The U.S. "has a technology called a printing press"
So I'm working hard on meeting my deadlines for the upcoming University of Arizona Free Personal Finance site and course, as well as an unusually large teaching load, running our business, etc., etc., and the Wall Street Journals are piling up. So I decide to take a break and go through them. In the Tuesday, November 18th Money and Investing section, I run into something very interesting:
In his famous address on fighting deflation in 2002, Mr. Bernanke said the Fed wouldn't run out of ammunition to influence prices, even after cutting interest rates to zero: "The U.S. government has a technology, called a printing press ...that allows it to produce as many U.S. dollars as it wishes at essentially no cost,"
Ok, so why have we not used that printing press a lot more? William Buiter of the London School of Economics wrote on Saturday that the Fed had doubled its balance sheet since the crisis started. This means that the Fed has printed up (or the electronic equivalent) a great deal of money, and used it to pay for the purchase of U.S. government bonds and other financial assets. But with the economy nonetheless on the brink of deflation and a severe recession or depression, why doesn't the Fed print a lot more?
The risk of future inflation is far less of a danger right now than the risk of deflation and depression, plus the Fed has tools that can combat any future inflation quickly and effectively. Very short term rates are close to zero, but medium and long term rates are far from zero, and the evidence is strong that if the Fed printed a massive amount of money to buy up those securities, and thus down their real interest rates, it would be a great stimulus.
So why isn't the Fed doing these open market purchases on a much greater scale (as opposed to discount rate cuts which are about exhausted)? Unfortunately, we can't have a massive and intelligent fiscal stimulus for another two months when the Democrats take power, but Bernanke can act in a strong way now with massive open market purchases (which would also lower the interest the government pays on its fiscal stimulus, and thus decrease inhibitions about spending due to the deficits). Why isn't he? This is an important question that is not discussed enough in the economics/finance/politics blogosphere.
There's nothing more important for Obama to achieve than universal health care.
Regarding Mark Thoma's post, "Will the Financial Crisis Crowd out Health Care Reform? Should It?":
I strongly believe that health care is the most important thing. It is the most valuable thing that can be done when considering the probability distribution of its payoffs -- in non-mathematical-economics jargon, it is the most valuable when considering how much good it's likely to do.
Isn't there more potential to do good (or prevent bad) in combating global warming? Yes, but the best way to combat global warming is to pass a good universal health care program, or at least to move us greatly in that direction. The reason is that this would be so enormously good for people's lives, and for the economy, that it would generate a gigantic amount of gratitude and political capital for the Democrats, and that would allow them to push through far stronger anti-global warming legislation -- a lot more money for alternative energy, a lot greater conservation measures, etc. And it would also help Democrats in elections for decades to come, greatly decreasing the harm Republicans can do on so many issues (at least in the Republican party's present extreme, anti-thinking form).
There's nothing more important than passing a good universal health care program, and hopefully Obama won't falsely think it's too politically risky to push for this, because once we've had it, and Americans saw the reality of just how much better it made their lives, rather than the Republican false arguments and lies, it would be like the New Deal; it would generate enormous gratitude and political capital for decades; it would expose the falseness of the Republican arguments and lies, and the Republicans would never be able to get rid of it. Would the Republicans dare even to try to get rid of old age social security, medicare, or unemployment insurance? No, these are programs that the Republicans could never get rid of once enacted. Universal healthcare would be the same.
As Nobel Prize Winning Economist Paul Krugman wrote in his 2007 book, "The Conscience of a Liberal", "Health care reform is the natural centerpiece of a new New Deal. If liberals want to show that progressive policies can create a better, more just society, this is the place to start." (page 216), and, "The most dangerous government programs, from a movement conservative's point of view, are the one's that work the best and thereby legitimize the welfare state." (page 228), and finally, "Getting universal care should be the key domestic priority for modern liberals" (page 243).
The question, then, is how to best achieve universal health care, by pushing for it first, or by first passing a stimulus plan and other measures to deal with the recession and credit crisis, or by doing all of it more or less simultaneously in one big package?
I think it actually might be better to pass bills dealing with the recession and credit crisis first, and certainly with the extreme downward spiral, this must be done as soon as possible to stop and reverse this spiral before it leads to a demand decreasing, negative spending chain reaction that gets completely out of control. It's just do you do it separate of healthcare, or along with healthcare as part of the stimulus. If you push through quickly some good strong stimulus and pro-credit measures and regulation, separately of healthcare first, that could create valuable public approval for the Obama administration, and thus political capital and momentum for tackling the health care legislation next.
On the other hand, enacting universal health care, hopefully, or at least legislation that moves us greatly in that direction, would in fact also be a great fiscal stimulus to combat the current recession. It could in the first year add over $100 billion to spending, even though after the transition period it will not be far from cost neutral for the economy as a whole. Because of the efficiencies of a good universal health care program, we can cover everyone for close to the same amount as we currently spend with 50 million uninsured and 1/3 of adults between 18 and 65 spending some time over the last two years without health insurance.
Universal health care not only would be a strong fiscal stimulus, it could probably be sold as such, at least fairly well. A problem, though, is the campaign for it can then get bogged down in its fiscal and deficit virtues, rather than its long term benefits in per capita health care savings, and how much more secure and better it would make the lives of the middle class and the vast majority of Americans in general. These benefits are a much stronger selling point, so it really may be better, stronger politically, to just push through the deficit and credit market plans quickly, and then focus completely on the great importance and benefits of universal health care (I really hope), or at least a program which moves us greatly in that direction. Still, something crucial to keep in mind is that the political capital, urgency, and momentum from a strong electoral victory usually dissipates very quickly, so it can be very dangerous to wait even a short time before trying to pass universal healthcare.
Hard to say, though, what's the best strategy. It depends how you package and promote it; the main thing is to just do it. As Krugman wrote today, "The bottom line, then, is that Barack Obama shouldn’t listen to the people trying to scare him into being a do-nothing president. He has the political mandate; he has good economics on his side. You might say that the only thing he has to fear is fear itself."
By the way, here are some suggestions for at least moving us greatly in the direction of universal healthcare which would be highly attractive to the public and politically strong:
1) A very strong reinsurance program, like the government pays all "catastrophic" health care costs, with "catastrophic" defined as any and all costs over $50,000. This would obviously plummet health insurance premiums, and would be a huge step towards universal health care. You can pay for this with increased income taxes on earnings over $250,000, and with increased corporate taxes, especially given the huge savings corporations would realize in decreased health insurance costs.
2) Lower the age for medicare eligibility to 50. This would be hugely popular, especially after it was enacted -- try taking it away then! The 50 to 64 age group has by far the hardest problem with health insurance. They're in such danger here. Of those who don't already get universal healthcare through Medicare (Yes, we already have universal healthcare, and have had it for 40 years, it's just only people age 65 and older get it, and they love it.), they have the worst health, the greatest risks, the highest costs, and the most difficulty obtaining coverage. They have so much stress and worry about being ruined by illness, either because they don't have health insurance, or they might lose it, or the insurance they have doesn't end up paying for tens or hundreds of thousands of dollars of the costs of an illness. Senators who voted against lowering the age of Medicare to 50 could really get nailed to the wall on this in the next election. People over 50 vote heavily, and this is a huge deal for them. It's also a huge deal for people in their 40s, knowing that guaranteed coverage would be so close. And 40-somethings are another group which votes heavily. You can pay for this by raising the Medicare payroll tax only for income over $250,000.
With regard to any fears about the costs or short term deficits, if you think these programs provide too much stimulus, and thus too much in short term deficits, just increase taxes on the wealthy to ratchet down the deficit and stimulus effects, and certainly enact large tax increases now on the wealthy to begin phasing in after three years, when the recession should be over, so that the projected deficits after 2011 move quickly to surpluses. For details on this, please see my post, "We can fight the recession, make large high return government investments, and balance the budget, all three – over four years."
A reminder; in an earlier post I noted that Jonathan Chait claimed that a universal health care bill could be structured in such a way that it could not be filibustered. It would only require 50 votes in the senate (plus the vice-president's to break a tie). I'm not positive Chait is right, but there's strong evidence that he is. I certainly hope the Obama administration will consult with legal specialists on this.
As one might expect, the book takes swipes at the usual suspects: the Washington Consensus, the IFIs, the MNCs, Tom Friedman, and Jeff Sachs. Against the growth-focused and globalization-centered views of these institutions and commentators, Robin and John argue for a localized, community-based, self-sufficient model of development. What many others would celebrate as real development (for example the spread of commercial farming for export in the Philippines) they see as the destruction of local communities. They write: "We stand at a moment marking the end of what may well be the most destructive development era of modern history."
Can we be talking about the same era during which, according to World Bank calculations, the number of people in extreme poverty fell (in absolute terms!) by 400 million people? Broad and Cavanagh don't pay much attention to such figures because they seem to have a somewhat romantic view of the lives of rural poor, who apparently have a relatively decent quality of life until market forces in the form of international trade and MNCs encroach upon them.
Broad and Cavanagh responded to Rodrik's criticism in an essay that he posted on his blog. They conclude claiming, "...time and time again, the critics [of globalization] have been right. Witness the food crisis, the climate change crisis, the financial crisis, as well, of course, as the development crisis." I'd like to now respond to this:
"the food crisis" is nothing compared to the hunger before globalization. Compare hunger in China today to hunger in China before the era of globalization.
"the climate change crisis" – This is essentially due to reasons other than globalization, and certainly is possible to combat without getting rid of globalization. It's like saying that modern technology is the cause of climate change, so everyone should go back to living like cavemen. It would solve global warming, but it would cause mass starvation, and for the tiny percentage of the world that survived, it would make life harsh, miserable, and short, with an average lifespan of about 30 years. Economists would call discarding all technology a "next best solution" to the problem of global warming. It would solve global warming, but there are other ways to solve this problem at less cost, in this case at immensely less cost.
Global warming can easily be combatted effectively without getting rid of globalization, and in fact, because of the efficiencies and wealth creation of globalization, science and technology advance substantially faster, speeding up solutions, from safe nuclear, to solar, to exotic heat deflection and genetically engineered carbon eating algae. These solutions are also made cheaper by globalization, and therefore more widely adopted. The costs of solar, wind, and nuclear power, for example, are highly dependent on scale, and a global scale is far bigger than any local scale.
"the financial crisis" – again, not really due to globalization, and it's certainly possible to solve this and prevent future incidents without decreasing globalization. Transparency laws, good regulation, and smart central bank strategy would do it, and they're a far better solution than getting rid of, decreasing, or not increasing globalization. Diminishing globalization is again a next best solution.
"the development crisis" – My first thought when hearing this was that Broad's and Cavanagh meant the crisis from lack of development. My thoughts run this way because I care a lot more about people than rocks, trees, and butterfly eggs. I'm funny that way. The lack of development crisis has been tremendously decreased by globalization -- India and China are such large and amazing examples it would be hard to believe they could think otherwise. If, however, they meant environmental issues by "the development crisis", stopping globalization might help the environment – maybe – in the short run, but it's been overwhelmingly shown that the wealthier a country gets, after the point of basic industrialization, the cleaner it gets.
Environmental cleanliness is a luxury good. The wealthier people get, the more they're willing to spend on it, and globalization has been shown over the long run to be by far more effective than anything else in making poor countries wealthier – China, India, South Korea, Taiwan, etc., etc.
In general, free trade is extremely good for poorer countries over the long run, but it's very true that it depends greatly on the accompanying programs, laws, and governance, for example to make sure that the benefits are widespread and any negative effects are minimized. Nonetheless, as Nobel Prize winning economist Paul Krugman, a staunch liberal, wrote of Globalization in a 1997 Slate article:
These improvements have not taken place because well-meaning people in the West have done anything to help--foreign aid, never large, has lately shrunk to virtually nothing. Nor is it the result of the benign policies of national governments, which are as callous and corrupt as ever. It is the indirect and unintended result of the actions of soulless multinationals and rapacious local entrepreneurs, whose only concern was to take advantage of the profit opportunities offered by cheap labor. It is not an edifying spectacle; but no matter how base the motives of those involved, the result has been to move hundreds of millions of people from abject poverty...
It should also be noted that a lot of the non-free trade things added to free trade agreements are bad, like increased enforcement of drug patents for very poor countries, but the free trade part itself has been a crucial factor in lifting hundreds of millions out of the most extreme poverty. We just need to improve the side agreements, and make these agreements freer in the things that can really help the poor, like by dropping first world agriculture tariffs and subsidies.