November 27, 2008
The more the merrier
How many economic-advice-giving organizations does it take to run a White House?
President-elect Barack Obama tapped former Federal Reserve Chairman Paul Volcker to run a new White House advisory board tasked with offering independent advice about how to stage an economic recovery. Obama named the 81-year-old Volcker to head the President's Economic Recovery Advisory Board....
The board is modeled on the Foreign Intelligence Advisory Board that gave President Dwight Eisenhower independent opinions on intelligence issues. Austan Goolsbee, another key Obama adviser, will serve as the economic board's staff director and chief economist.
Volcker can be single-handedly credited with ending the great inflation of the 1970s, and has been critical of the unorthodox steps that Fed Chair Ben Bernanke has taken to address our current challenges. Although I share some of Volcker's concerns, it is not clear to me what specifically Volcker would propose to do instead. Certainly the policy for which he is famous and justly praised-- stopping inflation at all costs-- is seriously contraindicated at a time when we just saw the biggest recorded monthly drop in the CPI. A policy of real toughness in dealing with failed financial institutions has some appeal to me, and Volcker may be the sort of person who could insist on that, if given some real power. But is that what Volcker and Obama have in mind?
Chicago Professor Austan Goolsbee is very bright and certainly has my respect. Given his important role in the campaign, it's hardly a surprise that his voice will play a major role in shaping economic policy. But Time's Justin Fox worries about "economic-adviser gridlock", and David Cho and Alec MacGillis warn in the Washington Post of the
central leadership challenge the president-elect will face: how to manage a stable packed with big brains and bigger personalities -- and how to make decisions when those high-powered experts disagree.
There was already some inherent ambiguity and conflict as to what the respective contributions and roles would be for Larry Summers at the National Economic Council, Christina Romer at the Council of Economic Advisors, Tim Geithner at the Treasury, and Peter Orszag at the Office of Management and Budget. Greg Mankiw shares some insights from his experience inside the White House. But based on my knowledge of those four, I could imagine them working together very effectively.
What I'm less clear about is how creating yet another separate advisory group is going to facilitate that. Fortunately Justin Fox has come up with a solution to the potential problem: Obama just needs to appoint Jason Furman to run the "Coordinating Council of Economic Advice-Givers".
Posted by James Hamilton at November 27, 2008 09:12 AMdigg this | reddit
First, you are to be praised for giving me something to read other than the titles on Macy Day Parade Floats.
Second, and more on point, the Bush has been criticized for appointing advisers, all of whom were true believers. The result has been the least successful administration since the Buchanan. Obama is seeking to appoint advisers who can represent a wide variety of opinion. I believe he has confidence in his own ability to serve as honest broker of their ideas.
Posted by: Chris at November 27, 2008 09:34 AM
no economist left behind.
Posted by: odograph at November 27, 2008 11:54 AM
Volcker is willing to accept far higher levels of unemployment as wlaking dead corporations actually die.
Just as in biological systems where death makes room for new organisms to exist, the death of businesses makes room for new and more efficient firms to exist.
Something the UAW does not want to hear
Posted by: esb at November 27, 2008 02:07 PM
I notice that Volker gets an age credit ...that does not extend to the others. JDH, no octogenarian, is either making us work here to find out exactly who is younger or older than that benchmark...or assuring us indirectly that, however old we are, there is still hope for us...provided we are not 82.
Kudos to odo for being right on being left behind. We, only somewhat left behind, are still absorbing the amazing financial management of Obama's campaign. Can we expect the same level of management from his policy development team?
UAW, esb, is down to 140,000 members, yes? Even the news about "walking dead corporations" is not all that fresh (speakin about bein left behind) and having dished out so generously to Citi, it seems very unlikely that The Big Flops will not get some financial package...and maybe a reason why Obama's staff is ballooning: tons of work to do.
Posted by: calmo at November 27, 2008 04:10 PM
There is something we can do to resolve the problem. We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.
Such a stabilizing mechanism would accomplish four much-needed tasks:
- First, by buying paper that otherwise is effectively not trading, it would help restore liquidity to the marketplace and help markets to function more fluidly again.
- Second, by warehousing the troubled paper for a longer period than, for instance, the Fed's discount window typically should or could, it would allow for a more orderly liquidation of this paper, and the chance for much of it to recover a portion of its value.
- Third, by giving the agency the ability to manage mortgages with flexibility to keep people in their homes and businesses running, it should lessen the number of foreclosures. This, in turn, would help moderate the decline in real estate values and the deterioration of neighborhoods, thus supporting house prices that in fact lie at the heart of the crisis.
- Fourth, where necessary, like the RTC of the 1980s, this new mechanism can assist the Federal Deposit Insurance Corporation in resolving sick institutions that are so clogged with the troubled paper they cannot continue as independent entities. However, we would hope that purchasing the mortgage-related paper will minimize the need to provide emergency, short-term assistance to solvent banking institutions.
Crisis times require stern measures. America has done well in the past to face up to economic turmoil, take strong measures, and put our problems behind us. RTC-like mechanisms have worked well in past crises. Now is the time to take a similarly forceful step.
Posted by: egc at November 27, 2008 08:44 PM
It's been so long since we've witnessed a serious downturn that most people are over reacting to the current financial crisis. Yes, it is problem. No, it's not the end of capitalism or life as we've known it. The monetary changes necessary to end the recession have already taken place and we will emerge from this downturn stronger if we let nature take it's course and we weed out the marginal companies. If we bail everyone out we are only postponing the inevitable process of letting the weak fail. When a company goes bankrupt the productive assets don't disappear- someone will end up owning them at a lower cost with a chance at producing goods or services and profits. It's a necessary process of eliminating some of the debt from an ever extended economy.
Posted by: Peter Van Schaik at November 27, 2008 09:14 PM
My hope is that these guys are all window dressing and that Obama's decisions on these matters will be heavily influenced by phone conversations he has will Warren Buffett.
Now is the time to question traditional economic thinking. Face reality fearlessly.
Paulson was right when he said the huge size of the toxic assets on the books of banks must be reduced to fix the financial mess.
He was wrong to discard this objective just because no easy solution is available. All real solutions will cause much pain.
Reducing the size of these toxic assets requires not honoring the face value of the contracts. Bankruptcy is one way to not pay some of the contracts. The second way is to make enforcement of these contracts in the U.S. courts conditional on reducing the value of all the contracts by whatever amount will stabilize the U.S. financial sector.
Posted by: ReformerRay at November 27, 2008 09:21 PM
Volcker can be single-handedly credited with ending the great inflation of the 1970s...
If you had said that it has been REPORTED that Volcker can be credited with ending the Great Inflation I might have let this pass, but the way you worded it I have to take exception.
Volcker single-handedly created the recession of 1980-82 but not the ending of the Great Inflation. Volcker's actions in the face of the Reagan tax cuts created deflation that made the bursting of the inflation bubble into a deep recession. We did not emerge from the Volcker recession until he abandoned his monetarism to bailout Mexico. Only then did he supply sufficient liquidity to stabilize the dollar. And note that this was done by accident not intentional. He had to abandon his methodology.
I also do not believe there will be one problem with the Obama team working together. There can be no doubt that Larry Summers and Tim Geithner will run things, even wimpy Ben Bernanke. Anyone else, especially Paul Volcker, will be nothing but window dressing.
Posted by: Anonymous at November 28, 2008 06:07 AM
Sorry. Anonymous is me.
Posted by: DickF at November 28, 2008 06:08 AM
Thought folks might be interested in some Austan Goolsbee quotes so they can get to know the man. Think housing bubble.
· March 29, 2007, New York Times: “[The Center for Responsible Lending] estimated that in 2005, a majority of home loans to African-Americans and 40 percent of home loans to Hispanics were subprime loans. The existence and spread of subprime lending helps explain the drastic growth of homeownership for these same groups. Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.”And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted. When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.”
· September 23, 2007, Slate: “If you want to make money off the housing bubble, you’ll have to do it the old-fashioned way: Buy a place with a no-money-down mortgage and then flip it.”
· September 23, 2007, New York Times: “[P]eople who refuse to sell their houses for less than they paid for them are violating a cardinal rule of the market: stuff is worth what it’s worth. It doesn’t matter what you paid for it…”(B)y being hung up about whether your condominium will sell for what you paid for it, you aren’t just driving yourself crazy trying to get a buyer. You may be threatening the very performance of the economy and driving up the unemployment rate — provided that many others behave in a similar way.”
Posted by: DickF at November 28, 2008 07:05 AM
"Volcker can be single-handedly credited with ending the great inflation of the 1970s" ??
Coming from you, hyperbole and professional pride, I suppose. What about the gradual entrance of the Chinese labor force into the global economy around the time, what about the spreading of computer technology in corporations during the period? To cite just two glaring examples that may not be amenable to econometric study like data on rates and such but to me seem infinitely more powerful than the influence of any one man or institution. Of course, Volcker was important, putting a different man in the position could have led to a completely different outcome. But the same holds for any of all the big and small parts of the system at the time. Which makes me highly skeptical when I see a "big man" from one era transported to another. Too much attribution, I say.
Posted by: Anonymous at November 28, 2008 01:27 PM
Clipping Austan Goolsbee from Dick:
By being hung up about whether your condominium will sell for what you paid for it, you aren't just driving yourself crazy trying to get a buyer. You may be threatening the very performance of the economy and driving up the unemployment rate --provided that many others behave in a similar way.
At first glance this seems to be a psychological assessment of a stubborn condo owner who refuses to recognize (this assessment of) his denial. But maybe it is Goolsbee (an economist, not a psychologist) who fails to recognize that this owner may not be the typical condo owner in denial...that the room full of prospective clients had emptied --an observation an economist, not a psychologist, might make.
At 2nd/3rd glance this appears to be an update of JFK's "Ask not what you can do...", just bendova and take your medicine you (poverty stricken desperadoes). Your bravery in accepting these losses will be remembered for eternity...just not by your lineage...which you have to admit, is so suspect, it deserves this termination.
So the creation of an angry horde will be the result if you are not listening to Goolsbee who demands your financial cooperation...that sacrifice.
Well, I hope those folks who were contributing $5 every week to the Obama campaign are not listening to this ...brain-damaged message from Goolsbee.
Posted by: calmo at November 28, 2008 01:40 PM
Thanks DickF for the quotes. A little disturbing to me.
I clicked the link on Furman and read a paragraph or two of a few papers. This one recalled something else I had seen recently.
"the benefits of these tax cuts were much smaller, on average, and much more skewed toward people with higher incomes. " Typical Economic Studies piece, I think. Just like EPI.
Here is what it recalled. I hope space isn't too tight.
by David R. Kamerschen, Ph.D.Professor of Economics University of
THIS IS EXACTLY THE WAY THE TAX SYSTEM WORKS.
U.S. Tax System explained in Beer !!!
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers,' he said, 'I'm going to reduce the cost of your daily beer by $20.'Drinks for the ten now cost just $80.The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so the fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 ( 22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. Bu t once outside the restaurant, the men began to compare their savings.
'I only got a dollar out of the $20,' declared the sixth man. He pointed to the tenth man,' but he got $10!
''Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too.. It's unfair that he got ten times more than I!
''That's true!!' shouted the seventh man.'Why should he get $10 back when I got only two? The wealthy get all the breaks!
''Wait a minute,' yelled the first four men in unison.'We didn't get anything at all. The system exploits the poor!
'The nine men surrounded the tenth and beat him up. The next night the tenth man (the richest) didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important.
They didn't have enough money between all of them for even half of the bill!
Posted by: Hitchhiker at November 28, 2008 02:05 PM
The folks writing about "how to manage a stable packed with big brains and bigger personalities" are just selling newspapers. Its drama. To the extent that they or anyone else believes it, even before Obama starts, it is an implied wish that central planning (from a few ideas) works. Most of us know that competition brings out the best in results. So here's to the great prospect of government officials competing on economic ideas and programs to implement a few of them well. We haven't seen that in about 8 years.
Posted by: Mike Laird at November 28, 2008 04:45 PM
JH - the world has passed... by my friend. Steer clear of things political and policy. Stick with fossil collection, or if a must - dissect road kill of a provenance and some aging...
Posted by: madmarty at November 28, 2008 04:58 PM
I am more and more discouraged everyday by Obama's picks for economic advisors. I realize that nobody is perfect and that Obama has many constituents that he must please but I am getting the sinking feeling that a lot of these big brains are just like the big brains they are replacing. I like Volcker (or liked what I THOUGHT he did) but he seems like window dressing for what appears to be a bunch of young Keynesians. (OTOH, perhaps as the man who eliminated the gold standard says, we are all Keynesians but still . . .) Besides, the guy's like 102 years old up against all these young studs?? Geithner? Fed and Wall Street insider. Summers? Retread. Goolsbee? New guy - same economics orthodoxy. Orszag and Romer? Not enough of geek to know who they are but suspect they will not put up much of fight for change we can believe in in economic policy either. I grant you it is not fair to presume how they will all work out but it is fair to say that the big boast of change so far isn't obvous in his economic team. And how about that Secretary of State pick? How's that for change?!
Posted by: Footwedge at November 29, 2008 12:20 PM
Assuming it even gets posted, I regret my comments about the new Obama economics team and I regreted them the moment I posted it. They were based on a very little information about the individuals gleaned from here and other boards and a LOT of ignorance. Since I really don't know what I would want or if such expertise is possible in such a team it seems pretty disingenuous to criticize what I'm about to get. I wish them a lot of luck and hope they do better than those they are replacing. A fairly sad and pathetic hope it is. I do not, however, retract my related comment about the selection for Sec. of State.
Posted by: Footwedge at November 29, 2008 03:24 PM