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: