Catallaxy Files

Will California suspend its own ETS?

Now the jobless rate is 12.3%, 2.25 million Californians are unemployed, and the state government is broke. So Republican Assemblyman Dan Logue has begun collecting signatures for “The Global Warming Solutions Act,” a ballot initiative that would suspend California’s cap-and-trade scheme until the unemployment rate falls below 5.5%. He’s aiming to get it on the November ballot.

No matter what one thinks of climate science, it makes little sense for an individual state to unilaterally impose major new tax and regulatory costs on its own industries. The impact of California’s gesture on global temperatures will be infinitesimal, but the economic impact will make the state even less attractive to start or expand a business.

I’m reposting this as it is still of interest.

David Gruen presented a paper at the Australian Business Economists Forecasting Conference today where he basically admits the government, and its advisors, panicked last year. Of course, he doesn’t say that – rather it is a self-congratulatory piece whereby the government, acting early and decisively, saved Australia from a recession.

In contrast to the ‘official’ story, consider an alternative. The Treasury has a long history of poor forecasting, and got it wrong again. They told the government that we’re going to hell in a basket and the government hocked us to the eye-balls and spent money on all sorts of inefficient infrastructure. Gruen provides some nice graphs comparing actual performance to forecast performance.

This is what happens when you follow Ma Henry’s advice. Let us not forget this Senate exchange (on the first stimulus package).

Dr Gruen—No formal modelling was done of that package. Certainly, analysis was done of that package, but it was not formal modelling.
Senator JOYCE—So we have spent half of the nation’s surplus without a formal modelling of the package, is that correct? We have spent half of the nation’s surplus without a formal modelling of the effects of the package?
…
Dr Gruen—I can confirm that the package was $10.4 billion and that no formal modelling was done. I can confirm that no formal modelling was done.

Gruen now makes all sorts of arguments to justify this wasteful expenditure. Apparently avoiding a recession at any cost is a ‘good thing’. He dismisses the Ergas-Robson cost-benefit analysis of the stimulus package by talking about ‘disequilibrium’ as if that somehow changed the story. If it does he hasn’t explained that at all. Rather he implies that Ergas and Robson need to explain why recessions are not long-lived. But they never said that recessions are long or short-lived. Gruen’s comment is a complete non-sequitur – mind you, that probably applies to the whole paper.

The problem Gruen faces is to explain why fiscal policy has apparently succeeded in Australia and failed everywhere else. Obviously, he wants to claim credit for Treasury and the government, and that is understandable. But he has yet to make that case. The evidence presented today simply reinforces the view that that government went too early and spent too much. Of course, that is before we look at the appalling quality of the spend.

Update (13 Jan 2010): The Assistant Treasurer Nick Sherry insists that unemployment will rise to over 8% in the second half of 2010.

From the WSJ

Indeed, President Obama’s stimulus bill failed by its own standards. In a January 2009 report, White House economists predicted that the stimulus bill would create (not merely save) 3.3 million net jobs by 2010. Since then, 3.5 million more net jobs have been lost, pushing the unemployment rate above 10 percent. The fact that government failed to spend its way to prosperity is not an isolated incident.

‘Indeed’ is exactly the word to describe what has happened.

(HT: Mankiw)

This is no longer a theoretical exercise. The idea that increased deficit spending can cure recessions has been tested repeatedly, and it has failed repeatedly. The economic models that assert that every $1 of deficit spending grows the economy by $1.50 cannot explain why $1.4 trillion in deficit spending did not create a $2.1 trillion explosion of new economic activity.

Why Government Spending Does Not End Recessions

Moving forward, the important question is why government spending fails to end recessions. Spending-stimulus advocates claim that Congress can “inject” new money into the economy, increasing demand and therefore production. This raises the obvious question: From where does the government acquire the money it pumps into the economy? Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.