Wednesday, July 23, 2008

Samuelson, etc.

Robert Samuelson is always fantastic for providing big-picture perspective on all matters economic. In some cases, like today's column, he's highlighting the fact that the 2008-2009 recession is not going to be a doomsday depression... he provides a moderating influence. In other cases - such as when he talks about the aging of the baby boom generation and it's effect on entitlements - his big-picture perspective is a call to action from the complacency that grips the country. Either way, he always has something good to say (even if I don't agree with it 100% of the time), and I thought I'd share today's article.

One thing he highlights that is important - the fundamentals of the American economy are strong. We have strong financial institutions (despite the credit crisis), strong housing markets (despite the subprime crisis), and strong labor markets (despite recent job loss). I think if anything is going to unleash a system-level crisis like the Great Depression, it will have to be external. Particularly it might be:

1. Depressions in other major economies (ie, China) that cannot deal with shocks like fuel price increases spreading to the U.S. The series of financial crises that wracked Mexico, Brazil, Russia, Indonesia, Thailand, and South Korea in 1997-98 demonstrated that as economies get more integrated, it's easier for them to spread ailments.

2. A loss of faith in the U.S. dollar, leading to massive dumping of dollar reserves by central banks around the world.

The scary thing is that (1.) both of these scenarios would come up on us fast, and (2.) they both will emerge outside the U.S. economy. BUT - we can do things to prevent both of them as well, and that's where policy should be directed.

In other news, this is a new Urban Institute Tax Policy Center report on the candidates tax plans. It projects that both candidates plans will continue fiscal deficits, but that McCain's will be substantially greater than Obama's. I was just at a release event for the report where the senior economic policy advisors for both campaigns commented on it - the Obama guy disputed the baselines that the TPC report compared their plans to, but came out with the same basic point - even if you use a more reasonable baseline, the difference between the McCain and Obama plans are maintained. I'm a little slow when it comes to tax policy, so I can't comment much more on that - but I've gotta say I was impressed with a lot that both sides had to offer. As Urban analyst Len Burman said at the event - both sides could benefit from borrowing a few policies from the other.


JSN said...

I enjoyed the event, too, having listened to it recorded.

Not that I'm sure there will be a depression, one simply can't know everything that will happen next, but Samuelson missed Merril sold 30 billions worth of CDOs for 22 cents on the dollar and, according to the report, is still on the hook for further losses in those instruments.

And the other thing is based on what you said. Maybe the American economy, after the 1970s shocks, did learn to become a bit more energy independent, but other countries, which basically became industrialized since then... maybe not so much.

I believe there is a mass psychology aspect to such events that numbers-economists don't publicly consider. Did you know that Paris Hilton is going to have a TV show to help her find a new best friend! Fairness is a concept even non-humans can understand.

dkuehn said...

Great thoughts, jsn! I'm personally not as familiar with the world of finance, so thanks for the Merril stats as well.

I think a lot of economists - in the academic and the policy world - are very aware of the mass-psychology side of recessions and depressions (Robert Shimer had a great article on it in the most recent issue of The Atlantic).

But economic policymakers are in an awkward position in this regard - I think they understand all too well how mass-psychology can tip us into a recession, and so they are very careful about the words they use so they don't set a self-fulfilling prophecy in motion. Just look at the media coverage whenever Bernanke testifies before congress. They parse every single word that comes out of that guy's mouth, scrutinizing it far more than any speech that Bush ever made. Bernanke has to be perfectly scripted for those sessions, or else the market will respond in an unexpected or an undesirable way.

I'd hardly say that the US is energy independent - I'd disagree with you there. In fact, we have become MORE dependent on foreign oil since the 1973 shock. The thing is, there isn't going to be huge growth in US energy use over the next decade or two - not so for China and India, who will consumer magnitudes more oil in a decade than they do today.

JSN said...

I'm completely aware of the parsing of Bernanke and, before him, Greenspan speeches.

What I heard, and this was some years back, that a) the inflation adjusted price of oil was $80, and b) oil was half as important to the economy as it was then.

I was mistaken in saying it had anything to do with energy independence. And perhaps this economist was wrong, but it all sounded pretty reasonable, if a bit rosy.

Definitely check out Ha-Joon Chang. Here is a sort of teaser for Bad Samaritans online.