Several people have asked me to comment about the oil spill.  Obviously I am not really qualified—but when has that stopped me before?

Other bloggers have already expressed some of these views, but for what it’s worth here’s my take on things.

1.  BP stock has fallen quite a bit.  I don’t know how much, but I assume their losses are in the $10s of billions.

2.  The environmental damage in massive, probably in the $10s of billions.

3.   BP and the firms they hire are very technically sophisticated.  They probably know as much about how to prevent these accidents as anyone else.

4.  It’s been widely noted that people and institutions become complacent about risks when accidents haven’t happened for a long time.  People have pointed to the Titanic, Three Mile Island, the Challenger, and other similar accidents.

So where do we go from here?  The knee-jerk reaction in Washington and among more liberal economists is “more regulation.”  I don’t have any problem with that view in principle; (I favor government attempts to address externalities) but I just don’t see how the facts match the proposed solution.  It seems to me that there are two possibilities, neither of which call for regulation:

1.  The financial losses to BP are the same order of magnitude as the damage to the environment.

2.  The damage to the environment is an order of magnitude or more bigger than the losses to BP.

In case one it seems to me that we need to simply accept the fact that “stuff happens.”  And hope this will be a wake-up call for the offshore oil drilling industry to be more careful.  In case 2, I think we should just throw in the towel and give up on off-shore drilling.  Or perhaps give up on it in the bigger and deeper wells that are potentially so damaging.  (I assume that smaller wells in shallow water are easier to cap.)  My hunch is that case one is more plausible, but I have an open mind.

I just don’t see an in between case where regulation can do much good.  The oil companies already have a strong incentive to avoid these problems, and the engineers in the oil industry are extremely talented, probably more so than those who would be regulating them.  So it really comes down to a simple issue: is this a “market failure” where incentives are way out of line, or just the sort of really bad event that occasionally happens.  If there is a market failure here, I’d say shut down all the wells that are potentially this dangerous, don’t even waste time on regulation.

By this point my liberal critics have given up reading and are scrambling to write posts about how clueless those Chicago economists are in their reflex opposition to regulation.  But you know I always like to tack on something unexpected, like an O’Henry story.  So here it is:

The lesson of the BP fiasco is that we don’t need more regulation of off-shore drilling, but we do need more regulation of electrical power and biotech.  More specifically, we need the government to start strategizing about what to do if there is a massive solar flare that wipes out the power grid east of the Mississippi for months on end.  Or what happens if Craig Venter’s evil twin develops a deadly virus that spreads like the common cold.  If we are to have more regulations, I’d rather we have our regulators think about the time bombs that everyone is ignoring, rather than problems that the oil companies are probably already hard at work addressing.

What would that regulation do?  I don’t know.  Perhaps send more satellites into space to warn us of solar flares.  Of more dress rehearsals of shutting down the electrical grid if there is one.  Or stockpile transformers.  For bio-tech we might want to divert some of the money used on research to cure diseases, into research on how to prevent man-made plagues.  Perhaps we could stockpile vaccines that might offer limited protection against certain types of plagues.  Again, this isn’t my area, but from articles I’ve read we seem woefully unprepared for crises that would be 100 times worse than this oil slick.  I used to assume that the government had some sort of secret agency of geniuses that strategized all these dangerous possibilities, like in James Bond movies or Mission Impossible.  But I outgrew that naivete years ago.

I suppose it is more fun to bash the oil industry than think about two billion people dying from a human engineered plague.  But perhaps it’s time we stopped going with our gut, and started thinking more rationally about the dangers that our high technology society seems to be rushing toward with little forethought.

Stuff happens?  Yes, and maybe that means we are overreacting to the oil spill.  But that’s not what worries me.  Even if increased regulation of oil drilling does no good, it also does comparatively little harm.  What worries me is the “stuff” that may happen in areas that we don’t even seem to be thinking about.  Areas where we can’t afford a single accident.

Mark Thoma had a recent post that got me thinking about how people see the issue of poverty.  But first a quick story.

When I was young my dad had a very tiny general store.  (I worked there when I was 2 years old, and have a picture to prove it.)  Once he tried to give away some toys and games to charity.  Toys that were slightly defective, like Monopoly games missing a few pieces.  The charity wouldn’t take those gifts.  They said it could cause psychological damage to the children if they had to play with inferior toys.  My dad would roll his eyes when he told this story.  So he ended up giving these toys to us kids for Christmas.  (Please, no jokes about “that explains why Sumner . . . “)

He had lots of stories that probably sound a bit reactionary today.  He once said he could never be unemployed.  He’d said he’d take a pencil and go door to door selling it.  When he sold it he’d buy two pencils and go door-to-door selling those.  Don’t think he could pull it off?  He was much more charming and outgoing than me.  When the banks were closed in 1933 his father (a college prof at Wisconsin) couldn’t get at his money.  My dad went upstairs and came down with several hundred dollars he had saved up.  He had earned the money wheeling and dealing things like bicycles and scrap metal.  He was 11 years old, and that was a lot of money for a kid to have saved up in March, 1933.

Now that I’ve convinced you that he was a reactionary with no sympathy for the poor, you might also be interested in knowing that he was actually a liberal and a strong supporter of civil rights his whole life.  He was an FDR Democrat who hated prohibition and favored welfare and easy money.  He knew his unemployment anecdote didn’t apply to most workers.  He didn’t change, the world changed around him between the 1930s and the 60s.  That picky charity’s attitude would have been viewed as absurd in the Depression years.

I’m starting to feel like that as well.  Imagine my reaction when I read this from a Mark Thoma post:

It’s true people don’t literally starve on the streets anymore, but is that our goal as a society? I think a relative standard that says that people who, because of their incomes, cannot participate fully in society are poor. A child getting enough to eat, and with clothes to wear, who cannot afford the toys needed to be part of the group of kids in the neighborhood is socially isolated and socially disadvantaged (we don’t want to play at your house because you don’t have a TV, you can’t come with us because you don’t have a bike, you didn’t get my text message about baseball practice being moved?, etc., etc., etc.). Giving people, children in particular, what they need to participate in the society around them is an important element of how successful they will be in the future. It helps to determine their ability to give back to society as fully participating adults.

I don’t even have a cell phone.  Or how about this (Thoma quoting Jamelle Bouie):

With microwaves, air conditioning and cell phones, it’s clear that poor people aren’t nearly as poor as we think they are! I mean, it’s not as if poverty is concentrated in the nation’s two warmest regions “” the South and the West “” where air conditioning is a necessity, and it’s not as if cell phones are a cheaper alternative to landlines, and critical to navigating the world of low-wage service jobs.

Air conditioning is a necessity!?!  Nobody in the South had air conditioning during the first 150 years of the country.  Should we feel sorry for upper middle class Southerners who in 1925 lacked AC?  So that’s my gut reaction.  I am getting to be a reactionary.

By now you are thinking you have me pegged.  You always knew I was a right-winger, so these views are no surprise.

But just as with my dad, you may have jumped to the wrong conclusion.  My reactionary gut instincts have zero impact on my policy views.  When I sit around the table with a bunch of liberal college professors, I am often the most liberal in my attitudes toward today’s students.  They mock all the luxuries of today’s college students, like spa services in dorms.  And my gut instinct is the same.  But my response is; why shouldn’t today’s students have it easier than we did?  We are a much more affluent country today than in the 1970s.  We grew up in smaller homes with one or one and a half baths; they grow up in McMansions with 5 bedrooms and 4 baths.  They have their own cars in college.  They don’t want to live in a little dorm cubicle, they want a nice apartment.  So in a way I agree with Mark Thoma and Jamelle Bouie.  I may even have pretty similar values (assuming they favor income redistribution for utilitarian reasons.)

It seems to me that there are lots of binaries in the framing of poverty:

Past vs. present:  What’s the appropriate benchmark; how thing used to be, or how the middle class lives today?

American vs. South Asian poor:  Vastly different living standards, but what does that mean?

Relative vs. absolute poverty:  This is closely related to the previous distinctions.  In absolute terms, the living standard of America’s poor has improved.  In relative terms it may not have.   Income has become less equal.  Consumption inequality seems more stable, but it’s hard to get figures everyone agrees on.

Migrants vs. the native-born:  Do we have less obligation toward those who came here from even poorer countries, as compared to the native-born poor?

Deserving vs. undeserving poor:  This is one of the most emotional issues, where there is a clear split between liberals and conservatives.  Here are a couple examples of how people think about poor people:

From the Daily Mail:

He became the self-proclaimed king of the chavs after turning up to collect his £9.7 million lottery win wearing an electronic offender’s tag.

But eight years on, having blown all that money, Michael Carroll is practising for a return to his old job as a binman.

The 26-year-old, who squandered his multi-million fortune on drugs, gambling and thousands of prostitutes, has since February claimed £42 a week in jobseeker’s allowance.

And this is from the NYT:

MEMPHIS “” For two decades, Tyrone Banks was one of many African-Americans who saw his economic prospects brightening in this Mississippi River city.

A single father, he worked for FedEx and also as a custodian, built a handsome brick home, had a retirement account and put his eldest daughter through college.

Then the Great Recession rolled in like a fog bank. He refinanced his mortgage at a rate that adjusted sharply upward, and afterward he lost one of his jobs. Now Mr. Banks faces bankruptcy and foreclosure.

“I’m going to tell you the deal, plain-spoken: I’m a black man from the projects and I clean toilets and mop up for a living,” said Mr. Banks, a trim man who looks at least a decade younger than his 50 years. “I’m proud of what I’ve accomplished. But my whole life is backfiring.”

So which view is right?  I think they are both right, and both wrong.  The NYT is clearly the much more respectable paper.  And the example of a lottery winner that ends up poor is obviously extremely rare.  So that favors the NYT.  On the other hand the NYT tends to be politically correct, and most of their readers are too affluent to know many poor people.  During my life I’ve found that the periods where my income was fairly low, I tended to know many more low income people.  And I met lots of people in that category who had “issues.”  So in one sense I agree with the Robert Samuelson column that Thoma finds so distasteful:

Who is poor in America? This is not an easy question to answer, and the Obama administration would make it harder. It’s hard because there’s no conclusive definition of poverty. Low income matters, though how low is unclear. Poverty is also a mind-set that fosters self-defeating behavior — bad work habits, family breakdown, out-of-wedlock births and addictions. Finally, poverty results from lousy luck: accidents, job losses, disability.

Surely there are lots of people with what is viewed as “bad luck” and lots of others who seem to have made “bad decisions.”  On the other hand from a philosophical perspective (whatever that means) I don’t see how this distinction is defensible.  Consider that lottery winner.  How did he end up like that?  At age 2 did he stand up in his crib, use his “free will” to decide “I’m going to head down the road to being a pathetic loser?”  I rather doubt it.

If categories like “deserving” and “undeserving” are to be defended, in my view they must be defended on utilitarian grounds.  I.e., conservatives might argue that they are “useful fictions” that encourage people to shape up.  I guess society is free to think about these issues as they wish.    But in terms of public policy, I’d rather just focus on utility maximization.  How do we do that?  I have already made some suggestions such as a welfare state that combines low taxes, forced saving, and meaningful subsidies for the poor.  I won’t argue that it solves all the dilemmas associated with the deserving/undeserving distinction.  For instance, there is the issue of what sort of distinction is too be made between able-bodied people who aren’t working, and the disabled.  I don’t have any good answers.  But I think it’s a start, and it reduces the amount of framing that we need to do.

Conservatives tend to look down on the poor.  Liberals are more inclined to romanticize the poor.  Neither attitude helps in coming up with sensible public policy solutions.  Liberals are right that we need some empathy in order to become motivated to address the issue.  But once we get to the stage of drawing up legislation, we are better off thinking about the issue with as little emotion as possible.  I saw Samuelson taking a clear-headed and reasonable look at a technical issue—how to measure poverty.  Thoma thought he was exhibiting a lack of compassion for the poor.  The more blogging I do, the more I realize that people see very different things when they read a post.

PS.  The NYT story is why I feel so passionate about the unemployment problem.  The cost of this recession in terms of human suffering is immense.  Just consider the effect of using monetary policy to raise the inflation rate from 1% to 2%.  That would make inflation more stable, which is one of the Fed’s goals.  And if the SRAS is fairly flat right now, it would put millions of people back to work.  That’s a win-win.  That’s a massive free lunch just waiting to be exploited.  Think of all the people in situations like that black guy in Memphis.   And we aren’t even lifting a finger to make it happen.

(That’s me being emotional in trying to get others to see that we need to address the problem.)

HT:  Tyler Cowen

Update:  I am getting a lot of conservative/libertarian commenters who misunderstood my point.  Just to be clear:

1.  I don’t view losing one’s house as a tragedy.  I lived much of my adult life in an apartment.

2.  I don’t think the government should help low income people get houses (or any other good except health care and education.)

3.  I thought the tragedy in the Memphis story was the loss of the job.

4.  I don’t support our current welfare state, although it is marginally better than 20 years ago.  I support wage subsidies for low wage adult workers.

5.  Yeah, I can tell stories too.  I worked and borrowed my way through college and grad school, with virtually no financial aid.  For eight years I ate hot dogs and generic macaroni and cheese.  And absolutely nobody cares, nor should they.

6.  It’s only a matter of time before liberals write in and say how insensitive I am to the poor.  People get very emotional about these issues.

Mark Thoma recently linked to this post:

Scott Sumner meet Tyler Cowen

Between the two of you, you are three fourths of the way to understanding the main national accounts identity.

Let me refresh your memories Y = C+I+G+NX

Tyler Cowen mixed up the concepts of demand and supply when he argued that uncertainty causes low investment and that this is low aggregate supply (via Brad DeLong). In the medium term, but not the short term, low investment causes lower aggregate supply. Low investment, right now, means low aggregate demand, right now. This is the strange case considered by uh Keynes in the General Theory. Cowen argues that, if uncertainty is causing low investment, then fiscal stimulus will have a “marginal” effect. This is an unfortunate choice of words, as Cohen is also confusing levels and derivatives (that is level and marginal effect). Uncertainty implies low I and low Y for given G. It does not imply a low effect of G on Y.

Not to be outdone, Scott Sumner forgets that C, G, and NX contribute to aggregate demand and argues that a fiscal stimulus works only if people believe it will work (Via Paul Krugman and Mark Thoma). Evidently, he equates stimulating the economy with stimulating investment. It is possible he assumes that G crowds out C completely unless people believe the stimulus will work. This is, of course, nonsense. If people assume that they will pay the full increase in G with higher taxes (ignoring how the increase can partly pay for itself by increasing Y and tax revenues) then the stimulus will work unless the increase in G is permanent or G and C are perfect substitutes.

Behind the apparently diametrically opposite errors, there is a common perspective — the only thing that matters is private investment and therefore the confidence of businessmen.

The Economist is determined not to deprive its readers of this perspective inviting both of them as guest contributors.

Darn!  All that time spent reading Woodford’s Interest and Prices, and the answer was right there in front of me if only I had known that Y = C + I + G + NX.  Tyler “Cohen” might also want to stop thinking about real theories of the cycle, and go back to that good old national income accounting workhorse.  There is no surer way to understand causality.

I suppose I should say something non-sarcastic, so I don’t slide completely into Brad DeLong territory.  OK, here it is:

Please read my post before commenting.

PS, If The Economist has anymore room, they really should add a Canadian like Nick Rowe or Stephen Gordon.

Update 6/7/10:  Several commenters said this post was in poor taste.  I apologize if I was too catty.  I had thought that he was obviously being humorous in his over-the-top criticisms of me, and assumed that if I returned serve he’d treat it like a joke.  I know that he knows I understand Y = C+I+G+NX, and I know he isn’t as silly as I made him out to be.  I’ll try to be more careful in the future.  (BTW, I actually enjoy reading these goofy attacks on me.  I tack DeLong’s over-the-top headlines about me onto my office door.  We all get a good chuckle in the department.)

I hope everyone knows me well enough by now to guess what I regard as the answer to this question, based on the way I framed it.  I was thinking earlier today about this recent post by Tyler Cowen:

Reading the Keynesian bloggers, one gets the feeling that it is only an inexplicable weakness, cowardice, stupidity, whatever, that stops policies to drive a more robust recovery.  The Keynesians have no good theory of why their advice isn’t being followed, except perhaps that the Democrats are struck with some kind of “Republican stupidity” virus.  (This is also an awkward point for Sumner, who seems to suggest that Bernanke has forgotten his earlier writings on monetary economics.)  The thing is, that same virus seems to be sweeping the world, including a lot of parties on the Left.

Tyler doesn’t come right out and say the Fed disagrees with me, but I think that is the clear implication of his post.   (I’m not afraid to make reasonable inferences about Tyler’s posts, as he’s not inclined to scold me if I am wrong.)  In any case, let’s work with the assumption that most people believe the Fed disagrees with me.  Indeed I think it is widely assumed they think I am a bit of a crackpot, or would think that if they knew of me.  

Before going any further, let’s stop to review what it is I believe:

1.  It would be nice if aggregate demand (or NGDP) where higher.

2.  The Fed can make that happen.

My hunch is that lots of people at the Fed agree with me on the first point.  I recall that last year Janet Yellen said “we should want to do more.”  And then she explained that they couldn’t do any more, because rates are near zero.  And I am quite confident that some of the other doves at the Fed share this view.

I also strongly believe that the right-wingers on the FOMC think that the Fed indeed could do much more.  Right-wingers tend to be contemptuous of Keynesian theories of liquidity traps.  They worry that monetary policy is potentially inflationary.  They think the Fed could do more, but they also think it would be a bad idea.

So most people at the Fed agree with me on at least one point.  Unfortunately those who agree with me on the Fed’s ability to “do more,” don’t think it would be wise, and those who favor more nominal spending, don’t think the Fed could do any more. 

There is nothing new in any of this; I’ve blogged on these ideas before.  But I just want to make sure that readers of Tyler Cowen’s post don’t assume that the Fed is some monolithic institution that has looked at my ideas and discarded them.  All of the views that I listed above are shared by top Fed officials, just not the same officials.  I am very much in the mainstream of American monetary policymakers on every single assumption that leads to my policy recommendation.

You might have noticed that I haven’t yet mentioned the mysterious Ben Bernanke.  If there is anyone who believes both of the views I expressed above, it would be him.  I won’t bore you with his previous statements on Japan, but even in his recent statements you can find evidence of both viewpoints.  When Brad DeLong asked him about a 3% inflation target, he didn’t say “we can’t do that.”  That might have seemed a reasonable response to those who know nothing about Bernanke’s academic reputation.  But trust me, if he had said that he would have instantly become the laughing stock of monetary economists.  He has a reputation for mocking the Japanese claim that there was nothing they could do to boost inflation when rates hit zero.  So I am pretty sure he thinks they can do more.  And Bernanke has also said something to the effect that the Fed sure wished AD would rise—so much so that he recommended some fiscal stimulus in 2008.  So there is plenty of evidence that he is a dove.

You might then be thinking “OK, if he agrees with you Sumner, why did he tell DeLong that he opposes a 3% inflation target?”  There are two possibilities:

1.  Since 2003 he has had a brain transplant, and a new brain was installed by a secret cartel of Treasury bondholders.  He is now the “Manchurian Fed Chairman.”  (Younger readers may not get this reference.)

2.  When Brad asked him that question he might have thought “I wish.  But Brad’s tenacious.  If I say the Fed should do that, he will ask me why we haven’t.  And I’ll have to say that it would promote recovery, but those other bozos I have to deal with on the FOMC won’t let me.  If I throw them under the bus my life will become a living hell.”

You can probably guess which explanation I find more plausible, but I think I’ll wait for his memoirs before going stating an opinion.

Nick Rowe had a recent post suggesting that we might want to consider tying the pay of employees at the Bank of Canada to their performance.  He noted that the BOC’s most important objective is 2% inflation.  But how do we compensate each employee on their contribution to meeting that goal?  After all, there is only one monetary policy, toward which each employee contributes.  Here’s how:

1.  Each member of the Canadian monetary board votes on a policy setting for the monetary instrument (short term rate or monetary base.)  They are told to vote for the instrument setting that they believe is most likely to lead to 2% inflation.   The BOC counts the votes sets the monetary instrument at the median vote.  A year later all those who were “right” get paid a $1000 bonus.  All those who were wrong get $1000 deducted from their paycheck.  The votes occur once a month.  Being “right” means voting for a more contractionary than average instrument setting if inflation overshot the target, and vice versa.  Thus if you voted for a 4.5% policy rate, but the median vote was 3.5%, your vote was more contractionary that the median.  In that case are considered right if actual inflation exceeds 2%, and wrong if actual inflation falls short of 2%.  (At the zero bound you’d vote on a monetary base setting.)

2.  Why stop here?  Let’s open up the committee to all 6.7 billion humans.  One man, one vote.  Make participation voluntary.  And wouldn’t one dollar, one vote be more effective at getting the optimal instrument setting?  If you are still with me we have arrived at my 2006 Contributions to Macroeconomics paper.

3.  Why not adopt the policy in the US as well?  And how about switching from a 2% inflation target to a 4% NGDP growth target?  Now we have arrived at my 1989 Bulletin of Economic Research paper.

That’s right; Nick is proposing CPI futures targeting.  At least I hope he is.