Category: Economics

Euro on the Brink

The European Union is a sweet deal for Germany – and the Euro makes that deal even sweeter. Germany isnt like most rich western countries. Proportionately, it has a double-size manufacturing sector. German exports are double that of the UK, triple that of France, and equal to the US, though Germany is only one-quarter its size. And while Germany runs a huge trade surplus, it’s still by far the EU’s biggest importer too.

More than any other nation, Germany depends on the EU’s open borders. And the common currency is a great facilitator of trade, lowering transaction costs and eliminating exchange-rate risks for Eurozone transactions. Given that Germany has the most to gain from a common currency – and the most to lose from its collapse – you’d think Germans would be very careful about keeping their Eurozone partners happy. Think again.

Up until 2008, countries like Greece, Portugal and Spain benefited greatly from the common-currency zone too. The Euro made it easier for foreign banks to extend credit, and as Euros poured in, real estate boomed, building skyrocketed, incomes rose, and tax revenues soared. Spain ran a budget surplus in 2007. But when the music stopped, fannies far outstripped seats. The financial crisis rendered many banks insolvent, so they stopped lending. Given the small size of those countries relative to the enormity of capital flows, their economies crashed. Things were tough all over – but small, developing countries like Greece got it worse.

From the wreckage, two schools of economic policy emerged. One is typified by Ben Bernanke, a scholar of the Great Depression. He, along with Tim Geithner, and ultimately Barack Obama, believed that the government needed to maintain pre-crash spending levels, even if deficits soared. Since consumers were broke and investors were freaked out, the government was the last man standing – to keep the economy going, they reasoned, the government would have to step up as the spender of last resort. Conservatives at the time heavily criticized Bernanke, Geithner and Obama for super-low interest rates, quantitative easing and generous deficit spending, predicting the devaluation of the dollar, increasing unemployment and hyper-inflation.

The other school was made up of fiscal and monetary conservatives, like Angela Merkel. Fearing inflation, they preferred to reduce deficits by slashing government spending, in the hope that the economy would bottom out, and business would pick up again once the recession ran its course. Interest rates were held steady to reduce the risk of inflation and to safeguard the currency. Liberals at the time criticized Merkel and the European Central Bank (ECB) for these policies, predicting that recessions would deepen into depressions, inflation would turn into deflation, and economies would founder for lack of demand.

Countries like Greece werent even free to choose their own course – the realities of the Eurozone meant that Greece had to accept the dictates of the ECB, which is and has been dominated by conservative economists.

Who was right? Six years and seven trillion dollars of debt later, US employment markets are approaching pre-crash levels, budget deficits have shrunk to sustainability, the dollar is at its strongest in years, inflation is at its lowest in a half-century, and the US economy is growing at its fastest pace since before Bush Duh. Meanwhile in Europe austerity has returned the Continent to recession. Unemployment is high, deflation hovers as a constant threat, and the countries that got hid hardest slid into full-fledged depression, with unemployment exceeding 25%, while the Euro has depreciated to its lowest levels in a decade.

It took Greeks seven years of misery to elect a government that shares their disgust with the status quo, and the failed German approach to the crisis. If only Greece had credibly threatened to leave the Eurozone seven years ago, a lot of suffering might have been avoided – Germany might have been coerced to do what was in its own best interest to do: zero out interest rates, and pour money into struggling states to keep their governments spending and their economies afloat – i.e., do what the US did under Obama, Bernanke and Geithner.

Today, it’s less clear what will happen if Greece exits the common currency – the Euro may in fact survive. And that, unfortunately, has emboldened Germany into playing chicken with Greece’s new government, which seems intent either to end current fiscal policies or to resurrect the drachma and go their own way. Germany’s handling of the Great Recession could hardly have been worse – but Germans themselves still have a lot to lose. The demise of the Euro would be a painful blow to Germany and a weak Continental economy.

Conservatives in the past have demonstrated a fearsome inability to learn from experience. Let’s hope, for Europe’s sake, that the dramatic triumph of liberal economic policies will not be lost on European policymakers – and that they will seize on the US example to plot a better course going forward.


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My Vaccine is Your Vaccine

Teaching children medieval superstitions in place of evolution is bad. Failing to grasp the facts and theories of climate change, and thus electing politicians who pander to and-or share such ignorance is worse. But scientific illiteracy among our fellow citizens can be lethal. Opting children out of vaccinations endangers those children directly, as well as many millions who have no choice but to depend on herd immunity for protection because they are unable to get vaccinated themselves.

There are plenty of decisions people make every day that endanger their own health. You can smoke, drink to excess, skip your meds, drive without a seatbelt, skydive or scubadive – it’s a free country, and you’re not hurting anyone but yourself. But your vaccine is my vaccine, and vice-versa. And the aggregate effect of many people failing to get vaccinated is many other people getting sick.

People with weakened immune systems cannot get vaccinated, and depend on the rest of us to act as a firewall, so when a case crops up, it doesnt spread beyond the afflicted individual. The four million children born each year in the US are among the most at risk, because they cannot be vaccinated until their 1st birthday. And no vaccine is 100% effective – even for healthy people, other peoples’ vaccines are an important part of one’s own individual health.

People didnt evolve in the urban environment most of us find ourselves living in today. When our species lived in bands of 20 to 50 individuals, there was no place for an infectious disease to hide. You werent gonna catch the measles from squirrels – if the people around you were healthy, you were pretty safe.

Things are different now. We live in massive networks of millions of people interacting directly and indirectly, amidst a world of billions tied together via modern transport. Unless a disease is globally eradicated (like smallpox), it can pop up tomorrow in a neighborhood near you. Putting aside the fact that life expectancy was about 30 in our evolutionary environment, relying on our own unaided immune systems just doesnt work.

So-called childhood diseases continued to sicken and kill many people in the West deep into the 20th century. The difference today is vaccinations. It is the only thing between us and measles killing a thousand or so children in the US alone each year. (Measles kills about 1 or 2 people per 1000 cases.)

Measles is among the most contagious diseases ever identified. But measles has one serious weakness: it cannot survive outside a human host, and needs a constant source of fresh carriers. Nasty though it may be, it can be nullified, if not eliminated, through mass vaccination.

There’s a catch. Because it’s so contagious, you have to vaccinate a huge fraction of a community to obtain “herd immunity” – the point beyond which a disease will vanish after an individual infection, instead of spreading. Measles require a vaccination rate of about 90%.

Because measles remains quite common in the developed world, it’s almost impossible to eliminate it completely in the West. (Vaccination efforts continue worldwide.) Over the past 15 years, the US saw only 60 or so cases in a typical year. In 2014 there were 600.

The reason behind the spike is simple. Many Americans are ignorant to the science behind vaccinations, and so they’re opting their children out of shots at an increasing rate. The problem isnt specific to measles, or to the US. (The UK and Japan have also had outbreaks.) But measles, which is given to outbreaks because of its extreme contagiousness, should be taken as a warning of what’s to come unless these trends are reversed.

The reason people continue making bad decisions is that they do not bear the full cost of the consequences. For that to change, from an economic standpoint, the cost of failing to get a child immunized should be monetized, and parents should be required to submit proof of vaccination when they file their taxes, or pay a penalty approximating the expected value of their decision. A pair of studies found the average cost of a measles case to be about $1,000 – including cases involving hospitalizations, whose average cost is $10,000. Those studies are 20 years old – the cost of healthcare has since more than doubled, and that’s on top of ordinary inflation. When you factor in that a single measles case in an unvaccinated population causes between 12 and 18 additional cases, you’re talking big money.

Using these crude figures, it seems that $5,000 to $25,000 would be a fair price to pay for failing to get a child vaccinated. Hey, it’s a free country, so the police arent gonna drag kids out of homes and stick needles in their arms. But it is reasonable to ask people to take personal responsibility for their decisions, and pay their own way. That’s what conservatism is all about – or so they tell us….


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The Case for Making College Free

One hundred years ago, the US was in the early stages of its push to make high school universal and free. This policy was heavily criticized in Europe, where it was believed that high school was wasted on many – particularly on girls – and that most children should simply enter the workforce after 8th grade. The US did not relent, and high school graduation rates shot up from 5% in 1905 to reach 50% by 1940.

The experiment was a grand success. Economic historians attribute the superior expansion of the US economy in the 20th century to “the High School Movement,” which endowed the country with a far more educated labor force, allowing workers to learn new skills more easily, and thus move more readily between fields, as the US rapidly evolved into a complex, modern economy.

It took them awhile, but the rest of the world figured this out, and free, universal high school has become a commonplace. However many countries did not stop there, and now offer a free college education to qualifying students as well.

Following WW2, with the GI Bill, the US also started graduating many more young adults from college than any country in the world. But that competitive edge is rapidly disappearing. While the US is still at or near the top in college grads, a closer look at the data affords us a glance into the future. Among the older generation – men aged 55-65 – the US still has a far greater proportion of college grads than any country in the world. However among young people, particularly aged 25-35, the US has fallen behind many countries, and the trend lines are steep enough that the US may fall to the middle of the pack within a few decades.

The science of economics has improved much over the past 100 years. While the High School Movement required a giant leap of faith, economists today dont have to speculate on the value of a college education. It can be calculated by comparing the difference in wages between people with a college degree and people without one, controlling for as much as one can. The resulting value is the college wage premium. That premium is now higher in the US than in any developed country in the world, and the highest it’s been since the 1920s.

That enormous college wage premium is the voice of the labor market, shouting that it is so starved of highly-educated workers, that it is bidding their wages up to higher and higher levels. The message could not be any clearer: the US economy needs more college grads, needs them now, and will pay top dollar for them.

An excellent question to ask is why people arent responding to this signal and staying in school longer. The short answer is that education is one of those sectors that doesnt function very well within the free market system. That’s why governments, for centuries, have been in the education business. Public provision of pre-K and K-12 proceeds from the same logic as West Point and UCLA.

One can only wonder at how posterity will judge the US, which today has no federal public university system beyond its twenty-odd military schools. By comparison, many European countries have nationally-run and -funded public university systems. And so the Liberal Field Guide goes beyond President Obama’s call for free community colleges. The US Government should itself establish a system of Federal Universities, with a presence in all fifty states, and all major urban areas, and should offer a free four-year degree to any student meeting its admission standards.


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The Real Global Warming Issues

Global warming is for real. Even the most skeptical climatologists subscribe to the basic notion that man has pumped so much carbon dioxide into the atmosphere that the planet has and will continue to warm.  However they do not agree on how much the planet will warm as a function of atmospheric CO2 – and the range of values is as large as the chasm between best and worst case scenarios.

Some models assume the climate to be very sensitive to CO2 levels, while others assume much less sensitivity. A simple value that’s commonly used to compare sensitivities among models is the amount of warming that ensues from a doubling of atmospheric CO2. (Mankind has thus far jacked atmospheric CO2 by more than 40% over pre-industrial levels, to its highest concentration in several million years, since before our species existed. Doubling is expected to occur during the 2050s.)

At the low end are models predicting that doubling atmospheric CO2 will yield an increase in average planetary surface temperature of 1 to 1.5 C degrees. That kind of warming would be inconvenient, not disastrous – assuming, of course, that mankind succeeds only in doubling CO2, not trebling it, which is quite possible given current emissions. At the other end of the spectrum are climate models predicting a 6 to 7 C degree increase for the same doubling. This isnt merely a death sentence – it means we’re dead already: the CO2 we’ve already released will inexorably wreck our civilization-friendly biosphere no matter what we do.

How does one pick and choose among these different climate models? A clever answer to that question may win you a Nobel. While many models converge on a sensitivity of about 3 C degrees, it’s not at all clear that the true value should be near the mean or median. But lacking a better criterion for judgement (only climatologists can judge individual models on their merits), we would suggest that a sensitivity of 3 C degrees is a reasonable basis for making public policy prescriptions – leaving open the real chance that the actual value may be much higher or lower. That level of sensitivity should motivate us to act on global warming without delay. An increase in mean surface temperatures of just 2 C degrees may prove disastrous. A 3 degree increase will end life as we know it.

The catch is that cutting CO2 is not costless. Cheap energy has lifted hundreds of millions out of poverty in India and China, and stands to lift hundreds of millions more. The developed West has much less at stake in terms of human misery, and their economies are far less energy intensive. Thus it’s reasonable that the developed and developing worlds should approach global warming differently. Aggressively cutting back emissions is far more attractive to western countries on a simple cost-benefit analysis. The developing world, by comparison, can reasonably tolerate higher emissions in pursuit of faster growth.

This leads us to another strategy to approach global warming: do nothing, except grow the world economy with cheap energy, and hope that future generations, with their higher incomes and superior technology, will be better able to manage the mess we leave them. Consider how primitive technology from the year 1915 looks to us today. Given that the pace of innovation is increasing, 2015 will look even more primitive to the people of 2115. Problems that are incurable to us may not be so daunting to them. It may be that the best gift we can make to future generations is greater wealth, technology and productivity – not lower CO2 levels.

Of course wealth and climate change are not independent – a rapidly changing climate will impoverish future generations, as they are forced to divert resources to deal with crop failures and rising seas. Likewise, cutting emissions too aggressively will undermine economic growth, leaving millions in poverty, and robbing future generations of the means to cope with whatever problems they face.

Modeling climate is a tricky business. Guessing at what generations 50 and 100 years hence might be capable of is even harder. While global warming is a real problem, the best approach is not at all clear. We have options, and must pay careful attention as new facts arrive, to plot our best course for the future.


Editor’s note: Reluctantly, effective next week, the Field Guide is cutting back to one post weekly, to make time for other projects. Sincere thanks to the LFG faithful – we hope to return to twice or thrice weekly by the end of the year.


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Oil: Cheap and Too Cheap

Oil is cheap again. Though it’s still double its pre-OPEC (pre-1974) levels, it’s down by about half from its average price of the past 4 years. Overall, this is a good thing. While energy sector stocks have been a drag on some indices, the stock market as a whole – and the US economy as a whole – does better with cheap oil. Consumers save far more than energy companies lose. Geopolitically, cheap oil means less cash for Saudi Arabia, Iran and Russia, all of whom use oil money to cause trouble.

Cheap oil also means less investment in oil exploration and extraction in the US and Canada. Putting aside the virtues of “oil independence”, the North American oil industry has bet a goodly chunk of economic resources on enterprises that depend on OPEC for profitability. At current prices, a lot of the oil in North Dakota and Alberta cannot be profitably extracted. Many producers bought “price insurance” just in case the price of oil crashed – as it has. That insurance will run out over the course of the next year, and if prices remain low, production will drop.

It’s rarely appreciated that OPEC has made more millionaires in Texas, North Dakota and Alberta than it has in Saudi Arabia. When OPEC artificially drives prices up by restricting supply, the benefit accrues equally to all oil producers, whether they are part of OPEC or not. In fact, non-OPEC producers benefit even more because they dont reduce output – they just keep pumping and pocket the premium OPEC secures for them.

OPEC countries today only account for 40% of world oil production. That share is sufficient to manipulate prices because the demand for oil is relatively inflexible – small changes in supply can make for big swings in price. Few are aware that the US would probably have overtaken Saudi Arabia to become the world’s number 2 oil producer this year (after number 1, Russia), were it not for the price crash, which will significantly lower US exploration and production. After years of ramping up, the US and Canada combined now produce more oil than any single country.

Some liberals are uneasy about cheap oil, and about projects like the proposed Keystone XL pipeline, because it facilitates oil use. Since oil is a sort of benchmark fuel source, when it gets cheap, it makes renewables (wind and solar) less attractive. But the only reason oil ever seems cheap is because producers and end users dump a significant fraction of the true cost of oil on the rest of us. When you factor in environmental degradation and political instability, oil gets expensive in a hurry. Some estimates put the break-even price for a gallon of gas at between $10 and $15.

The solution, of course, is to use the government power to tax and regulate to make oil producers and end users pay their own way. Levy higher taxes on fuel oil and gasoline. Require that manufacturers and power companies pay for their CO2 emissions.

OPEC is bad, and its elimination will make the world wealthier and safer. This is not to say that there havent been significant benefits to high oil prices, such as the accelerated development of alternative fuel sources, and improved efforts toward efficiency and conservation. But the US government should give these trends a boost by raising taxes on oil now.


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Swiss Sanity and Madness

American liberals might take comfort in knowing that other western countries are also beset by a conservative minority mucking up the works of government. Even Switzerland, that paragon of civility, has its very own conservative party to serve as a fount for bad old ideas. The good news is that Swiss voters were recently able to beat back two especially misguided conservative ballot initiatives.

In a country whose high living standards depend significantly on a steady supply of foreign labor, one measure sought to tightly restrict immigration. Another would have handcuffed Switzerland’s capable central bank by forcing it to dramatically increase its reserves of gold. Each initiative exemplifies the primitivism common to conservative movements worldwide: a gratuitous bias against foreigners; and a scientific illiteracy fostering debunked beliefs and practices.

To understand the failed immigration initiative, it helps to understand a bit about Swiss politics. While Switzerland is a very rich country, its conservative party, the SVP, is based in Switzerland’s poorer rural backwaters. (Sound familiar?) Though the bulk of Switzerland’s immigrants head to cities to find work, opposition to immigration is nonetheless based in less-affluent agrarian communities. (Sound eerily familiar?)

In 2009, the SVP succeeded in holding an especially disgusting referendum to illegalize the building of minarets. Horrifically, it passed – and lacking constitutional protections for freedom of expression, it is now the law of the land. Paradoxically, the Swiss government has long been a good world citizen, taking in refugees from all over the world, including predominantly Muslim countries like Iraq and Bosnia. Switzerland’s Muslim population has grown over the past 30 years, from 1% to 4.5%.

At nearly four times the US rate, immigration into Switzerland has been brisk. However the Swiss economy has had no difficulty absorbing additional workers, with unemployment under 4% for the past ten years. Beginning as an amalgam of several distinct ethnicities and four official languages, Switzerland has long been extremely diverse. The foreign-born now make up 29% of its resident population, double that of the US, and the most any major western country. Diversity has served Switzerland well: it is the wealthiest country in the West, and close to the top in per capita income and life expectancy.

There is hope that Switzerland’s economic success will temper its conservative movement – that they might be cautious about killing the golden goose. While the minaret referendum passed with 57% of the vote, the anti-immigration measure failed with just 26% in favor. And hearteningly, the gold-hoarding referendum did even worse, with the support of just 23% of voters, despite aggressive SVP campaigning.

Conservative misapprehensions of history and science notwithstanding, gold has no intrinsic value, and there are no valid reasons – geopolitical or scientific – for central banks to heavily rely on gold as a reserve asset. For good reason, virtually every country has abandoned the practice.

Conservative belief in the intrinsic value of gold is especially goofy, considering that the godfather of intrinsic-value theory is Karl Marx, who needed it to validate his notions on the value of labor. That conservatives today make the same mistake about gold that Marx made about labor does not diminish their esteem for yellow metal. Conservatism, after all, is a largely about belief in a vacuum – a hearkening back to an imaginary past, not a real world.

Swiss sanity in killing these two measures was tempered by their decision to reject a third measure that would have ended a tax regime sheltering rich foreigners, encouraging them to reside in Switzerland. Just as some countries create special tax havens to attract business, Switzerland has its own cottage industry of attracting the idle rich to live in their mountains. They buy Bentleys and chalets and negotiate an individual lump-sum tax with the canton in which they reside (for real) – passing their tax burden on to ordinary people. Several cantons have eliminated the practice, requiring everyone to pay their fair share. The measure would have forced all cantons to eliminate it, but unfortunately it only gained 41% of the vote.

While two out of three on the referenda aint bad, the SVP has unfortunately grown in popularity, and now holds a plurality of popular support and legislative representation. Its chief selling points remain xenophobia, isolationism, anti-environmentalism and opposition to government services. The latter position does not prevent them from continuing to support agricultural subsidies – farmers, after all, are the SVP’s largest constituency; and adherence to principle remains a trait unknown among conservatives.


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The Nation’s Business

Government spending on health, education and insurance is the path to riches. And not one of many paths – if a nation isnt lucky enough to sit atop a fortune of mineral wealth, it’s the only pathway by which modern countries have ever grown rich. And there’s ample evidence that public investment in other sectors is a must for economic development too.

For conservatives, “Solyndra” has become the poster-child for the inevitability of failure whenever government wades into the marketplace. Mitt Romney wasnt content to mention Solyndra in every other speech – in May 2012, he journeyed to its Silicon Valley headquarters, to have the shuttered building in the background as he railed against the evil of public meddling in private enterprise. Solyndra’s failure was indeed spectacular – taking with it more than 500 million taxpayer dollars when it went bankrupt in 2011.

But in the three years since Solyndra’s bankruptcy, the government program that funded it has kept right on doing what it’s been doing all along: helping out young, green-energy firms going through rough patches. And a funny thing has happened: the numbers on the government’s balance sheet have gone from red to black. The Department of Energy, which administers the program, reports that they expect it to return a profit of some $5 to 6 billion over its lifetime, on investments totaling $32 billion. If you’re keeping score at home, that’s profits in excess of 10 Solyndras! And mind you: those are only the profits expected to accrue to the government itself, as it receives interest payments from companies paying back their loans. It does not begin to express the total economic value created for shareholders, or the green tech which will benefit all of humanity, or the tens of thousand of jobs that have been created at less-than-zero cost.

Government involvement in the marketplace has a long, storied past, in the US and abroad. Countries such as Singapore, Taiwan, South Korea and Israel – among the greatest exemplars of rapid economic growth of the past sixty years – all have had governments deeply involved in decisions on capital allocation. Government support has been indispensable to numerous industries throughout US history, from railroads and agriculture, to education and aviation, to the internet and drug research. Looking only at the iPhone, government investment facilitated advances in microchips, cellular, touch screens, GPS and voice-recognition – not to mention the $500,000 government-backed small-business loan that helped Apple get off the ground in 1978.

With her book, The Entrepreneurial State, Professor Mariana Mazzucato of Sussex University has emerged as an authority on the importance of public investment for economic growth. Simply put, companies are leery about long-term investments. Even guys like Steve Jobs knew how the game was played. Apple has done well tying together existing technologies into consumer-friendly packages – and is often more interested in stock buybacks than R&D. Their achievements are not to be downplayed – but the business model only succeeds with a robust public sector targeting certain industries and technologies for development.

Government isnt crowding out private investment – it’s picking up the slack in areas that private investors neglect. Companies tend to have short planning horizons when it comes to research and development. Even large companies who can afford long-term investments are rarely eager to test their shareholders’ patience with projects whose returns may take ten or fifteen years to realize. And the days of Bell Labs and Xerox PARC are also long gone – when tech firms collected scientists, and funded them in academic-like settings, content to wait and see what their research produced.

There will always be Solyndras. In new fields, failure always outnumbers success. But dont hesitate to let conservatives know that in the final accounting, the value of the Teslas outstrip the Solyndras by a wide margin – and always have.


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Eight Years Wrong

If your economic models led you to make the same bad predictions for six straight years, perhaps you’d pause to consider their validity before plunging ahead into the same mistake. But not if your Charles Plosser. The conservative head of the Philly Fed has made a fine folly of calling for inflation for six years now, repeating his time-worn shtick for the benefit of a roomful of reporters again this past Wednesday.

Plosser’s ineptitude makes for a long, sorry public record. In March 2008, during the worst US economy in 70 years, Plosser somehow opposed Fed rate cuts, expressing belief that a recovery was imminent. Fortunately the Fed blew him off and cut rates anyway – and the recession persisted for another 15 months. Plosser was just warming up. In July 2009, he said he expected the Fed would soon have to raise rates to head off inflation. That year the US posted its lowest inflation rate in 54 years, with prices actually deflating 0.4%! In May 2010, Plosser acknowledged that inflation had been unusually low (duh), but said he was still concerned about inflation risks beyond the short term. The Fed stayed the course and inflation barely budged. In March 2011, he claimed that Fed policies were raising the threat of inflation. He spent 2012 and 2013 beating the same drum, and this past July said on Bloomberg TV that the Fed risked “losing control of inflation.” As 2011, 2012 and 2013 turned out, Plosser was wrong, wrong and wrong.

Predicting inflation isnt a mere academic pursuit. When the Fed acts to head off inflation, Americans pay the price with higher unemployment. Constant, spurious calls for inflation can be extremely detrimental to an economy, putting millions out of work needlessly. One need only look at the European Central Bank, which for years has been filled with hacks like Plosser, whose conservative mismanagement of monetary policy has returned the Eurozone to recession.

It isnt merely the case that Plosser’s imagined threat of inflation never materialized. During the period 2009-14, the US experienced its lowest inflation of the past half-century! For all of Plosser’s harping, inflation has at times gone so low as to pose the graver threat of deflation. Inflation for 2013 came in at a low 1.5%; 2014 is running at a similar level; projections by better-skilled economists call for the same in 2015.

Plosser’s crowning non-achievement came in July 2013, when the Wall Street Journal ranked him dead last among his colleagues at the Fed, for his utter inability to predict the rise or fall of interest rates, inflation or unemployment. The joke about a broken clock being right twice a day doesnt quite capture the ineptitude of an economist whose models arent even borne out once per decade. His dismal record notwithstanding, Plosser remains conservatives’ go-to guy whenever they need to cite a Fed official to justify their latest unfounded criticism of Fed policy.

As a conservative, Plosser must be terribly frustrated, given that the Fed has not once raised rates during his tenure. But fortunately the end is in sight. No, the Fed isnt going to accede to conservative hysteria and raise rates. After stinking it up for eight years as the president of the Federal Reserve Bank of Philadelphia, Plosser, thankfully, is retiring in March. And the Fed can get on with the business of keeping rates low, while US wages and employment continue to recover.


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Detroit Gets a Treatment, Not a Cure

Sixteen months after becoming the largest-ever US municipality to enter bankruptcy, Detroit has a court-approved plan to move forward, and is poised to move ahead with several billion dollars less debt, plus new aid commitments from the state and federal governments. But nothing has been done to fix the underlying problem: that the “City of Detroit” is a legal fiction – an anachronism with no bearing whatsoever on the region’s physical and economic facts.

Detroit’s history follows both the rise of the automobile industry and the use of the automobile itself. Detroit grew from a modest-sized town in 1900 to become the 5th largest city in the US in 1950. But then the course of the city and the auto industry diverged. While the industry continued to expand, new plants were built in Detroit’s suburbs. Workers took advantage of cheap cars and better roads to head to the suburbs too.

The depopulation of midwestern cities is not unique to Detroit. Almost every midwestern city has lost between twenty and sixty percent of its population since 1950. The larger metropolitan areas have kept right on growing – it’s only the cities that have shrunk. While the city of Detroit today has about one-third the population it had in the early 50s, the larger Detroit region is now forty percent more populous.

The difference is the automobile and the US highway system. Before the age of cheap transport, economic realities forced people to live in town, close to work and needed services: schools, shops, family, etc. Since the 50s, people have had the option to live away from town, relying on cars and a modern road network to get where they need to go.

Newer American cities in the west have established their city limits in accordance with this new reality. The major cities of Texas are a good example. Austin and El Paso each have nearly the same area as New York City. Dallas, Fort Worth and San Antonio are all geographically larger than New York City, and Houston is twice New York’s size. But those six Texas cities combined have fewer people than New York City. Unlike older cities in the east and midwest, Texas cities were were built around the automobile, and their sprawling incorporated limits reflect that.

The urban sprawl of cities like Detroit is, today, no less extensive – however most midwestern cities have literally left their incorporated limits unchanged since the days of the horse-drawn carriage. Detroit is about one-half the size of New York City, and has been for more than a century.

The people leaving midwestern cities since the 50s have been disproportionately affluent, because they can more readily afford cars and new houses in the suburbs. The people left behind are disproportionately poor. And because of the disparity between black and white incomes, and discriminatory business and banking practices, the net result is relatively white, affluent suburbs and relatively black, poor cities. This demographic trend is common to many major metropolitan areas across the midwest, including Detroit, Buffalo, Cincinnati, Milwaukee, St. Louis, and Cleveland.

In and of itself, this would not have been a problem if the larger metropolitan area were united within a single municipality. However suburbanites were able to escape the tax base of the city, while still using numerous city resources, from hospitals to roads to water supply and other elements of the city’s infrastructure. Detroit spent billions of dollars providing health, education and other services to people who would ultimately leave to become productive members of society elsewhere.

The real cure for cities like Detroit is the annexation of its suburbs – to bring political realities (the lines on the map) into accord with the social and economic reality: that city and suburb is a single entity, united by a common infrastructure and commerce. Detroit today is little more than the least desirable neighborhood in a much larger economic zone, of which it comprises less than 20% of the total population, and an even smaller fraction of the total land area.

Leaving the old municipal lines intact effects a ghetto, within which medical care and education are far inferior, predictably producing children who will lack the skills to be productive in a modern economy. The obstacles to incorporation of the suburbs are political, but they have been overcome in places such as Kansas City and Louisville. Detroit’s latest plan will get it out of bankruptcy, and improve things a little bit in the short term. But over the long haul it will only perpetuate an unjust and unproductive status quo.


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Everybody Must Get Keystoned

The Keystone XL pipeline is not a very big deal. While its politics are complicated, the ultimate effects from building the pipeline – or not – are not going to have a big impact on anything or anyone. The reason: Canada’s tar sands are (duh) in Canada – beyond the reach of US policymakers. And Canada is intent on seeing them exploited to the fullest. Whether the oil coming out of Alberta gets piped down to refineries on the US Gulf Coast or not, it’s going to be extracted from those tar sands and burned for energy somewhere on planet Earth just the same.

Much controversy stems from the fact that tar sands yield an exceptionally dirty oil, via processes that release far more atmospheric CO2 than conventional oil extraction – even more than is released by extraction from the Bakken formation. And the environmental harm is not limited to greenhouse gases. Considerable harm also occurs on the local level, to Alberta’s boreal forest, which is itself a carbon sink; and to numerous local animal species.

Some make the economic argument that, by allowing the project to move forward, the US will be lowering the production costs of an especially dirty fuel source, making it that much more competitive in the world market for energy, and consequentially making alternatives to fossil fuels that much less attractive. The problem with this argument is that the effect of the pipeline on production costs is not likely to be significant enough to impact development of the tar sands. It will not impact the price of oil one way or another, and as such will have no effect on oil consumption at all.

Some raise concerns about the environmental hazards of the pipeline itself. While it’s true that it would pass over vital stretches of the Ogallala aquifer – a massive underground formation that sprawls beneath much of the US high plains, critical to the region’s multibillion dollar agriculture industry – the pipeline does not pose a significant threat to the vitality of the aquifer as a whole, because any spill would likely be locally contained in its effects. (A far more serious concern about the aquifer is the unsustainable rate at which agribusiness is currently drawing water from it.)

The oil from Alberta is presently being moved across the US via road and rail, which are far more carbon-intensive modalities than a pipeline. And even if the US doesnt approve Keystone XL, Canada has a back-up plan: to build an all-Canadian pipeline, east to New Brunswick.

The struggle to protect the planet from the risk of global warming occurs on many fronts – but this is not a good fight. The real problem with fossil fuels is economic: their use carries enormous costs that are not borne by end-users, and as such these fuels are priced much more cheaply than they should be. If those costs were internalized by the industry and its customers, fossil fuel prices would rise dramatically, and their desirability as an energy source would drop precipitously – making renewables immediately more attractive for use and development.

Instead of looking to throw up arbitrary obstacles to oil production and use – like refusing to build a pipeline that would probably shrink the carbon footprint of tar sands exploitation – governments should take the direct route of tax policy. Specifically, taxes should be levied on oil consumption such that end-users pay something that approximates the true cost of burning oil. That cost includes local environmental degradation, the use of the atmosphere as a carbon sink, health costs from pollution, and military costs concomitant with the enrichment of states like Iran, Russia, and Saudi Arabia, who use revenue from oil sales to support repressive regimes and-or terrorism worldwide.

US President Obama should not sign off on any plan to approve Keystone XL that does not include a provision to significantly increase taxes on coal and oil. That is the compromise liberals should aim for. The real problem with fossil fuels comes down to dollars and cents. Force producers and consumers to absorb the true cost of their actions, and those actions will change – faster than you can build a pipeline through Nebraska.