Category Archives: Infrastructure (Economics)

Large Costs Loom for Upgrades to U.S. Water Infrastructure

Source: Governing, July 22, 2013

The issues plaguing American water infrastructure are simple, as experts describe them: Systems are old and need replacing. Most pipelines were laid during the booming 1940s, 1950s and 1960s and were typically constructed of cast iron that corrodes and turns brittle over the years. A sizeable slice is even older; some of today’s failing pipes are more than a century old.

Reforming the United States’ Economic Model after the Failure of Unfettered Financial Capitalism

Source: Richard Freeman, Chicago-Kent Law Review, Vol. 85 no. 2, 2010

From the abstract:
This Article is based on the 2009 Kenneth M. Piper Lecture at the Chicago-Kent College of Law. The 2008-2009 financial meltdown and ensuing economic developments have shown three things about modern capitalism: First, that unfettered financial markets remain the Achilles heel of capitalism with the capability of destroying economic stability and bringing misery to all. Second, that high-powered incentives paid to “talent” in finance are a fundamental cause of the excessive risk-taking, chicanery, and financial fraud that contributes to instability. Without a new compensation system that rewards banking and finance for contributing to sustainable economic progress rather than for economic rent-seeking and a renewed regulatory system that punishes chicanery and financial crime and near-crime, there is unlikely to be any change in the behavior of the financial world. And finally, that in the wake of the implosion of laissez faire finance, labor and allied groups have to participate in rewriting the rules and regulations governing banking and finance so that finance serves the real economy rather than the reverse. Accordingly, if Wall Street insiders continue to make the key policy decisions alone, banking and finance will remain a loose cannon on the good ship Capitalism, sure to crash the ship yet again.

From the Crisis of Distribution to the Distribution of the Costs of the Crisis: What Can We Learn from Previous Crises about the Effects of the Financial Crisis on Labor Share?

Source: Özlem Onaran, Political Economy Research Institute, 3/11/2009

From the abstract:
The working paper analyzes the possible distributional consequences of the global crisis based on the lessons of past crises. The decline in the labor share across the globe has been a major factor that led to the current global crisis. Onaran argues that this is a crisis of distribution, and similarly the policy reactions to the crisis are part of a distributional struggle. The paper presents the effects of the former crises in the developing countries and in Japan on income distribution, wages, and unemployment. This comparison is important not only because it compares developing and developed country cases, but also because it highlights the differences between the currency crises and domestic financial crises as to the distributional consequences.

Despite differences, the cumulative effect is in both cases a dramatic pro-capital redistribution. Building on these lessons, the paper discusses the possible different effects of the current global crisis in the developed countries, Eastern Europe, and developing countries, and concludes with policy alternatives to avoid the socialization of the costs of the crisis.

Proposals for Effectively Regulating the U.S. Financial System to Avoid Yet Another Meltdown

Source: James Crotty & Gerald Epstein, Political Economy Research Institute, October 8, 2008

From the abstract:
Our current economic crisis is a result of cycles in which deregulation accompanied by rapid financial innovation stimulates powerful financial booms. In this paper the authors analyze a series of structural flaws in the current financial system that helped bring on the current crisis, and then propose a nine point regulation policy designed to end this destructive dynamic.

The Economic Crisis and the Fiscal Crisis: 2009 and Beyond

Source: Alan J. Auerbach, William G. Gale, Urban Institute, February 19, 2009

From the abstract:
In 2009, the federal deficit will be larger as a share of the economy than at any time since the 1940s. After 2009, we project an average deficit of $1 trillion per year for the next 10 years, under optimistic assumptions. The longer-run picture is even bleaker, with a fiscal gap of 7-9 percent of GDP — between $1 trillion and $1.3 trillion annually in current dollars. Recent trends in credit default swap markets suggest that although fiscal policy problems are usually described as medium- and long-term issues, these problems may be upon us much sooner than previously expected.

Strengthening American Competitiveness: Regaining Our Competitive Edge – Four Priorities and 20 New Ideas

Source: Jason Bordoff, Lael Brainard, Carola McGiffert, Isaac Sorkin, Brookings Institution, February 12, 2009

From the summary:
The United States is in the midst of the most serious economic downturn since the Great Depression. Policymakers are understandably preoccupied with applying the right mix of fiscal and monetary policy responses to stanch and eventually reverse the decline. At the same time, policymakers need to build a foundation for sustainable, long-term prosperity that can drive our economy once we move beyond the present crisis. Going forward, the economy will no longer have the technology boom of the 1990s or the housing bubble of the 2000s to sustain its growth. And it is unlikely that debt-driven consumer spending or Wall Street will provide the same boost as in the past. If we are going to provide opportunities for all Americans going forward, we need to make the right investments today to rebuild American competitiveness by investing in our people, infrastructure, ideas, and green transformation.

This paper addresses this central challenge for the United States. We begin by discussing the economic downturn and financial turmoil facing the country and how policymakers should respond to both boost our economy in the short-run and also build the foundations for long-term competitiveness. Second, the competitiveness agenda is motivated by, and must therefore be responsive to, at least three changes in the fabric of the global economy: the increase in global integration; the attendant shift in economic power to rising powers such as Brazil, China and India; and the realization of the existential threat that climate change poses. Finally, we lay out the fundamentals of a competitiveness agenda through descriptions of specific policy proposals by leading experts on how to invest more robustly in infrastructure, people, ideas and green transformation.

Causes of the Financial Crisis

Source: Mark Jickling, Congressional Research Service, R40173, January 29, 2009

The current financial crisis began in August 2007, when financial stability replaced inflation as the Federal Reserve’s chief concern. The roots of the crisis go back much further, and there are various views on the fundamental causes.

It is generally accepted that credit standards in U.S. mortgage lending were relaxed in the early 2000s, and that rising rates of delinquency and foreclosures delivered a sharp shock to a range of U.S. financial institutions. Beyond that point of agreement, however, there are many questions that will be debated by policymakers and academics for decades.

Why did the financial shock from the housing market downturn prove so difficult to contain? Why did the tools the Fed used successfully to limit damage to the financial system from previous shocks (the Asian crises of 1997-1998, the stock market crashes of 1987 and 2000-2001, the junk bond debacle in 1989, the savings and loan crisis, 9/11, and so on) fail to work this time? If we accept that the origins are in the United States, why were so many financial systems around the world swept up in the panic?

To what extent were long-term developments in financial markets to blame for the instability? Derivatives markets, for example, were long described as a way to spread financial risk more efficiently, so that market participants could bear only those risks they understood. Did derivatives, and other risk management techniques, actually increase risk and instability under crisis conditions? Was there too much reliance on computer models of market performance? Did those models reflect only the post-WWII period, which may now come to be viewed not as a typical 60-year period, suitable for use as a baseline for financial forecasts, but rather as an unusually favorable period that may not recur?

Did government actions inadvertently create the conditions for crisis? Did regulators fail to use their authority to prevent excessive risk-taking, or was their jurisdiction too limited and/or compartmentalized?

While some may insist that there is a single cause, and thus a simple remedy, the sheer number of causal factors that have been identified tends to suggest that the current financial situation is not yet fully understood in its full complexity. This report consists of a table that summarizes very briefly some of the arguments for particular causes, presents equally brief rejoinders, and includes a reference or two for further reading. It will be updated as required by market developments.

Addressing the Ongoing Crisis in the Housing and Financial Markets

Source: Douglas W. Elmendorf, Congressional Budget Office, Testimony before the
Committee on the Budget United States Senate, January 28, 2009

A strong financial sector is a necessary component of a robust economy. Financial markets and institutions channel funds from savers to borrowers who need the money to build businesses and hire workers and to buy homes and other goods and services. Indeed, credit is often required to support the ordinary operations of businesses–for example, to finance their inventories and to meet payrolls before payments are received. If the customary means of obtaining credit break down, the disruption to
households’ and businesses’ spending can be severe.

Thus, the ongoing crisis in the U.S. financial system has significantly depressed economic activity during the past year and a half, and it poses a serious threat to the nation’s ability to quickly return to a path of solid economic growth. Losses on mortgages, on assets backed by mortgages, and on other loans to consumers and businesses, together with an associated pullback from risk taking in many credit markets,
have raised the cost and reduced the availability of credit for borrowers whose credit ratings are less than the very highest. To be sure, among the fundamental causes of the crisis was the provision of too much credit at too low a price as well as insufficient capital. However, the sudden shift to a much higher price for risk taking has led to a significant reduction in wealth and borrowing capacity; it has also forced a number of financial institutions to close and others to be merged with stronger operations. Those forces, in turn, are weighing heavily on consumption, the demand for housing, and businesses’ investment.

Understanding Bushonomics: How We Got Into this Mess in The First Place

Source: Scott Lilly, Center for American Progress, August 2008

From an article:
Nearly three quarters of a century after the 1929 crash, George W. Bush began gathering his economic advisors to prepare the policy agenda for his incoming administration. There seemed to be little appreciation of the lessons of either Henry Ford or the Great Depression. The first orders of business were massive tax cuts focused heavily on corporations and the highest income individuals to foster economic growth through assistance to the “supply side” of the economy.

Subjects of this report include: the Bush administration’s tax policy, minimum wage, enforcement of federal wage and hour laws, unions, enforcement of trade agreements, and immigration.
See also:
Is Redistributing Wealth a Bad Thing? You Betcha!
Source: Scott Lilly, Center for American Progress, October 21, 2008

Federal Responses to Market Turmoil

Source: Peter R. Orszag, Congressional Budget Office, Statement before the Committee on the Budget U.S. House of Representatives, September 24, 2008

Thus far, turmoil in the financial markets has had less impact on macroeconomic activity than may have been expected, and, indeed, economic growth was relatively strong in the second quarter of this year–in part because of the stimulus package enacted earlier this year. A modern economy like the United States’, however, depends crucially on the functioning of its financial markets to allocate capital, and history suggests that the real economy typically slows some time after a downturn in financial markets. Moreover, ominous signs about credit difficulties are accumulating. The issuance of corporate debt plummeted in the third quarter, and the short-term commercial paper market has also been hit hard. Bank lending, which has thus far remained relatively strong, will undoubtedly be severely curtailed by the difficulties that banks are facing in raising capital. Such a curtailment of credit means that businesses and individuals will find it increasingly difficult to borrow money to carry out their normal activities. In sum, the problems occurring in financial markets raise the possibility of a severe credit crunch, which could have devastating effects on the U.S. and world economies.