To sum up my posts for today:
1. My first thought was about avoiding the same debates
2. Climate change denial goes beyond climate change
3. India’s microloan problem
4. Former OMB Chairman Peter Orszag on the deficit commission report
5. Interesting marriage trends
6. Why the deficit should not be the top priority
Two Nobel Laureate economists, Joseph Stiglitz and George Akerlof, have written a very interesting piece about how the recession will forge a thousand theories for economists to ponder over for centuries to come and how new economic models will be created to stimulate future growth:
The economic and financial crisis has been a telling moment for the economics profession, for it has put many long-standing ideas to the test. If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.
But there is, in fact, a much greater diversity of ideas within the economics profession than is often realized. This year’s Nobel laureates in economics are two scholars whose life work explored alternative approaches. Economics has generated a wealth of ideas, many of which argue that markets are not necessarily either efficient or stable, or that the economy, and our society, is not well described by the standard models of competitive equilibrium used by a majority of economists.
Behavioral economics, for example, emphasizes that market participants often act in ways that cannot easily be reconciled with rationality. Similarly, modern information economics shows that even if markets are competitive, they are almost never efficient when information is imperfect or asymmetric (some people know something that others do not, as in the recent financial debacle) – that is, always .
A long line of research has shown that even using the models of the so-called “rational expectations” school of economics, markets might not behave stably, and that there can be price bubbles. The crisis has, indeed, provided ample evidence that investors are far from rational; but the flaws in the rational expectations line of reasoning—hidden assumptions such as that all investors have the same information—had been exposed well before the crisis.
Just as the crisis has reinvigorated thinking about the need for regulation, so it has given new impetus to the exploration of alternative strands of thought that would provide better insights into how our complex economic system functions – and perhaps also to the search for policies that might avert a recurrence of the recent calamity.
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Jonathan Chatt of The New Republic writes on his blog today:
I do think the long-term deficit is a serious issue that I’d like to see addressed. I don’t understand the idea that this is an especially good political time to solve it. While many Democrats oppose any revisions to entitlement programs, the entire Republican party is in the grips of anti-tax dogma so powerful that not a single Republican in Congress has defied it for twenty years. Now, a moment of high Republican hubris, seems like a very unlikely moment to force the party to compromise its core policy commitment.
What’s truly bizarre is this idea that it’s the most urgent issue to address. Climate change seems clearly more urgent–and, what’s more, it’s probably irreversible. The economic crisis is also more urgent. But Washington elites are fairly removed from the cataclysmic effects of the economic crisis–they’re not losing their homes or living in economic terror. And climate change is a “partisan” issue, unworthy of the urgings of a non-partisan wise man. And so, by dint of the peculiar isolation and sociological demands of the members of the political and media establishments, the deficit must become the top priority.
I would agree that climate change impacts are happening now, but the main events will probably start taking place around 2040-2050 at the earliest. Interesting, the debt problem and the climate problem could happen at the same time, yet we choose to tackle the debt. We don’t prioritize very well in America. A much broader point to make is the deficit is a problem, but it should probably be tackled after the recession when stimulus spending is needed to keep the economy going.
There are two main reasons Americans are freaking out about the debt right now. First, Greece, and currently Ireland, had collapsing economies that they had be bailed out. The part that is not mentioned is how Greece also made bad investments and cooked the books to make it look better for speculators than what was really happening. The second problem is Americans have an irrational phobia of big numbers. $1 trillion dollars sounds very scary to most people because they do not have that type of cash, and probably never will. Really, the debt is only about 8% of the overall GDP and deficit reduction plans will probably bring it down to 2-3% of the GDP at best. This is also normal during a recession. So take a chill pill on the deficit, it will get fixed when the time is right.
The Pew Research Center, in conjunction with Time Magazine, has released a study indicating that marriage is starting to become obsolete to most people. Here are some graphs from the study that I find interesting:
The charts that I chose were primarily focused on generational attitudes. Some of them are good, like changing gender roles and views of different types of families. Others were interesting like having a husband who provides a good income is high priority for women and education level does not score high percentage wise.
The Council on Foreign Relations published an interview with the former Office of Management and Budget Chairman Peter Orszag to get his take on recent proposals by the bipartisan debt commission:
What does this draft proposal achieve, since it’s not a piece of legislation or the finalized recommendation due December 1?
I always thought that the most likely mechanism through which the commission would exert its influence was through a proposal from the co-chairs. There has been a lot of focus on whether the co-chairs would be able to get fourteen or more votes in favor of a recommendation. While that may or may not still be possible, the discussion that the co-chairs’ suggestions has prompted shows it may not matter that much whether they ultimately get an official recommendation, since, as you see from the reaction to the proposal, it is generating substantial discussion.
Ultimately its impact will depend in part on how the administration decides to respond. That, in turn, will reflect a choice that the administration faces about whether it decides to tack to the left or tack to the center. From the initial reaction, it is clear that the left in particular is not very pleased with the proposals from the co-chairs.
Attacks have been launched at the proposals from both sides of the political spectrum. Does the draft strike you as partisan?
No, it seems to have displeased both the left and the right, so it doesn’t strike me at partisan. And on Social Security in particular, the reaction from the left seems off to me. If you look at the specific Social Security proposals in the co-chairs’ set of recommendations, they include a change that makes the benefits formula more progressive; they include a change that makes the payroll tax more progressive; they include changes to make the index used to measure cost of living increases more accurate. Most importantly, the proposals don’t include private accounts as part of social security, which, four of five years ago, had been the single most important thing that progressives were fighting against. The proposal now offers an opportunity to lock that in, because in ten, or fifteen, or twenty years, assuming there’s not a reform now, those issues may well be back on the table. Private accounts as part of Social Security are definitively dead for now, so I don’t fully understand why the left is not eager to lock in that victory.
Also, right now, the left is most concerned about a gap in aggregate demand, and the need for more stimulus, which is a concern I share. But additional stimulus currently has about zero chance of getting enacted. The more that’s done to reduce the deficit in the out-years, enacted now but to take effect in the future, the more it becomes plausible that we could actually get another round of stimulus.
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