Lehman and the Crisis

John Cochrane and Luigi Zingales opine.

Update: Phill Swagel, who was Assistant Secretary of the Treasury for Economic Policy at the time of the Lehman collapse, emails me the following commentary:

While I have a great deal of respect for John and Luigi, their oped in today's WSJ is misleading in important aspects. One example is this passage:

"It did not help that the TARP was such a transparently bad idea. The Fed and Treasury soon figured that out, settling on equity "injections" and a bank-debt guarantee instead. Floating a bad idea does not instill confidence."

The problem here is that it would have been impossible to start with capital injections -- a proposal for the government to buy 20 percent of the banking system would not have passed the House of Representatives. This was a hard constraint. John and Luigi might think that the initial TARP proposal was a bad idea -- that's a discussion I'd be glad to have -- but it is misleading to make this argument in comparison to an infeasible alternative. They should consider instead the choice between the TARP as originally envisioned to buy illiquid MBS and the (feasible) alternative of not having any TARP and thus not having the ability to switch to capital injections as financial market conditions deteriorated in the ensuing weeks.

This is all discussed on page 38 and following in the paper I wrote for Brookings in April. To find the discussion of this point in my paper, search for the phrase "politically oblivious."

Thanks, Phill.

Gordon on Macro

Bob Gordon surveys the state of macroeconomics.

Thanks to David Warsh for the pointer.

A Coming Trade War?

In case you have not been following the headlines, here is a recap:

Obama to impose tariffs on Chinese tires: Obama imposes tariffs on China tires for 3 years, a decision that could anger Asian powerhouse

China Strikes Back on Trade: Beijing Threatens U.S. Chicken, Car Parts After Washington Slaps Stiff Tariffs on Tires

Stocks head lower on US-China trade concerns: Major indexes fall in early dealings amid concerns about US-China trade dispute

Tire Tariffs Are Cheered by Labor: Mr. Obama ordered the tire tariffs after the United States International Trade Commission, an independent government agency, determined that a more than tripling of Chinese tire imports had disrupted the $1.7 billion tire market....President George W. Bush had rejected four similar recommendations from the trade commission, angering organized labor

Flier on Health Reform

The dean of Harvard Medical School weighs in on the current debate. An excerpt:

there is our inefficient and inequitable system of tax-advantaged, employer-based health insurance. While the federal tax code promotes overspending by making the majority unaware of the true cost of their insurance and care, the code is grossly unfair to the self-employed, small businesses, workers who stick with a bad job because they need the coverage, and workers who lose their jobs after getting sick.

This employer-based system arose not by thoughtful design but as an unforeseen result of price controls during World War II and subsequent tax policy. How this developed and persisted despite its unfairness and maladaptive consequences is a powerful illustration of the law of unintended consequences and the fact that government can take six decades or more to fix its obvious mistakes.

Where's the beef?

Jim Capretta on the President's healthcare speech:

The president has promised for months now that he would have a plan to “bend the cost-curve.” Indeed, even tonight, he spoke of the plans being worked on in Congress as if they would address the problem of rising costs and improve our long-term budget outlook.

It’s as if the president and his team haven’t read anything that the Congressional Budget Office (CBO) has said about the health care bills under consideration. The truth is that these bills would add an additional runaway health care entitlement to the ones already on the federal books. CBO has said that the House bill would set in motion new spending that would grow at about 8 percent rate per year, while the revenue to pay for it would increase only about 5 percent per year. You don’t have to be a financial genius to see a problem here.

Yes, indeed. That is why this passage in the President's speech had me scratching my head:

I will not sign a plan that adds one dime to our deficits -- either now or in the future.(Applause.) I will not sign it if it adds one dime to the deficit, now or in the future, period. And to prove that I'm serious, there will be a provision in this plan that requires us to come forward with more spending cuts if the savings we promised don't materialize.

At first, it sounds like the President is threatening to veto the bills being considered in Congress because, according to CBO, they will add significantly to deficits in the out years. If true, that would be a big story. But the provision he mentions in the next sentence seems to suggest he is just passing the buck.

Translation: "I promise to fix the problem. And if I do not fix the problem now, I will fix it later, or some future president will, after I am long gone. I promise he will. Absolutely, positively, I am committed to that future president fixing the problem. You can count on it. Would I lie to you?"

A Victory for the Protectionists

Disappointing news:

Obama to impose tariffs on Chinese tires

President Barack Obama on Friday slapped punitive tariffs on all car and light truck tires entering the United States from China in a decision that could anger the strategically important Asian powerhouse but placate union supporters important to his health care push at home.

How Did Economists Get It So Wrong?

Barry Eichengreen's answer (from a few months back).

John Cochrane's answer (in response to Paul Krugman's).

Update: Martin Baily responds to Krugman.