"Tilting at Green Windmills"

In a post last fall ("A Green New Deal?"), we mentioned Van Jones's explication of the idea, advocated by many progressives, that government subsidies for solar and wind energy would spur job creation. In his Washington Post column yesterday ("Tilting at Green Windmills"), George Will draws on research from a Spanish economist who suggests otherwise. An excerpt:

WASHINGTON -- The Spanish professor is puzzled. Why, Gabriel Calzada wonders, is the U.S. president recommending that America emulate the Spanish model for creating "green jobs" in "alternative energy" even though Spain's unemployment rate is 18.1 percent -- more than double the European Union average -- partly because of spending on such jobs?

Calzada, 36, an economics professor at Universidad Rey Juan Carlos, has produced a report which, if true, is inconvenient for the Obama administration's green agenda, and for some budget assumptions that are dependent upon it.

Calzada says Spain's torrential spending -- no other nation has so aggressively supported production of electricity from renewable sources -- on wind farms and other forms of alternative energy has indeed created jobs. But Calzada's report concludes that they often are temporary and have received $752,000 to $800,000 each in subsidies -- wind industry jobs cost even more, $1.4 million each. And each new job entails the loss of 2.2 other jobs that are either lost or not created in other industries because of the political allocation -- sub-optimum in terms of economic efficiency -- of capital. (European media regularly report "eco-corruption" leaving a "footprint of sleaze" -- gaming the subsidy systems, profiteering from land sales for wind farms, etc.) Calzada says the creation of jobs in alternative energy has subtracted about 110,000 jobs from elsewhere in Spain's economy.

An Economic Stimulus Idea That Seems to Work

One economic stimulus idea that has been proposed a number of times is for the government to spur auto sales by offering a voucher good towards the purchase of a new car¹ to owners of old cars. The first I remember reading of such a proposal was last summer, but here are a couple of more recent examples, from the Brookings Institution ("Refuel Economy with Cash for Old Cars") and from the chairman of Ford in the USA Today ("Cash in Old Cars for New Ones"). As the Brookings piece notes, Germany included this sort of voucher program as part of its stimulus package it implemented in January. The German version offers vouchers of 2,500 euros to citizens who scrap cars that are at least nine years old. According to an article in today's Financial Times ("Berlin hit by cost of car incentive scheme"), this German stimulus program is having a big effect, both in Germany and in other parts of central Europe. A few excerpts from the article make this point:

“In February and March, we made about three times the sales we had in the first quarter of last year,” says Bernd-Uwe Prochnow, sales director at a Volkswagen dealership in Frankfurt. “And the first quarter of last year wasn’t bad at all.”

Car sales nationwide rose 11.9 per cent in February, making Germany the world’s only bright spot for the car industry.

[...]

Car-scrapping incentive programmes introduced by Germany and other European Union countries² are having a dramatic impact on central European car factories, and could help boost the region’s slumping economies, write Jan Cienski in Warsaw and Thomas Escritt in Budapest.

The turnround at factories making smaller and cheaper cars has been striking. During much of November and December, the Dacia factory in Pitesti, Romania, stood empty, its workforce at home on 80 per cent pay. However, Dacia, owned by France’s Renault, produces the €5,000 ($6,600, £4,500) Logan, Europe's cheapest production car, which has become a winner thanks to Germany’s €2,500 government rebate available for new car purchases.

Recently François Foumont, Dacia's general manager, said surging west European demand meant exports would account for three-quarters of the company’s production this year, against two-thirds in 2008. Dacia said it sold 25,500 vehicles in Germany last year, and German orders this year already exceeded that number.

In the Czech Republic, Skoda, a subsidiary of Volkswagen, has seen its sales to Germany more than double to 11,000 in February, and the factory in Mlada Boleslav has gone back to full-time production after working only four days a week in January.

Petr Vanek, a spokesman for Hyundai, which has a factory in the Czech Republic, said the plant shipped 20 cars a month to Germany in January and February, but last month delivered more than 2,000. Hyundai is now hiring about 500 workers.

Fiat, which makes small cars in southern Poland, exported 47,417 cars in March, almost 10,000 more than in the same period a year ago.

The image above, of a welder working on a Logan sedan in the Dacia factory in Romania, comes from this ViaMichelin.com site

¹Some have proposed making vouchers good for the purchase of newer used cars too, which would indirectly boost new cars too.

²The article mentions that France offers a voucher program as well, but the French vouchers are worth only 1,000 euros.

KSW Update

Yesterday KSW, Inc. (Nasdaq: KSW) filed an 8-k and issued a press release regarding its 2008 results, "KSW Reports Record 2008 Profits and Revenue". Excerpt:

Net income for 2008 increased by 16% to $4,239,000, or $.68 per share (basic) and $.67 per share (diluted), compared to 2007 net income of $3,662,000, or $.59 per share (basic and diluted).

Revenues in 2008 increased by 20% to $93,027,000, as compared to $77,266,000 in 2007.

As of December 31, 2008, the Company’s backlog was approximately $62,500,000.

The release didn't break out 4Q numbers, but after backing out the previous three quarters' earnings I get earnings of $1,004,000 or about 16 cents per share for 4Q 2008, a sequential drop from 3Q's $1.3 million in earnings.

I spoke with KSW's corporate counsel Jim Oliviero today. He said that the company was focusing more on government work and hoped to position itself to benefit from some of President Obama's stimulus money. He said that KSW was going to bid on two government projects this spring -- a pollution plant in Queens and a part of the Port Authority's new World Trade Center. The value of the Queens contract would be about $40 million, and the value of the WTC project is estimated at between $25 million and $60 million. KSW should know by the end of April whether it wins either of those projects.

I also asked Oliviero about the long-anticipated Second Avenue subway project currently under construction in Manhattan. He said that at this state of the project (tunnel boring) there isn't much role for an HVAC contractor, but KSW would consider bidding on the construction of the stations when the project gets to that point.

Based on the current share price of $2.05 and 3Q balance sheet data, KSW is currently trading for about a third less than its net cash (the 10-k showing year-end balance sheet data should be filed within a couple of weeks).

Ross Douthat on Obama's Speech and Jindal's Response

From his Atlantic blog ("Snap Judgments"):

Obama was fantastic - worlds better than his inaugural. He laid out the most ambitious and expensive domestic agenda of any Democratic President since LBJ, and did it so smoothly that you'd think he was just selling an incremental center-left pragmatism. I think that he has an acute sense - more acute than most people in Washington, probably - of just how much running room is open in front of him at the moment, and he intends to make the absolute most of it. Burkean temperament or no, this was not a Burkean speech by any stretch: It was the speech of a man seeking to turn a moment of crisis into a domestic-policy revolution, and oozing confidence from every pore along the way. Now all he has to do is find a way to pay for it ...
 
And Jindal - yeah, he was just as lousy as everybody's saying. As far as themes and messaging went, he basically chose option A on Ambinder's list - government isn't the solution; pork is the problem; etc. - and embedded it in a weak, sing-song delivery that I suspect left even the people who respond favorably to that message cold. Sure, responding to a Presidential speech is almost always a thankless, hopeless job - but shouldn't someone as smart as Jindal have recognized that, and either turned the opportunity down flat, or found a way to sound like something other than a kindergarten teacher delivering familiar GOP talking points? In the event, his speech was the capstone on a lousy night for conservatism: If that's the best the Right has to offer as a rebuttal to Obama, American liberalism is going to be running untouched down the field for years to come.

Douthat's mostly on-target here. There are plenty of legitimate criticisms of the stimulus bill Obama recently signed -- e.g., that it won't provide enough stimulus when it's needed most, that many of its provisions aren't likely to be temporary and will strain the long term fiscal picture, etc. -- but dogmatically opposing fiscal stimulus during a long recession (especially when monetary policy has already taken the Fed funds rate to near-zero) is bad politics and bad economics. The smarter approach for Republicans in Congress would have been to demand a more effective stimulus -- one with more temporary, fast-acting measures (e.g., more aid for the unemployed, a payroll tax holiday, a temporary tax credit to encourage businesses to move up capital spending to this year, etc.).

On the other hand, on the longer-term policy objectives President Obama listed in his speech last night (e.g., free college for everyone, etc.), a good economic case (though a more difficult political one) can be made to oppose them, or to offer more fiscally sustainable alternatives.

Governor Jindal is a Rhodes Scholar who has had a meteoric political career so far, so he ought to be smart enough to realize this. He has time to reposition himself as a "effective government" conservative and differentiate himself from some of the Republican leaders in Congress by offering intelligent, nuanced opposition to President Obama's liberal policies. Jindal's rebuttal last night was an inauspicious start though¹.


¹One small example was Jindal's mockery of volcano monitoring in his rebuttal last night. As Matt Yglesias asked on his blog,

What’s with the attack on “something called ‘volcano monitoring’”? Volcano monitoring is where they monitor volcanos. So as to better understand, better predict, and better prepare for natural disasters. Is that so complicated? Are only hurricanes worth responding to?

If you're going to pick an example of wasteful government spending, volcano monitoring doesn't seem like the best one (not that Sen. McCain got much traction last fall with his jihad against pork -- which, in the big picture, has little impact on the federal budget anyway).

Economics as Politics by Other Means

Although Greg Mankiw didn't mention it specifically in the post I linked to previously ("News Flash: Economists Agree"), I wonder if part of what prompted him to write it was the row set off by Clive Crook's Financial Times column last week, ("Politics is damaging the credibility of economics"). In that column Crook wrote,

Economics outside the academy has become the continuation of politics by other means. If you wish to know what Mr [Paul] Krugman thinks on any policy question, do not read his scholarly writings; see which policies are advocated by the progressive wing of the Democratic party. Mr Krugman agrees with liberal Democrats about most things, and for the rest gives as much cover as the discipline of economics can provide - which, given its scientific limitations, is plenty. He does this even on matters where, if his scholarly work is any guide, the economics is firmly against his allies. Liberal Democrats are protectionists. Mr Krugman is not, but politics comes first.

The syndrome affects economists on the right as much as on the left. Just as there is a consensus among economists that protectionism should be opposed, most economists believe that a powerful fiscal stimulus is both possible and desirable in present circumstances, and that the best stimulus would include big increases in public spending. Yet recently, Robert Barro, a scholar with conservative sympathies, wrote in the Wall Street Journal that this view was an appeal to "magic".

The problem is not that Mr Krugman questions the consensus on trade (if indeed he does), or that Mr Barro questions the consensus on fiscal policy (as he certainly does). It is that both set the consensus aside so carelessly. In doing so, these stars of the profession destroy the credibility of their own discipline. Mr Krugman gives liberals the economics they want. Mr Barro gives conservatives the same service. They narrow or deny the common ground. Why does this matter? Because the views of readers inclined to one side or the other are further polarised; and in the middle, those of no decided allegiance conclude that economics is bunk.

Crook threw in a (mostly accurate) criticism of the blogosphere as well:

The web, for all its blessings, is an aggravating factor. Many of the most successful economics blogs promote communication within political groupings, not across them. On the web you best build an audience by organising a claque and stroking its prejudices. Extend elaborate courtesy to people you agree with and boorish contempt to those who do not get it. Celebrate exasperation and incivility as marks of intellectual authenticity - an attitude easier to tolerate in teenagers under hormonal stress than in professors at world-class universities.

For Krugman's and Barro's respective responses to that column, see Crook's Atlantic blog post, "The Dismal Science, Revisited".

"News Flash: Economists Agree"

Hat tip to Atlantic blogger Andrew Sullivan for linking to this post by Greg Mankiw, the Harvard economist and former Bush Administration Chairman of the Council of Economic Advisers: "News Flash: Economists Agree". From Mankiw's post,

The recent debate over the stimulus bill has lead some observers to think that economists are hopelessly divided on issues of public policy¹. That is true regarding business cycle theory and, specifically, the virtues or defects of Keynesian economics. But it is not true more broadly.

Mankiw goes on to list fourteen propositions on which a majority of economists agree, according to various polls of the profession. The fourth one is the most relevant to the recent stimulus debate:

Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)

Mankiw adds,

Note that the proposition about fiscal policy (#4) does not distinguish between taxes and spending as the best tool for purposes of macro stabilization. Maybe that question should be added in a future poll. I doubt, however, that the answer would make it onto this list of widely agreed upon propositions.

Robert Samuelson on the Proposed Stimulus Package

In his syndicated column today ("Too Little Bang for the Bucks"), Robert Samuelson makes some good points about the stimulus package as recently passed by the House of Representatives. Key excerpts:

The $819 billion program passed by the House will only slowly provide stimulus. The Congressional Budget Office estimates that in fiscal 2009 (through this September) about 21 percent [$169 billion] of the new spending and tax cuts will flow to the economy.

[...]

A package so large can be defended only because the economy is so weak -- and seems to be getting weaker by the moment. The central purpose is simple: halt downward momentum. Perhaps some of the out-year spending might ultimately prove useful. But the immediate need is for the stimulus package to stimulate -- now. It needs to be front-loaded; it isn't.

Obama's political strategy fails to address adequately the economy's present needs while also worsening the long-term budget outlook. Some of his "temporary" spending increases in practice will almost certainly become permanent. There were tough choices to be made -- and Obama ducked them all.

Much is made of the ideological arguments about government spending versus tax cuts in the context of this stimulus bill, but there's less to those arguments than meets the eye. In practice, since the tax system is already highly progressive, most tax relief targeted mainly at lower income earners will essentially be government transfer payments (e.g., refundable tax credits). The key issue with respect to front-loading any fiscal stimulus is that, aside from the relatively small amount of money that can be spent on shovel-ready infrastructure projects, the only other way to impact the economy this year is through fast-acting measures such as transfer payments (e.g., unemployment insurance, food stamps) and tax relief (e.g., a payroll tax holiday).