This post began as a question about whether a resilient and redundant power grid would be a public good which as I composed it took a somewhat different turn. I may be able to move back in that direction. We’ll see.

Have you ever looked at a utility bill? Not just the “You owe this” part but looked at it in detail? My electricity bill and my gas bill look very much the same: I’m billed at such and such a rate for each unit (kwH, therm) I use and to this is added a service charge, taxes, and fees. My cable, phone, water, and cellphone bills are a little different: I’m billed at a fixed rate for the services I’ve contracted for, I’m billed more if I use any additional services, and to that is added a service charge, taxes, and fees.

The service charges and fees are all monthly. You couldn’t contract for a day’s worth of electricity if you wanted to. And here’s my point: the most you’ll ever get from your cable company if they fail to provide the service you’ve contracted for is a pro rata reduction. You’ll get nothing from the power company when the power is out.

Compare that with the register tape you get when you buy groceries. They refund at the unit of measure at which whatever you’re returning is sold at. They don’t refund for a single bad egg.

But we pay the gas, electric, and cable companies for a month of service without necessarily receiving a month of service.

Now I think I may have circled around. It’s obvious that electricity, water, or gas aren’t public goods. You and your neighbor can’t consume the same electricity , gas, or water (rivalrous) and you can have your house connected to the gas company without your neighbor being connected (excludable). Slightly more tenuous arguments can be made for cellphone and cable service (excludable but probably non-rivalrous, therefore club goods).

However, continuity of service is a somewhat different matter. It seems to me that as a practical matter it’s impossible for the electric or gas company to provide reliable continuity of service that isn’t non-rivalrous and non-excludable.

I don’t think I’ve had a month of continuous service from the electric company or the cable company (through which I get my broadband Internet connection) since I moved into this house nearly 30 years ago. I’ve had better service from the gas company and the phone company. The city provides the water and it’s only been out a couple of times over the years.

Why don’t the electric company and the cable company provide continuity of service? It is technically within their capability to provide continuity to a much higher degree than they’re doing. Clearly, they don’t have enough incentives to do so, allowing discontinuity of service helps them realize lower costs, and, since their rates are at least nominally controlled by commissions and the commissions let them get away with their practices, they charge for services they’re not providing.

I don’t take any particular comfort in knowing that my electricity, cellphone, and Internet connection are all likely to be unavailable at the times when I may need them the most. That’s why I keep my telephone landline. The phone company has its own power grid.

I’d meant to draw your attention to this yesterday. Greg Mankiw and Matthew Weinzierl have written an article (PDF) on the optimal monetary and fiscal policy responses to a decline in aggregate demand. It’s not for the casual reader or the math-phobic although the introduction and conclusion are reasonably accessible to a moderately well-informed reader. Let’s jump straight to the conclusion.

Drs. Mankiw and Weinzierl propose the following hierarchy of policy responses:

1. When you can utilize conventional monetary policy, do that first. You can no longer utilize conventional monetary policy once short term interest rates are at or near zero.
2. When you can no longer utilize convention monetary policy, utilize non-conventional monetary policy. In this context “non-conventional monetary policy” means cutting long term interest rates which the authors assert is effectively targeting a higher rate of nominal GDP growth.
3. When monetary policy is constrained, i.e. by short term interest rates already being at or near zero and the central bank being unable for whatever reason to commit to future monetary policy actions, apply fiscal policy to incentivize investment and other components that are sensitive to interest rates.
4. Conventional pump-priming fiscal stimulus, e.g. targeted tax cuts, government spending.

In this context “optimal” means that any other strategy will realize poorer results.

It’s an interesting paper. The question that comes to mind for me is just how sub-optimal has policy been to date?

There’s quite a bit being written about austerity these days viz. here, here, and here.

Please define austerity. Does the term apply to what’s being done in Greece? The United Kingdom? Here in the United States?

Yes, I’ve looked at Wikipedia’s definition. It clearly does not apply here at least.

Joseph Stiglitz suggests some of the underlying factors behind the economic downturn:

First, America and the world were victims of their own success. Rapid productivity increases in manufacturing had outpaced growth in demand, which meant that manufacturing employment decreased. Labor had to shift to services. The problems are not dissimilar to those of the early 20th century, when rapid productivity growth in agriculture forced labor to move from rural areas to urban manufacturing centers. With a decline in farm income in excess of 50 percent from 1929 to 1932, one might have anticipated massive migration. But workers were “trapped” in the rural sector: They didn’t have the resources to move, and their declining incomes so weakened aggregate demand that urban/manufacturing unemployment soared.

For America and Europe, the need for labor to move out of manufacturing is compounded by shifting comparative advantage: Not only is the total number of manufacturing jobs limited globally, but a smaller share of those jobs will be local.

Globalization has been one, but only one, of the factors contributing to the second key problem: growing inequality. Shifting income from those who would spend it to those who won’t lowers aggregate demand. By the same token, soaring energy prices shifted purchasing power from the United States and Europe to oil exporters, who, recognizing the volatility of energy prices, rightly saved much of this income.

The final problem contributing to weakness in global aggregate demand was emerging markets’ massive buildup of foreign-exchange reserves—partly motivated by the mismanagement of the 1997-98 East Asia crisis by the International Monetary Fund and the U.S. Treasury. Countries recognized that without reserves, they risked losing their economic sovereignty. Many said, “Never again.” But, while the buildup of reserves—currently around $7.6 trillion in emerging and developing economies—protected them, money going into reserves was money not spent.

I would trace the buildup of foreign exchange reserves farther back than that to China’s decision to peg the yuan to the dollar back in the early 90s but no matter.

His prescriptions:

The prescription for what ails the global economy follows directly from the diagnosis: strong government expenditures, aimed at facilitating restructuring, promoting energy conservation, and reducing inequality, and a reform of the global financial system that creates an alternative to the buildup of reserves

I suppose it is the mark of a good storyteller but this leaves me wanting more. Has any country anywhere ever conserved its way to prosperity? I don’t think so but I’m willing to learn. A lot of the energy that we produce is lost in the distribution process. We can accomplish energy conservation and what I think is more important, cheaper, more abundant energy by putting more attention on energy distribution.

What government expenditures would facilitate restructuring? I honestly want to know. Certainly neither infrastructure spending nor healthcare spending. I think that Dr. Stiglitz is repeating by implication the assertion that more education is the solution to the problem of not enough jobs. What concerns me is that the claim may be reverse causality, a sort of cargo cult proposal. I don’t think that more people with college degrees automatically creates more jobs that require college degrees. It just provides a credential that enables those with college degrees to displace candidates with lower levels of educational attainment from jobs that don’t require college degrees. Given the high expense of college education that sounds like a prescription for what’s been called “indentured servitude via student loans”.

If he’s proposing that more people complete high school, who doesn’t believe that? Unfortunately, the rate of on time high school completion has remained stubbornly stable for more than a half century. It’s an elusive goal for which no one really has a good solution.

The Watcher’s Council has announced its winners for last week. First place in the Council category was Joshuapundit’s Can Israel Survive?.

First place in the non-Council category was Gonzalo Lira with What I Learned At Dartmouth.

You can see the full results here.

When I read this headline, “Danish archaeologists discover 300 year old toilets”, my immediate reaction was “Were they staying in an English B&B?”

James Kwak has a lengthy analysis of our debt problem that’s worth your time. In his analysis he updates the CBO Extended Baseline and Alternative scenarios with the new developments of the last couple of monhs and adds some &147;Realistic Scenarios” of his own. He remarks:

So the bottom line is: If we extend the Bush tax cuts, we have very big deficit problems over the next ten years and the next twenty-five years. If we let them expire, there is no ten-year problem. That’s the same as in my earlier post, and I don’t think that’s controversial to anyone who understands the numbers.

What’s more controversial is my claim that if we let the tax cuts expire, there is a twenty-five year problem, but it’s not a huge one. Many other people argue that even if we let the tax cuts expire, we still have to cut Social Security and Medicare. On my reading, the problem is a national debt at 69% of GDP and growing steadily. If we have another financial crisis, or we start losing our status as the reserve currency, that could be a serious problem. My opinion is we should do something about it. But it’s not necessarily the end of the world.

I think the problem is more serious than Dr. Kwak apparently does for several reasons. First, his accounting for puiblic debt, like the CBO which he follows, does not include intragovernmental debt. Once you’ve included intragovernmental debt into the reckoning the public debt nears 100% of GDP rather than 69%. 69% is worrisome enough but 100% or more is disastrous.

Second and more importantly, his analysis is not robust: it is highly dependent on his assumptions and contrary to his claim that his assumptions are conservative to my eye they appear hopelessly optimistic. So, for example, he estimates an average 2.1% growth rate in real GDP, approximately the long term average growth rate. This year we will fall far short of that and IMO we are likely to do so for the foreseeable future. As evidence I’d submit that a) the current real GDP growth rate is far below 2.1%; b) when you account for the two consecutive bubbles we’ve experienced the real GDP growth rate has been below 2.1% for some time; c) to achieve an average 2.1% growth rate when you have growth rates significantly below that in some years means that you’ve got to have significantly higher growth rates in other years; d) there are no prospects whatever for growth rates significantly over 2.1% in coming years, not at least without serious structural changes; e) levels of public debt as high as the one we have are associated with lower rates of growth and f) just this morning PIMCO’s Bill Gross noted:

There are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0 than the 3 – 4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years.

I intend to return to Mr. Gross’s article in a later post. However, zero growth rates and near zero inflation means negative real growth rates.

Finally, look at the deficit and debt from a cashflow standpoint. We’re already paying a half trilllion a year in interest on the debt. At our present level of debt tiny changes in the interest rate we’re paying can push that up very rapidly.

Update

Here’s a very interesting muli-country analysis of public debt. Take particular note of the debt to GDP and interest to GDP ratios illustrated graphically in the report.

This post isn’t really fully fleshed out but I’m just going to blunder ahead and hope for the best. I have a question or, more correctly, a series of questions for those among my commenters who support a large fiscal stimulus. Here’s the question: why?

That may seem like a dumb question on my part but I think there’s more to it. First, the more recent articles by the model-makers like Moody’s Mark Zandi and Macroeconomic Advisers have cautioned that the effects of fiscal stimulus are temporary. Any increased GDP produced by fiscal stimulus in 2012 would be followed by GDP growth lower than it otherwise would be in 2013 and 2014. What this tells me is that either 1) any fiscal stimulus must be large enough to “jump start” the economy on its own or 2) fiscal stimulus merely provides the political space to undertake other necessary reforms that will help to produce sustained economic growth.

Second, we have a serious demographically-based cashflow problem which will continue for several decades. That’s no surprise. We’ve known about it for a half century. The additional interest we will pay as a result of the borrowing we do for fiscal stimulus will only exacerbate that problem.

Third, there are no prospects whatever that robust growth will enable us to pay down the additional debt. For the last two hundred years the U. S. has seen a very steady 3% year-over-year GDP growth, 2% in real terms. That itself is very atypical among developed countries (the UK, France, and Germany haven’t had the same experience).

Fourth, the current level of debt is around 100%. There’s economic scholarship that’s shown that levels of public debt this high reduce growth.

I’ve made no secret of my wariness of fiscal stimulus as a solution to our economic problems or of my dismay that the stimulus that was enacted into law in 2009 was the size that it was, had the structure it had, and was spread out over so long a period. IMO to whatever degree fiscal stimulus might have helped us was negated by the construction of the bill that was enacted into law. I also don’t think that permanently higher taxes, the natural implication of undertaking higher debt, is a formula for greater prosperity.

That’s why I’ve emphasized methods of stimulus that don’t include increasing the debt like approving more free trade agreeements and replacing measures that don’t produce a great deal of increased economic activity with those that do.

Please help me out with this. Why more fiscal stimulus? In your answer please address some of the issues I’ve brought up in this post. “What else we can do?” isn’t a very reassuring answer. Please don’t try to explain Keynesian multipliers to me. I understand that. The question is what the multipliers of specific strategies are and whether they exceed their cost.

Simon Johnson, former chief economist of the IMF, comments on what it would take to save Europe:

If Italy or any other eurozone country is in good shape and can pay its debts, the European Central Bank (ECB) can provide ample short-term support – through buying up bonds to prevent interest rates from reaching unreasonable levels. The euro is a reserve currency – meaning investors around the world hold it as part of their rainy day funds – and all European debt is denominated in euros. In Mexico in 1994, for example, much of their debt was in dollars; in such a situation, a foreign loan can help stabilize a crisis – although even there the right policies have to be put in place.

But if Italy cannot pay its debt, then the ECB has no business lending to it. The Europeans have to decide for themselves: Is Italy’s fiscal policy reasonable and responsible? If yes, provide full support as need – from within the eurozone. If not, then find another way forward.

Meanwhile, Germany has reached the end of the road on its contributions to the EU bailout fund:

German Finance Minister Wolfgang Schaeuble has ruled out Germany contributing any more money to the beefed-up EU bail-out fund than the 211 billion euros ($A294.51 billion) approved by parliament.

‘The European Financial Stability Facility has a ceiling of 440 billion euros, 211 billion of which is down to Germany. And that is it. Finished,’ he told the magazine Super-Illu in an interview published on Saturday.

which sounds like a triumph of politics over policy to me. Whatever German public opinion on the subject the primary objective of the bailout fund isn’t to allow lazy and profligate Greeks, Portuguese, Spaniards, and Italians to keep the party going. It’s to prop up greedy and irresponsible German and French banks that are too exposed to Greek, Portuguese, Spanish, and Italian debt.