP Morgan Chase and the $9 million bonus for Lloyd Blankfein of Goldman Sachs,

“I know both those guys; they are very savvy businessmen,”

and

““I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

Taken separately, these statements are undeniably true.  But put them together in the context of the Bloomberg story – we have to wait until Friday for the full text of the interview – and the White House has a major public relations disaster on its hands. Continue reading “President Obama On CEO Compensation At Too Big To Fail Banks” →