Paul Ryan on the Borrow-and-Spend Philosophy

If you expected a GOP budget today, Steve Benen says they have played an April’s Fool joke on us as all we seem to have so far is this WSJ op-ed:

The plan works to accomplish four main goals: 1) fulfill the mission of health and retirement security; 2) control our nation's debts; 3) put the economy on a path of growth and leadership in the global economy; and 4) preserve the American legacy of leaving the next generation better off. Under the president's plan, spending will top $4 trillion this year alone, and consume 28.5% of our nation's economy ... Instead of doubling the debt in five years, and tripling it in 10, the Republican budget curbs the explosion in spending called for by the president and his party. Our plan halts the borrow-and-spend philosophy that brought about today's economic problems.

Ryan provides a chart that claims that the spending to GDP ratio will exceed 40% in 50 years under “Democratic Budgets” while this ratio will fall below 20% under the “Republican Alternative”. Steve response to this op-ed included:

In reality, the "borrow-and-spend philosophy" did not create the crisis, so Ryan's prescription is automatically based on a misdiagnosis. But even if we put that aside, the alternative budget reflects a political party that embraced a breathtakingly radical worldview. In a nutshell, Ryan proposes a massive tax cut, totaling, by some estimates, around $4 trillion -- on top of the Bush/Cheney cuts, which would remain place. The Republicans plan would voucherize Medicare, and, best of all, impose a five-year spending freeze on non-defense discretionary spending

In my view, Steve is getting Congressman Ryan and the Republicans too much credit. I say this for a couple of reasons. This so-called borrow-and-spend philosophy was the actual fiscal stance of President Reagan and Bush43. Both of these Administrations promised us permanent tax cuts by claiming that they would reduce the ratio of Federal spending to GDP. Under Reagan, this ratio did not fall. Under Bush43, it rose.

We can also take a look at an analysis from the Center on Budget and Policy Priorities entitled Obama Budget Reduces Deficit by $900 Billion Compared to Current Budget Policies:

Contrary to some claims, President Obama’s 2010 budget would reduce federal deficits by about $900 billion over the next ten years compared to current budget policies. The $900 billion is the difference between deficits over the next decade under the President’s budget, as estimated by the Congressional Budget Office (CBO), and projected deficits under a realistic assessment of current budget policies … Some critics charge that Obama’s budget is fiscally irresponsible, and they cite CBO’s estimate that, under it, deficits would total $9.3 trillion over the next decade. They fail to note, however, that these future deficits result from the existing budget policies that Obama inherited — not those that he is proposing … Budget experts have been saying for a number of years that the official baseline departs sharply from reality.

While CBPP rightfully complains about how the official baseline departs from reality, I suspect it is closer to reality that the numbers that Congressman Ryan is using to draw his graphs. But I guess we’ll need to wait until the GOP actually bother to provide us with some actual numbers for their “budget”.

Will Deferring Social Security Taxes Encourage More Current Consumption?

One of the proposals to encourage aggregate demand is to reduce payroll taxes. One might ask – how would one cover the lost revenue from such a proposal. Greg Mankiw has one answer:

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

Amitai Etzioni proposes another:

The government should not collect Social Security taxes for one month — as long as the Obama administration commits the government to collect it for a 13th month once the economy is growing again at a fair pace … Last but not least, the Social Security tax is famously regressive. Hence, cutting it would put proportionally more money into the pockets of people most likely to spend it all in short order, a key goal for any stimulus.

Both proposals have no effect on after-tax lifetime income so if one is a proponent of Friedman’s permanent income hypothesis or the Ando-Modigliani lifecycle view of consumption or the Barro reformulation of Ricardian Equivalence – then deferring taxation would not be seen as encouraging more current consumption according to this theory. Then again - Mark Thoma reminds us that this theory may not work so well in practice.

Misleading Cato Petition Ad On Climate

In today's Washington Post (and I think some other papers) a paid ad appeared from the Cato Institute that has a bunch of signatures by various climate scientists, directed at President Obama "with all due respect" questioning that global warming is happening and asserting that after accounting for population and property value growth, there has been no increase in damage due to climate disasters over time. Citations are provided for some of these assertions.

I shall only note that this last one is rather problematic. A source is claimed to be an article from 2005 in the Bulletin of the American Meteorological Society by Pielke et al. I googled and found no such article, but did find some statement by him addressed to "Stern Review." In that he says that while climate is a factor in rising disasters, they could not necessarily be tied to global warming, and that in the future they might be offset by rising population and property values, hardly what is claimed the petition/ad.

I did some further checking and found a figure showing natural hydro-meterological disasters over time. While 2008 is back down to about 350, about the same as 1998, that is still more than any year prior to then, with such numbers being below 200 mostly in the past, although getting over 500 in 2000 and 2002 and equaling 500 in 2005. In any case, not at all supporting the reported claims by Pielke. This figure is from a chapter by D. Guha-Sapir and F. Vos in a book out from Springer this year, and it can be found down a ways on the right with the full citation on a blog post by Andrew C. Revkin of the New York Times.

Will The SDR Replace The Dollar?

The head of the Peoples' Bank of China has made headlines recently proposing that the IMF's Special Drawing Rights (SDR) replace the dollar as a world reserve currency. An excellent discussion of this issue has been put up by Brad Setser at http://blogs.cfr.org/setser. There are some reasons why it is unlikely without some other very big changes, and that indeed the idea rather conflicts with what has been Chinese currency policy.

The main problem is that despite being created to replace gold as "paper gold," the SDR is not a currency at all. It is strictly a unit of account used by the IMF, currently with a value based on a basket of the US dollar, the euro, the British pound, and the Japanese yen, with the German mark and French franc preceding the euro before it replaced them. Presumably an altered SDR that brought in some other currencies, presumably including at least the Chinese yuan/renmimbi, could serve as a better measure of global value, but unless the IMF starts actually issuing actual SDRs, there is no way it will serve as a reserve currency. As it is, even the reserves of the IMF in other currencies, measured in SDRs, is only $200 billion, likely to be inadequate for dealing with the emerging financial crises in various Eastern European and other "peripheral" countries.

The problem for China is that they have been pegging to the US dollar. They are becoming uneasy about the value of their dollar holdings, but a decline of the dollar would keep their exports competitive with other countries (besides the US), which seems to be a major concern of theirs. If they were to peg to the SDR, whatever is in its basket, they could damage their export competitiveness. As it is, while some countries used to peg to the SDR, very few do anymore, with one of the most recent to abandon doing so being Latvia, which switched to pegging to the euro, big surprise.

A quiz for the idle unemployed.

Who said the following?

"There is no doubt in my mind that this is the greatest problem confronting mankind at this time and that it has reached the level of a state of emergency”

Dr ?

“[inserting global dimming sulphur into the stratosphere] would change the colour of the sky. It's the last resort that we have, it's the last barrier to a climate collapse. We need to be ready to start doing it in perhaps five years time if we fail to achieve what we're trying to achieve…The consequences of doing that are unknown …"

Professor ?

“We have far less time to minimize dangerous anthropogenic climate change than previously thought. Observations of the climate system indicate that the impacts of atmospheric warming are at the upper end of the range predicted by the IPCC. This puts us in an extremely precarious and urgent situation that compels immediate action”

Professor ?

[Current CO2 levels are 387 ppm] "...leading toward conditions which existed on Earth about 3 million years (Ma) ago (mid-Pliocene), when CO2 levels rose to about 400 ppm, temperatures to about 2–3 degrees C and sea levels by about 25 +/- 12 metres."

Dr ?

Surprisingly everyone who had known the people in the carbon lobby said that they were all polite, kind and intelligent.

Hoover Economics – Czech Style

Is Czech prime minister Mirek Topolánek looking to write for the National Review? While he acknowledges the global recession, he also writes:

Even high-quality medicine, if administered in excessive doses, can be harmful or, if used permanently, cause unhealthy addiction. That's why I have been repeatedly calling on countries, within as well as outside the EU, to be prudent. I used the rather hyperbolic simile of the “road to hell” in my speech to the European Parliament last week to warn against the danger of temporary measures - such as excessively increasing public borrowing, nationalising or subsidising banks and industries, putting up protectionist barriers or enforcing “buy American” clauses - becoming permanent. It was in this context that I referred to the adverse experience of protectionism and state intervention in the US in the 1930s ... I do not need to explain that the welfare states of Europe act as “automatic stabilisers”, sustaining consumer spending even in a slump. This means that Europe does not need such a large fiscal stimulus compared with the US, which does not have such a system of social support. I also believe that as the President of the European Council I do not need to explain that the situation in the EU is different from that in the US in a further way - the EU cannot choose to apply a wide-scale financial stimulus. Even though the Czech Republic is not a member of the eurozone, I do not need to explain the vital importance of the rules of the Stability and Growth Pact that restrict the size of a country's budget deficit and national debt. Or do I?

While I am not in favor of using trade protection to bolster U.S. net exports (something about the prospect beggar thy neighbor retaliation), Smoot Hartley was not the cause of the Great Depression. Nor was the New Deal. As far as a potential defense of the Buy American provisions that Topolánek criticizes, let’s turn the microphone over to Paul Krugman:

And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole. And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.

Topolánek now advocates the lack of fiscal stimulus that worried Paul. If the European economy were currently facing excess aggregate demand, this call to adhere to the Stability and Growth Pact would make sense. Otherwise, it is the kind of Hoover economics that Republicans in Washington are also advocating.

Update: Paul Krugman has more:

Like many other economists, I’ve been revisiting the Great Depression, looking for lessons that might help us avoid a repeat performance. And one thing that stands out from the history of the early 1930s is the extent to which the world’s response to crisis was crippled by the inability of the world’s major economies to cooperate. The details of our current crisis are very different, but the need for cooperation is no less. President Obama got it exactly right last week when he declared: “All of us are going to have to take steps in order to lift the economy. We don’t want a situation in which some countries are making extraordinary efforts and other countries aren’t.” Yet that is exactly the situation we’re in. I don’t believe that even America’s economic efforts are adequate, but they’re far more than most other wealthy countries have been willing to undertake. And by rights this week’s G-20 summit ought to be an occasion for Mr. Obama to chide and chivy European leaders, in particular, into pulling their weight. But these days foreign leaders are in no mood to be lectured by American officials, even when — as in this case — the Americans are right.

Ian Traynor reports that the European leaders are likely not going to listen to President Obama:

The case pushed by Merkel repeatedly in recent weeks, and echoed by France and the European commission, is that there is no point now in more tax cuts and deficit spending to boost demand since it is not yet clear whether the huge fiscal stimuli packages already launched are actually going to work … the European leaders are indeed worried that Obama's huge public spending programmes could fuel hyper-inflation and leave Europe struggling to refinance colossal levels of state debt if they followed suit.

Work Time Regulation as Sustainable Full Employment Strategy

by the Sandwichman

Bob LaJeunesse's book, Work Time Regulation as Sustainable Full Employment Strategy has been published by Routledge. A 30-page preview is available online. I tried to paste the widget for the preview on EconoSpeak but couldn't figure out how it worked.

Table of Contents: Introduction 1. The Origins of the Work and Growth Fetish 2. Rethinking the Work Fetish and the Growth Consensus 3. Work Time Regulation as a Macroeconomic Policy Tool 4. The Ecological and Social Sustainability of Work Time Regulation 5. The Employment Effects of Work Time Reduction 6. A Proposal for Reform 7. Conclusion

A Sign of the Times

New York Times "Room for Debate" blog: Europe’s Solution: Take More Time Off

While many European companies have long turned to shorter workweeks and mandatory time off in economic downturns, the idea has never really caught on in the United States. Despite reports of unpaid furloughs and wage cuts, American companies continue to rely heavily on layoffs to control labor costs...

Is Economic Man Parsimonious?

by the Sandwichman

"Of course we know that this is not so... but we assume it for simplicity’s sake, as an hypothesis."

But of course... For simplicity's sake...

In Narrative Policy Analysis, Emery Roe argued that a counter-narrative must be "as parsimonious" as the policy narrative that it challenges. That word, parsimonious, appeared also in Joseph Persky's 1995 JEP retrospective on "The Ethology of Homo Economicus": "to compete successfully against Economic Man, a new ethology must be parsimonious..." (Nemo contra deum nisi deus ipse!)

Roe and Persky were, of course, referring to Occam's Razor -- the principle that the fewest possible assumptions should be made when explaining a thing. Such theoretical economizing by economists is not to be confused with the economizing done by Economic Man. Or is it? Could there be a strange, self-referential loop that fancies itself parsimonious about parsimony?

There's one way to find out. Build the equally parsimonious counter-narrative that, so to speak, unmans Economic Man.

Doctor Frankenstein's got nothing on the Sandwichman, who has been disposing of his spare time for several weeks constructing the definitive counter-narrative to Economic Man. In an earlier post, I proposed the name Hesci for my creature. Another possibility would be Persona Parsimoniae. Or how about both: "HESCI, Persona Parsimoniae"?

Heschi is a spreadsheet that summarizes the characteristics of an implied economic subject from (so far) 19 texts from the working time literature, spanning 237 years. The idea is to relate those characteristics to the presumed characteristics of Economic Man, i.e., utility maximization, rationality and independent preferences. Inevitably, there is overlap between the working time literature and the 'classics' of political economy and economics with, for example, Adam Smith, J.S. Mill, Marx, Lionel Robbins and J.M. Keynes being represented in both.

Some of the statements don't so much contradict the assumptions of Economic Man as complicate them. Others do contradict them flatly. What I believe the exercise shows is that not only are the assumptions about Economic Man, in the words of Walter Bagehot, trivially "not so" but they are also, more importantly, not so simple. Assuming them "for simplicity's sake" is thus disingenuous, a strategy for deferring, deflecting or evading reasoned analysis rather than for facilitating it.

Reveal Rejects?

Over on Overcoming Bias, Robin Hanson has proposed that journals report the papers that they reject, including names of authors and dates of rejections, possibly even with the referee letters. He argues that this might improve the efficiency of the economics journal publishing process by "raising the bar" so that people will not send papers to journals that they are unlikely to get their papers accepted in.

As a journal editor I disagreed, noting that this would be very humiliating for many would-be authors, with some I know having a hard enough time submitting papers given their fears and unhappiness about rejections and nasty comments by refererees. I also noted that there are other proposals out there along similar "efficiency" lines, but that they go against practices and trends in the hard sciences. Thus one says that lengthening the times to first responses from journals (which has been a trend) would achieve this result also, and there are journals that charge very high submission fees, but then return them if papers are accepted (last time I checked, $650 at the Journal of Financial Economics, with the Journal of Monetary Economics not far behind). As it is, in the hard sciences, very rapid turnaround and publishing times are emphasized, and rather than punishing submitters who get rejected and rewarding those who are accepted, many hard science journals have no submission fees, but make authors pay for pages of papers that are being published, something I am unaware of any economics journal doing, whatever one thinks of that. But it is certainly the opposite of the practice of the J. Fin. Econ. and the J. Mon. Econ.

The Dithering Society

LBJ gave the US the Great Society. He also gave us Vietnam, but let's put that aside for the moment. A lot of the Great Society was really meant to co-opt radicalism, but some of what he did looks almost miraculous compared to what we have today. I would suggest we have today is the Dithering Society, except for the rapidity with which the administration responds the unmerited demands of finance.

Obama began with some vague ideas, sometimes even suggesting bold measures. Once in office, we got Clinton retreads, with a handful Goldman Sachs alumni placed in strategic positions.

So far we see few breaks with the loathsome Bush administration, either on the international or on the national front. Every time some Obama initiative seems to inconvenience them rich and powerful interest group, it is modified mostly to their satisfaction. All the while, the hammer falls on ordinary people.

One might at least expect competence, but even here disappointment awaits us. So far the bailout seems to suggest little improvement over the Paulson plan.

Even conservative economists recognize why bankrupt financial institutions should be allowed to go bankrupt. Instead, the Obama boys want to bail out the financial market by virtually guarantying hedge speculators who buy the bad debt.

There is one bailout bill waiting for some action. The Los Vegas casinos are hurting. I know: boo hoo. How could the government bail them out? They could lend me money to gamble. I will be obligated to share my winnings with the government, but they agree that I do not have to repay the loans if I lose. So, I would stand to gain a great deal with little risk.

How is my casino plan different from the present plan of creating a market for "legacy" [Isn't that nicer than saying toxic] assets, other than that financial firms will have to put up a wee bit of their investment.

The best we can hope for from Obama would be to continue to embarrass himself with the obsequiousness toward rich and powerful in such a way as to spark a massive protest comparable to the 1960s. Let's stop dithering. Any takers?

Intelligent Design and Evolution

Econospeakers may be interested in my mini-review of Michael Behe's effort to open the door to "Intelligent Design" in his book The Edge of Evolution: The Search for the Limits of Darwinism. (This was originally a letter to a friend.)

Reading Michael Behe's book, I came to the conclusion that even though he's a very clear writer and knows a lot (especially about malaria), it's no accident that none of the blurbs on the covers are from biologists. He doesn't know evolutionary theory very well. There's nothing wrong with chemists such as Behe "doing" doing biology (just as there's nothing wrong with economists such as myself doing it), but they should heed that profession's knowledge.

In his section "the importance of the pathway" (pp. 4-7) of the evolution of beasts and species over time, he wonders about the likelihood of a random process of mutation getting creatures from "biological point A to biological point B." If "you had to walk blindfolded from one side of an unfamiliar city to the top of a skyscraper on the other side -- across busy streets, bypassing hazards, through doorways -- you would have enormous trouble." He adds that this blindness would be "in the spirit of Darwinism, blind drunk."

I agree: there's little possibility of getting to the top of the skyscraper. It's very unlikely that a bunch of amoebae existing billions of years ago would take a random walk through Darwinian natural selection and end up typing these words into Econospeak.

The problem is that Behe looks at evolution backwards from the end result, implying that Darwinism is teleological, working toward a predetermined goal. Darwinism is not that way, as the late Steven J. Gould emphasized again and again. Just because many such as Herbert Spenser have tried to make Darwinism teleological does not make it so.

Behe assumes that creatures such as humans are currently on top of a skyscraper (with very complex organisms, etc.) and then asks how we could have gotten here blindly. But the exact nature of this point B was not predetermined; evolution is an historical, not a teleological, process. We might have ended up with completely different creatures, perhaps even with our planet lacking complex organisms. The amoebae may have evolved to write for Rush Limbaugh's site instead. Or for the Huffington Post. Or wherever -- or not at all. The current end-point wasn't known ahead of time.

It's more as if we stagger starting at one point in the unfamiliar city and we could end up anywhere. We might end up at the top of a skyscraper, but which skyscraper it was not predetermined. Once we get to the top of whatever building we end up, it make look like that was the only option, but it wasn't. History is contingent. It only looks like it was a predetermined process after the fact, just as winning a war seems inevitable only after you've won. Looking back at the process, the alternative paths that could have been taken are easy to forget because they did not actually happen.

After that, Behe misinterprets the randomness in Darwinian theory. It is not the randomness of flipping coins or of the blind drunk. Randomness in Darwinian theory refers to processes that are not explained by common descent or natural selection. (It's randomness relative to these.)

For example, we see that a parasite and its host can actually learn to live with each other, like a lot of the bacteria in our guts. Sometimes the parasite becomes part of the host, the way that organelles in our bodies' cells seem to have done. There's also the case where a large number of almost exactly the same kind of cell can form a "colony" (as with yeast), which turns out to give them all some adaptive advantage. Next, there's the principle of specialization: a hydra is a lot like a colony, but some cells specialize in doing some tasks, so that the entire creature can get an adaptive advantage. Then there are entire organs (such as our lungs) inside more complex bodies; each of these is like a colony which specializes in one or more of the body's function. Etc.

All of this is totally unexplained by selection, and therefore "random" relative to natural selection. But it is not random by other criteria. It is not a drunkard's walk.

On page 15, Behe seems amazed that the malaria microbes haven't figured out a way to get around sickle-cell anemia. But it's not like all types of germs have to be successful in the sense of killing off all of the people, etc. (There's no inherent imperative to kill people.) In fact, if the malaria microbe killed off all of the mammals it infects, it might kill the geese that laid the golden eggs for them: parasites that kill their hosts do not survive to propagate their species.

It's quite possible that malaria and sickle cells have reached a rough equilibrium where malaria continues to be reproduced generation after generation, along with its hosts, and the sickle cells have attained a similar status. It might be somewhat like the continuing relationship between predator and prey.

On page 16, Behe refers to E. coli as devolving: it's becoming simpler over time, so that nothing "of remotely similar elegance has been built." He assumes that one of Darwinism's ideological overlays -- i.e., that evolution produces more and more complex and elegant creatures as part of a unilinear "upward" path toward more and more "improvement" -- is part and parcel of Darwinism. But this is not true: point B might be a cheap motel rather than a skyscraper; it might be a cheaper motel than at point A. (As mentioned, the amoebae might have devolved to writing for Limbaugh.)

It's notable that this increasing complexity is not one of his three components of Darwinism that Behe defines at the beginning of his introductory chapter (mutation, selection, common descent). He sneaks it in after introducing those three pillars. In fact, it's quite possible that the increased complexity we see is only in the eye of the beholder: as Gould stressed, the dominant species on Earth are simple bacteria, not complex humans. We see complexity as so important because we're flattering ourselves.

Also on page 16, Behe wonders why malaria hasn't gone beyond the tropics. Again, what matters in the evolutionary process is survival to propagate, not expansion. It's not a matter of "survival of the fittest," which is often interpreted in terms of "better" species winning over others. Rather, it's survival of those species that are most able to pass their genes on to offspring that can pass them on to their offspring, ad infinitum. In order for this to happen, the species has to fit with its environment, but that does not mean that a species gets "better and better" or spreads to the entire world. It can be like those anaerobic bacteria that persist in volcanic vents. Isolated yes, but they survive for generations and generations. It's the latter that counts in evolution.

Though human beings have altered our ecological niche, the environment in which we live (especially once cultural evolution took over), that isn't true for all species. The expansion of malaria is blocked by other species which compete to use the same resources. We should not expect such a disease to spread all over.

I'm not an expert on malaria, so the details of my criticisms may be wrong. But I decided that it was not worth my while to continue to Behe's chapter 2. He has created his scare-crow figure of Darwin and has started the pre-determined process of knocking it down. In addition to advocating the use of "intelligent design" as an after-the-fact rationalization to fill gaps not yet explained by Darwinism, he has misrepresented the subject of his book.

I am not saying that Darwinian evolution does not have some holes. Rather, it is that trying to fill those holes by reference to intelligent design get us nowhere, adds nothing to our understanding. Standard biology is a much more useful tool.
--
Jim Devine

The Geithner Plan: Time Is Not on Our Side

Here is the short version of what Simon Johnson, Paul Krugman, Brad DeLong and Mark Thoma said in their discussion of Geithner’s PPIP: no one thinks it is likely to be adequate, Johnson/DeLong/Thoma express varying degrees of optimism that it can lay the political groundwork for more decisive action down the road, and Krugman fears the Obama administration is using up what remains of its political capital and will be unable to take any further action.

I was not asked, but that doesn’t mean I don’t have an opinion. I think these four worthies have all missed the main point: there is a hard limit to the financial resources we will be able to throw at economic recovery. At some point the apparently boundless desire of the world’s portfolios to engorge themselves on T-bills will come to a halt in the form of an interest rate spike and plunge in the dollar. Can I look you in the eye and tell you when this will be? No, at least not if I’m not wearing shades, but I am quite confident the limit is out there. We may hit it in a few weeks or another year or two, or maybe we will be lucky and some how apply a fix before reaching it, but the US is not exempt from the general principle that there is a limit to how much money can be borrowed or quantitatively eased into existence.

The problem with the Geithner plan, as with all other varieties of bailout largesse, is that it depletes our limited resources with no particular likelihood of success. I would ask everyone to consider what our situation will be if the dollar spigot is exhausted before the financial system is back in approximate working order. My candidate adjective: dire.

The alternative continues to be the same: invest public money in a good, new public bank. Make sure the economy has a working, well-capitalized, unencumbered financial infrastructure; then, if you want, sort through the legacy institutions and assets.

A Slight Gap in the Analysis

I finally got around to reading the proposal by Lucian Bebchuk that informed the latest incarnation of the Geithner plan. Recall that a central problem is pricing toxic assets for which no current market exists. The old approach (Paulson) was to have the government simply dictate prices in the course of buying up a few hundred billion dollars of them, presumably to overpay and surreptitiously subsidize the sellers. The new plan is to encourage a multiplicity of private funds, stuffed with mostly public dollars, to bid for the assets. The key paragraph reads:

The existence of such a significant number of private buyers armed with substantial capital will produce a well-functioning market for troubled assets. This will be a market in which many potential sellers (banks) face a significant number of potential buyers (the funds). The profit share captured by the funds’ private managers will provide these managers with powerful incentive to avoid overpaying for troubled assets. At the same time, the profit motive of the selling banks, coupled with the presence of competition among the private funds, will make it difficult for funds to underpay for troubled assets. As a result, we can expect the market for troubled assets to function well, with prices set around the fundamental economic value of purchased troubled assets.

Remember that old Gary Larson cartoon in which two scientists are standing before a blackboard crammed with math? One furrows his brows and says he has doubts about Step 3. Standing apart from all the Greek letters and operators above and below it, Step 3 says, “And then a miracle occurs....”

This paragraph is Bebchuk’s Step 3. With so much tweaking of fund managers’ incentives needed to get them to participate in the program, it is not at all a given that they will maximize expected profits by bidding to the expected value of the assets on offer. In fact, it is easy to show that, the more dispersion there is in their subjective probability distributions around the assets’ expected values, the more distortion there is in price discovery. Paul Krugman picks a maximally dispersed example (all the density at the two extremes) to demonstrate the problem his post from three days ago.

It’s funny how “competition” can take on magical properties for some people. It seems that Bebchuk was so pleased to have found a way to inject competition into the “bad bank” strategy that he didn’t inquire into how well it would perform.

Open for Questions: Workweek

by the Sandwichman

Here are questions submitted to the White House website asking about a shorter work week. Sandwichman is intrigued that 60% of the viewers who voted on these questions, "didn't like the question." The numbers in parentheses are the tallies of "like"-"don't like" votes.

"Any way to encourage a temporary 36 hour workweek (except for you and your staff), A 10% cut in regular hours would help deal with 10% unemployment."
RJK, NC - Jobs (361-566)

"Is a 35 hour work week not a solution for the lack of jobs?"
Yoyo, Paris, France - Jobs (199-283)

"What do you think of shortening the work week and job sharing as a solution to systemic unemployment? I would be happy to work fewer hours as long as I could get access to health care."
Kaller, Portland, OR - Jobs (82-75)

"I would like to know if the administration has considered as a possibility to improving our economy by reducing the fulltime work week frrom 40 hours to 30 hours or asking congress to look into revisiting the Black-connery bill of 1932?"
Justasking, Atlanta, GA - Jobs (125-184)

"Have you considered allowing the economy to contract? It seems to me that a lot of our current economic activity (cars, fossil fuel, defense, etc.) is wasteful. Why not make a 3-day work week and stop the wealthy from taking such a big cut?"
Thomas, New York - Jobs (79-136)