Tag Archives: Paul Krugman

Volcano Monitoring and Climate Change Negotiations

A couple of days ago, Paul Krugman took Louisiana Governor Bobby Jindal to task on his response to President Barack Obama’s Tuesday night speech.  In his response, Jindal criticized the government for its wasteful spending, highlighting two examples: $140 million spent on volcano monitoring and $8 billion for high speed rail projects, including a magnetic levitation line from Las Vegas to Disneyland. Setting aside the accuracy of the claims regarding the two projects (people on both sides of the debate have challenged both the figures and the accuracy of the description of the two projects), Jindal’s criticism does point to an interesting and important questions.  What should the government be doing?

This simple question is at the heart of the political and philosophical divide between conservatives and progressives in American politics.  Conservatives echo Jindal’s sentiment that, “The strength of America is not found in our government. It is found in the compassionate hearts and the enterprising spirit of our citizens” (which itself is a refrain of President Ronald Reagan’s famous statement, “Government is not the solution to our problems; government is the problem.”)  Progressives argue that government should play an active role in ensuring all Americans enjoy certain basic and fundamental rights, including livelihood.

Beyond these philosophical differences, however, Krugman rightly points out that historically conservatives and progressives agreed that the government also had a role in addressing collective goods problems.  Collective goods are characterized by two important features which differentiate them from other goods.  They are non-rivalrous and non-exclusive.  Non-rivalry means that one person’s use of the good does not diminish another person’s ability to use that same good.  Non-exclusivity means that it is not possible to prevent people who have not paid for that good from benefitting from the provision of that good.  The classic example of a collective good in international relations is national defense.  Because of these two characteristics, the private market generally under-produces collective goods.  Both progressives and conservatives thus agree that the state should provide for public goods like national defense.

Here’s the problem, though.  Volcano monitoring is clearly an example of a public good.  We have a collective interest in ensuring that communities living near volcanoes have sufficient warning in the event of an eruption.  And clearly the market will tend to under-produce volcano monitoring, as it exhibits the characteristics of a collective good: one person knowing about a forthcoming eruption does not prevent others from having the same knowledge, and it is not practical to warn only those who have contributed to the volcano monitoring of a forthcoming eruption. High speed rail may be a bit more complicated, but most rail networks rely to a greater or lesser extent on public financing, primarily because of the nature of rail transit itself (lending itself to monopolistic characteristics). 

At the international level, though the problem is even more difficult.  At the domestic level, we can look to the state to provide collective goods—assuming, of course, that we can agree on what they are.  At the international level, there is no overarching authority to look to.  The nature of the international system thus makes collective goods even more difficult to provide.  Indeed, historically the provision of collective goods at the international level has tended to rely on the goodwill and desires of a particularly powerful state (e.g., through hegemonic stability theory), or through difficult and convoluted negotiations around national interests.  The lack of a higher authority with the ability to enforce its decisions means that states (behaving rationally) would hope to free ride on the goodwill and generosity of others.  But if all states do that, the collective good will be under-provided.

And thus the difficulty of international negotiations.  The problem of global climate change exhibits many of the characteristics of a collective good.  Yet states have incredible difficulty in reaching consensus on developing a framework to address the problem of climate change.  International negotiations underway this year are intended to develop a post-Kyoto framework to reduce global greenhouse gas emissions.  The likelihood of success will depend on the degree to which states can address the collective good dilemma that characterize talks in this area.  And if progressives and conservatives in the United States can’t agree that volcano monitoring is a collective good, I’m afraid that any real agreement at the global level around the issue of climate change may prove even more elusive.

You can see Barack Obama’s speech on the MSNBC website .  A transcript is available at the official White House website.  The video of Bobby’s Jinal’s response as well as the transcript of his speech  are both available at his official website.

Fixing the Economic Stimulus

On Monday, two heavy hitters in economics weighed in on the economic crisis facing the United States (and the global economy more generally).  In an opinion piece published in the New York Times, Nobel Prize-winning economist Paul Krugman offered a powerful argument in favor of a Keynesian-style stimulus package.  In particular, he contends that because the Federal Funds rate is effectively at zero, the only real policy option remaining for the U.S. government is a fiscal stimulus package.  In an article writing for CNN, Nobel Prize-winning economist Joseph Stiglitz offers an equally powerful critique of the current discourse surrounding the economic stimulus packageBoth make powerful points in addressing the current crisis.  Hopefully, Geithner is listening.


The Return of Keynesianism?

On Monday, the Federal Reserve’s Board of Governors took the dramatic move of lowering the federal funds rate—the interest rate the Fed charges banks on short term loans—by 50 basis points.  A half point cut would normally be noteworthy by itself.  But this cut was particularly newsworthy because it lowered the federal funds rate to 0.25 percent—one quarter of one percent—its lowest rate ever.

The Fed hopes that the move will provide the market a clear signal of the Fed’s willingness to take sweeping action to address the current financial crisis.  And indeed, U.S. markets briefly reacted positively to the announcement, with equities increasingly slightly before falling by day’s end.

However, the move also raises some concerns.  First, with the U.S. funds rate so much lower than the rate of other major central banks (especially in European Union), the move may put downward pressure on the dollar.  This could help the U.S.’s balance of trade, but it may also make investors more hesitant to hold dollar-denominated assets, particularly U.S. Treasury Bills, due to their historically low yields.  Some groups within the Chinese government, the single-largest holder of U.S. t-bills, have already raised such concerns and have been pushing the Chinese government to diversify its holdings.  Were this to happen, the U.S. government could find it increasingly difficult to finance its operations, not to mention its $10 trillion debt.

More generally, however, the current low federal funds rate raises some important questions regarding the relative influence of (Neo)Keynesian and Monetarist policy in the United States.  Since the early 1980s, monetarism has been the prime approach to managing the nation’s economy, and the most important tool in the monetarist policy kit is arguably the federal funds rate.  By increasing the rate, the Fed can slow down the economy and bring inflation under control.  Conversely, by lowering the rate, the Fed can inject liquidity into the system, stimulating the economy and encouraging expansion.  Until recently, this system worked relatively well, keeping recessions (such as the one that occurred in 1990-1991) relatively short and shallow.

But with the federal funds rate now near zero percent (and potentially negative in real terms), the most important tool in the monetarist economic policy kit is no longer available.  If this move does not work—and there is good reason to think that it may not—the Fed will be forced to come up with new ways to stimulate the economy.

The current situation may therefore call for a return to Keynesian policies of this post-Great Depression era.  By focusing on the maintenance and expansion of aggregate demand, Keynesian policies may provide an additional tool for the U.S. government to address the current crisis.  Although Keynesianism may have fallen out of favor in the 1980s, in truth Keynesian policies never fully disappeared from the scene.  Since the 1980s, the U.S. government has been much less willing to use Keynesian tools than it historically had been.  But now that monetarism’s most important tool has been exhausted, perhaps we are all, to paraphrase Richard Nixon, Keynesians again.

If you’re interested in learning more, Paul Krugman has written extensively on the topic.  There’s a great ongoing discussion of his book, Return of Depression Economics, at Taking Points Memo.  And Krugman’s blog always makes for an interesting read!

Paul Krugman’s Nobel Prize

Congratulations to Paul Krugman, who won this year’s Nobel Prize in Economics for his work on international trade and economic goegraphy.  According to the Nobel Prize Committee,

Krugman’s approach is based on the premise that many goods and services can be produced more cheaply in long series, a concept generally known as economies of scale. Meanwhile, consumers demand a varied supply of goods. As a result, small-scale production for a local market is replaced by large-scale production for the world market, where firms with similar products compete with one another.

Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities.

Interested in more Krugman insights?  Head over to his blog, The Conscience of a Liberal.

And for just for fun, try the Journal of Improbable Research, which specializes in publishing work that “makes people laugh, then think.”  It awards its Ig Nobel Prize every year in anticipation of the Nobel Prize Award.