Chickens, Eggs, and Krugman
Paul Krugman has the amazing ability to get me (briefly) interested in economic theory. He writes that the (non provisional) IRA has had a larger than expected impact on investment writing:
A new blog post from Heather Boushey of the Council of Economic Advisers argues that Biden’s industrial policy helps solve what she calls the “chicken and egg problem,” in which private-sector actors are reluctant to invest unless they’re sure that others will make necessary complementary investments. The easiest example is electric vehicles: Consumers won’t buy E.V.s unless they believe that there will be enough charging stations, and companies won’t install enough charging stations unless they believe that there will be enough E.V.s. But similar coordination issues arise in many other areas, for example in the complementarity between battery and vehicle manufacture.
Here one point is that the cost of the subsidies can be negative. The Federal Government can promise to bailout EV makers or charging station makers if the other wimps out. If so, both will invest and the Federal Government will pay zero. It is bearing the risk of a bad Nash equilibrium in a way which eliminates the bad Nash equilibrium.
More generally the Federal Government can (and has) profited by selling loan guarantees (writing credit default swaps). Given its almost infinite risk bearing capacity, this is a huge profit opportunity passed up because of silly ideology. I note that the risk is better than no risk — the Federal Government would bear losses if there were a recession, so the deal is an automatic stabilizer which is better than a sure thing
What about Solyndra (one of the Obama administration pseudo scandals). They sold CDS to, among other firms, Solyndra which failed The US Federal Government made a profit on the program. The aim was to encourage green investment. It worked at less than zero cost. Solyndra wasn’t the only firm insured. Another is called “Tesla.”
Now you might ask why, if I think the Federal Government could make huge profits at better than no risk, I don’t advocate putting trillions into a sovereign wealth fund (answer: I do so advocate).
So Krugman understates his case (and gives Biden a break for subsidizing when the same goal could have been achieved at a profit).
One other thing. On the Big Push he writes:
the Big Push. This was the argument that you needed an active government role in development because companies wouldn’t invest in developing countries unless assured that enough other companies would also invest.
This claim fell out of favor for a long time, partly because at first economists didn’t know how to think about it clearly…
I call BS. He means that one can’t explain the logic of the Big Push if one insists on assuming there is perfect competition. He often suggests that economists made that assumption because there were no tractable models of imperfect competition. This is not true. There were tractable models of imperfect competition. Economists avoided them, because they understood that with imperfect competition anything could happen so admitting competition is imperfect implies admitting that economic theory is useless.
The change was the adoption of a standard model of imperfect competition which all agree to use for no good reason. With the convention that it is always modeled with the standard model, the mathematical result that anything can happen can be ignored. The advance was not developing a tractable model. It was agreeing to all assume something which all know is false.
Paul Krugman has the amazing ability to get me (briefly) interested in economic theory. He writes that the (non provisional) IRA has had a larger than expected impact on investment writing:
Krugman’s latest column:
A wonderful argument for industrial policy.
“More generally the Federal Government can (and has) profited by selling loan guarantees (writing credit default swaps). Given its almost infinite risk bearing capacity, this is a huge profit opportunity passed up because of silly ideology. I note that the risk is better than no risk — the Federal Government would bear losses if there were a recession, so the deal is an automatic stabilizer which is better than a sure thing.”
Really, really nice.
While it possibly would make a profit, I think the chance of “regulatory capture” (or whatever you wish to call it in this field) would be enormous and probably prove to be quite divisive. Pay-to-play might be the actual baseline condition in such an enterprise.
Eric:
In 2008, the banks, Goldman Sachs, AIG etc., the latter which are now banks and backed by the Gov. proved they were too irresponsible to safely trade in CDS the counter to which was naked CDS or a bet on a bet. The call on AIG by Goldman Sachs would have been catastrophic if the Gov had not stepped in at the time.
There were calls to establish a clearing house for CDS which are derivatives. It was supposed to be put there and it never happened. People such as Brooksley Born and Iris Mack pointed out the dangers of an unregulated market for CDS. The thought was the market would manage its trading competently. It failed miserably and Main Street paid the price to save Wall Street.
There is a whole story detail the events of this event on Angry Bear if you search for it. I am sure some of Roberts posts will come up also.
If the point is that credit default swaps actually increase risk because they can’t be underwritten except by entities who cannot make truly rational decisions for a host of reasons (imperfect information, emotions, social friendships, venality and likely many more), then why bring the federal government into this? You think that things will be totally okay if firms know that approval by Mr. Z in office CDSGov can get them 100 basis point cheaper money? And for a bit more, their competitor won’t be approved? If you think there aren’t hundreds of civil servants pondering if it’s okay for the boss for millions, why not for me with enough for Megan’s school fees, maybe you’re fooling yourself.
“Consumers won’t buy E.V.s unless they believe that there will be enough charging stations”. This is a pre-purchase decision. Of course there will be reluctance to purchase if their new cars can’t be conveniently refueled..
As for “complementarity between battery and vehicle manufacture”: this would seem to be less of a purchase decision factor, given that EV battery warranties are exremely long, and a post-purchase consideration anyway.
But (for me), the main thing is price. I don’t drive that much. A new EV would cost me at least $45K (not counting tax breaks, which might be elusive), perhaps twice what a conventional car might cost.
I would like to buy an EV. I really would. It would be foolish & expensive to do so. That hasn’t stopped me before, as far as car purchases go.
Dobbs
the chicken/egg problem is why the invisible hand needs to be held sometimes by nanny government.
I think most advanced countries solve this problem routinely. It’s only economists who can’t solve the paradox.
Dobbs
I won’t buy an EV because the people building them are making the same stupid mistakes that got us the environmental problem in the first place. Maybe the learning that takes place building the super EV will make it easier to build a sensible one when we get sensible,
not just in time.
EVs of a sort were not entirely uncommon in the early automotive era.
They were perhaps as popular as the steam-propelled Stanleys.
It would appear that Standard Oil & the burgeoning petroleum fuel industry put a stop to that. But now EVs are back, with a vengeance. Can they stay that way?
https://www.nytimes.com/2023/08/17/opinion/biden-green-ira-industrial-trade.html
August 17, 2023
Biden and America’s Big Green Push
By Paul Krugman
The threat of climate change, the strategic risks created by an erratic, autocratic China….
[ Paul Krugman is full of irrational disdain, ranging from a disdain for John Kenneth Galbraith to James Galbraith, but more seriously now Krugman has a wild irrational disdain for China that is repeated in almost every writing. ]
For me, an interesting aspect about IRAs (and 401ks) is that investment changes can be made without capital-gains tax hassles, and also – unfortunately – without benefit of capital-gains tax benefits – no taking losses for tax purposes. This must change how one approaches personal investing, I think.
It may also compel the Mitt Romneys of the world to use their IRA funds for charitable donations.
Because, as you may know, funds can be transferred directly from an IRA into a ‘qualified charitable distribution’ which is considered by the IRS to be ‘not income’ and is therefore not subject to income tax. It serves the purpose of reducing the value of an IRA so that future required mandatory withdrawals become smaller. It doesn’t reduce ones income taxes otherwise.
Obviously the IRA that is the Inflation Reduction Act is not the same as the one that is the Individual Retirement Account. The former means practically nothing to me, so far, while the latter is something I am dealing with constantly, alas.
[Krugman] means that one can’t explain the logic of the Big Push if one insists on assuming there is perfect competition. He often suggests that economists made that assumption because there were no tractable models of imperfect competition. This is not true. There were tractable models of imperfect competition. Economists avoided them, because they understood that with imperfect competition anything could happen so admitting competition is imperfect implies admitting that economic theory is useless.
[ What a brilliant passage, particularly for development economists to remember. I love this essay.
Thanks so much, Robert. ]
Also, Robert, this shows why Krugman has so much trouble with John Kenneth and James Galbraith. The Galbraith’s are pragmatists of an Amartya Sen kind, Krugman is a theoretical dogmatist.
The disdain that Krugman has for China, comes simply for China being socialist (with Chinese characteristics). Krugman can not look at the accomplishments of a socialist system on the system’s own terms. So even China ending poverty is of no significance for Krugman.
Good grief, this is important in understanding Krugman’s analytical limitations.
ltr
yes, important, but not dismissive.
you appear to know more about these things than I do.
but while I have my own beef with Krugman (he said something stupid once about Social Security, but he corrected himself when Dean Baker pointed it out. But he still refuses to understand the basic principle of Social Security. He is not alone.)
…but if he dismisses the accomplishments of China..if you say so… he may have what he regards as more fundamental reasons..fearing (i think rightly) the human implications of a totalitarian system. A (total) free enterprise system has quite as serious human implications as a frankly totalitarian one. But arguing about that is to step outside of “economic” argument or even “material progress” comparisons.