OPINION - Wall Street Journal

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THE WALL STREET JOURNAL.
Wednesday, January 14, 2015 | A13
OPINION
G
eneral Motors chief Mary
Barra says the company’s
new electric car, the Chevy
Bolt, will cost around $30,000
and get 200 miles per charge.
One thing she didn’t say it would
be is profitable, even considering
the $7,500 that federal taxpayers
will presumably contribute to
each buyer.
An electric
car aimed at
the middle class
at a time when,
in inflation-adterms,
BUSINESS justed
gasoline is sellWORLD
ing near its allBy Holman W.
time low, might
Jenkins, Jr.
seem the definition of wrongheaded. Relying on
continued taxpayer subsidies to
electric car buyers now that Republicans are in control of Congress might also seem a tad risky.
But maybe gasoline prices will
go back up. Maybe various proposals for an increased gasoline
tax or carbon tax will steepen the
price of gasoline enough to make
the electric Bolt look like a good
deal to cost-conscious, middle-income consumers.
Or maybe something else is
going on. For once, when a CEO
uses the term “game-changer,” as
Mrs. Barra did, perhaps the
words should be credited with
carrying actual meaning.
The year 2017, when the Bolt
supposedly rolls out, will also be
the year of the much-anticipated
midterm review of the Obama
fuel-economy mandates.
Let us review why a review is
necessary. In the early years of
the mandate Mr. Obama first announced in 2011, the rules have
been tilted to protect the Domestic Three’s truck and SUV business, even at the cost of irate
private emails from Toyota and
A Chevy Bolt at Detroit’s 2015 North American International Auto Show.
public denunciations from German car makers.
In the early years, the rules
have also been designed to encourage car makers to fulfill Mr.
Obama’s throwaway prediction of
a million electric vehicles on the
road by 2015 by overegging the
mileage credits for electric cars
in order to help offset Detroit’s
low-mileage trucks and SUVs.
Its electric Chevy Bolt is
about Washington games,
not about making money
or saving the planet.
But after 2017 the full wallop
of the Obama mandate kicks in.
As detailed by a congressional
investigation, the Obama target
of 54.5 miles per gallon was not
the product of science and engineering, which tell us that nearly
all post-2025 cars would have to
be hybrids roughly the size of a
Fiat 500.
Arguably the 2025 goal was
never meant to be taken seriously
at all. It was simply the product
of the White House PR shop’s
hunt for an impressive-sounding
headline number. As a concession
to the auto makers, and to sanity,
the administration also included
a statutory review to take effect
just after Mr. Obama leaves
office, whereupon he can be seen
criticizing his successor for backsliding on the earth-saving measures Mr. Obama put into effect.
As he must, Ford Chief Executive Mark Fields continues to pay
lip service to meeting the 2025
target—though sometime well
after 2025. “I expect we’re going
to have a very robust midterm
review. . . . It’s a great opportunity to talk about the feasibility
and the time frame to meet those
requirements,” he recently told
the press.
Ms. Barra put her own chip on
the table in the form of the promised Chevy Bolt, which is supposed
to make the federal climb-down
easier. See, Detroit received the
message and no longer needs a
BOOKSHELF | By Roger Lowenstein
History
Repeating
federal boot up its backside to
pursue zero-emission vehicles.
Though the car industry daily
works to reduce its cycle time, it
still takes years to bring a new
vehicle into production. Deeply
crazy and obviously undesirable,
then, is afflicting such a high-investment industry with so much
regulatory uncertainty about the
fuel-mileage targets it’s supposed
to begin meeting just two years
hence.
Which may explain another
mystery. Sen. Bob Corker, usually
a favorite of conservatives and
hardheaded business types, is
finding invective rained on his
head for putting his name to a
bill that would hike the federal
gasoline tax.
Mr. Corker represents Tennessee, which is rapidly emerging as
America’s premier car-building
state, with GM, VW and Nissan
churning out vehicles locally. He
cites the need to fund the highway trust fund, but Mr. Corker’s
modest, 12-cent hike in the
federal gas tax would also be an
efficient way to encourage Americans to use less gas (if that really must be our goal). At this
point, for any given gasoline-consumption target, it certainly
would be far more efficient than
continuing to inflict on car makers an increasingly convoluted,
costly and politicized duty to
build cars the public doesn’t
want and that can only be sold at
a giant loss.
Mr. Corker’s bill also stipulates
that any gas tax proceeds would
be used to offset other taxes, but
even so his bill likely won’t be
going anywhere. Still, it’s another
chip on the table in the game the
auto industry and federal regulators and politicians will be playing
over the all-important midterm
review of the fuel-mileage rules.
Hall of Mirrors
By Barry Eichengreen
(Oxford, 512 pages, $29.95)
T
here are two broad schools of economic history.
One contends that people learn nothing and are
doomed to repeat the past; the other that, with
each successive crisis, understanding improves and the
worst of the past’s mistakes can be avoided. Barry
Eichengreen tests the latter proposition in “Hall of
Mirrors,” a painstaking effort to compare the recent Great
Recession with the Great Depression of the 1930s. Among
much else, Mr. Eichengreen, an economist and political
scientist at the University of California, Berkeley, sets out to
answer a question that has been lurking in the shadows
ever since 2008: Did the officials entrusted with responding
to the economic crisis learn, and apply, the right lessons
from the Depression?
His short answer
would be yes—in
general, policies did
improve. His more
drawn-out response,
which supplies the leitmotif of the book, is that
contemporary policy
makers did not sufficiently
grasp the parallels between
then and now. They could
have done better.
Why did such lapses occur
even when Ben Bernanke, a
student of the Depression,
was running the Fed? Mr.
Eichengreen notes that Mr.
Bernanke and other officials were well
aware of Milton Friedman’s diagnosis of the
Depression, which focused on the shocks to the banking
system—bank runs and bank failures. But they interpreted
Friedman too literally. By the early 2000s, the problem of
retail bank runs had been solved, thanks to the 1930s
innovation of deposit insurance. Regulators thus relaxed
their gaze, Mr. Eichengreen argues. They failed to see that
risks were accumulating in the “shadow banking” system.
Lehman Brothers and other firms experienced “runs”; the
runs just didn’t consist of depositors lining up on the
sidewalk. Rather, wholesale lenders pulled their loans, and
regulators were unprepared for the disastrous effects.
Mr. Eichengreen is even tougher on officials in
Europe—not surprisingly, given the extent to which its
problems have lingered. He contends that the Europeans’
biggest mistake was creating the euro in the absence of
political unity. The historical parallel dates to the 1920s,
when various countries on the gold standard could not
devalue their currencies to dig out of hard times. This
predicament was repeated in recent years, notably in
Greece, by a “blind faith” in the euro, an even tighter-fitting
monetary straitjacket. Europe further ignored the lessons of
the Depression by flirting with austerity, resulting in serial
recession and, recently, deflation. Of course, the European
“obsession” with price stability cited by Mr. Eichengreen is a
response to a different episode, the German hyperinflation
of the early 1920s. The problem is that history offers up a
lot of lessons, some of them contradictory.
A Fight Obama Needs to Have With Democrats
his year may be the most
consequential one for trade
agreements in a generation. It is all but certain to be the
most combative—although America’s top negotiator is optimistic
about the outcome.
Unless the negotiations unexpectedly run off the rails, a draft
Trans-Pacific Partnership agreement should be
on the table for
congressional
consideration by
Labor Day. Well
before that, the
House and Senate
POLITICS will debate the
& IDEAS reauthorization of
By William
the Export-Import
A. Galston
Bank, which has
staunch friends and ardent foes
in both parties. Later this year,
attention is likely to shift to
negotiations for a new Transatlantic Trade and Investment Partnership between the United
States and the European Union.
Preceding all of these will be
trade-promotion authority (TPA),
popularly known as “fast track,”
which would allow the president
to bring completed treaties to
Congress for up-or-down votes,
without amendments. In last
year’s State of the Union address,
President Obama asked Congress
to approve TPA. Less than 24
hours later, then-Senate Majority
Leader Harry Reid told him to
forget about it. The president is
likely to renew his call for TPA
this year.
The battle-lines are already
forming. Last week Rep. Rosa
tative Michael Froman is undaunted. He has conducted the
TPP negotiations, he insists to me
in an interview, with the lessons
of the past, including the 1994
North American Free Trade
Agreement, firmly in mind.
In fact, he says, “This is the
renegotiation of Nafta that Obama
talked about as a candidate in
2008,” a process that will produce
The president must work
hard for the ‘fast track’
authority he needs to
make vital trade deals.
breakthroughs in areas of concern
such as labor rights and environmental protection. He predicts
that TPP will be the “most progressive trade agreement in history.” Whether this will be enough
to mollify his Democratic critics
remains to be seen.
Mr. Froman also expresses confidence that he could conclude a
draft TPP treaty with our trade
partners. The reason: “Everyone is
motivated to get it done.” Explaining their shared determination, he
underscored the significance of
Japan’s decision to participate in
the negotiating process: “By opening Japan’s market, everyone will
benefit.”
Trade experts and veterans of
past negotiations believe that
attaining this goal requires tradepromotion authority—the sooner
the better. Without TPA, they say,
our negotiating partners would
be reluctant to put their best and
final offers on the table. One
former government official told
me that Japanese Prime Minister
Shinzō Abe had made this link
clear in a private conversation. A
draft TPP that failed to crack
open Japan’s agricultural market
would disappoint many U.S. lawmakers and weaken support for
the agreement.
Everyone with whom I have
talked stresses how vital TPA is
to a manageable legislative process. Without a closed rule that
prohibits amendments in the
House and its functional equivalent in the Senate, which is what
TPA amounts to, the draft would
be exposed to hundreds of special-interest amendments. It is
hard to believe that the House
and Senate would be as likely to
endorse an up-or-down vote
after the draft TPP is unveiled
than they are right now. Amendments would force U.S. representatives back to the bargaining
table.
Republican leaders have made
clear that although they will have
to provide the bulk of the votes
for trade-promotion authority,
they are unwilling to go it alone.
If President Obama really wants
the authority, he will have to
fight for it, not just ask for it.
That would mean going against
the grain of his own party, which
he has been reluctant to do
throughout his presidency. But
not doing so could turn his
vaunted “pivot to Asia” into a
hollow phrase.
In the 1920s, electrification spurred a faith
in rising productivity, fooling regulators.
The same thing happened with the Web.
I
’ve been teaching economics
for 25 years, and yet I’ve routinely missed a perfect opportunity to explain how markets fail
to deliver efficient solutions. It
isn’t just me. During our first day
of class in introductory economics, thousands of economics professors begin with a key lesson:
how to make better decisions by
carefully weighing benefits and
costs. Yet we professors are
shockingly blind about what our
We economics professors
are missing a chance to
teach a lesson about the
unchecked rise of prices.
students pay for the textbooks
from which we teach these valuable lessons. Even on Amazon,
the average price of a new copy
of one of the best-selling economics textbooks, “Principles of Economics” by Greg Mankiw, can be
more than $250 (and retail for a
hardcover edition is about $360).
Think about it: For a student
working at minimum wage, it
would take him about 35 hours
of work after taxes to afford this
book. Not to pick on Mr. Mankiw,
since he has written a fine book,
but $250 for a new textbook?
Really?
In 1982 I took principles of
economics for the first time and I
believe I paid about $20 for a
wonderful textbook by Richard
Lipsey and Peter Steiner, “Economics.” Minimum wage was
$3.35 then so it took about six
hours of work for me to pay for
the book, which I did with cash
earned over the summer. (The
textbooks haven’t changed all
that much, by the way.)
So what is going on? Since
1985, prices of all consumer goods
have about doubled, but textbook
prices have risen sixfold, according to the Bureau of Labor Statistics. The reason is such an interesting one that it’s surprising it
doesn’t find its way into the first
chapter of every economics textbook. The cardinal lesson is that
prices rise unchecked if the people
who order the goods aren’t paying
the prices.
Publishers routinely hide the
suggested retail prices of their
textbooks from the book cover
and most of us never bother to
ask what they cost. After all,
we’re not paying for them, right?
Instead, we’re swayed by the publisher offering us free examination copies, PowerPoints, lecture
notes, quiz generators and so
forth. Instead of engaging in costbenefit analysis, we only pay
attention to the benefits to us
Getty Images
The $250 Econ 101 Textbook
Composite
By Craig Richardson
DeLauro convened a press conference to declare that “fast
track would be yet another insult to the American worker. It
will not happen. We are not going to do it.”
If history is any guide, Rep.
DeLauro is speaking for the vast
majority of House Democrats. In
2002, the last time TPA was
authorized, it squeaked through
the House 215 to 212, with only
25 Democrats voting in the affirmative. This was more than a
Democratic declaration of no
confidence in the trade priorities
of a Republican president. In
1998, during the last of Bill Clinton’s failed attempts to obtain
TPA, only 29 Democrats supported him.
Although the Senate is typically more favorable to trade
treaties than the House, the president’s prospects among Senate
Democrats are at best uncertain.
In 2002 only 21 Senate Democrats out of 50 supported TPA,
and of those 21 only six remain in
the Senate.
In a speech last week to the
AFL-CIO, Sen. Elizabeth Warren
excoriated “trade pacts and tax
deals that let subsidized manufacturers around the globe sell
here in America while good
American jobs get shipped overseas.” These pacts, she declared,
were among the choices in Washington “that have left America’s
middle class in a deep hole.” If
the past is any guide, Sen. Warren is also speaking for most of
her Democratic colleagues.
United States Trade Represen-
before ordering the outrageously
expensive books that we ask our
students to pay for.
There’s more to this story.
During the past 30 years, there
has been an explosion of student-loan debt. Students rarely
pay for books out of pocket and
instead roll it into their financial-aid package. So a $250 textbook is now being paid back over
decades. It’s a bit like the prospective car owner who pays
$400 for optional floor mats
when it only adds a few dollars
to her monthly payment, yet
would never pay cash out of
pocket for the same mats. The
easy access to financial aid has
meant there is no natural binding
mechanism on price increases,
since the pain of rapidly rising
prices is scarcely felt by years of
student-loan payments.
So here is the $250 economics
textbook, a creature of government-subsidized student loans,
professors who pay no attention
to prices, and students who strive
to push the costs down the road.
It seems like a natural end of
chapter one question, doesn’t it?
Mr. Richardson is a professor
of economics at Winston-Salem
State University in North Carolina.
As for modern regulators, especially in the U.S., Mr.
Eichengreen gives them a mostly passing grade once the
crisis hit. For him, the signal lesson of the 1930s is that
when private markets implode, government must step in
forcefully until some semblance of a normal economy
returns. Thus he applauds governments here and
elsewhere for ramping up deficit spending and central
banks for flooding markets with liquidity. He thinks that
more could have been done, but the point is that, in the
1930s, governments were too cautious. This time, Mr.
Eichengreen writes of policy makers, “their decisions
were powerfully informed by received wisdom about the
mistakes of their predecessors.”
It is remarkable how similar the periods were. A credit
boom and a real-estate bubble were as much features of
the 1920s as of the mid-2000s. In each period, new
technology (earlier, electrification; recently, the Internet)
spurred a faith in rising productivity and in a new era of
stability, fooling regulators and encouraging permissiveness. There were also similarities once the bubbles burst.
The Reconstruction Finance Corp., created by Herbert
Hoover, was stymied because it lacked authority to inject
capital into insolvent banks. Similar restraints discouraged
federal officials from saving Lehman. Once Franklin
Roosevelt succeeded Hoover, he closed the banks and
announced a plan to reopen the “good” banks. Although
the New Dealers hardly knew which banks were sound, the
display of official wizardry boosted public confidence. The
Obama administration pulled a similar trick with its “stress
tests” at the nadir of the mortgage crisis.
But the periods also diverged in many ways. Europe
ditched the gold standard in the 1920s and ’30s, but, so far,
it has clung to the euro. And the world didn’t experience
anything close to a global depression during the recent
crisis. Peak to trough, global GDP fell 15%, world-wide,
from 1929 to 1932; it fell less than 1% from 2008 to 2009.
It would have been good, then, for Mr. Eichengreen to
have emphasized the limitations of history as well as its
uses. Instead, his treatment goes overboard by suggesting
that the periods were carbon copies in the making. He
laments that regulators did “just enough”—and not more—
to avoid “another Great Depression.” Their partial success,
he says, undercut more substantial reforms of the sort that
were enacted under the New Deal.
Such an analysis implies—and Mr. Eichengreen
repeatedly suggests—that without the cures prescribed
by regulators in 2008, the Great Depression would have
returned. But history is not so formulaic. Nor is there
reason to think that reforms post-2008 should mirror
those of the 1930s. The test of recent changes in policy
should be whether, for instance, mortgage finance has
been made more sound, not whether the same percentage
of mortgage holders in the 2000s received government
refinancing as in the 1930s.
Mr. Eichengreen seeks both to contrast the eras and to
narrate them pulse for pulse. He gives us the story not only
of Charles Ponzi and the Florida land boom in the 1920s but
also, in our own time, the sagas of Countrywide’s Angelo
Mozilo and of Greece. “Hall of Mirrors” is dense with detail,
survey-like in breadth. Although the detail is often striking,
the avalanche of information somewhat obscures the
book’s purpose. When, however, Mr. Eichengreen mines
his material for lessons learned and lost, “Hall of Mirrors”
becomes a worthy, and distinctive, addition to the literature
on the crash.
Mr. Lowenstein is the author of “The End of Wall Street.”
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