Stimulating a Return to Imbalances

We aren’t going to see these stimuli, but even if we did, the status quo ante was and remains untenable. We’re reminded of this by Richard Alford, c/o Naked Capitalism. He writes:

Once one recognizes that the US is contending with structural as well as cyclical problems, then it is clear that a move to sustainable trend growth requires something other than the standard countercyclical stimulus. In order to achieve balanced sustainable growth the US will have to increase savings (relative to income and consumption), increase investment relative to income, and increase the production of tradable goods versus nontradable goods. However current US policy has consisted of efforts to stimulate private consumption (decrease savings), increase public dis-saving, subsidize consumption of nontradable goods (housing) all coupled with perfunctory calls for exports to double.

Which is why

the US does not face a simple choice between lower fiscal deficits and idle resources on the one hand, and temporarily higher deficits and trend growth with full employment on the other.

The first step toward enlightenment is to see that the accounting balances are everywhere and always binding. As long as the US has a substantial current account deficit, over time either fiscal deficits explode, private deficits explode or the economy crashes. In the short run, the main danger is an economic crash, so maintaining stimulus is essential, but in the longer run there is no solution without a structural shift.

The second step is to see that the interlocking constraints facing the US (and other deficit countries) are primarily driven by shortfalls in competitiveness, not national savings behavior. This follows from empirical examination of the channels through which the different variables affect one another. In particular, differences in interest rates due to savings–investment balances have little to no effect on trade balances, as I showed a few years back. So the structural solutions for the US have to focus on policies that demonstrably increase exports and reduce imports.

The third step is to inquire into why it is that the US has systematically adopted policies that have eroded its trade position over time. This opens the door to political economy. A very rough sketch of my view can be found here; I hope I have the chance to develop it further at some point. For now, it is enough to say that the economic crisis has not yet brought about the political shifts we would need to see in order for a different, more sustainable path to open up.

Fannie and Freddie: The Times Misses the Point

You would think after all the ink that has been spilled over the mortgage meltdown that the Times would get the basic story right. But no. This morning’s piece on the “Cost of Seizing Fannie and Freddie” still peddles the theme of “lenders run amok”. These agencies, which always had implicit government backing, operated in the secondary market. They didn’t make the loans, they bought the loans. By retaking them and continuing to operate them at a loss (the article cites a CBO estimate that the cumulative cost may approach $400B), while sparing holders of agency bonds any losses themselves, the government is using them as a principal vehicle for its bailout of the financial sector.

The word bailout is important here. Readers need to know where and how their tax dollars are being used to protect wealth-holders against reductions in the value of their assets. It is interesting that the federal government spends $80 a month per house to cut grass in a subdivision outside of Phoenix (xeriscaping, anyone?), but really, this is third order.

Thoughts from 1975 Provoked by Veblen in 1908-09

I am sorting and packing at the moment, and I came across an essay I wrote as an undergraduate at the University of Wisconsin in 1975. (I had returned after several years of sometimes blissful hippiedom.) It’s in response to a pair of articles written by Veblen in the early years of the twentieth century denouncing marginalist economics. Here’s an excerpt:

“Certainly what is not justified is the movement from a descriptive to a normative role for price. Veblen argues persuasively that contracts are situated, that prices are sensible only as adjustments to situations, and that the forces that constitute the situation bias the results. By setting these adjustments up on a pedestal and calling it [sic] “optimality”, economists may unwittingly serve to buttress the constraints operating to define the original situation. Also, as Veblen never tired of pointing out, in no society are human beings only individuals; no theory that fails to accord a prominent place to collective and undifferentiated activity can claim to tell the whole story. In my opinion, this is particularly true of theories of demand.

“...Veblen’s accusation that neoclassical economics is reductionist has much going for it. Again, he was hampered in his effort to develop this criticism by his lack of mathematical training. Modern economics—and modern social science in general—has much to learn from developments in other fields that demonstrate that there is more to quantitative analysis than mere size and rate of growth. Concepts of pattern and sequencing in ecology, molecular biology and information theory, for example, indicate that many matters of “quality” can be understood in terms of quantity. And beyond the ability of mathematical methods to describe, qualitative changes still take place that any science must grapple with as best it can. A specific charge could be made, moreover, that marginal theory relies too heavily on a notion of incrementalism in descriptive methodology; particularly in a social science which concerns itself with people who look ahead and make decisions on the basis of patterned perceptions, the incremental bias may miss as much as it captures.

“The first casualty of a reductionist methodology is an adequate conception of change. This is because, while at any given moment things can be isolated for separate, quantitative analysis, they change as part of an interconnected whole which can only be perceived in terms of what these various things do with and to one another....In economics this becomes a special problem since part of this whole is not human economic behavior, but also the material world, whose “utilities” are regulated by very different sets of laws.”

I’m surprised by how much this essay, written for my first ever economics course, sets the tone for nearly all my thinking since then. I hope I’m more precise now, but in some ways I’m still right there.

Incidentally, my professor’s response at the end was: “Your paper is abstract and difficult to respond to.”

Krugman: Right Result, Wrong Reason

PK continues to fight the good fight for Keynesian common sense in the face of resurgent austerity. The austerity front, which brings together Tea Partiers and Tories, blue dogs and Bundesministerien, wants to snuff out last year’s stimulus and force the North Atlantic economy to sink or swim. It’s chances of sinking are frighteningly large. Krugman says we should keep applying fiscal CPR until economic growth is in full recovery and unemployment has dropped—and until the zero lower bound on interest rates no longer binds, and normal monetary policy becomes an option.

Yes but.

There is an enormous hole in Krugman’s argument. A chief worry of the austeritarians is that their country—Britain, Germany, even the US—will be the new Greece, abandoned by creditors and teetering on default. These fiscal deficits are unsustainable, they say, and debt-to-GDP ratios are drifting up into the danger zone. The risk is that financial markets will lose confidence in governments with so much red ink, leading to a spike in interest rates, the dumping of bonds, and national humiliation at best, meltdown at worst. Why wait for this moment, the argument goes, when you can prevent it by bringing fiscal deficits down now?

Krugman’s response is that the creditor flight threat is imaginary. Speaking of the new budget cuts and tax increases in Germany, he writes, “Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.” This has also been his pitch for the US, which also enjoys lowest-ever rates on its long-term bonds. The markets aren’t worried, so why should we be?

Does anyone else notice that this argument rests on the assumption that low interest rates today guarantee low rates tomorrow? Yes, the US, Germany and England can borrow long-term at firesale prices, but old debt keeps coming up for refinancing, and if market sentiment changes, the effects will be felt immediately. Do financial markets ever swing radically from favoring one asset or currency to panic buying of its substitute? Is there unpredictable herd behavior among investors? Do we have to ask?

The issue is not what markets “think” today, but how exposed we are to their gyrations in the coming months and years. This is the strongest argument of the austeritarians, and Krugman can’t see it. It is entirely possible that we could be in for a period of cascading panics, with money surging to one apparent safe haven, and then another, and then somewhere else, wrecking whole economies in the process. In other words, we have to worry not only about 1937, when premature austerity put an end to economic recovery in the US, but also 1931, when the failure of Vienna’s Kreditanstalt led to a period of devastating currency runs. Now, as then, there is no sufficient international lender of last resort, and any defense would have to be improvised on the fly. Back then, defense failed utterly.

The solution, however, is not fiscal tightening; Krugman is right about that. The starting point for any intelligent analysis has to be the basic accounting identity, that the sum of private sector deficits plus fiscal deficits equals the current account balance. Surplus countries that choose austerity are choosing some combination of decreasing private sector savings and increasing trade surpluses, most likely through declines in national income. They are making life even more difficult for their counterparties. Deficit countries, like ours truly, are in an even worse situation. Fiscal retrenchment means even greater private borrowing, with the only difference, in the short to medium run, coming from the effect of falling incomes on imports. We got into this situation because the private sector, especially financial institutions, were over-leveraged and badly invested; with deleveraging the debt burden was shifted onto governments that stepped into the breach. To withdraw the fiscal lifeline before private wealth-holders are prepared to lend would be catastrophic. We would have unavoidable crises, first in the deficit countries, then in the surplus regions exposed to them.

This is Scylla and Charybdis territory, to be sure. We got here by a long sequence of institutional failures and policy errors, and it will not be easy getting out. I remain convinced that the bailouts of 2008 were deeply mistaken, and that we are now paying the price. (At the time I instead favored the use of public money to create “good, new” financial institutions.) Moreover, no action was taken to address global imbalances, and without this it is difficult to see how growth can resume: the US will no longer borrow the vast sums needed to sustain global demand. (Recent labor action in China is a sign that bottom-up rebalancing may be gathering force—I hope so.) The Eurozone crisis is itself a dilemma of rebalancing on a regional scale.

In short, there is no obvious way out. Austerity is a sure-fire loser, but the risk of distended fiscal deficits in a low- or no-growth world is real. Time is running out to deal with the underlying causes.

Letter to a German Friend

I just had an insight, and maybe you can tell me if I am right or wrong. It's about Germany mainly, although other countries might qualify, and it comes from reading German academic and political commentary over the past few weeks.

It is common for some people (i.e. most people in your world) to think about the nation as if it were a firm. A firm provides income and security for its workforce by succeeding in competition. It must regularly increase its productivity, innovate and keep abreast of changes in the market. It must keep its costs under control. If costs rise too rapidly, and there is a risk of being priced out of the market, then strong measures may need to be taken. German unions as well as employers and everyone else recognize that competitive reality has to be taken into account.

The problem is that there is an enormous difference between the perspective of a firm and that of a society. A firm does not, and cannot, worry about the others who lose out in competition. If you gain market share and others are pushed aside, this means you are doing something right. You might be concerned for the workers and other stakeholders who are losing, but whatever you do for them, it would not include harming your own competitiveness.

Not so for a country. A country can organize itself to have a trade surplus through enhancing human resources, more productive allocation of capital and keeping wages and other costs down. Such a surplus, however, is necessarily matched by a deficit in trading partners. Deficit countries cannot shrink or dissolve as deficit companies can. Nor can they continue very long as deficit countries, unless they are the US and they export their financial instability to everyone else. But Greece, Spain, Ireland et al. cannot go on with these deficits. There is no solution for the deficit countries that does not imply a reduction in surplus for the surplus countries.

In other words, the "game" of international competition between countries, unlike between firms, cannot really be won. Any victory is only temporary, until its financial consequences become overwhelming. This is why no country ought to seek to outcompete the others. Raising productivity, innovating, and the rest is very good, of course, and should not be discouraged. But if a country is very successful at these things, it has a responsibility to the system as a whole to allow its costs to rise to the point that other countries are not crushed.

Here is a different way to say the same thing, from the other side of the ledger. Germans want to save. Good! But if they save quite a lot, and if their government borrows relatively little, then the only thing they can do with these savings is buy foreign debt. This means that the value of German accounts depends on the financial health of these foreign borrowers. But there we are again: we are seeing what happens to the chronic borrowers when their credit runs out.

In the end, what the surplus countries have to see is nothing more than the laws of accounting, that someone's surplus and savings is necessarily someone else's deficit. Firms do not have to worry about this, but societies do.

But I will agree to this: it is also obvious that there can be no solidarity across the Eurozone unless retirement ages are harmonized!

UPDATE: In a followup conversation, we agreed that the best course for a rich but thrifty country like Germany is to decrease its work hours still further. (I also think that a rich surplus country should consider making large transfers to very poor people in other regions. Just give some of it away. Why not?)

How is Turning Over Less Than Half of What You Owe a Shakedown?

BP and the Obama Administration came to an agreement that BP would put $20 billion in an escrow account as partial payment for the damages this Gulf oil spill caused – and certain Republicans have screamed “shakedown”. But given the following:

BP and the Republicans have reluctantly agreed to the proposition that BP should pay for all of the damages.

Initial estimates of the damages are around $40 billion.

These estimates were based on evaluation of the amount of oil leaking into the Gulf that have been subsequently shown to be far below reasonable estimates of the amount of oil leaking into the Gulf.

If we take the decline in BP equity value since the oil spill began as the market’s best guess of how much BP will ultimately pay, then the market’s price tag is closer to $100 billion.

Let’s say that you and I have a disagreement as to how much I owe you with you claiming the amount is $100 and me claiming the amount is only $40. If I choose to hand you a twenty dollar bill today with the agreement that we’d settle on the rest tomorrow, could I then scream to the police that you shook me down? Probably not – but that is what certain Republicans are effectively claiming.

Richard Epstein Makes Sense

At least before he tears into environmentalists.

Epstein, Richard A. 2010. "BP Doesn't Deserve a Liability Cap: The best way to deter future spills is to expose drillers to the full costs of any mistake and not let any company without proper insurance near an oil derrick." Wall Street Journal (16 June).

http://online.wsj.com/article/SB10001424052748704312104575298902528808996.html?mod=WSJASIA_hps_sections_opinion

"What's needed going forward is a comprehensive legal strategy that addresses the risks though a combination of regulation before the fact and tort liability (and criminal sanctions where appropriate) afterwards. Tort remedies are essential to protect people (and their property) who do not have contractual relations with defendants from harms such as air and water pollution. The legal system should never allow self-interested parties to keep for themselves all the gains from dangerous activities that unilaterally impose losses on others -- which is why the most devout defender of laissez-faire must insist, not just concede, that tough medicine is needed in these cases. The fundamental question here is one of technique: What mix of before and after sanctions will do the job at the lowest cost?"


"The first element in the mix is a no-nonsense liability system that fastens full responsibility on the parties who run dangerous operations, no excuses allowed. Accordingly, we have to be especially wary of statutory caps on tort damages."
"A tough liability system does more than provide compensation for serious harms after the fact. It also sorts out the wheat from the chaff -- so that in this case companies with weak safety profiles don't get within a mile of an oil derrick. Solid insurance underwriting is likely to do a better job in pricing risk than any program of direct government oversight. Only strong players, highly incentivized and fully bonded, need apply for a permit to operate. This logic also suggests that the Price Anderson Act's $375 million cap on damages for each responsible party to cover incidents at a nuclear power facilities should be rethought."

Craufurd Goodwin Steps Down At HOPE

The Society for the History of Economics has just annouced that Kevin Hoover will become the second editor of the History of Politial Economy (HOPE), generally accepted to be the leading journal in the history of economic thought field. He is replacing Craufurd Goodwin, who is retiring after founding the journal 40 years ago at Duke, making him the longest lasting editor of an economics journal out there. He made the journal into the leading journal that it is today, and deserves a respectful thanks from anybody who takes this field seriously. Unfortunately, it is a field that seems to be receding each year further and further from being studied by most economists, although many mistakes of thought and policy might have been avoided if more were better educated in the subject, IMHO. Anyways, thanks, Craufurd, for one of the best performances as an economics editor ever.

New Estimates of the Gulf Oil Spill and the BP Stock Price

CNN reported last night:

Government scientists Tuesday increased the estimate of oil flowing into the Gulf of Mexico to between 35,000 and 60,000 barrels per day, up to 50 percent more than previously estimated. That translates into 1.5 million gallons to 2.5 million gallons per day. The government's previous estimate, issued last week, was 20,000 to 40,000 barrels per day.

If BP is really going to take 100% of the financial responsibility from the damages causes by this oil spill, one would think that such upward revisions would be bad news for its stock price but that price seems to have gone up today. I wonder how much this story has to do with our little puzzle here:

BP will set aside $20 billion to pay the victims of the massive oil spill in the Gulf, senior administration officials said Wednesday, a move made under pressure by the White House as the company copes with causing the worst environmental disaster in U.S. history.

Even the conservative estimates of the damages from this oil spill put the sum at an estimated figure double this $20 billion fund and those estimates were made before the news about the extent of the oil being leaked. I just hope this deal with the government is not a signal that BP will be able to shift some of the burden onto taxpayers.

Update: Haley Barbour does not like this $20 billion escrow account for the following “reason”:

So it bothers me to talk about causing an escrow to be made, which will -- which makes it less likely that they'll make the income that they need to pay us.

So dedicating $20 billion of BP income to pay for the damages is going to mean we will have less funds to pay for these damages? Leave it to Greta van Susteren of Faux News to not question Governor Barbour’s “logic” here!

Demanding Democracy: American Radicals in Search of a New Politics

I have just spent an interesting day immersed in this new book by Marc Stears. I was looking for a recent work that combines political history and democratic theory with a radical bent, and I found it. Even better, Stears has insightful things to say about the “paradox of politics”, that the political forms that we would like to live under and the political life we would like to lead in an ideal world are inappropriate to the unequal world we live in today. This is always a central dilemma of radical movements, and it’s helpful to have it illuminated. From a historical vantage point, I like the linkages he draws between the radical Progressives (like Dewey), labor movement radicals of the 1930s, and civil rights and new left activists of the ‘60s.

I have some qualms as well. One criticism I would not make is that Stears was too selective in his choice of movements and political visions. It is true that he leaves out a lot: Marxists of almost every stripe, anarchists, and the fascinating parade of individuals and groupuscules which, even if they had little impact, often had ideas worth considering. If you are an afficionado of twentieth century American radicalism, you will probably find that some of your favorites are missing. But one can only do so much. Stears has arguably centered our attention on a core, continuous strand in American political thought and action. The book benefits from this clarity.

My real criticisms are these:

1. The most visible error in this work is to treat the 1950s consensus theorists as bearers of the radical democratic tradition. Some were reformers, but few members of the flock Stears identifies deserve to be called radicals; nor, more to the point, did most see themselves this way. In the end this does not undermine the book’s arguments, but it feels very wrong.

2. The most important lacuna is the linkage between movements to achieve greater democracy and those in pursuit of narrower ends. One aspect of Westbrook’s extraordinary biography of Dewey is its ability (through remarkable scholarship) to place the man in the context of his (long) times—all the crusades, from education reform to labor struggles to new forms of journalism and all the rest. This makes it possible for us to appreciate the substantive goals that lie behind the abstract formulations. Except for the most general references to the conditions of industrial workers during the ‘30s and segregation in the ‘60s, Stears gives us no indication of the issues around which the radicals were organizing, nor their relationship to those immersed in single-issue causes (immigrant rights, environment, etc.) whose struggles overlapped and gave meaning to struggles for fundamental political change. And, by the way, the women’s movement, both for suffrage and during the revitalization of the ‘60s and ‘70s is missing altogether—which means that feminist political theory is largely absent as well. Not good, brother.

3. The subtler problem is the framing of democratic theory as an “American” issue. This enables Stears to foreground the references that Progressives and later consensus theorists made to so-called American political values. But this is to give acquiescence to a myth, for the problems of democracy in America have never been insular. Every significant thinker/reformer in American history who has pondered democracy is closely tied, knowingly or otherwise, to ideas and experiences from abroad. The civil disobedience tradition has its origin in German idealism (via Thoreau), and nonviolent direct action was undergoing simultaneous experimentation in much of the world at the same time it was being tested in the US. Progressive reformers drunk heavily from European examples, as Dan Rodgers showed in Atlantic Crossings: Social Politics in a Progressive Age. (Everyone should read this book: the history of social policy becomes pure poetry.) The new left was a truly global phenomenon, which most of us in the movement knew in a general way, although we were constantly surprised by how global it turned out to be.

One consequence of the national frame is that Stears tries to shoehorn his analysis of radical democracy into a parochial debate between two camps in current US political science, the “deliberative” and the “realist” democrats. In one sense this is a distraction; in another, it obscures the much stronger connections between radical democratic theory and practice in the US, on the one hand, and the global exploration of radical democracy (particularly in the wake of 1989) on the other. That would have been a better frame entirely.

But I liked this book. I enjoyed reading it, and it helped me see the political issues I first struggled with in the ‘60s in a broader historical context. I think it could do some useful work in the classroom.

Robert Leonard

Robert Leonard's latest working paper, part of his magisterial project on the history of game theory, is "The Collapse of Interwar Vienna: Oskar Morgenstern's Community, 1925-1950." It is, as is everything else of his I have read, brilliant. What Toulmin and Shorske did for culture and philosophy in doomed interwar Vienna, Leonard does for the economic and mathematical community. If you have any interest in the history of economic thought, you must read him!

One focus of the paper is the growing rift between Morgenstern and Mises during the 30's. Morgenstern started out as a self-identified Austrian but pulled away. A big influence here was Karl Menger, the mathematician, not to be confused with his father, Carl Menger, the economist, founder of the Austrian school and indeed one of the troika usually credited with the Marginal Revolution. Anyway, Karl with a "K" thought Mises was presenting his normative libertarianism as scientific description and Morgenstern increasingly agreed. (Menger thought Neurath was doing the same thing on the Left.)

Another fascinating figure in the story is Abraham Wald, the general equilibrium pioneer to be, for whom Morgenstern found money in his capacity as head of the Institute for Business Cycle Research, funded by the Rockefeller Foundation. Here again it was Menger who saw Wald's genius and clued Morgenstern in. Wald was from Romania, Jewish, and made it out of Vienna after the Anschluss to Colorado to work for the Cowles Commission. Eight of his immediate family members were victims of the Nazis in Rumania.

I can't do Leonard justice here, but read him by all means!

Has BP Been Too Careless Due To Its Imperial Past?

There has been much speculation about why British Petroleum has been reportedly slopppier and more careless about safety and the environment than other oil companies. This may not be it, but the company has a past that is probably more tied up with classic imperialism than any other, or at least as much as the top ones. In that regard, its only rivals are probably the old Standard Oil, with the tradition most carried on after its breakup by New Jersey Standard, or Esso, which would become Exxon (and then merge with the old New York Standard to become Exxon Mobil), and Royal Dutch Shell, with its British-Dutch lineage, originating out of a company that sold shells out of the Dutch East Indies.

BP's origin is in the later 19th century D'Arcy oil concession by Persia to Britain, and much of the troubled history of Persia/Iran and the West has focused on BP, which was originally called the Anglo-Persian Oil Company, and then the Anglo-Iranian Oil Company after 1935 when Reza Shah changed the name of the country to go along with his budding alliance with Aryan master race fan, Hitler.

In the early 1950s, the Iranians under Mossadegh nationalized the company, which had been owned by the British government since 1917, when First Lord of the Admiralty, Winston Churchill, had it nationalized to guarantee a supply of oil for the British navy during WW I. The Brits had to bring in the US CIA to help overthrow Mossadegh and restore the Shah, along with BP activities in the country, although the price was that some US oil minors got in on the action there.

Perhaps an appropriate symbol of BP's traditional position as one of the first among the leading oil majors is the meeting that took place at Achnacarry Castle in Scotland in 1928. It was between the CEOs of BP (then APOC), New Jersey Standard (now Exxon Mobil), and Royal Dutch Shell. They made the Red Line Agreement and the As-Is Agreement, with the Red Line Agreement involving drawing red lines on a world map to deliineate which parts of the world would go to which companies. BP got Iran. Royal Dutch Shell got Kuwait. Both of them got into Iraq. Jersey Standard got Saudi Arabia, and even today, ARAMCO is dominated by Exxon Mobil.

The ghost of the Red line Agreement hovers over the world even today, even as their effort to restrict prodcution and prop up the price of oil collapsed when the great Texas gusher came in during 1930 at the beginning of the Great Depression, collapsing the price to about a tenth of what it had been. But, BP and the others would live to see it rise again, along with their fortunes, through thick and through thin, although BP may have overdone it this time with its hubris.

Afghanistan: Rich in Minerals?

There is a mystery to be unraveled in today’s New York Times story that declares that Afghanistan stands on the cusp of untold mineral wealth, almost a trillion dollars in undeveloped deposits. The mystery has nothing to do with the minerals themselves or their economic implications. Readers who think this portends a rosy future for the ravaged country should pinch themselves and remember that no nation—repeat, no nation—has ever become rich from mining. Mine owners, yes, of course, but the sad lands that sit atop mineral wealth, no.

The real question is, why are we reading this? Let’s assume that James Risen, the byline author and a journalist of considerable talents, is in this case a faithful conduit for an Obama administration news feed. What we might ask is, what purpose lies behind this disclosure? Those closest to the scene may already know the answer, but let me speculate:

1. The war is going very badly, and Washington wants to put a more positive spin on things. Hang in there, Afghanistan will become a prosperous, self-reliant nation. There is a light at the end of this tunnel. Or: we can’t let all these riches fall into the hands of the Taliban.

2. The Karzai regime is cutting deals with Chinese or other mineral-seekers that the US wants to squelch. By shining a light on this sector, some elements (rogue? official?) within the US bureaucracy are trying to mobilize the full resources of the government to bring the Afghans in line.

3. The real audience for the Times piece is not in the US but Afghanistan and Pakistan. Elites there are advised: Stick with the Americans, even though your people despise us. We know where the loot is buried. We can make you rich.

What do you think?

What Should the Price of Gasoline Be?

In today's WaPo Business section, in "Think gas is too pricey? Think again," Ezra Klein reports on a recent study by Ian Perry of Resources for the Future that attempts to estimate the cost of all the externalities arising from the use of gasoline in vehicular transportation. At the time of the report, the average price of gas in the US was $2.72 per gallon, but after adding in (in order of estimated costs), 52 cents for traffic congestion, 41 cents for auto accidents, 30 cents for energy security, 20 cents for climate change, 12 cents for local pollution, and 10 cents for oil dependence, this brings a supposedly more efficient prices of $4.37 per gallon. It is unclear if that 12 cents for local pollution was estimated before or after the BP oil spill in the Gulf of Mexico happened.

The Case Against Home Ownership

I am glad to see Elizabeth Warren come out, sort of, in a way, against the fixation on home ownership. When I give talks about the economic crisis to community organizations, I get, at best, a blank stare when I launch into my diatribe on why most working class people should not be buying their own homes. Warren is worried about the asset market implications, but I am moved, at least initially, by Finance for Dummies. Rule number one: diversify. Don’t put all your savings in one basket. Especially not your home, since if something terrible happens to it, it will also likely put a dent in your living expenses. Buy index funds or dairy futures in Switzerland or anything, but don’t put it all into your home.

Nocera’s commentary is about how the government can reconfigure its interest subsidies, but just as important, if not more so, is strengthening the tenure rights of renters. In areas of Europe where renting is more popular and enjoys higher social status, it is also more protected than it is here. The rules governing rental agreements are local, and we are not likely to federalize them very soon, but imagine a scenario like this: Washington announces that it plans to withdraw subsidies for homeownership, but in doing so it wants to provide a better rental alternative. So, in coordination with academic specialists and various stakeholders, the feds hammer out a new model for local ordinances, perhaps even new language for rental agreements. The withdrawal of subsidies is tied to the uptake of the new rights for renters.

A side benefit is that mortgage balances level off and the nation’s finances become less ragged.

Worried that average folks won’t save enough if they don’t have that monthly mortgage payment demanding their attention? Other countries have used postal savings accounts for this purpose. Postal is too 20th century. How about getting families to play a multi-player internet game, something medieval with armor and magic potions, where you buy kingdoms with game points that you earn by depositing some money in a savings account? As long as our virtual warriors are not borrowing from the moneylenders (with players’ real money), we’re OK.