I was at a seminar the other week on inequality in US household income, and I asked the speaker about something that’s puzzled me for a while. I didn’t really get an answer, so rather than do a lot of work myself, I thought I’d try this crowdsourcing all the cool kids are talking about. Here’s the puzzle.
Over the past 40 years or so, real median US household income has risen by about 30 per cent.
but real US GDP per person has more than doubled. How can this be ?
It’s time for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
That’s when credit default swaps (CDSs) with a notional value somewhere between $500 billion and $1.4 trillion will have to be settled as a result of the (re)nationalization of Freddie Mac and Fannie Mae, which has been deemed to constitute a default event on their bonds. Paradoxically though because the government guarantee of the bonds is now explicit, they are actually safer than before which means that the net payments required in settlement will be very small, and sometimes go to the party who offered protection against default. Don’t worry too much if none of this makes sense, the main point doesn’t depend on it, but you can read a bit more from The Economist.
As The Economist notes, most participants are expecting all this to go smoothly. But one thing about the longrunning credit squeeze is that unexpected (bad) things tend to happen. So what could go wrong?
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Assuming that he was pursuing a consistent plan at all, Peter Costello’s months of coyness about possible leadership aspirations now appear to have been designed to ensure a big splash for his memoirs. Presumably, his departure from Parliament won’t be long delayed and (while you should never say never) it seems that his political career is over.
Unlike with Howard, I’ve never really rated Costello. Undoubtedly he’s a sharp debater and has the good lawyer’s capacity to get on top of a brief, but in his twelve years or so as Treasurer, I didn’t see anything to suggest that he really understood economics or thought much about economic policy. His near-silence since losing office, despite repeated Labor attacks on his legacy seems to me to confirm this. Without the backup of Treasury and staffers, he doesn’t seem able to mount an effective argument (or maybe he just can’t be bothered). Perhaps his book will tell a different story though – I certainly expect it to sell pretty well given the promised bagging of so many colleagues.
The outcome of the Western Australian election remains undecided. Labor could hold on to power either by winning enough seats to govern with the support of independents or by making a deal with the Nationals. Conversely, the Libs need to win the seats in which they are currently ahead, and then cut a deal with the Nationals.
Apart from being a reminder of the folly of snap elections designed to capitalize on transitory political circumstances, this close result reminds me of something I’ve observed over time. Whichever of these two even-money chances is realised, we’ll come to think of it as inevitable. Consider for example Bush’s win in 2000, Howard’s in 1998 or Hawke’s in 1990. In each case, the vagaries of the electoral system turned a loss (admittedly narrow) on the votes into a winning outcome.
Yet with the possible exception of Bush, this fact is forgotten when we come to assess the electoral appeal of the winners and even more of the losers. Peacock, Beazley and Gore could all have reached the top if a few electoral dice had fallen differently. But they go down in history as failures while Bush’s two terms and Howard and Hawke’s four mark them as winners, at least until their luck ran out.
Measured by the dollar amount involved, the nationalisation of the mortgage guarantors Fannie Mae and Freddie Mac, announced today by the Bush Administration, is the largest in history. No less than $5 trillion of assets and obligations have been taken over by the US government in one hit.
Of course, that debt had long been regarded as having an implicit government guarantee and the companies involved were quangos (in the original sense of quasi-NGOs) rather than genuine private firms. Fannie was a government agency privatised in the 1960s, and Freddie was created to provide competiion for Fannie. So even though the US government will now guarantee virtually all new mortgages, this is more an admission of existing reality than a big step towards socialism.
While the quasi-governmental status of Fannie and Freddie was always problematic, this wasn’t the reason for their failure. Rather, they were pushed to accept increasingly bad loans made by the private sector. And when their difficulties became acute, the most satisfactory solution, under normal conditions, would have been to formalise the government guarantee of the existing loan book, then put them into run-off mode, writing no new business. But given the failure of the private sector, that would, mean, in effect, making it impossible for anyone to write a mortgage contract.
The fact that the credit crisis has reached this point marks the failure of the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state.
In the boom that created this crisis, every part of the financial system (retail banks and mortgage businesses, major Wall Street banks, the financial engineers who designed new securitisation assets, investment funds, ratings agencies and bond insurers) had a major role to play. All have failed miserably, even though most will get to keep the rich rewards they received when things were going well.
Further update As various commentators point out, the failure here is one of actually existing neoliberalism. The “unknown ideal” of a perfect free market system remains pure and unsullied by empirical experience.
More seriously, the significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.
It’s time once again for the Monday Message Board. Post your thoughts on any issue. Civilised discussion only. Please avoid snarks and trolling and strictly no coarse language.
I’m planning a full-length post on Garnaut, but I thought I’d do a quick check on what would be involved in meeting the target of a 10 per cent reduction in emissions between 2000 and 2020. My guess is that the increase in oil prices we’ve already seen will be enough to bring consumption of petrol and diesel back to the 2000 level, and that other sectors like agriculture will be roughly stable. That means that most of the reduction will have to be found in energy generation.
My rough estimate is that the use of brown coal in energy generation contributes around 10 per cent of total emissions (Update:After I revised my estimate to 15 per cent, reader Chris Short pointed me to a section of Greenhouse Gas Inventory I’d missed, which gives brown coal a 30 per cent share of electricity’s 34 per cent of emissions, so 10 per cent was right ), so, as a first approximation, the Garnaut target could be met shutting down the brown coal sector and replacing it with enough renewables to cover the brown coal share of existing electricity, and any growth in final consumption. Consumption growth would be constrained both by increasing prices and by conservation measures.
That would certainly require a substantial adjustment assistance program in the Latrobe valley and similar locations. We’ve done this kind of thing before, for example, with the end of the steel industry in Newcastle, sometimes well and sometimes poorly.
My guess is that the actual outcome would involve keeping some brown coal stations, with drying technology that reduces emissions to a level comparable with black coal, and some expansion of gas-fired power stations, offset by a combination of domestic offset measures and purchases of international offsets. The Garnaut cost estimates of around 1 per cent of GDP look pretty plausible for this. This story actually suggests a lower value, since $35 billion over 10 years is around 0.3 per cent of GDP.
One thing I’ve learned in life, though not always applied, is that if you ignore a job long enough, it often goes away. I was going to write a post excoriating Maurice Iemma and Michael Costa for their handling of the electricity privatisation issue, but it doesn’t matter much now (retail privatisation may still go ahead, but that’s not such a big deal either way). The earlier departure of deputy premier John Watkins is more of a loss, though no real surprise.
Labor now has a chance to salvage a government that looked to be utterly doomed. It’s a long shot, but the NSW Liberals have a long record of snatching defeat from the jaws of victory, so who knows.
A week ago my Fin column (over the fold) predicted a double dissolution over legislation to establish an emissions trading scheme. The rejection of the government’s changes to luxury car tax shortens the odds considerably. The government made a number of compromises to satisfy the Greens and Nick Xenophon that highly fuel-efficient vehicles would be excluded, but that only made it harder (in the end, impossible) to deal with Steve Fielding of Family First. The same problems will emerge, in spades, with an emissions trading scheme.
It seems likely that lots of legislation will be rejected between now and the time an ETS becomes a trigger,. If the government can hold its nerve, and its popularity, a double dissolution will look very attractive by then.
John Quiggin 