Sunday, March 15, 2009

When you're up to your ass in alligators...

Back when Lawrence Summers name was being bandied about as an Obama economic advisor there was a fair amount of unhappiness in some quarters because of his remarks about women and math. I took a look at that controversy and the other Summers dustups and concluded - sadly - that there was not enough to them to warrant my attacking Summers. Having come to that conclusion, I nonetheless cautioned:

On the other hand, he does seem to have a talent for rubbing people the wrong way and that may be a bad thing under the current circumstances.

You can now count me among the people who are being rubbed the wrong way. My disillusionment is occasioned by a March 13 talk Summers, now Director of the White House National Economic Council, gave to the Brookings Institution. (The video of the event is here and a full transcript is available at the same site in pdf form. The transcript contains both the prepared text of Summers remarks and the Question and Answer period that followed. Page numbers in the discussion below refer to the pdf transcript.) I have two minor complaints and one major one.

One minor complaint has to do with an exchange during the Q&A session. Martin Baily asked the first question (p. 22). He began with:

The two concerns that I hear most are, number one, that restoring the financial sector needs to be the number one priority, and people are not kind of reassured yet that it is. Now you spoke to that, but you also talked about health care and climate and so on. [snip]

To which Summers replied:

Look, I think the first thing to say is at a crucial moment during the campaign it was proposed that one of the presidential debates be cancelled because there were a set of congressional debates regarding the TARP, and President Obama took the position that part of being President is being able to deal with more than one issue at a time.

I have two problems with that answer. First, barely over a week ago we were reading that “Mr Obama and his staff have been ‘overwhelmed’ by the economic meltdown” and that Obama was “[surprised] at the sheer volume of business that crosses his desk.” And even if that story was pure baloney, there’s no question that the Treasury Department is understaffed, to put it mildly. (For example, see a number of posts by Megan McArdle including her latest on the matter and this from The Washington Post.) When you’re in the middle of a crisis, possibly unable to handle what’s on your plate now, and certainly short of help, should you really be looking for more projects?

Second, Baily’s concern was that “restoring the financial sector needs to be the number one priority”. Summers saying Obama can deal with more than one issue at a time is explicitly saying that there isn’t a number one priority. That’s going to make it tough for people to ever be “kind of reassured” that there is. (It also seems to me that Summers’ answer here sort of undercuts his claim throughout the rest of his speech that radically transforming health care, education, and energy policy are an integral part of “restoring the financial sector” but I may be nitpicking.)

My other minor complaint stems from the rest of the Q&A between Baily and Summers. Baily asked:

... what are the specific steps that are going to be taken to deal with the financial crisis? There seems to be, you mentioned that, that [Treasury Secretary Timothy Geithner] is going to lay out those, but there seems to be a bit of hesitation there, and one wonders is this because the price tag is so big. Nobody wants to own it. Or, is it just a matter of time? Are we being impatient?

This is where Summers defended Geithner and I have to say his defense was less than reassuring. You can read Conor Clarke at The Atlantic for some thoughts on this but what jumped out at me were the following lines (emphasis mine):

... I think that Secretary Geithner has handled this in a difficult and courageous way. The easy thing to do would be ... to lay out a nine-point plan with the illusion of specificity and the sense of certainty about what the future would bring. [snip]

Secretary Geithner has taken ... an approach that lays out a framework that, unlike so much of the commentary, actually recognizes the enormous complexity of the problem [snip]

So my suggestion is that we let this stress-testing continue. We allow the process of supporting and reactivating the capital markets to be carried out, and we evaluate what the results have been some time from now, and I think the wisdom of Secretary Geithner’s approach will be much clearer at that time

Hmm, let’s see. No specificity, no certainty, enormously complex but we’ll see in the future that Geithner’s approach is wise. Sounds like a faith-based initiative to me.

So much for the minor stuff. What really, really irritated me were these statements:

An equally important engine of recovery can be investment in reducing our energy vulnerability and our contribution to climate change. [p. 18]

Sooner or later we'll have to reduce our dependence on foreign energy and contain our carbon emissions. [p.18]

I can’t imagine that it would be rationale ... not, at a time when there are millions of people unemployed, to be thinking about the sector like energy and the environment where new jobs can be created. . [p. 23]

I think this conflation is dishonest. The environment is a separate issue from energy dependence and energy jobs. It’s only the Administration's own policies that insure the two issues must be treated as one. Obama has blocked offshore drilling and drilling in Utah. The Interior Department has halted oil shale development (although they may restart it under different guidelines). Obama’s budget has ruled out the use of Yucca Mountain as a nuclear waste depository site which kills any increased reliance on nuclear power. Regardless of whether you think these decisions are correct for environmental reasons, they have greatly constrained our ability to reduce our energy vulnerability, reduce our dependence on foreign energy, and create new jobs in the energy sector. In fact, these decisions mean that the only way to achieve those goals is through green technology.

Summers bland linking of energy issues and the environment conceals the fact that a choice has already been made: go the green route rather than take the path of more domestic oil and gas development and more use of nuclear power. This concealment allows Summers to avoid mentioning that this choice has significant economic costs. Instead, he can completely ignore those costs and speak only of the jobs and investment that can be created through alternate energy sources.

It may be that in the long run green technology will be viable without government support and will be a dynamic engine of growth. In the short run, however, the policies Obama is pursuing will definitely result in higher energy costs due to his restrictions on domestic production and - if implemented - his cap and trade program. I don’t think any economist will argue that higher energy prices drive economic recovery in the near term. Furthermore green technologies are a long way from being implemented on a large scale. Therefore in the interim between giving up on domestic carbon and nuclear energy and achieving widespread green energy we remain vulnerable to whatever price hikes our foreign suppliers may impose on us. If such price hikes occur they will further delay or depress the recovery. If our foreign suppliers decide to cut our ration, the consequences will be even more dire.

This is how Summers expands on his remarks (p, 18):

Let's be realistic. Sooner or later we'll have to reduce our dependence on foreign energy and contain our carbon emissions. Thinking about this issue, I was reminded of Ben Bernanke's doctoral thesis written about 30 years ago. The basic argument of Bernanke's doctoral thesis was that if you think energy prices will be low, you will buy one kind of boiler. If you think energy prices will be high, you will buy a different kind of boiler. If you don't know what will happen to energy prices and you think you'll find out soon, you don't buy any boiler and you don't invest at all. There's a message here about the importance of certainty and the importance of resolving the cap-and-trade issue in a rapid way. There's another benefit as well. As many enlightened business leaders have recognized, the confident expectation that pricing policy will discourage carbon use in the future will spur a whole range of green investments in the present when our economy can benefit from all the investment it can get, and in the long run we believe this can create jobs on a substantial scale. We can choose to lead these industries with all the commensurate economic, political and environmental benefits or we can choose to lose out on these jobs and opportunities.

Although Summers refers to “a whole range of green investments in the present when our economy can benefit from all the investment it can get” he also says (emphasis mine), “in the long run we believe this can create jobs on a substantial scale.” Unfortunately the economic crisis is occurring now.

Beyond that, I think the whole “certainty” idea is a gamble. Even if the Administration keeps the lid on oil and gas exploration, never gets around to oil shale development, and kills the nuclear power industry, I don’t see how even “enlightened business leaders” will ever achieve “the confident expectation that pricing policy will discourage carbon use in the future”. As long as there is viable political opposition to those policies there will always be uncertainty about carbon pricing policy in the future.

Bottom line, I’m not convinced that risking economic hardship by refusing to develop domestic carbon and nuclear based energy will result in the thriving private sector development of alternative energy sources. If it doesn’t then either the government is going to have to continue to really, really sweeten the pot for alternative energy or alternative energy development will lag badly in which case we will have turned our backs on using our own carbon and nuclear and have nothing to show for it any time soon.

None of this sounds like Obama believes “that restoring the financial sector needs to be the number one priority”. Rather he believes that cutting CO2 emissions and avoiding the risks of nuclear power are more important than doing absolutely everything possible to fix the financial system quickly. Since Obama was duly elected, that’s his prerogative. I just wish Summers would be upfront about that rather than trying to obscure the fact that focusing on green technology will interfere with cleaning up the financial mess as quickly as possible.

Or to put it another way, I wish the Administration would just admit that their primary objective is not, in fact, to drain the swamp.



Healthcare and Competitiveness - Greg Mankiw explains why Summers’ is incorrect when he claims that relieving companies of providing health care policies will make them more competitive.

When should the taxpayers "allow" high executive compensation? - TigerHawk asks an interesting question about government support for education.

Deception at Core of Obama Plans - Charles Krauthammer, um, disagrees that shortcomings in health care, education, and energy policy are the cause of - and their correction the cure for - “our current economic difficulties”: Read the whole thing but my favorite part is:

... the list of causes of the collapse of the financial system does not include the absence of universal health care, let alone of computerized medical records. Nor the absence of an industry-killing cap-and-trade carbon levy. Nor the lack of college graduates. Indeed, one could perversely make the case that, if anything, the proliferation of overeducated, Gucci-wearing, smart-ass MBAs inventing ever more sophisticated and opaque mathematical models and debt instruments helped get us into this credit catastrophe in the first place.

The No-Cost Stimulus - A proposal to open up oil and natural gas exploration to create 2 million jobs.

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