Matt Yglesias

Abandoned Boats

Apparently the recession is leaving the nation’s coastline plagued with a glut of abandoned boats.

Central City Home Values Holding Up Amidst Collapse?

Alejandro Lazo writes about the decline in home prices in the Washington, DC metro area in 2008, writing that “By any measure, 2008 was a brutal year for the local real estate market, as gains made during the housing boom continued to unravel.” Except it actually wasn’t so brutal in the District itself where prices went up. Ken Baidfeld offers this chart and hypothesizes that “strong central cities” may be weathering the housing bust better than sprawling exurbs:

I think this is probably correct in broad terms. Housing overcapacity, almost by definition, exists on the far-flung fringes of metro areas. On the other hand, the ZIP-by-ZIP analysis of changes in the District doesn’t show a particularly clear pattern.

Making the G20 Mean Something

The idea of a G-20 summit is a good idea. Relative to other, more established international institutions, it’s a better set of countries to tackle the world’s overarching need to get on track to a pattern of growth and prosperity that’s sustainable for the long haul. But nobody’s actually expecting anything incredibly useful to come out of this week’s meetings. The world would, however, be a better place with a high-functioning G20 and this CAP report recommends some ways we could make that a reality.

Ultimately, however, in economic terms the world is suffering not just from a lack of institutions but from something of a leadership gap. The United States is a major economic player. But the economic realm isn’t like the military realm where we have a hegemonic position. By some measures, the European Central Bank actually presides over a larger economic unit than does the Federal Reserve and by all measures the European Union as a whole is bigger than the United States. Then beyond the two economic superpowers, there are a number of other really major players. That means the world really can’t just assume the U.S. is going to pull a rabbit out of a hat and put everything back together. But at the moment, nobody else seems especially interested in stepping up.

Higher Skill Levels May Mean Slower Recovery

Paul Krugman waxes gloomy: “So far, there’s nothing pointing to a fundamental turnaround this year, or next, or for that matter as far as the eye can see.” Ryan Avent’s not so sure:

Whoa! There is nothing pointing to a recovery at any time in the future? As I said, the world spent four years doing everything wrong, and yet the Depression finally came to an end. Even if we’re not taking all the steps Krugman would have us take, we are at least avoiding the big errors that doomed the economy before. Krugman is basically saying that this downturn will last as long as the Depression or longer, despite the drastically different — and economically orthodox — policy path taken by the world’s large economies. This seems crazy to me.

Those are good points. On the other hand, there’s at least one factor indicating that recovery is harder on present circumstances than it was during the Great Depression—our much higher level of human capital. Consider this chart from the 1940 Census (apologies for the legibility issues, this is literally a chart from the 1940s, not a new chart based on 1940 Census data):

A majority of Americans hadn’t so much as set foot inside a high school. These days, about 80 percent of Americans have a high school diploma and about a quarter have a bachelor’s degree. As the 2007 CPS report on educational attainment says “this reflects more than a three-fold increase in high school attainment and more than a five-fold increase in college attainment since the Census Bureau first collected educational attainment data in 1940.”

This reflects a large-scale increase in the skill-level of the population which has done a great deal to drive prosperity. But it also points to a problem with recovering from economic downturns in modern circumstances. Unskilled workers do work that, by definition, requires few skills. You need to be willing to show up and work hard, but beyond that it’s easy to teach you how to do the job. That means that an unskilled worker can, broadly speaking, be a generalist. If there’s a downturn in demand for maids in a given labor market but an uptick in demand for CVS cashiers, then unskilled workers can shift from one sector to another without much of a problem. Skills, by contrast, tend to be somewhat specialized. When a fifteen-year veteran newspaper writer gets laid off, his fifteen years worth of experience leave him with skills that have some value outside of the newspaper sector—general writing and verbal ability are always useful. But fifteen years worth of newspaper experience is most valuable in a world where there continues to be robust demand for newspaper writers and that’s not the world we live in.

The skill-base of the American workforce is the cornerstone of our prosperity. But a large economic dislocation typically forces some sectoral shifts. And when you have large sectoral shifts, the value of your workforce’s skills diminishes. I believe something similar is true for capital goods. The cars manufactured in the 1920s and 1930s were crude compared to today’s cars. And the tanks of the 1940s were crude compared to today’s tanks. So it was easier to convert the car factories of the 30s to tank production than it would be to effect an equivalent transformation these days. Or, more to the point, it was easier to do that than it will be to convert capital goods related to the production of houses into capital goods related to the production of import-substituting manufactured goods.

Another issue is that it’s at least possible that America’s key export industries—aviation and entertainment—are both in long-term structural decline.

Which Agencies Are the Best

Apparently on alternate years the Office of Personnel Management does a huge survey of the federal workforce in which they, among other things, rate each agency on four dimensions. Lee Siegelman determined that “the correlations between agencies’ scores on any pair of dimensions are all .88 or above” so you can useful combine the four scores into a single composite and then get a nice chart:

The best-run federal agencies, according to this measure, are the Nuclear Regulatory Commission, the National Science Foundation, the Office of Management and Budget, and the National Aeronautics and Space Administration. Three cabinet departments — HUD, Homeland Security, and Transportation — are bottom-of-the-listers. The worst-run agency by far, though, appears to be the Broadcasting Board of Governors, which oversees nonmilitary international broadcasting by the government. It used to be part of USIA, but it became independent in 1999, and, to judge by the assessments of those who work there, seems to be something of a disaster. What is it about the Broadcasting Board of Governors that’s soo bad? Basically everything, according to the OMB survey: It ranks dead-last on three of the four dimensions iand 36th of 37 on the other dimension.

Fortunately, the Broadcasting Board of Governors isn’t that big a deal in the scheme of things. By contrast, the low quality of HUD, DOT, and DHS is a very significant problem. There seem to be some very interesting ideas about sustainable communities coming from the leadership at HUD and DOT that I’m very interested in, and that have important implications for our long-run growth, quality of life, and ecological sustainability. But it seems to me that these initiatives are unlikely to be successful unless the agencies running them can be reasonably effective.

How Important Are “Safe Havens”?

The head of the Pakistani Taliban, Beitullah Massoud, has threatened to strike Washington, DC with a terrorist attack. But while everyone takes Massoud’s threat to the stability of the Greater Hindu Kush area seriously, nobody seems to take his threat to do this very seriously. As Spencer Ackerman says “It’s difficult to see how Beitullah Massoud, the leader of the Pakistani Taliban, has the capability to launch attacks against the U.S.”

So that’s the good news. The bad news is that this points to what I think is a serious conceptual flaw in the administration’s thinking—this heavy emphasis on the idea that we need to deny al-Qaeda a “safe haven” in Afghanistan or Pakistan. As Andrew Exum observes, it’s not at all clear that a “safe haven” is necessary to carry out a terrorist attack:

Thus, [European governments] are wary of their Afghanistan operations leading to greater unrest in their own immigrant communities, being as likely to look to the suburbs of Paris and London for terror plots in utero as they are to the Federally Administered Tribal Areas in Pakistan. The foiled 2006 transatlantic aircraft plot, for example, was allegedly plotted almost entirely within the confines of my old neighborhood in East London. And while some terrorists–such as Mohammed Sadiq Khan, who is believed to have masterminded the 7/7 bombings–traveled to Pakistan and trained in militant camps, the common denominator that has emerged from domestic terror threats in places like the United Kingdom is that their staging ground was actually on the internet rather than in a physical “safe haven.”

And as per Spencer’s point, not only is a safe haven not necessary, it’s not sufficient either. A safe haven in the mountains in Central Asia doesn’t let you carry out a terrorist attack in the United States. You need an attacker physically located in the United States, in possession of explosives that are also physically located in the United States, in order to attack the United States. The danger is of a terrorist being here or else in someplace like Western Europe or Canada from which it’s easy to get into the United States. Recall that key action in the 9/11 plot took place not just in Afghanistan, but in Hamburg and the best governance initiative in human history is not going to make Afghanistan as orderly and prosperous as Germany. The attackers went to flight school in America; you can’t learn to pilot a jumbo jet in the mountains. Clearly “al-Qaeda has a safe haven” is worse than “al-Qaeda does not have a safe haven” but orienting our national security policy around the goal of denying safe havens is not going to achieve what we’re looking for. And as Exum explains, it could easily lead to dangerous overreach:

The emphasis on destroying “safe havens” also establishes a tricky rationale for our presence in Afghanistan. Even if we succeed in spreading effective governance to southern Afghanistan and western Pakistan, are we then prepared to go to wherever the transnational terror groups relocate? Are we prepared to clear out the Palestinian refugee camps of Lebanon? Or provide governance to the Horn of Africa? The new Obama plan is a dangerous precedent. If the reason we are staying in Afghanistan is to deny al-Qaeda the use of safe havens, where are we going next?

I think that’s right. You need to be wary of a strategic concept which implies that the security of American citizens requires the United States to achieve effective physical control over 100 percent of the world’s land area. We should be especially wary of it given that effective physical control of U.S. territory didn’t actually stop the 9/11 attackers from traveling throughout the country, learning to fly, hijacking airplanes, etc. Absent al-Qaeda acquisition of a nuclear weapon (and they’re not going to find one in Kandahar), the main way al-Qaeda can threaten the United States is by baiting us into implementing costly and unworkable policy responses and some of the “safe haven” rhetoric seems to be pointing us in that direction.

Netanyahu Threatens Attack on Iran in Months

And here I was working on a piece arguing that the new Israeli government either wants the United States to bomb Iranian nuclear facilities or else, more likely, implicit U.S. approval for Israel to do so itself. Jeffrey Goldberg just asked Bibi Netanyahu:

In an interview conducted shortly before he was sworn in today as prime minister of Israel, Benjamin Netanyahu laid down a challenge for Barack Obama. The American president, he said, must stop Iran from acquiring nuclear weapons—and quickly—or an imperiled Israel may be forced to attack Iran’s nuclear facilities itself. [...]

Neither Netanyahu nor his principal military advisers would suggest a deadline for American progress on the Iran nuclear program, though one aide said pointedly that Israeli time lines are now drawn in months, “not years.” These same military advisers told me that they believe Iran’s defenses remain penetrable, and that Israel would not necessarily need American approval to launch an attack. “The problem is not military capability, the problem is whether you have the stomach, the political will, to take action,” one of his advisers, who spoke on condition of anonymity, told me.

To make just a quick point, the idea that Israel would be “forced” to bomb Iran is laughable; people shouldn’t write stuff like that. It’s possible that Israel will bomb Iran in the near future, but nobody’s going to force them to do it.

As for needing American approval, I suppose this all comes down to what we mean by “necessarily” “need” and “approval.” You can’t fly from Israel to Iran without going over Turkey, Saudi Arabia, or Iraq and every discussion of this I’ve ever heard specifically says the Israelis would need to go through Iraq. It would of course be possible for Israel to do that without American approval. But none of those three countries would conceivably give Israel permission to use their airspace for this mission and the United States is committed to the defense of all three. In practice, the fact of an Israeli attack would be read throughout the region as proof of an American green light, especially were the attack not swiftly followed-up by a sharp curtailment of American aid. And for Americans, that’s really the point—as long as Israel is the biggest winner in the U.S. aid sweepstakes, Israeli actions are inevitably seen as the actions of American proxies, and if we can’t get Israel to respect our interests then we need to revisit that relationship.

It’s Blitz

Yesterday, writing about the Yeah Yeah Yeahs’ new album It’s Blitz Ta-Nehisi Coates said he “liked each one of the YYY albums better than the last” and idiosyncratic view he attributes to “missing any music created by white people during the mid to late 80s.” I, for one, have been listening to music created by white people for my entire life and completely agree with him about the band’s growing powers. Besides which, Karen O is half-Korean so it’s hardly white people music. Well, okay, that’s exactly what it is. But still.

Here’s “Zero”

At any rate, I’m lamer than ever these days so dismiss my views if you like, but I’m loving this album.

Bank Bailouts on the Cheap

Via Noam Scheiber, an Adam Posen piece that I think accurately sums up the appeal of the Geithner Plan while being harshly critical of it:

In essence, the U.S. Treasury’s plan to subsidize private investors’ purchases of the banks’ toxic assets is a too-clever-by-half mechanism to fix the banks while avoiding going to Congress for more upfront on-budget expenditures. One can imagine the discussions at the White House: We have a budget to pass, and cannot give up those goals to give the bankers still more. Figure out some way to do this off-budget. [...]

I know that the very same self-limiting discussions took place at Okurasho, the Japanese Ministry of Finance circa 1995-1998. And they ended with the same result, a series of bank-recapitalization plans that tried to mobilize private-sector monies and overpay for distressed bank assets without forcing the banks to truly write off the losses. Even though the top Japanese technocrats at the ministry were even more insulated from a weak Diet than the congressionally unconfirmed advisers currently running economic policy for the Obama administration, they did worse. Whatever the political context, countries usually try to end banking crises on the cheap, with a limited public role at first, overpaying for distressed assets and failing to change banks’ behavior, only to have to go back in a couple of years later.

The question here is what would Adam Posen have done if he had Tim Geithner’s job? And based on Posen’s analysis, I think the only conclusion you can reach is that he’d have done more-or-less the same thing. Talking about a different issue last week, I heard Tyler Cowen forcefully make the point that you have to think of the political constraints as a real policy consideration. Suppose Geithner had asked congress to appropriate $1 trillion to implement a program of bank nationalization, asset writedowns, and loan guarantees—what would that have accomplished? It certainly wouldn’t have gotten congress to appropriate $1 trillion to implement a program of bank nationalization, asset writedowns, and loan guarantees. It might have derailed the budget and thrown the political momentum on the Hill to proponents of a neo-Hooverite spending freeze program. It might have caused panic. And it certainly would have undermined the credibility of the inevitable effort by Geithner to do the most he can with the authority he already has.

Given all that, why not just skip to the last step and have Geithner do the most he can with the authority he already has? The inescapable conclusion of Posen’s analysis isn’t that Geithner’s plan is likely to be inadequate (though it is) but that Geithner’s plan is essentially inevitable. The best we can hope for is to cycle through policy options in a relatively expeditious manner, rather than getting stuck somewhere along the line or moving backwards out of a sense that “doing stuff” isn’t work so we need to stop “doing stuff.”

The Constitutionality of Bonus Tax Bills

Since the great wave of AIG outrage crested, I’ve heard lots of speculation as to whether or not the bills under consideration to retroactively tax bonuses paid out at bailed-out firms might be unconstitutional. The Congressional Research Service has a useful discussion of the issues (PDF) which reveals that lots of the things some people have deemed potential constitutional problems are fine, but that there may be a viable constitutional challenge under the “bill of attainder” clause of the constitution.

I continue to find the specific focus on bonuses to be somewhat mysterious. If executives were getting less money in the form of “bonuses” and more in the form of base salary, what would that really change? I’m all for measures to curb excessive compensation, but zeroing in on the bonuses seems like putting semantics ahead of real policy goals.

German Politics

There’s an easy story you can tell about deficits in American politics. Basically, the way it goes is that tax cuts produce a positive short-term response from those who get them. And spending hikes also produce a positive short-term response from those who get the spending directly or the services provided indirectly. Deficits, meanwhile, have their impact over the medium term and don’t directly target anyone’s interests. Hence the tendency is for deficits to drift up and up until you’re on the verge of collapse in the bond market, at which point “avoid short-term collapse” becomes an important constraint on politicians. And if you look at, say, Italy you’ll see that a similar story seems to be in effect. And these appear to be pretty simple facts of political life grounded in basic elements of human nature. But consider the case of Germany, which has provided a pretty large fiscal stimulus by continental European standards, but which most American observers want to do more. Look at the political incentives facing Angela Merkel:

Unlike Mr. Sarkozy, who has three more years to his term, Mrs. Merkel finds herself in a difficult position, facing elections in September with voters leery of fiscal profligacy. Her Christian Democrats have been sinking in the polls, with the pro-business Free Democrats eating away at their support.

I keep hearing this. In part, Merkel is constrained by policy considerations that she deems compelling. But in part she’s constrained by a German political logic in which the voters would, apparently, prefer to see unemployment skyrocket as economic problems abroad cause Germany’s export-oriented economy to collapse than to see large budget deficits. She is, I’m reliably told, actually paying a political price for having done as much stimulusing as she has. But no matter how many times I read that, I find it difficult to imagine a political culture that operates that way.

In principle, my understanding is that Germany’s heavily regulated retail sector means you could actually find ways to stimulate domestic consumption and demand without necessarily spending more money. But changing those policies has been a hardy perennial of “things non-Germans think Germany should do” and the German people themselves don’t seem very enthusiastic about the idea.

FinancialStability.gov

It’s stimulus for website designers as the Obama administration continues to roll out nifty new media products to pair with their policy initiatives. Today, it’s FinancialStability.gov dedicated to the administration’s financial stability efforts.

I’ve heard a lot of buzz about the problems with doing new media work in a way that comports with the legal restrictions on government work. The upside is that .gov domain names are easy to snag.

A New Day at the EPA

The way environmental policy in the United States is supposed to work is that we’ve set up these agencies with statutory mandates to protect the environment and staffed them with experts and so forth to do analysis of what kinds of things constitute environmental hazards that are sufficiently grave as to merit the costs of action. It’s supposed to be that those experts do their work and policy results accordingly. Of course in practice if George W. Bush is in office, policy results not according to what EPA staffers say is good for public health but according to what lobbyists say their bosses want. Juliet Eilperin reports for The Washington Post on a new day at the EPA:

By Feb. 20, the efforts of Reifsnyder and dozens of other rank-and-file federal employees had borne fruit: After the United States voiced support for the idea of a new, binding mercury treaty, the world community embraced it in Nairobi.

The rapid policy reversal is just one of more than a dozen environmental initiatives the new administration has undertaken in its first two months. In nearly every case, the decisions were based on extensive analysis and documentation that rank-and-file employees had prepared over the past couple of years, often in the face of contrary-minded Bush administration officials.

After years of chafing under political appointees who viewed stricter environmental regulation with skepticism, long-serving federal officials are seeing work that had been gathering dust for years translate quickly into action.

This relates to one of my favorite themes—how harmful it is for the United States to have such an overgrown number of political appointees at our civilian agencies. In other countries, a given ministry will typically have one or two political appointees but the vast majority of the responsibility is in the hands of career civil servants. The role of the political appointees is to give overall direction to the agency and, in their role as a cabinet, perhaps help set overall policy for the administration. But running the government is seen as a job for professionals. If politicians want to change an agency’s mandate, they can write legislation doing so, but not just subvert it by fiat. It works in other systems around the world, and it works in the United States military where the president has some discretion about which generals and admirals fill which high-level roles, but doesn’t just bring a giant crew of people in from the outside.

Post on Dealing With Netanyahu

Good editorial from The Washington Post on how the Obama administration can cope with the fact that Israel’s new government won’t acknowledge Palestine’s right to exist:

The remaining problem is how to respond to Mr. Netanyahu’s failure to accept Palestinian statehood, which in the past decade has become the anchor of U.S. policy in the region. Since the Palestinians are currently weak and divided, the temptation for the administration will be to tacitly tolerate Mr. Netanyahu’s position and focus on Israeli negotiations with Syria, which could benefit U.S. interests even if they don’t succeed.

The problem with that course is that it could deliver a fatal blow to the two-state solution, which most Israelis recognize as the only way to preserve a democratic Jewish state. As outgoing Prime Minister Ehud Olmert understood, the time for that solution may be running out. It is vital that the United States and European governments insist on Israeli acceptance of it — just as they have done with Palestinian governments — and that they publicly oppose actions that could undermine it, such as settlement expansion. If that creates tension between the United States and Israel in the short run, the result may be productive. Israelis — starting with Mr. Netanyahu — need to get the message that acceptance of a two-state solution has become a prerequisite for normal relations with the United States.

Working on the Syria issue is a good idea and could bring benefits to a lot of people. But neither the prospects for peace with Syria nor the need to continue dealing with the Iranian nuclear issue should distract from the fact that the Palestinian issue is central and years of additional settlement expansion will make peace harder and harder to achieve over the long run.

“Do Crises Weaken Vested Interests?”

Via Ezra Klein, a perhaps noteworthy paper from Simon Johnson, Todd Gorley, and Changyong Rhee titled “Do Crises Weaken Vested Interests? The Illustrative Case of Korean Corporate Bonds.” It’s about who can get bond financing in the wake of a major financial crisis:

Using a unique dataset of publicly placed corporate bonds in Korea, this paper assesses a bond market’s ability to provide financing during a severe bank crisis. Evidence from Korea after the 1997-98 crisis confirms that bond markets can develop quickly in bank-dominated economies. However, access was feasible only for the largest firms and, as with bank loans before the crisis, bonds were not allocated well. Large firms with weaker pre-crisis corporate governance were no less likely to obtain bond financing, and default risk was not priced by investors. This evidence suggests that while bond markets can develop quickly in a crisis-hit, bank-dominated economy, they may fail to allocate resources well in the absence of reliable credit rating agencies and when ‘too large to fail’ beliefs persist among investors. In terms of access to capital during the crisis, the largest firms did best and the financial playing field tilted further in their direction.

My guess is that this would be applicable to the United States. If, at the moment, you were interested in investing in corporate bonds you would probably have very little confidence in the credibility of the ratings agencies. And a reasonable person looking for a viable heuristic with which to assess the riskiness of lending to a firm will probably find it both easier and more significant to focus on the odds of the firm getting bailed out in the event of inability to pay than to try to do a detailed assessment of the business model. You’re looking, in other words, for a firm with a lot of political clout more than anything else. So as everyone becomes more dependent on the government, the vested interests grow stronger.

Hope the Economic Crisis Stays Economic

A friend remarks “things could be worse — we could be Ukraine”:

Ukraine’s economy shrank by 25-30 per cent year on year in the first two months of 2009, but concerted measures to tackle the financial crisis can restore growth, President Viktor Yushchenko said on Tuesday.

Growth in the ex-Soviet state, hit by shrinking markets for its steel and chemical exports, stood at 5.8 per cent of gross domestic product in the same period of 2008. ”We were ill-prepared to confront the crisis and its first blow was painful and difficult…,” Mr Yushchenko told parliament in his state of the nation annual address.

I read this another way. Things could get worse—the economic crisis could turn into a serious geopolitical crisis. After all, Ukraine is not famed for its political stability. And Ukrainian domestic politics are tied in with great power rivalry between the United States and Russia. The probability of a major international blowup around Ukraine isn’t huge, but it isn’t zero either. And Ukraine’s not the only place on earth where you can imagine an economic crisis turning into a big political problem. The odds of rising unemployment in China leading to major domestic violence aren’t zero. And it’s something along these lines—a major geopolitical crisis—that’s the real risk of a serious global depression. Twelve percent unemployment would be terrible, but one can imagine much worse things. The Depression was bad but the Eastern Front, the Holocaust, Nanjing, and Nagasaki were worse.

Obama Still Popular, GOP Still Doesn’t Care

With there seeming to be more Senate Democrats who are wary of Barack Obama’s agenda than there are Senate Republicans wary of opposing it, Washington often takes on the feel of a town with a president whose honeymoon is over. But every time a poll comes out, you see that it’s not true. Today it’s The Washington Post:

Overall, 66 percent of the public approves of Obama’s performance on the job. Back in November, 53 percent of the vote was enough for him to carry North Carolina, Indiana, Ohio, Nevada, and Florida. Given that he’s more popular now than he was then, you’d think that the Republican Senators from those states—along with the ones from Pennsylvania and Maine and New Hampshire—would be running scared. But instead they’re quite boldly marching on.

Do they have some secret insights? Maybe they do. I think public opinion matters less than most people in politics think. That said, the Senate GOP caucus did a marvelous job of holding together in defense of the unpopular George W. Bush’s agenda back in 2007-2008 but all their tactical acumen just got them a bunch of lost seats. So maybe this is madness rather than method.

Birthrates Followup: All About the Social Insurance?

One popular response to yesterday’s question of why should we worry about low birthrates comes from James Robertson and James Gary namely that high birthrates are necessary to sustain generous public sector benefits for retirees.

This seems a bit strange to me, however, since the people urging us to panic about low birthrates are almost always conservatives who oppose the existence of such programs. Certainly, the two commenters I was citing seemed to feel this way. What’s more, it’s not entirely clear to me how true this really is. After all, children are a significant—and legitimate—claim on the public purse. And high birthrates seem likely to lead to low workforce participation on the part of women, which makes sustaining your retirement benefits more difficult. Conceivably you could get around that by making public spending on child care and preschool and after school programs even more generous, but that just gets you back around to where we started. It actually strikes me as more plausible to argue that generous public sector retirement programs encourage low birthrates than that low birthrates discourage generous public sector retirement programs.

But without denying that the effect is real, this strikes even a lover of Social Security such as myself as a pretty unpersuasive reason to explicitly target higher birthrates as a policy objective. If it’s true—as I’m inclined to think it is—that slower population growth rates are likely to increase average living standards then people could still be made better off even with smaller transfer payments. Alternatively, a developed country that did find itself in desperate need of additional workers can always let more immigrants in.

I think part of what drives these anxieties is the intuition that if birth rates fall and fall eventually the human race will dwindle to nothing. But in practice, if you take a country with low birthrates that chooses not to compensate with immigrants—Japan, in other words—I think the situation will stabilize. Right now housing in Japan is incredibly expensive. But if the Japanese population were to fall, density would fall and space would get cheaper. And the availability of cheap, relatively spacious housing is an important determinant of people’s decision-making about having children and family size.

Buy High, Sell Low

I understand that California’s got budget problems, and looking into the sale of potentially valuable state owned land thus has some merit, but it seems to me that it would be pretty unfortunate to sell these parcels amidst a huge recession and real estate bust. The time to sell publicly owned property that’s ripe for redevelopment is when times are good. During good times when there’ll be plenty of buyers you can make sure to sell it to someone whose development plans serve some kind of reasonable conception of the public interest.

Besides which, the smart thing to do would be to monetize those assets during an upturn, and then sock the money to plug budgetary holes during downturns. Or even better, you could use the money to fund capital projects. Currently, we tend to do capital projects during good times when revenues are high, even tough this is also when costs are high. Meanwhile, we sell assets during bad times when revenues are low, even though this is when sale prices are low. The smart thing would be to do the reverse—the overall tax burden would be the same, but we could get much more infrastructure for our money. Not, of course, that sound budgetary practices are typical of state governments in general or California in particular. But our failure to adopt sounded budgeting at the state and local level significantly lowers our economic growth and overall well-being in the long term.

The Obama Auto Plan

It’s taken me all the way until the end of the day to actually digest the day’s big story—the Obama administration’s new auto industry plan. The first thing to say about this is that unlike a lot of other things that have raised the cry of “socialism!” this really sort of is socialism. You have the President of the United States firing the CEO of General Motors, and simultaneously ordering Chrysler to pursue a process of selling itself to Fiat. The administration is wisely trying to avoid an extended period of state-directed management of industrial firms producing consumer goods, but that’s certainly the situation they’re in at the moment and it’s something we ought to try to bring to an end as soon as possible.

My understanding of the Chrysler portion of the deal is basically that if Chrysler and Fiat can’t come to terms within 30 days, then Chrysler is going to enter into a Chapter 7 liquidation process at which point Fiat could buy whatever it wants. Consequently, Fiat is likely to be able to extract favorable terms on whatever deal they reach. General Motors, meanwhile, is in effect being put into a debtor-in-possession bankruptcy. They haven’t technically been put in such a scenario, but the firm’s restructuring plan has been rejected and the panel is offering a 60 period in which to put together a more radical restructuring featuring haircuts from bondholders and labor unions and dealers. This is basically what would happen in a DIP bankruptcy. The thinking is that given current conditions in the economy and the credit markets it wouldn’t be possible to arrange that through the private sector, so a bankrupt GM would need to be liquidated rather than reorganized. The government is stepping in to, instead, facilitate reorganization.

In both cases, these seem like economically reasonable courses of action. It’s important to note, though, that if these plans work it doesn’t seem like they’ll especially achieve what people would ideally like to see. The American auto industry isn’t really going to be “saved.” General Motors is going to shrink radically, and Chrysler’s production facilities will basically become “transplant” factories of an Italian firm. In job terms, the auto industry is going to continue to shrink as a source of employment. In particular, the Chrysler-Fiat merger scenario is consistent with massive job losses in the United States since it’s not obvious how many Americans Chrysler would really want to employ. If GM succeeds in getting out of a lot of its debt obligations, the resulting company isn’t going to be well-positioned to expand when the broader economy recovers since it’ll be hard to borrow on favorable terms. And the “good jobs” nature of blue collar work in the auto industry is going to further erode.

Long story short, this looks like an economically responsible way to avoid a cataclysmic implosion of these firms at an inopportune moment. But this isn’t going to prevent the conditions facing the population of Michigan from further deteriorating. That state more-and-more looks like it’s going to be the 21st century version of the Great Depression’s Dust Bowl. The most important policy question facing us in this regard thus continues to be what can be done to help the people of the Rust Belt that doesn’t just involved indefinitely propping up shrinking firms. The first step is simply to turn around the shrinkage in the larger economy, but the question will remain even if recovery reaches the rest of the country.