Something to think on

What if...

Cast your mind back to the summer of 2009 for a moment.  As you might recall, there were two major policy proposals being discussed in Washington that summer.  One was the Waxman-Markey Climate Bill and the other was Obama’s Healthcare Bill.  One of these got the weight of the President fully behind it and one of them didn’t.  Consequently, the healthcare bill made it out of Congress and into law and Waxman-Markey died when the Senate couldn’t come up with their own version of a climate bill.  While passing this healthcare bill has been hailed as one of the highlights (or lowlights, depending on who is asked) of Obama’s Presidency thus far, what if, rather than being a highlight, choosing to prioritize the healthcare bill was this biggest political mistake that Obama has made as President? 

This premise rests on a few ideas:  (1) that Obama had enough political capital at the time to pass one of the two bills but not both and that he chose healthcare instead of climate, (2) that the healthcare bill is the, or one of the, primary motivator(s) for the Tea Party, (3) if Obama loses in November 2012 it will be because of the economy and (4) a climate bill would have been a boost to the economy.  So let’s explore these four ideas.  First, however, note that this is not an examination of which of these policies was the right one to choose from the perspective of what they will accomplish – health care reform was desperately needed and climate change is a massive problem that must be addressed – or an examination of how Obama has performed as President.  It is simply looking at whether, by choosing healthcare over climate, Obama made his political life more difficult. 

Starting with the idea that Obama had enough political capital to get one of these two policies passed.  He came into office with a massive groundswell of support after the Bush years.  Although this was undercut slightly by the unpopularity of the bailouts and TARP funding he was still in quite good shape by the summer of 2009.  His personal approval rating in June 2009 was 67%.  This obviously isn’t conclusive evidence that he had the political capital to do whichever he wanted – clearly he couldn’t do both though – but there is no really good measure of political capital.  So for the sake of argument say that 67% approval rating, combined with the fact that 71% of “likely voters” supported the Waxman-Markey bill, meant that if Obama had chosen to back it, we would now have climate legislation.

Now, to be fair, there are several people who think that Obama didn’t so much choose to endorse healthcare over climate change as he was forced to do so by the makeup of Congress and his own party.  I don’t buy this argument.  In part because of what has happened since then.  I think that Obama was forced to endorse healthcare only insomuch as his leadership style, or lack thereof, is very hands off.  He doesn’t dictate the debate; he allows the debate to be dictated and then tries to stake out a position in the middle.  This is not leadership, and it isn’t what I’d expect from a President.  “Leading from behind” as it was recently termed, is not really leading. 

So on to the next idea, that the healthcare bill is the leading motivator of the Tea Party.  Although the Tea Party was started in the spring of 2009, mostly in response to the bailouts on Wall Street, it really got going in the summer and fall of 2009 (the notable rally was held in DC in September) during the debate over healthcare.  It was at the town hall meetings discussing the bill that the Tea Party gained most of its notoriety.  While I think that the Tea Party would have developed in the absence of the Healthcare Bill, I think that it would have been less widespread and less politically important in its absence.  The Healthcare Bill gave the Tea Party two things: (1) it threatened people on a very personal level (they’re going to “Kill Granny” with their “death panels”) that riled people up and (2) it appeared, rightly or wrongly, unconstitutional, thus appealing to the notion that by opposing it the Tea Party was returning America to it’s constitutional roots.  The climate change bill would have offered neither of these things – and I think – taken away quite a bit of the draw of the Tea Party. 

So here is the first reason I think choosing healthcare was a political mistake:  it drove the creation of the strongest and most vitriolic opposition that Obama faces.  I’d suggest that the climate bill, while it probably would have hurt some people economically (more on that in a minute) would not have had the same effect on the Tea Party.  There was nothing in the bill that could have been construed as unconstitutional.  Furthermore, there is nothing comparable to the death panel claims, except perhaps, claims of killing jobs.  That doesn’t cause quite the same visceral reaction that saying a bill will kill you does.  Finally, the climate bill is based on cap and trade, a fundamentally Republican idea, introduced by the paragon of Republican virtue himself, Ronald Reagan. 

Now, the idea that if Obama loses in November 2012 it will be because of the economy.  I think this a pretty uncontroversial statement.  It’s pretty well documented that the fortunes of President’s rise and fall on the economy.  This leads into the last point then, that the climate bill would have helped the economy. 

This is probably the most controversial part of the theory.  Indeed, most of the opposition to the bill stemmed from the fact that it was seen as a job killer.  In some areas it certainly would have been.  West Virginia, Wyoming, the other coal states, would have been hit pretty hard.  But overall, a climate bill would likely have led to job creation.  See here, here, here, here, and here for reasons why.  But, the basic idea is that there is a ton of money looking to be invested in renewable technologies and energy and areas that have made policies to encourage this investment are seeing job creation and lower rates of unemployment.  Passing climate change legislation would have gone a long way towards creating those policies on a national scale and, as a result, produced national scale job creation. 

Furthermore, and perhaps most importantly, these effects would have begun to appear by the time the election takes place in 2012.  This means that the economy would have begun to improve, improving Obama’s chances, and that there would be direct evidence to counter allegations made by is opposition. Instead, he is burdened with a healthcare bill that inspires very strong opposition, does little if anything to create jobs, and the effects of which – good or bad – will not be seen for years, providing him with no ammunition to counter critics of the bill. 

Obviously, it’s impossible to say whether all of this would have happened the way it’s laid out here.  Maybe the Tea Party would have found something in the climate bill just as offensive as in the healthcare bill.  I don’t think that this is a particularly outrageous scenario though and I do think that passing the climate bill would have had benefits in a lot of areas unrelated to the climate (reduced political opposition, improved economy and therefore less problems with the deficit) that have bedeviled Obama for the last 16 months. 

Still think the U.S. doesn't need a climate policy?

These are both slides from a presentation we had in class the other day.  As I've said before, if you don't think that the lack of a clear policy on carbon emissions is hurting the U.S. economy then you're a fool.

I have quite a bit more to talk about in the next few days so check back soon. 

Papers

I have 8000 words of economics and energy policy due in the next 4 days so all of my literary output will have to be devoted to that for the time being.  However, I have quite a lot to write about apart from those papers so expect some new thoughts after Thursday.

Fukushima Fallout

I said a few months ago that the Fukushima disaster might be the best thing to happen to renewable energy in quite some time.  Not only will it, hopefully, raise some serious questions about the economics of nuclear and thus redirect some of the money that has been subsidizing nuclear power into renewable investment, but if Japan gets serious about kicking nuclear power and using renewables instead they're going to have to address the major problem facing a 100% renewable future: intermittentcy.  

Well, it looks like the first of those two things is happening.  Various segments within the Japanese business and government spheres have announced in the last few days that Japan is quite serious about becoming renewable, with the PM going so far as to say they will be generating twenty percent of their power from renewables by the 2020s.  Perhaps more importantly, they want to reduce the cost of solar power (what type is left unclear) to one sixth of what it is today by 2030.  Doing so would make PV very cost competitive with fossil fuels. 

Most importantly though, Japan getting serious about renewables means that one of the most technologically innovative countries in the world will now, almost assuredly, have to put a lot of thought towards solving the intermittentcy problem of renewable generation and, this likely means, putting a lot of thought towards new, large-scale battery storage.  Advances in this area would do wonders for the wide-spread implementation of renewable power.  That Japan is now getting into this game in a big way has dramatically accelerated the time-table for potential business feasibility of these technologies. 

Fun with Graphs pt II

So here is another entry based mostly on some graphs I put together - or borrowed from the St. Louis Fed - based on BLS data and OECD statistics data.  Inspired by a comment my macroecon professor made in class the other day I decided to compare four things: (1) the decline in output in the U.S. during the recession in 2008, (2) the decline in output in Germany at the same time, (3) the increase in unemployment in the U.S. during and after the recession, and (4) the increase in unemployment in Germany at the same time.  The graphs of each of these four things are below (I used GDP as a proxy for output since it was easier to find that data) and the grey boxes in each graph correspond roughly to the period that the U.S. economy was technically in recession. 

 

A couple of things should be obvious from these graphs.  First, and most surprising to me, there is almost no increase in German unemployment associated with the recession.  I hadn't expected there to be a U.S. sized increase in unemployment (that expectation was what prompted the whole exercise) but I had thought it would be larger than the roughly half a percent increase that that the graph shows.   

That half a percent increase corresponds to roughly a ten percent increase in the overall level of unemployment.  Contrast that to the five percent increase in the U.S. unemployment.  As you can see from the graph, that's a drastic increase in the level of unemployment in the U.S.  Roughly, 100% in fact.  

Now look at the declines in output in each country around the same time, and would have, to some degree, caused the increases in unemployment.  In the U.S. GDP dropped roughly 550 billion from it's peak in late 2007 to the low point in mid 2009.  That's a decline of a little less than five percent.  In Germany, by contrast, GDP peaked in mid to late 2008 and bottomed out around the same time in 2009 after a fall of about 2.2 billion or a little more than six percent.  

What's remarkable to me about this is that a slightly smaller decline in GDP in the U.S. led to a massive increase in unemployment relative to the increase in Germany.  Not only that, but in the U.S. the unemployment rate has remained high since the recession whereas in Germany it jumped up and then has resumed the steady decline seen since 2006.  

Here is where the comment by my professor comes in.  He suggested that the reason that the Germany unemployment rate didn't respond to the recession is that as the recession hit Germany paid out subsidies to companies to retain employees.  So although German productivity dropped sharply in the recession (as compared to a smaller drop in the U.S., neither is shown here) that productivity drop meant that unemployment stayed low.  In turn, this meant that once companies came out of the recession employees already had jobs and were not waiting for companies to return to hiring as they are in the U.S.  How accurate this is I'm not sure but it seems reasonable.  To my mind it also argues for a slightly more interventionist state when it comes to responding to recessions.  Sure the government can stimulate demand by direct spending but it seems that if people where still employed they be more willing to go spend money and thus stimulate demand themselves and so a subsidy that encouraged companies to retain employees during a downturn might have been a more effective recovery package.  

A final note about the U.S. GDP data.  For all the talk of a gradual "U" shaped recovery the GDP data seems to suggest a fairly straightforward "V" recovery in output.  So it isn't the economy that still needs to recover but the jobs market.  However,  this doesn't seem too likely in the near future.  Someone is capturing that increase in output and it isn't workers.  That leaves companies and executives and they aren't known to willingly give up profits. 

Engineering vs. Adaptation

Those few of you out there who are loyal readers know that I oscillate between being a cheerleader for economics and economic/market solutions to problems, and criticizing the tendency of economics to reduce everything to models and dollars. I find myself squarely in the middle of these to poles after reading Nick Kristoff’s most recent editorial on aid. Kristof is clearly infatuated with economics in a way only a non-economist could be. To quote at length, we apparently possess:

“…a rigor that other fields in the social sciences don’t – and often greater relevance as well. That’s why [we’re] shaping national debates about everything from health care to poverty, while political scientists often seem increasingly theoretical and irrelevant. Economics are successful imperialists of other disciplines because they have better tools.”

While I’m flattered that I possess such great tools and, apparently, unique intellectual rigor, I think that Kristof is a bit off the mark (perhaps that’s his political science background coming though?).

Too often, both within the field of economics and, perhaps even more, outside of the field, the clean mathematical answers that economic models provide are confused with intellectual rigor. As some notable economists (Summers & Krugman among others) have recently pointed out, math does not have a monopoly on intellectual rigor. Legal opinions are extremely rigorous and most of my attorney friends haven’t taken a math class since high school algebra. This is not to say that economics is not a rigorous field, it most definitely is and its models can provide elegant solutions to certain problems, but it is a field that has limits like any other and it certainly is not the only rigorous field in the social sciences. I’d also suggest that it does not have the best tools and could learn a great deal from fields such as geography, ecology, and the natural sciences.

Turning to science for inspiration as an economist is not a new idea. Much of the strength of economic thinking, as well as most of its weaknesses, stem from its obsession with physics. Economists, by and large, love mathematical models. If they could reduce everything to Latin symbols and equal signs they’d be all the happier. They, like physicists, like to come up with elegant models that explain why things happen and then go out and test them. And here is where economists run into a problem. The universe, and in turn physics, is governed by certain laws. We may not know what they are but they certainly exist and they typically don’t change from day to day. Gravity worked yesterday, it worked today, and it will continue to work for the foreseeable future. So when a physicist comes up with a new model he or she can go out and test it and see if it works and know that if it does or doesn’t work today they conditions that led to that result will not change too much tomorrow.

Obviously this only goes so far. As our knowledge of the universe expands our understanding of the “laws” of physics will continue to change. But the point remains, basic laws, once we get them right, don’t change. The same cannot be said of economics and there’s the rub. An economist can come up with a model and go out and test it today and it works and when they test it tomorrow it suddenly doesn’t. This is because economists don’t model the behavior of the laws of the universe. They model human behavior. And humans are nothing if not irrational and inconsistent. So attempts by economists to neatly express how humans will behave fall back on assumptions that are not broadly applicable. Thus, economic models give us ideas as to how people may behave in certain circumstances but these models are not absolutes and should not be treated as such. Human behavior is not gravity. It changes often and for reasons that are not in the models. Economists broadly understand this and don’t claim that their models are absolutely predictive. But the field as a whole remains too heavily reliant on mathematical models of behavior. More work examining individual motivations behind behavior and less attempting to model a ‘representative agent’ would be helpful. At the same time, recognition outside the field that economic models are not the word of God would be nice as well.

Expecting the general public to have a greater understanding of the limits of economic models brings me to a second problem however. The public and policy makers are too concerned with “knowing” the absolute correct answer. This is the real reason for the rise of economics in national debates that Kristof points out. The only feature inherent to economics that allows it to dominate current policy debates is its ability to provide one “right” answer. Look at the end of Kristof’s article: “What kind of aid works best? For those who want to be sure that to get the most bang for your buck, there is also a ‘proven impact fund’…” These are questions asked by a generation raised on Cost Benefit Analysis and who expect immediate measurable returns for every dollar spent. Characterized by some as the “engineering” management style this view sees the world as a series of cause and effect relationships. Do A and B will happen and if C happens then you did something wrong. The real world doesn’t work that way but is the dominance of this view that leads to the dominance of economics.

There is real danger in the dominance of both economics and the engineering mode of management. Yes, we should expect that our aid programs work to solve the problems set out before them and to that end data collection and measurement is important. My brother just spent six months demonstrating this with respect to aid organizations in Afghanistan. So in this regard I agree with Kristof. Randomized field tests can be helpful and the information that de-worming kids is more cost effective than building schools in some areas is important. But maximizing the distance that each dollar goes in accomplishing an aid goal is not the only important thing and taking the view that it is can dangerously obscure other, equally important, goals.

With respect to aid, first among these is increased understanding of issues. In contrast to the engineering style of management, which calls for specific models of a situation and strict control of the process and results, adaptive management calls for a much more expansive and integrative approach. Critically, adaptive management acknowledges that any approach to a complex problem must cope with substantial amounts of uncertainty (differentiated from risk by the fact that risk implies we know it exists and whether it might happen. Uncertainty implies we don’t even know it exists) and builds in mechanisms to evolve and respond to new information. Adaptive management is much more suited to dealing with problems in the real world. Problems arise, however, when funders take an engineering approach and demand specific models with a strict process and clear success metrics when they give aid money. These strict processes and success metrics remove the opportunity for adaptation to new information and research into the roots of problems. It may not be glamorous but solving these problems requires long-term funding commitments to projects that will not have clear results for many years, if ever.

So while Kristof is right, despite his subpar political science background, about the fact that economics possesses some neat tools for solving these problems, and statistical examination of aid programs can improve their effectiveness, he suffers from the same mindset that has given rise to the dominance of economics. An expansion of what is defined as rigorous, what qualifies as good management, and an acceptance that there are not always clear metrics for success in solving these problems would well serve both economics and the field of humanitarian aid.