tag:blogger.com,1999:blog-970611666708740586.post8961252685152079825..comments2023-08-28T11:48:39.554-07:00Comments on Reserved Place: US economic policy shot in the foot #2: An exorbitant privilege squanderedRebelEconomisthttp://www.blogger.com/profile/13241098878248190971noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-970611666708740586.post-64733425716773930722010-10-15T08:27:13.500-07:002010-10-15T08:27:13.500-07:00Note to self:
Two examples of high return potenti...Note to self:<br /><br />Two examples of high return potential US public sector projects that I became aware of after this post was written are:<br /><br />(1) Pre-school education http://www.slate.com/id/2166852/<br /><br />(2) NE US railways http://www.washingtonmonthly.com/features/2009/0901.longman.html<br /><br />As mentioned by me in discussion, eg here http://www.nakedcapitalism.com/2010/02/should-germany-quit-the-eu-rather-than-rescue-greece.html#comment-82923RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-87060470531122370832008-06-15T03:07:00.000-07:002008-06-15T03:07:00.000-07:00outerbeltway,Thanks for your thoughtful reply.Actu...outerbeltway,<BR/><BR/>Thanks for your thoughtful reply.<BR/><BR/>Actually, I believe that markets generally do allocate resources better than governments, although there are some things that are best done by the government on behalf of the country as a whole. Dealing with official capital inflows is one of those things, partly because they tend to be invested in government liabilities, and partly because they raise national economic policy issues.<BR/><BR/>While it is a view that is difficult to sell politically, I would blame ordinary people more than Wall Street for the dotcom and real estate bubbles. They often expect easy gains but are too lazy to do proper due diligence. Wall Street may indulge peoples’ greed and take advantage of their ignorance, but I suspect that bubbles would arise anyway. If it is easier to get a loan to buy a car than start a business, that is probably because car loans are cheaper to administer and are less risky for the lender. Where I think government (including the Fed) did fail during these booms was in not being sufficiently honest and explicit about the dangers of participating. For example, after being criticised for interfering in the stock market following his innocuous mention of “irrational exuberance” Alan Greenspan became a cheerleader for the “new paradigm”.<BR/><BR/>Although it would have been better done a couple of busts ago, say during the LTCM crisis, my inclination would be to let the present bust take its course to (a) reinforce the incentives for people and bankers to more careful and (b) reward the prudent. In other words, if, in the absence of personal misfortune such as ill-health, people cannot pay their mortgage, foreclose and evict them. Sell the house at the going rate and if that bankrupts the bank that lent to them, nationalise it and fire the management. Spend public money on facilitating the adjustment (eg by subsidising the rent of the evicted for a while, retraining redundant real estate workers, protecting retail deposits etc), rather than on trying to prevent it. As far as possible, raise that money by imposing windfall taxes on financial bosses who did particularly well out of the boom.<BR/><BR/>I totally agree with you about helping individuals to be more productive. Here, I think education is key, which is another task suitable for the government. In the UK, we carry a burden of a large underproductive group which is perpetuated by a lack of opportunity, aspiration and even health. I would expand school education spending massively to break this cycle for as many as possible. I would spend more on teachers’ pay to get better and more teachers. I would offer a voluntary extension of the school day into the evening, during which time children would be encouraged to pursue sports, music, foreign languages, crafts and other hobbies, for which generous facilities would be provided. Besides giving them more experiences to find their talent, this would also reduce the burden on working or even neglectful parents. I would give the kids at least one highly nutritious meal per day to assist their concentration and physical development. Troubled kids would get special attention, and not be allowed to fall out of the system, as they often are now in the UK. In order to pay for all this, I would increase inheritance taxes. As you know, I have visited Japan, and some of these ideas are drawn from there, although I would want to preserve the ethos of individual expression and questioning that I think is an advantage of our existing education system. The longer we delay improving our productivity, the more countries like the US and UK will become stressed by competition from developing countries and the harder it will become to spare the necessary resources for the task.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-45806475732080787932008-06-11T06:44:00.000-07:002008-06-11T06:44:00.000-07:00RebelEconomist:Thanks for this excellent material....RebelEconomist:<BR/><BR/>Thanks for this excellent material. I had not really thought much about the role of incoming investment – the “exorbitant privilege” in the resource allocation puzzle. I see now that it’s quite significant. <BR/><BR/>On this topic of resource allocation, I have a different puzzle-part to throw onto the table for your consideration. Let me set the context for what follows with these baseline facts:<BR/><BR/>• The role of financial markets in an economy is to route credit to the most productive use. If the financial markets don’t perform their function, for whatever reason, the economy falters.<BR/><BR/>• There have been two recent egregious examples of mis-allocation of credit by the U.S. financial markets in the last decade. The first is the dot-com bust, the second is the real estate bust. Both were examples of allocation decisions made on the basis of Wall Street profitability rather than on the basis of U.S. economic health. Both events severely damaged the U.S. economy.<BR/><BR/>• The household credit-delivery system in the U.S. is badly tilted toward consumption rather than production. My retail banker will readily give me a home-equity loan to buy a new car, but is relatively unprepared to make early-stage entrepreneurial loans<BR/><BR/>• The U.S. population expects the Fed to operate as its economic steward. This seems to be misplaced expectation, as the Fed is an organization owned and operated by bankers, not an organization owned and operated by – for example - small business. I present small business as a contrast because small business generates most of the job growth and technical innovation in the U.S. economy. They are a better proxy for the U.S. economy than the banks are, but small business doesn’t control the money supply.<BR/><BR/>In your piece, you advocate for an oversight body to make allocation decisions for the capital that comes into an economy from abroad. This is a great idea. But why limit the focus of their oversight to capital coming in from abroad (the “exorbitant privilege” proceeds)? Why not the domestic national and household spending and investment, too?<BR/><BR/>Clearly, the reason to eschew such a broad scope for any so-called “oversight” entity is that it soon leads to centralized economic planning, and that has real problems if the oversight board behaves unwisely. Better to trust to a more dispersed decision-making model. <BR/><BR/>Credit allocation decisions happen in two places: the credit “allocate-or”, and the credit “allocate-ee” - that is, the credit markets on the one hand, and governments, businesses, and households on the other. In recent U.S. economic history, both parties did really dumb things at a colossal scale. Both need to be fixed, and fixed quickly. But a dispersed decision-making system that makes bad decisions is worse than a centralized decision-making system that makes bad decisions. Why? Because of inertia. The dispersed system is big and complex, and that usually translates into “slow to adapt”. <BR/><BR/>In the interests of brevity, I’m going to short-circuit the discussion of optimal decision-making models, and I’ll re-state the problem into actionable form, and frame my thesis thus:<BR/><BR/>The U.S. household sees itself as a consumption entity. For now, that’s just what it is, but it must not continue so. It must restate its identity as a production facility, and use all available resources, including credit, to refine, re-direct, and amplify its productive powers. <BR/><BR/>Why single out the household? Because the household drives every other part of the economy. Wall Street simply cannot sell what Main Street won’t buy. The household supplies the labor, the knowledge, and the purchase decisions that form the independent variables of the remainder of the economy. What are the key things that must change at the household level in order for proper economic decisions to get made throughout the remainder of the economy? In two words, it’s “situational awareness”. The household must:<BR/><BR/>• Engage in more entrepreneurialism. There is no better teacher of economics<BR/>• Understand that as the household does, as the household buys, so goes the economy<BR/>• Understand that globalization has fundamentally and irrevocably changed the economic landscape. The household must wisely pick a niche that another household half a world away with a much stronger motivation to work, can’t compete in. This is not as easy as it was 20 years ago.<BR/><BR/>What I’m advocating is a sea-change in attitude at the bottom layer of the U.S. economic pyramid. This is a philosophical change from “consumerism” to “producerism”, and it needs to happen where it can do the most good: in the household. There are many benefits to be derived from an entrepreneurial household that firmly grasps its location in the global economic chessboard. This knowledge provides the motivation and the rationale for productive behavior. <BR/><BR/>Productive behavior is what is required for the formerly-rich economies to maintain something of their past standard of living. If we cannot re-invent our productivity, we must use fraud (“AAA” ratings) or the gun (Iraq) to steal from others. If you can’t create wealth, you must somehow obtain it from others.<BR/><BR/>Resource allocation decisions are the core of any economy. Where to allocate your time, effort, thoughts, and money? But which economic players need to know what to do, and how to do it? Great managers push capability and accountability down to the lowest possible reaches of the organization. That is what we must do – we must push this knowledge down to the household level. The obvious objections are that:<BR/><BR/>• Most households aren’t currently capable of making those decisions<BR/>• And they can’t get there any time soon<BR/><BR/>The first objection is true. The second one must be made to be false.Anonymousnoreply@blogger.com