Transcript Applications - Harvard Kennedy School

Applications
Jeffrey Frankel
Harpel Professor of Capital Formation & Growth
Policymaking in the 21st Century
Bosch Foundation
Bundestag executive education program
October 9-14, 2016
Wed., 12 Oct., 2:00-3:30 pm
Outline of two lectures
1) Economic Paradigms
2) Applications to:
 Microeconomic policies
 1. Agriculture
 2. Energy.
 Macroeconomic crises (2007-10)
 3. US housing policy & the sub-prime mortgage crisis of 2007
 4. US fiscal policy & the Great Recession
 5. Troika fiscal policy & the Greek/euro crisis of 2010- .
 Globalization
 6. Trade & the environment
 7. Brexit, Trump, anti-globalization & inequality.
1. Agriculture
• Farming comes about as close as possible to
the neoclassical model that calls for laissez-faire:
– Perfectly competitive.
• And yet we see heavy government intervention,
• often rationalized by appeals to environment & inequality.
• But actual policy worsens these goals as often as improving them.
• In EU, US, & Japan:
– Producer subsidies & import protection help rich farmers
– and hurt the environment as often as they help it.
– E.g., US ethanol subsidies.
• In developing countries:
– consumer subsidies & export controls don’t help the poor.
– E.g., rice in India, wheat in Argentina, flour in North Africa.
Farm supports have declined only modestly.
Agricultural Policy Monitoring and Evaluation 2016, OECD, Fig.1.3
http://www.oecd-ilibrary.org/content/book/agr_pol-2016-en
2. Energy
• The environmental externalities are clear:
– Air pollution,
– global climate change,
– traffic congestion…
• Answer from economists:
– Raise the price of energy (esp. carbon)
• by eliminating subsidies of fossil fuels,
• and then by raising taxes on them.
• Or cap-and-trade.
• Some other environmental approaches
(“command & control”) achieve lower
environmental quality at higher cost.
Energy, continued
• Europe
– shouldn’t be lectured to by the US, given our inadequate steps!
– But, to me, the energiewende seems costly
– while allowing EU carbon emissions to rise (2009 to 2013)
by replacing nuclear energy with coal.
• US should start by raising gasoline taxes
• and ending subsidies to oil production & ethanol.
• Some countries recently cut fossil fuel subsidies successfully,
– including Indonesia, India, Gulf countries, Morocco & Mexico.
– A win-win-win-win-win-win-win-win policy change:
• helping economic efficiency, government budget,
trade balance, income distribution,
• global climate change, local air pollution,
traffic congestion, and traffic accidents.
Fossil fuel subsidies remain big -- $409 billion globally
IEA Analysis of Fossil Fuel Subsidies, 2011.
www.iea.org/media/weowebsite/energysubsidies/ff_subsidies_slides.pdf
Few fossil fuel subsidies actually go to the poor,
typical of subsidies adopted in the name of equality.
Source: IEA
A disproportionately small slice
of fuel subsidiesbenefit the poor – only 8%.
IEA Analysis of Fossil Fuel Subsidies, 2011.
www.iea.org/media/weowebsite/energysubsidies/ff_subsidies_slides.pdf
Gas Taxes Are High in Europe, Low in the Americas
Fuel Taxes by Country in $/gal. (road use)
Gasoline
Diesel
Mexico
US
India
Canada
Germany
UK
US DOE http://www.afdc.energy.gov/data/10327
Data source: OECD/EEA database on instruments for environmental policy
Notes: Data for the US & Canada include average excise taxes at the state/province level.
3. US mortgage crisis of 2007• One can blame the 2008 financial crisis on many factors
• and -- true -- no economist forecast the precise date,
nature & severity of the global financial crisis.
• But most economists have always opposed the US policy
tilt in favor of housing debt:
–
–
–
–
tax-deductibility of mortgage interest;
huge moral hazard from GSEs (FNMA & FHLMC);
very little down-payment required of borrowers (highLoan/Value);
mortgage-originators not required to retain “skin in the game”
• None of this has been fixed since the crisis.
US mortgage crisis, continued
• All US politicians were, and still are, convinced that
maximizing home-ownership is essential, no matter
how deeply in debt families have to get.
• They fail to realize:
–
–
–
–
equity is better than debt;
renting can be as good as buying;
the subsidies go to the middle class, not the poor;
the policies may not even raise the rate of homeownership (e.g., vs. Canada),
• once taking into account the effect on higher housing prices
• or the fall in homeownership resulting from the financial crisis.
Countries with Higher Homeownership Rates Typically
Have a Larger Share of Owners Without Mortgages.
2013
”A Cross-Country Comparison of Homeownership Rates,” Michael Neal, NAHB Fig. 2, JUNE 19, 2015
4. US fiscal policy & the Great Recession
• Keynes did not favor big government.
– He favored, rather, countercyclical fiscal policy:
– “The boom, not the slump, is the right time for austerity at the
Treasury.”
• Advanced countries used to get this right, on average
(1960-2000).
• In the US recently, some politicians have been getting it
backwards, pursuing pro-cyclical (destabilizing) policies.
• 2003-06 boom: George W. Bush enacted large tax cuts &
spending increases.
• Response to the Great Recession: Congressional Republicans
– all voted against Barack Obama’s fiscal stimulus, but failed (2009);
– succeeding in reversing it after they achieved a majority (in 2010).
When Obama passed fiscal stimulus,
US GDP stopped falling.
Jan.20, Jan.20
2009 2009
June
2009
Level of GDP, monthly (Dec.2006-Dec.2013), estimated by Macroeconomic Advisers
5. Troika fiscal policy
& the Greek/euro crisis of 2010- .
• Another example of pro-cyclical fiscal policy,
– i.e., destabilizing.
• But, first: I do sympathize with the German
taxpayers who before 1999 feared the euro,
based on suspicion that they would
eventually be asked to bail out some
profligate Mediterranean country.
Greece let its deficit rise in the growth years, 2001-08,
despite the 3% of GDP limit set by the Stability & Growth Pact
& then was forced into sharp austerity in 2010.
SGP “floor”
Source:
IMF, 2011.
I. Diwan,
PED401, Oct. 2011
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Greece was forced into sharp austerity in 2010-13.
Source: Zsolt Darvas, Bruegel, Jan. 23, 2015.
The primary balance is the budget balance excluding interest payments.
The structural primary balance is the estimate of the underlying position of the primary balance, by excluding the impact of the economic cycle
(such as the negative impact of recession on tax revenues) and one-time revenue and expenditure measures (such as bank rescue costs).
Data Source: EC forecasts. The Nov. 2014 forecast includes data on the structural balance from 2010 onwards,. For earlier years we used the May 2014 forecast.
//bruegel.org/2015/01/greek-choices-after-the-elections/
As a result, Greek GDP fell sharply in 2010-13.
Source: Jeffrey Anderson and Jessica Stallings, Feb. 13, 2014, “Euro Area Periphery: Crisis Eased But Not Over,” Institute of International Finance, Chart 3
The euro countries imposing the sharpest
fiscal austerity experienced the sharpest falls in GDP.
Source: P.Krugman, 10 May 2012.
The bigger the fiscal contraction, the bigger the GDP loss
relative to what had been officially forecast
=> true multipliers > than multipliers that IMF had been using.
Europe: Growth Forecast Errors vs. Fiscal Consolidation Forecasts
Source: Olivier
Blanchard &
Daniel Leigh, 2014,
“Learning about
Fiscal Multipliers
from Growth
Forecast Errors,”
fig.1, IMF Economic
Review 62, 179–212
Note: Figure plots forecast error for real GDP growth in 2010 and 2011 relative to forecasts made in the spring
of 2010 on forecasts of fiscal consolidation for 2010 and 2011 made in spring of year 2010; and regression line.
Greece’s debt/GDP ratio accelerated upward
when fiscal austerity was imposed (2010-13).
6. Trade & the environment
• Widely agreed: trade openness is good for economic growth.
• In theory: classical comparative advantage (e.g., Ricardo)
& modern theories of trade based
on imperfect competition (Krugman)
& endogenous productivity (Melitz).
• Empirically: many econometric studies.
– E.g., one estimate: every .01 increase in a country’s trade/GDP ratio
raises income 3 ½ % (over next 20 yrs.).
• But what about effects of trade on other objectives,
such as environmental quality?
Trade can have either positive or negative effects
on the environment.
• Example of negative effects:
– “Race to the bottom” in environmental regulation among
national governments pursuing of cost-competitiveness.
• Example of positive effects:
– Trade in environmental goods & services.
• US ended 1980s tariffs & quotas on fuel-efficient Japanese autos,
benefiting both consumer pocketbooks & air quality.
• Almost ¾ of EU trade-remedy barriers currently target imports
of products used for renewable energy! (Kasteng, 2013; Wu, 2014)
• AD remedies currently block trade in solar power inputs:
–
–
–
–
US has AD tariffs on imports of Chinese solar panels (2012, 2014, 2015).
China has them against imports of polysilicon from US & EU (2012 & 2016);
EU has penalties on imports of Chinese solar glass & panels (2013, 2015).
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They should be dropped, either by negotiation or unilaterally.
Which tend to dominate in practice,
positive or negative effects of trade on the environment?
Econometric estimates depend on environmental criterion.
• For SO2
– Trade seems to be beneficial
• “Environmental Kuznets Curve” =>
at higher incomes, people want to clean the environment.
• For CO2
– Even at high levels of income, trade continues to hurt.
• The “freerider” problem => popular desire for environmental
quality cannot be enacted at the national level, absent an
effective multilateral treaty à la Paris Agreement.
Frankel & Rose, Review of Ec. & Stats. (2004).
7. Brexit, Trump, inequality & anti-globalization.
• After the surprises of the Brexit vote & Trump’s
nomination, typical explanations went as follows:
globalization => inequality =>
those left behind supported radical changes.
• Inequality has indeed risen, esp. in US, and
• trade & immigration may play partial roles, alongside:
–
–
–
–
–
technology that outpaces education,
“winner-take-all” labor markets
“assortative mating”
reduced corporate competition,
and excessive executive compensation.
• But I don’t see a logical connection to Brexit & Trump.
The choice between the two parties in the US
• in some ways is the same this year as usual.
• Globalization is a fact.
• The choice, it seems to me, is between politicians
who favor policies to address inequality -–
–
–
–
Financial regulation,
Universal health insurance,
Universal pre-school education,
A more progressive tax system, etc.
• -- and politicians who favor the opposite policies.
Economic Paradigms
& Applications
Prof. Jeffrey Frankel
Policymaking in the 21st Century
Bosch Foundation
Bundestag executive education program