Category Archive for: Policy [Return to Main]

Friday, January 25, 2013

Paul Krugman: Deficit Hawks Down

Deficit hawks are losing their clout:

Deficit Hawks Down, by Paul Krugman, Commentary, NY Times: President Obama’s second Inaugural Address offered a lot for progressives to like. ... But arguably the most encouraging thing of all was what he didn’t say: He barely mentioned the budget deficit..., the latest sign that the self-styled deficit hawks — better described as deficit scolds — are losing their hold over political discourse. And that’s a very good thing.
Why have the deficit scolds lost their grip? I’d suggest four interrelated reasons.
First, they ... spent three years warning of imminent crisis — if we don’t slash the deficit now now now, we’ll turn into Greece... But that crisis keeps not happening ... So the credibility of the scolds has taken a ... well-deserved, hit.
Second, both deficits and public spending as a share of G.D.P. have started to decline..., and reasonable forecasts ... suggest that the federal deficit will be below 3 percent of G.D.P., a not very scary number, by 2015.
And it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging..., the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression. Which brings me to the third reason the deficit scolds have lost influence: the ... claim that we need to practice fiscal austerity even in a depressed economy, has failed decisively in practice. Consider ... the case of Britain. In 2010, when the new government of Prime Minister David Cameron turned to austerity policies,... the sudden, severe medicine ... threw the nation back into recession.
At this point, then, it’s clear that the deficit-scold movement was based on bad economic analysis. But ... there was also ... a lot of bad faith involved, as the scolds tried to exploit an economic (not fiscal) crisis on behalf of a political agenda that had nothing to do with deficits. And the growing transparency of that agenda is the fourth reason the deficit scolds have lost their clout. ... Prominent deficit scolds can no longer count on being treated as if their wisdom, probity and public-spiritedness were beyond question. But what difference will that make?
Sad to say, G.O.P. control of the House means that we won’t do what we should be doing: spend more, not less, until the recovery is complete. But the fading of deficit hysteria means that the president can turn his focus to real problems. And that’s a move in the right direction.

Friday, December 21, 2012

Paul Krugman: Playing Taxes Hold ’Em

I think Justin Wolfer's claim that there are now three parties, the Democrats, the Republicans, and the Tea Party, at odds in the House is correct. That appears to be working in the president's favor, at least for the moment:

Playing Taxes Hold ’Em, by Paul Krugman, Commentary, NY Times: A few years back, there was a boom in poker television — shows in which you got to watch the betting and bluffing of expert card players. Since then, however, viewers seem to have lost interest. But I have a suggestion: Instead of featuring poker experts, why not have a show featuring poker incompetents — people who fold when they have a strong hand or don’t know how to quit while they’re ahead?
On second thought, that show already exists. It’s called budget negotiations, and it’s now in its second episode.
The first episode ran in 2011, as President Obama made his first attempt to cut a long-run fiscal deal — a so-called Grand Bargain... Mr. Obama was holding a fairly weak hand... The deal, if implemented, would have been a huge victory for Republicans... But ... Mr. Boehner and members of his party couldn’t bring themselves to accept even a modest rise in taxes. And their intransigence saved Mr. Obama from himself.
Now the game is on again — but with Mr. Obama holding a far stronger hand. ...
Yet earlier this week progressives suddenly had the sinking feeling that it was 2011 all over again, as the Obama administration made a budget offer that .. involved giving way on issues where it had promised to hold the line... Are we about to see another round of the president negotiating with himself, snatching policy and political defeat from the jaws of victory?
Well, probably not. Once again, the Republican crazies ... have saved the day. ... Mr. Boehner had evident problems getting his caucus to support Plan B, and he took the plan off the table Thursday night; it would have modestly raised taxes on the really wealthy, the top 0.1 percent, and even that was too much for many Republicans. ...
As in 2011, then, the Republican crazies are doing Mr. Obama a favor, heading off any temptation he may have felt to give away the store in pursuit of bipartisan dreams.
And there’s a broader lesson... This is no time for a Grand Bargain, because the Republican Party, as now constituted, is just not an entity with which the president can make a serious deal. If we’re going to get a grip on our nation’s problems ... the power of the G.O.P.’s extremists, and their willingness to hold the economy hostage if they don’t get their way, needs to be broken. And somehow I don’t think that’s going to happen in the next few days.

The U.S. Labor Market: Status Quo or a New Normal?

The introduction to this NBER Digest research summary says it well, "[There is no] compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the [recent] pattern of persistently high unemployment rates." I've noted this research before, but it's worth emphasizing again, particularly since one of the authors, Ed Lazear, was the Chairman of the President’s Council of Economic Advisers during the Bush Administration:

The U.S. Labor Market: Status Quo or a New Normal?, by Laurent Belsie, NBER Digest: The recession of 2007 to 2009 caused such high and persistent unemployment that it led many to conclude that the labor market had undergone structural changes, making it difficult or impossible to return to pre-recession employment levels. But in The United States Labor Market: Status Quo or A New Normal? (NBER Working Paper No. 18386), Edward Lazear and James Spletzer suggest that cyclical, not structural forces, are behind the surge in unemployment from 4.4 percent in the spring of 2007 to 10 percent in the fall of 2009, and the slow decline since then.
"[T]he current recession does not appear fundamentally different from prior ones, except that it is worse," they conclude. They fail to find "any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates." Instead, they note that "the evidence points to primarily cyclic factors."
The authors note that there are a number of ongoing, long-term industrial and demographic shifts in the labor market, but that none of these factors can explain the recent rise in unemployment. For example, the relative decline in U.S. manufacturing jobs has been under way for a half century, and the rise in female employment dates back to the second half of the twentieth century. The U.S. labor force is also aging, but again this is a long-term trend.
The authors' evidence suggests that long-term trends played a limited role in the recent recession and other past recessions. For example, in each of the business cycles between December 1979 and March 2012, the rise or fall in unemployment can be explained by changes in gender-specific unemployment rates, not by shifts in the gender composition of the workforce. Similarly, the aging of the workforce does not correlate very strongly with shifts in the unemployment rate during business cycle sub-periods. Since November 1982 the changing age composition of the workforce has lowered the unemployment rate by eight-tenths of a percentage point. This trend is reinforced by changes such as the rising education of the workforce and the shift toward service jobs, which have worked to lower unemployment over the last four decades.
The authors suggest that the rapid rise in unemployment during the 2007-9 recession can be explained almost entirely by the rise in unemployment within industries. Some industries such as construction, manufacturing, and retail trade saw unemployment soar. But these were the same industries that saw large decreases in unemployment during the recovery. The construction sector, for example, accounted for 19.4 percent of the increase in the national unemployment rate during the recession; this sector also accounted for 21.5 percent of the decline in the unemployment rate during the recovery.
The same phenomenon has occurred with mismatch -- the difference between vacancies and the number of unemployed in an industry, occupation, or location. Industrial mismatch rose during the 2007-9 recession, and then declined just as quickly. Occupational mismatch -- always higher than industrial mismatch and less sensitive to the business cycle -- rose during the recent recession but has since fallen below its pre-recession level. "There is no evidence that the recession resulted in a long-lasting skills gap that would require retraining experienced workers to work in different industries," the authors conclude. "Turning unemployed manufacturing and construction workers into nurses and teachers would not provide those workers with immediate jobs; there is already a surplus of unemployed even in the low unemployment industries."
There are at least two areas where this recession appears different than previous ones. First, the long-term unemployed make up a larger share of total unemployment than in past downturns, even those with comparably high unemployment rates. Second, there are more vacancies per unemployed person than even a couple of years ago. This shift of the Beveridge curve -- which measures the relationship between job openings and the unemployment rate -- may suggest that some permanent structural change is under way and is keeping the unemployed from filling the jobs that are available. The authors conclude that the reason for such a shift, if it has indeed occurred, won't be known until unemployment returns to normal levels.

On the Beveridge curve, see here.

Thursday, December 06, 2012

'Climate Science Predictions Prove Too Conservative'

Don't say you weren't warned about the risks of climate change, though you might be able to say you weren't adequately warned:

Climate Science Predictions Prove Too Conservative, by Glenn Scherer and DailyClimate.org: Across two decades and thousands of pages of reports, the world's most authoritative voice on climate science has consistently understated the rate and intensity of climate change and the danger those impacts represent, say a growing number of studies on the topic. 
This conservative bias, say some scientists, could have significant political implications, as reports from the group – the U.N. Intergovernmental Panel on Climate Change – influence policy and planning decisions worldwide, from national governments down to local town councils.
As the latest round of United Nations climate talks in Doha wrap up this week, climate experts warn that the IPCC's failure to adequately project the threats that rising global carbon emissions represent has serious consequences: The IPCC’s overly conservative reading of the science, they say, means governments and the public could be blindsided by the rapid onset of the flooding, extreme storms, drought, and other impacts associated with catastrophic global warming. ...

Stiglitz: America’s Hope Against Hope

Joe Stiglitz lists things we should hope for (though not necessarily expect) in Obama's second term:

America’s Hope Against Hope, by Joseph Stiglitz, Commentary, Project Syndicate: After a hard-fought election campaign,... not much has changed... With America facing a “fiscal cliff”..., could there be anything worse than continued political gridlock?
In fact, the election had several salutary effects – beyond showing that unbridled corporate spending could not buy an election, and that demographic changes ... may doom Republican extremism. The Republicans’ explicit campaign of disenfranchisement in some states... backfired... In Massachusetts, Elizabeth Warren, a ... tireless warrior ... to protect ordinary citizens from banks’ abusive practices, won a seat in the Senate.
Some of Mitt Romney’s advisers seemed taken aback by Obama’s victory:... They were confident that Americans would forget how the Republicans’ deregulatory zeal had brought the economy to the brink of ruin, and ... how their intransigence in Congress had prevented more effective policies... Voters, they assumed, would focus only on the current economic malaise.
The Republicans should not have been caught off-guard ..., much of the rise in US economic inequality is attributable to a government in which the rich have disproportionate influence... Obviously, issues like reproductive rights and gay marriage have large economic consequences as well.
In terms of economic policy for the next four years, the main cause for post-election celebration is that the US has avoided measures that would have pushed it closer to recession, increased inequality, imposed further hardship on the elderly, and impeded access to health care for millions of Americans.
Beyond that, here is what Americans should hope for...[list/discussion]..., though I am not sanguine that they will get much of it. More likely, America will muddle through – here another little program for struggling students and homeowners, there the end of the Bush tax cuts for millionaires, but no wholesale tax reform, serious cutbacks in defense spending, or significant progress on global warming. ...

Friday, October 19, 2012

Paul Krugman: Snow Job on Jobs

There is no Romney jobs plan:

Snow Job on Jobs, by Paul Krugman, Commentary, NY Times: Mitt Romney talks a lot about jobs. ... But Mr. Romney, it turns out, doesn’t have a plan; he’s just ... telling lies: claiming that ... independent studies support its position when those studies do no such thing. ...
Mr. Romney’s ... jobs plan ... has five points but contains no specifics. ... Mr. Romney says that the plan would create 12 million jobs over the next four years.
Where does that number come from? When pressed, the campaign cited three studies that it claimed supported its assertions. In fact, however, those studies did no such thing.
Just for the record, one study concluded that America might gain two million jobs if China stopped infringing on U.S. patents and other intellectual property..., but Mr. Romney hasn’t proposed anything that would bring about that outcome. Another study suggested that growth in the energy sector might add three million jobs... — but these were predicted gains under current policy,... not as a consequence of the Romney plan.
Finally, a third study examined the effects of the Romney tax plan and argued (implausibly...) that it would lead to a large increase in the number of Americans who want to work. But how does that help cure a situation in which there are already millions more Americans seeking work than there are jobs available? It’s irrelevant to Mr. Romney’s claims.
So when the campaign says that these three studies support its claims about jobs, it is, to use the technical term, lying — just as it is when it says that six independent studies support its claims about taxes (they don’t).
What do Mr. Romney’s economic advisers actually believe? As best as I can tell, they’re placing their faith in the confidence fairy, in the belief that their candidate’s victory would inspire an employment boom without the need for any real change in policy. In fact, in his infamous Boca Raton “47 percent” remarks, Mr. Romney himself asserted that he would give a big boost to the economy simply by being elected, “without actually doing anything.” ...
To summarize, then, the true Romney plan is to create an economic boom through the sheer power of Mr. Romney’s personal awesomeness. But the campaign doesn’t dare say that, for fear that voters would (rightly) consider it ridiculous. So what we’re getting instead is an attempt to brazen it out with nakedly false claims. There’s no jobs plan; just a plan for a snow job on the American people.

Friday, October 05, 2012

'The Community Reinvestment Act Did Not Induce Subprime Lending'

Via Richard Green:

Rub ́en Herna ́ndez-Murillo, Andra C. Ghent, and Michael T. Owyang show that the Community Reinvestment Act did not induce subprime lending: They look at lending originations and loan performance on either side of the CRA thresholds. If CRA encouraged subprime lending, one should see a discontinuity at the thresholds, but there is none.
These are originations for 2-28 subprime loans. Under CRA, lenders received credit for originating and funding loans in census tracts whose median incomes were below 80 percent of area median income. If the CRA was inducing lending, we should see a jump in lending to the left of the 80 percent cut-off--there isn't (either visually or econometrically). They find the same result when looking at pricing and default.

Sunday, September 23, 2012

'Mitt Romney's Housing Market Plan Has to Be a Joke'

Brad DeLong points to Joe Weisenthal's response to the Romney campaign's housing plan (calling it a "plan" gives it more credit than it deserves):

Mitt Romney's Housing Market Plan Has Got to Be a Joke, by Joe Weisenthal: At this point, we have no choice but to conclude that the Mitt Romney campaign is just trolling whiny journalists who have complained about the lack of detail in his plans.

Yesterday evening (a Friday evening!) the campaign revealed a whitepaper titled Securing the American Dream and The Future of Housing Policy that's so unsubstantial, we half-suspect the timing was done so that nobody would see it amid the release of the 2011 tax documents, which came out about 20 minutes earlier. This is honestly a sentence in his whitepaper on The Future Of Housing Policy:

The Romney-Ryan plan will completely end “too-big-to-fail” by reforming the GSEs.

Romney and Ryan believe that "too-big-to-fail", which generally refers to the assumption that a collapse of a major Wall Street institution would be catastrophic to the overall economy, thus making a bailout imperative, would be solved by the reform of Fannie and Freddie. Or maybe Romney and Ryan believe that only Fannie and Freddie are too big to fail, and that the collapse of a mega-bank would be fine. Those are the only possible readings of that sentence. As for Romney and Ryan's plan to reform the GSEs, the plan is to... reform them..., basically there are no details at all. Too Big To Fail will be fixed by reforming the GSEs, and the GSEs will be fixed... somehow….

It's reasonable to think that the challenger who is trying to disrupt the status quo, actually says something that would... disrupt the status quo. Failing to provide any details or a plan during the heart of the campaign undermines the notion that he is a serious alternative.

Bonus Brad DeLong ridicule of the "plan":

"End 'Too-Big-to-Fail' by Reforming the GSEs": Are Romney and His Campaign That Pig-Ignorant?

The Romney-Ryan plan will completely end “too-big-to-fail” by reforming the GSEs. The four years since taxpayers took over Fannie Mae and Freddie Mac, spending $140 billion in the process, is too long to wait for reform. Rather than just talk about reform, a Romney-Ryan Administration will protect taxpayers from additional risk in the future by reforming Fannie Mae and Freddie Mac and provide a long-term, sustainable solution for the future of housing finance reform in our country.

That is the Romney housing white paper's section on the GSEs and "Too-Big-to-Fail".

That is not the introduction to the section.

That is the section.

That is the entire section.

I don't know which is scarier:

  1. That Romney and everybody else in his campaign think that a "white paper" on housing can cover both the GSEs and "Too-Big-to-Fail" in 85 words.

  2. That Romney and everybody else in his campaign think that if the GSEs are somehow "reformed" that that can somehow magically resolve "Too-Big-to-Fail" as well--make it so that there are no longer any problems of systemic risk associated with the potential bankruptcy of Citi, JPMC, Wells-Fargo, BoA, GS, Morgan Stanley, or any of the other systemically-important financial institutions.

People: which scares you more?...

Tuesday, August 28, 2012

Republicans: We Won't Build That

I couldn't resist commenting on the economic policies being promoted at the Republican National Convention:

Republicans: We Won't Build That

(The discussion of Republican policy is at the end of the article.)

Saturday, June 09, 2012

Did Republicans Deliberately Crash the US Economy?

Michael Cohen, followed by a few comments of my own:

Did Republicans deliberately crash the US economy?, by Michael Cohen, CIF: So why does the US economy stink?

Why has job creation in America slowed to a crawl? Why, after several months of economic hope, are things suddenly turning sour? The culprits might seem obvious – uncertainty in Europe, an uneven economic recovery, fiscal and monetary policymakers immobilized and incapable of acting. But increasingly, Democrats are making the argument that the real culprit for the country's economic woes lies in a more discrete location: with the Republican Party.

In recent days, Democrats have started coming out and saying publicly what many have been mumbling privately for years – Republicans are so intent on defeating President Obama for re-election that they are purposely sabotaging the country's economic recovery ... in order to hurt Obama politically. Considering that presidents – and rarely opposition parties – are held electorally responsible for economic calamity, it's not a bad political strategy.

Then again, it's a hard accusation to prove: after all, one person's economic sabotage is another person's principled anti-government conservatism.

Beyond McConnell's words, though, there is circumstantial evidence to make the case. Republicans have opposed a lion's share of stimulus measures that once they supported, such as a payroll tax break, which they grudgingly embraced earlier this year. Even unemployment insurance, a relatively uncontroversial tool for helping those in an economic downturn, has been consistently held up by Republicans or used as a bargaining chip for more tax cuts. Ten years ago, prominent conservatives were loudly making the case for fiscal stimulus to get the economy going; today, they treat such ideas like they're the plague.

Traditionally, during economic recessions, Republicans have been supportive of loose monetary policy. Not this time. Rather, Republicans have upbraided Ben Bernanke, head of the Federal Reserve, for even considering policies that focus on growing the economy and creating jobs.

And then, there is the fact that since the original stimulus bill passed in February of 2009, Republicans have made practically no effort to draft comprehensive job creation legislation. Instead, they continue to pursue austerity policies, which reams of historical data suggest harms economic recovery and does little to create jobs. In fact, since taking control of the House of Representatives in 2011, Republicans have proposed hardly a single major jobs bill that didn't revolve, in some way, around their one-stop solution for all the nation's economic problems: more tax cuts.

Still, one can certainly argue – and Republicans do – that these steps are all reflective of conservative ideology. If you view government as a fundamentally bad actor, then stopping government expansion is, on some level, consistent. ...

Presidents get blamed for a bad economy... The obligation will be on Obama to make the case that it is the Republicans, not he, who is to blame – a difficult, but not impossible task.

In the end, that might be the worst part of all – one of two major political parties in America is engaging in scorched-earth economic policies that are undercutting the economic recovery, possibly on purpose, and is forcing job-killing austerity measures on the states. And they have paid absolutely no political price for doing so. If anything, it won them control of the House in 2010, and has kept win Obama's approval ratings in the political danger zone. It might even help them get control of the White House.

Sabotage or not, it's hard to argue with "success" – and it's hard to imagine we've seen the last of it, whoever wins in November.

Has the Republican Party's strategy been deliberate? Yes, of course, the things the Party proposes do not fall randomly from the sky, they are the result of GOP choices. So the question of whether they did this on purpose is easy to answer, it's yes.

Is it intended to undermine the president's agenda? Again, of course it is. The alternative would be to support Obama's policies, and they aren't about to do that. So Republicans have been deliberately obstructive, and it would be hard to argue otherwise.

Have they intentionally done harm? This is where flip-flops from what Republicans supported in the past matters. If they truly believed that all Keynesian type policies are harmful, then blocking them, and in the process blocking any policy at all -- which is essentially what they are doing since they surely know their pet policies have little chance of escaping a veto -- could not be considered an act of sabotage. The policies may be quite harmful in reality, but if they truly believe they are avoiding harm by blocking stimulus policies it would be hard to accuse them of sabotaging the economy in order to make political gains. But the fact that they have flip-flopped time and again on policies they supported when Republican presidents were in office and the economy needed help leads to the strong suspicion that blocking Obama's policy initiatives is a political strategy. The strategy is justified by a story about Keynesian economics being harmful that they clearly do not believe in their heart of hearts (witness, for example, Romney worrying about the consequences of the fiscal cliff, or their knee-jerk appeal to Keynesian principles when defense cuts are proposed). They have also concocted a story where a confidence fairy can make austerity work to support their ideological pursuit of smaller government. But this is quite a departure from the stimulative polices that Republicans presidents have pursued in recent years giving it every appearance of a belief of convenience rather than of true conviction. To me, the refusal to support policies they would have supported had the president been a Republican tells me everything I need to know about whether this is strategic or a true belief.

Sunday, May 06, 2012

"Learned Helplessness"

I talked a bit yesterday about the political hurdles standing in the way of more help for job creation, something that is desperately needed if we want to avoid the permanent scars of high unemployment. Robin Wells has more on the hurdles, in this case "learned helplessness" (though I might have called it something like "convenient claims of helplessness"):

In weakened economy, policymakers give in to learned helplessness, by Robin Wells, Commentary, guardian.co.uk: Yet another disappointing statistic today from the US labor market – only 115,000 jobs added in April, barely enough to keep the unemployment rate from rising given the growth in population... While not necessarily a sign that the economy is headed for another turn downward, April's job numbers signal a repeat of the pattern seen in 2011 – a recovery that is halting, unpredictable, and agonizingly slow. ...
And it's not surprising given the continued heavy drag on the economy from high levels of household debt, high oil prices, and significant budget cutbacks by state and local governments. Moreover, the longer the economy limps along, the harder it appears to be for policymakers to accept that another outcome is possible. ... Learned helplessness sets in.
One could not have asked for a clearer example of learned helplessness than Ben Bernanke's recent press conference, where he labeled calls for further Fed stimulus "reckless" and appeals for a higher inflation target "irresponsible" because it would, in his view, sacrifice its commitment to a 2% inflation target. Higher inflation helps stimulate a depressed economy... But that is just one example of the implicit deference given by policymakers to views that ignore the plight of the unemployed.
Another variant of this mindset is the appeals to "structural unemployment" as the problem. ... [W]e are not in normal times, and appeals to structural unemployment is a red herring that only serves to distract from what focusing on pushing for we can do. It's a travesty given the state of public education in the US that we've laid off hundreds of thousands of schoolteachers; rehiring them would not only help the economy but it would also improve our long-run growth potential. Ditto for hiring laid-off construction workers to repair falling-down bridges and schools and repairing broken roads.
Perhaps the most maddening area of willful policy blindness is failure to address the foreclosure crisis. Obama's own inspector general has roundly criticized the treasury department for its glacial approach in helping underwater homeowners and its unwillingness to pressure the big banks – recipients of Tarp bailouts, mind you – to help. ...
So where does this leave us? First, we need to understand that a "slow bleed" of the economy – chronically high but not catastrophic rates of unemployment, low levels of private investment, and deteriorating public infrastructure – are nonetheless devastating. Many workers will lead permanently diminished careers, and the economy's long-run productive capacity may be permanently lowered. Second, recognize that it is all too likely that policymakers will fail to advocate for policies to get this economy going. Learned helpless is, unfortunately, a comfortable state of affairs.
Finally, that leaves us with the distinct possibility that without a political sea-change in favor of more progressive policies, we have reached the limits of what is possible. It's up to US voters to overcome their habit of learned helplessness as well.

Friday, May 04, 2012

Paul Krugman: Plutocracy, Paralysis, Perplexity

Inequality is contributing to the slow recovery from the recession:

Plutocracy, Paralysis, Perplexity, by Paul Krugman, Commentary, NY Times: ...Did the rise of the 1 percent (or, better yet, the 0.01 percent) cause the Lesser Depression we’re now living through? It probably contributed. But the more important point is that inequality is a major reason the economy is still so depressed and unemployment so high. For we have responded to crisis with a mix of paralysis and confusion — both of which have a lot to do with the distorting effects of great wealth on our society. ...
For the past century, political polarization has closely tracked income inequality, and there’s every reason to believe that the relationship is causal. Specifically,... the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties, in the process destroying any prospect for cooperation.
And the takeover of half our political spectrum by the 0.01 percent is, I’d argue, also responsible for the degradation of our economic discourse...
Disputes in economics used to be bounded by a shared understanding of the evidence, creating a broad range of agreement about economic policy. ... Now, however, the Republican Party is dominated by doctrines formerly on the political fringe. Friedman called for monetary flexibility; today, much of the G.O.P. is fanatically devoted to the gold standard. N. Gregory Mankiw ... once dismissed those claiming that tax cuts pay for themselves as “charlatans and cranks”; today, that notion is very close to being official Republican doctrine.
And why is the G.O.P. so devoted to these doctrines regardless of facts and evidence? It surely has a lot to do with the fact that billionaires have always loved the doctrines in question, which offer a rationale for policies that serve their interests. Indeed, support from billionaires has always been the main thing keeping those charlatans and cranks in business. And now the same people effectively own a whole political party.
Which brings us to the question of what it will take to end this depression we’re in.
Many pundits assert that the U.S. economy has big structural problems that will prevent any quick recovery. All the evidence, however, points to a simple lack of demand, which could and should be cured very quickly through a combination of fiscal and monetary stimulus.
No, the real structural problem is in our political system, which has been warped and paralyzed by the power of a small, wealthy minority. And the key to economic recovery lies in finding a way to get past that minority’s malign influence.

Tuesday, February 28, 2012

"How to Bring Jobs to People Who Need Them Most"

We must do a better job of protecting workers and their families from the short-run and long-run consequences of globalization and technological change:

How to Bring Jobs to People Who Need Them Most, by Mark Thoma: Is manufacturing special? Should the US do more to preserve its manufacturing base? President Obama brought these questions to the forefront with his recent proposal to use tax breaks and other encouragements to revive the manufacturing sector. Some people such as former Clinton economic advisor Laura Tyson argue that “manufacturing matters.” But others such as her UC Berkeley colleague and former Obama advisor Christina Romer argue against such special treatment.
Who is right? In the past, I have given a lukewarm endorsement to the president’s proposal. I believe manufacturing is one of the more promising avenues for the future economic growth, but I’m wary of picking winners. I’d prefer that we create the conditions for winners to emerge instead of putting too much emphasis on any one area.
But perhaps a more targeted approach is justified after all. Recent research by David Autor, David Dorn, and Gordon Hanson highlights the large detrimental effects that the loss of manufacturing jobs has had on some communities. ...[continue reading]...

(Apologies that it is split into two pages, it's not my choice -- single page, bare bones, no comments, print version here.)

Monday, January 30, 2012

Paul Krugman: The Austerity Debacle

Austerity in recessions is a bad idea:

The Austerity Debacle, by Paul Krugman, Commentary, NY Times: Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. ...
Nor is Britain unique. Italy is also doing worse..., and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.
And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years. ...
Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”
Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.
Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.
And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.
The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

Friday, January 13, 2012

"Mind over Market"

Michael Spence surprises me by making many of the points about markets I've been trying to emphasize lately (and help making these points is more than welcome), in particular that markets are not very good at addressing stability, distributional equity, and sustainability issues:

Mind over Market, by Michael Spence, Commentary, Project Syndicate: In the 66 years since World War II ended, virtually all centrally planned economies have disappeared, largely as a result of inefficiency and low growth. Nowadays, markets, price signals, decentralization, incentives, and return-driven investment characterize resource allocation almost everywhere.
This is not because markets are morally superior... Markets are tools that, relative to the alternatives, happen to have great strengths with respect to incentives, efficiency, and innovation. But they are not perfect; they underperform in the presence of externalities (the un-priced consequences – for example, air pollution – of individual actions), informational gaps and asymmetries, and coordination problems when there are multiple equilibria, some superior to others.
But markets have more fundamental weaknesses. Or, rather, most societies have important economic and social objectives that markets and competition are not designed to achieve. In today’s rapidly globalizing world, the most important of these objectives – expressed in various ways through the political and policymaking process in a wide range of countries – are stability, distributional equity, and sustainability. ... Stability, equity, and sustainability challenges have become crucially important, and the role of the state in relation to markets may need re-thinking as a result. ...[continue reading]...

Thursday, December 08, 2011

The US is Almost Last in Relative Labor Market Policy Spending

Labor

More here.

Monday, November 21, 2011

Paul Krugman: Boring Cruel Romantics

Real technocrats don't take "refuge in fantasy as things go wrong"

Boring Cruel Romantics, by Paul Krugman, Commentary, NY Times: There’s a word I keep hearing lately: “technocrat.” ... I call foul. I know from technocrats; sometimes I even play one myself. And these people — the people who bullied Europe into adopting a common currency, the people who are bullying both Europe and the United States into austerity — aren’t technocrats. They are, instead, deeply impractical romantics. ...
And to save the world economy we must topple these dangerous romantics from their pedestals.
Let’s start with the creation of the euro. ...Europe’s march toward a common currency was, from the beginning, a dubious project on any objective economic analysis. ...
So why did those “technocrats” push so hard for the euro, disregarding many warnings from economists? Partly it was the dream of European unification, which the Continent’s elite found so alluring... And partly it was a leap of economic faith ... driven by the will to believe ... that everything would work out as long as nations practiced the Victorian virtues of price stability and fiscal prudence.
Sad to say, things did not work out as promised. But rather than adjusting to reality, those supposed technocrats just doubled down — insisting, for example, that Greece could avoid default through savage austerity, when anyone who actually did the math knew better.
Let me single out in particular the European Central Bank (ECB), which is supposed to be the ultimate technocratic institution, and which has been especially notable for taking refuge in fantasy as things go wrong. Last year, for example, the bank affirmed its belief in the confidence fairy ... that hasn’t happened anywhere.
And now, with Europe in crisis — a crisis that can’t be contained unless the ECB steps in to stop the vicious circle of financial collapse —... Mario Draghi, the ECB’s new president, declared that “anchoring inflation expectations” is “the major contribution we can make in support of sustainable growth, employment creation and financial stability.”
This is an utterly fantastic claim to make at a time when expected European inflation is, if anything, too low, and what’s roiling the markets is fear of ... financial collapse. ...
Just to be clear, this is not an anti-European rant, since we have our own pseudo-technocrats warping the policy debate. ...
So am I against technocrats? Not at all. I like technocrats — technocrats are friends of mine. And we need technical expertise to deal with our economic woes.
But our discourse is being badly distorted by ideologues and wishful thinkers — boring, cruel romantics — pretending to be technocrats. And it’s time to puncture their pretensions.

Friday, October 21, 2011

Paul Krugman: Party of Pollution

As I said the other day, the GOP's jobs proposals amount to picking something that they (or the people who finance their campaigns) don't like — the EPA, Dodd-Frank, health care legislation, Sarbanes-Oxley, etc. — and then finding some way to argue that eliminating it will create jobs:

Party of Pollution, by Paul Krugman, Commentary, NY Times: Last month President Obama finally unveiled a serious economic stimulus plan — far short of what I’d like to see, but a step in the right direction. Republicans, predictably, have blocked it. ...
So what is the G.O.P. jobs plan? The answer, in large part, is to allow more pollution. ... Both Rick Perry and Mitt Romney have ... put weakened environmental protection at the core of their economic proposals, as have Senate Republicans. Mr. Perry has put out a specific number — 1.2 million jobs — that appears to be based on a study released by the American Petroleum Institute ... claiming favorable employment effects from removing restrictions on oil and gas extraction. The same study lies behind the claims of Senate Republicans.
But does this oil-industry-backed study actually make a serious case for weaker environmental protection as a job-creation strategy? No.
Part of the problem is that the study relies heavily on an assumed “multiplier” effect, in which every new job in energy leads indirectly to the creation of 2.5 jobs elsewhere. Republicans, you may recall, were scornful of claims that government aid that helps avoid layoffs of schoolteachers also indirectly helps save jobs in the private sector. But I guess the laws of economics change when it’s an oil company rather than a school district doing the hiring.
Moreover,... the big numbers in the report are projections for late this decade. The report predicts fewer than 200,000 jobs next year, and fewer than 700,000 even by 2015. You might want to compare these numbers with ... the 14 million Americans currently unemployed, and the one million to two million jobs that independent estimates suggest the Obama plan would create, not in the distant future, but in 2012. ...
More pollution, then, isn’t the route to full employment. But is there a longer-term economic case for less environmental protection? No. ... The important thing to understand is that ... pollution ... does real, measurable damage, especially to human health. ...
How big are these damages? A new study by researchers at Yale and Middlebury College ... estimates ... that there are a number of industries inflicting environmental damage that’s worth more than the sum of the wages they pay and the profits they earn — which means, in effect, that they destroy value rather than creating it. ...
Republicans, of course, have strong incentives to claim otherwise: the big value-destroying industries are concentrated in the energy and natural resources sector, which overwhelmingly donates to the G.O.P. But the reality is that more pollution wouldn’t solve our jobs problem. All it would do is make us poorer and sicker.

Tuesday, August 30, 2011

Policymakers Need Better Data on the Economy

Binyamin Appelbaum recently highlighted the measurement problems we have with US data. Not only are the data often very slow to arrive, there can be substantial revisions to many series after they are released and the revisions can change the picture of the economy substantially.

As I've written about before, I would like to see resources devoted to improving our ability to understand the state of the economy in (near) real time. The lack of accurate data made it much more difficult to respond to the current recession, e.g. (this was December 2009 and is far from the only example where revisions told a very different story than the initial relase):

When it was announced two months ago that GDP had grown by 3.5 percent in the third quarter of this year, it took the sails out of any movement toward another stimulus package. Now the number has been revised downward to 2.2 percent.

At a growth rate of 3.5 percent, the economy would be growing slightly faster than the long-run trend so that, although progress would be very, very slow, the economy would at least be catching up to the long-run trend (in the recovery from previous recessions, it was not unusual for GDP to grow at 6 or 7 percent...). At a growth rate of 2.2 percent, the economy is not even treading water let alone making up for past losses.

The economy needs more help, but the 3.5 percent initial figure was heralded as the sign that better times were just around the corner. This undermined the case for a new fiscal stimulus package and likely caused the Fed to back off of any further plans it might have had to do more to help the economy recover. ...

This points to the fact that policymakers need better and more timely data. The fourth quarter is almost over yet we are still trying to figure out what happened in the third quarter, and we still don't know for sure. There has been lots of criticism of how policymakers have reacted in this recession, much of it deserved, but little of that discussion has recognized the data problems. ... If we can give policymakers better and more timely guidance about the state of the economy, it could improve policy considerably, and that would be money well spent.

In any case, let me say one more time as loudly as I can that given the data that we do have, it's clear that the economy -- the labor market in particular -- needs more help.

But if we are stuck with what we have, as we are, then this is a sensible suggestion: 

Focus On Unemployment To Measure Output Gap, by Mathew Ygesias: Sveriges Riksbank deputy governor Lars E.O. Svensson, my favorite central banker, delivered a speech a few months ago (it’s English title “For a Better Monetary Policy: Focus on Inflation and Unemployment” makes it sound totally banal but it’s not) that had bearing on the question of what’s a policymaker to do in a world where government statisticians can’t accurately measure recessions fast enough to do stabilization policy. He argues that we should forget about the GDP output gap and just pay attention to unemployment:

I believe instead that the unemployment gap is the most appropriate measure of resource utilisation. There are several reasons for this. Unemployment is measured often and is not revised. GDP on the other hand is measured less often and is highly uncertain, and major revisions are made. Unemployment is also directly related to welfare – one of the worst things that can happen to a household is that one of the members of the household loses his or her job. Unemployment is also the indicator of resource utilisation that is best known and easiest for the public to understand. The preparatory works for the Sveriges Riksbank Act state that the Riksbank should support the objectives of general economic policy. One of the main objectives of economy policy in Sweden is to limit unemployment, for example by improving the functioning of the labour market and increasing the incentives to look for work.

Sounds good to me.

Friday, August 19, 2011

Greg Ip: The Republicans’ New Voodoo Economics?

Greg Ip:

The Republicans’ new voodoo economics?, by Greg Ip, Commentary, Washington Post: When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he’d put sunglasses on the body, prop him up and hope no one noticed. It’s safe to say that GOP opinions of the Fed have slipped a bit since. ...
If Republicans dislike monetary stimulus, they loathe its fiscal cousin even more... They want balanced budgets, the sooner the better. ... This, too, is at odds with the party’s earlier views. The administration of George W. Bush sold its 2001 and 2003 tax cuts as Keynesian-style economic stimulus. Lawrence Lindsey, a top Bush adviser, even likened opponents of the tax cuts to President Herbert Hoover, whose obsession with balancing the budget in 1932 worsened the Great Depression.
Certainly, some of this rhetoric is just political opportunism. ... But something more fundamental is going on: The economic ideology of the Republican Party has changed in recent years... In their view, the government has no more role meddling in the business cycle than in any other market. ...
This is not to be confused with supply-side economics... The new GOP views actually have a much longer pedigree: They are rooted in an intellectual contest that raged during the 1930s and 1940s, and had long been settled by the opposing side.
Before then, orthodox economics held that the economy was self-correcting. ... The Great Depression shattered that orthodoxy, as high unemployment became entrenched... John Maynard Keynes convincingly argued that when interest rates were zero — a condition he termed a “liquidity trap” — the economy’s self-correcting properties did not operate. The best solution, he argued, was a burst of public spending to restore demand and employment. ... Keynes’s views ... won out and came to dominate postwar economic policy. ...
Many Republicans consider the tepid economic recovery an indictment of Keynesianism... They argue that aggressive fiscal and monetary stimulus have made things worse by generating uncertainty among firms and investors, and that austerity would put things right.
They almost surely have it wrong...

Republican Attacks on the EPA

The reasons behind the recent Republican attacks on the EPA are coming into focus:

Getting ready for a wave of coal-plant shutdowns, by Brad Plumer: Over the next 18 months, the Environmental Protection Agency will finalize a flurry of new rules to curb pollution from coal-fired power plants. Mercury, smog, ozone, greenhouse gases, water intake, coal ash—it’s all getting regulated. And, not surprisingly, some lawmakers are grumbling.
Industry groups such the Edison Electric Institute, which represents investor-owned utilities, and the American Legislative Exchange Council have dubbed the coming rules “EPA’s Regulatory Train Wreck.” The regulations, they say, will cost utilities up to $129 billion and force them to retire one-fifth of coal capacity. Given that coal provides 45 percent of the country’s power, that means higher electric bills, more blackouts and fewer jobs. The doomsday scenario has alarmed Republicans in the House, who have been scrambling to block the measures. Environmental groups retort that the rules will bring sizeable public health benefits, and that industry groups have been exaggerating the costs of environmental regulations since they were first created.
So, who’s right? This month, the nonpartisan Congressional Research Service, which conducts policy research for members of Congress, has been circulating a paper that tries to calmly sort through the shouting match. ... And the upshot is that CRS is awfully skeptical of the “train wreck” predictions. ...
The CRS report doesn’t try to evaluate the costs of the new rules, noting that it will depend on site-specific factors and will vary by utility and state. ... But, the report says, industry groups have almost certainly overstated the costs. ...
The CRS report also agrees with green groups that the benefits of these new rules shouldn’t be downplayed. Those can be tricky to quantify, however. In one example, the EPA estimates that an air-transport rule to clamp down on smog-causing sulfur dioxide and nitrogen dioxide would help prevent 21,000 cases of bronchitis and 23,000 heart attacks, and save 36,000 lives. That’s $290 billion in health benefits, compared with $2.8 billion per year in costs by 2014. “In most cases,” CRS notes, “the benefits are larger.”
Granted, few would expect this report to change many minds in Congress. Just 10 days ago, Michele Bachmann was on the campaign trail promising that if she becomes president, “I guarantee you the EPA will have doors locked and lights turned off, and they will only be about conservation.” ...

There's a generous interpretation -- Republicans are ideologically opposed to regulation and this is consistent with their general philosophy. There's also an explanation that isn't as generous that involves using a call for free markets to do what's best for those who provide campaign cash.

I think it's hard to deny that there is market failure in the electricity generation industry. The externalities are pretty clear. If this was about making markets work, then the debate ought to be about how best to force firms to internalize all of the costs of production (and if some firms are unprofitable when they are forced to pay all costs, then that's the market speaking and Republicans ought to listen). Should we impose a tax of some sort? Should we rely upon market-based regulation, or is command and control better in this instance? Is this a case where the market failures are so small that any intervention would do more harm than good? Is there a case for self-regulation given the history in this industry? And so on.

But that's not how the debate is carried out. It seems to be more of a knee-jerk reflexive defense whenever supporter's interests are threatened in any way. Politicians in particular hide behind a call for free markets without ever explaining how letting markets be free to fail, and fail badly, is the best choice for society (not in every case, of course, there are certainly those who are ideologically consistent). That leads me to suspect that while there are certainly people on the right who are interested in using things like carbon taxes to overcome these market failures, we shouldn't underplay the extent to which the opposition to the EPA and to regulation more generally is driven by other factors.

Tuesday, August 02, 2011

Our Dysfunctional Congress

I have a new column:

Congress: The Inmates Are Running the Asylum

[I would have chosen a different title, but mine isn't great either.]

Sunday, July 10, 2011

Historical Patterns, Okun's Law, and the Great Recession

Arin Dube shows that estimates of Okun's law are inconsistent with the assertion that most of the unemployment problem is structural rather than cyclical:

Historical Patterns, Okun's Law, and the Great Recession, by Arin Dube: After reading Paul Krugman's post today, I decided to follow up by actually estimating out-of-sample unemployment rate change forecasts during the Great Recession based on a pre-2007 Okun's law relationship (i.e., a regression of change in the unemployment rate on percentage change in real GDP).
As a starting point, let's estimate the pre-2007 Okun's Law relationship using data from 1948 to 2006. (I use 2007 instead of 2008 just because the unemployment rate started rising in 2007 - but as you will see, this makes no real difference for any of the conclusions below.)

G1

As expected, it shows that you need GDP growth above 2 percent or so to bring down the unemployment rate.
So what happens if we use this historical Okun's law to predict unemployment rate changes in the 2007-2011 period? In the next graph I plot the actual unemployment change by quarter with the predicted amount. The red line is just the 45 degree line to help us see what the actual change in unemployment would be if it behaved exactly according to the historical Okun's Law relationship. (The labels are a little bit off here: "01jan2010" really means "2010q1," "01apr2010" means "2010q2," etc.) I think this chart shows quite clearly what's going on:

G2

Several things jump out:
1. First of all, note that over this period, during 9 quarters the historical forecast underpredicted the change in the unemployment rate, while during 8 quarters it overpredicted it. The forecast error ranged from -0.85 to 0.73, with a mean of 0.03. So there is absolutely no evidence that the unemployment rate stands at a much higher level than would be predicted by movements in GDP.
2. In fact, during the past 6 quarters, the actual reduction in unemployment rate has been greater than what would be predicted by real GDP growth--i.e., the forecast errors have been negative.
3. However, it is also the case that during the initial downturn (especially 2008-2009), the unemployment change was greater than would have been predicted by GDP reduction - i.e., positive forecast errors. (You can also see that the inclusion of 2007 makes very little difference here - as those data points are quite close to the predictions.)
4. Overall, the main conclusion is that based on a historical Okun's Law and actual GDP growth, at least as of 2011q1, both the initial rise in unemployment and the subsequent reduction had been more amplified. This not the signature of structural unemployment. A structural unemployment scenario would show an asymmetry: a growth in unemployment that is near or even above the norm based on GDP slowdown, but a reduction in unemployment that is muted in comparison to the GDP growth. This is not what we see. The point is made even more sharply in the next graph which simply plots the same red 45 degree line along with the in-sample linear fit (with data from 2007 forward).

G3

The blue in-sample linear regression line has a slope of around 1.96 - in other words, the sensitivity of the unemployment rate to GDP growth during the Great Recession seems to have been twice as large as compared to historical norms - and this is true both in the downturn and the "expansion." (Split sample regressions confirm this point, which is also clearly shown in the earlier scatterplot.)
Now what is behind the "excess sensitivity" of unemployment rate to GDP growth? This is indeed an interesting question - and deserves to be studied further. It's possible that financial accelerators played a role early on, and as the financial markets stabilized, this effect unwound - leaving (normal) aggregate demand as the main constraint. This of course is just speculation, and I myself have some doubts about this story. However, what is not in question is that growth has been anemic, and that this anemic growth can more than explain the unemployment trajectory during the "expansion." Structural unemployment? Not so much. Reality-sensitive economists (and dare we say politicians?) should digest this simple fact.
Data Source: http://www.stlouisfed.org/
The two data series are UNRATE and GDPC1

Wednesday, June 15, 2011

Kash Mansori: Has the Bad Housing Market Reduced Labor Mobility?

Kash Mansori:

Has the Bad Housing Market Reduced Labor Mobility?, by Kash Mansori: Economists Colleen Donovan and Calvin Schnure have written an interesting new paper examining whether the fall in house prices since 2007 in the US -- which has left many home-owners owing more on their house than it is worth -- created a lock-in effect that depressed labor mobility. ...

The evidence presented in this paper indicates that the fall in house prices has indeed caused a "lock-in" effect, but has not significantly impacted labor market efficiency. Here's the abstract:

Locked in the House: Do Underwater Mortgages Reduce Labor Mobility?: The collapse of the housing boom led to an unprecedented number of homeowners who are “underwater”... These homeowners cannot move without incurring significant losses on their homes, possibly causing a “lock-in” effect reducing geographic mobility. This raises concerns that a reduction in labor market mobility may hamper the ability to move to accept employment in another geographic market, degrading labor market efficiency and contributing to higher structural unemployment.

This paper ... finds significant evidence of a lock-in effect. The lock-in, however, results almost entirely from a decline in within-county moves. As local moves are generally within the same geographic job market, this decline is not likely to affect labor market matching. In contrast, moves out-of-state, which are more likely to be in response to new employment opportunities, show no decline, and in fact are higher in counties with greater house price declines. Housing market lock-in does not appear to have degraded the efficiency of the labor market and does not appear to have contributed to a higher unemployment rate.

This is a significant piece of evidence against the "structural unemployment" explanation for the US's high and persistent unemployment rate... [T]he underwater mortgage "lock-in" phenomenon that has been cited as the primary reason why the US's labor market suddenly got so much worse starting in 2008 simply does not match the evidence. As a result, if we want to understand why unemployment has been so persistently high in the US since 2008, we have to look beyond "structural" or supply-side explanations. Once again, the far simpler explanation seems to better match the evidence: there's just not enough demand, so businesses aren't hiring, and people remain unemployed.

If the problem is structural, there's not a lot that policy can do to help in the short-run. Social insurance can ease the pain. Government can provide short-term employment to tide workers over, create incentives for both workers and firms to relocate, provide retraining, etc., but these problems take time to work themselves out. However, if the problem is lack of demand, then there is much more that policymakers can do to help the economy get back on its feet. The key is to offset the fall in demand through monetary and fiscal policy measures so that businesses will be willing to hire people again.

Tuesday, June 14, 2011

Aspirational Goals Can Distort Policy and Make Us Worse Off

John Taylor encourages policymakers to shoot at unattainable economic growth goals. But he of all people should know that when the Fed targets output growth in excess of potential growth, it can be highly inflationary (he argues he isn't doing this, that 4.7% growth is a reasonable goal to "aspire" to, but there's nothing in our history to suggest this level of growth is sustainable over the long-run).

Ah, you say, but fiscal policy is different. Actually it isn't. Suppose you've hit a 3.5% growth rate, and that is potential growth, but your goal is 5%. That will cause you to put policies into place -- more tax cuts if it's up to Republicans -- to try to hit the higher growth target. This distorts policy and captures resources that could be used better elsewhere.

To see this, imagine an economy at its long-run potential for output growth, and with some level of taxation to support government. To make it simple, assume the tax rate is optimal, i.e. the level consistent with welfare maximization. Now raise the target for growth above the long-run sustainable level (perhaps based upon incomplete or faulty information or the ability to fool people who are less than fully informed). That will cause additional tax cuts, perhaps targeted at investment, and then more and more tax cuts and other policies as the economy continues to fall short of target, The result is that the economy will be driven to a new equilibrium (or sequence of equilibrium points if tax cuts are ratcheted down in pursuit of the target), one based upon an unattainable aspiration, i.e. a growth rate that cannot be sustained in the long-run (essentially, the economy is no longer at the full information solution). Since the previous equilibrium point was optimal, moving away from it makes us worse off.

Friday, June 10, 2011

Paul Krugman: Rule by Rentiers

Why have policymakers all but forgotten about the unemployed?

Rule by Rentiers, by Paul Krugman, Commentary, NY Times: The latest economic data have dashed any hope of a quick end to America’s job drought... Yet there is no political will to do anything about the situation. Far from being ready to spend more on job creation, both parties agree that it’s time to slash spending — destroying jobs in the process — with the only difference being one of degree.
Nor is the Federal Reserve riding to the rescue. ... And debt relief for homeowners — which could have done a lot to promote overall economic recovery — has simply dropped off the agenda. ...
The situation is similar in Europe, but arguably even worse. ... What lies behind this trans-Atlantic policy paralysis? I’m increasingly convinced that it’s a response to interest-group pressure. Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense. ...
 Deficit spending could put the unemployed to work — but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump ... but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief.
Who are these creditors I’m talking about? ... The ... only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.
And that explains why creditor interests bulk so large in policy; not only is this the class that makes big campaign contributions, it’s the class that has personal access to policy makers — many of whom go to work for these people when they exit government through the revolving door. The process of influence doesn’t have to involve raw corruption (although that happens, too). All it requires is the tendency to assume that what’s good for the people you hang out with, the people who seem so impressive in meetings — hey, they’re rich, they’re smart, and they have great tailors — must be good for the economy as a whole.
But the reality is just the opposite: creditor-friendly policies are crippling the economy. This is a negative-sum game, in which the attempt to protect the rentiers from any losses is inflicting much larger losses on everyone else. And the only way to get a real recovery is to stop playing that game.

Thursday, June 02, 2011

How to Get Washington’s Attention

It's been awhile since we've checked in with Robert Reich:

How to Get Washington’s Attention, by Robert Reich: The current disconnect between Washington’s obsession with long-term budget deficits, on the one hand, and the frailty of the nation’s economy right now, is scary.
The question is whether today’s stock market wipe-out, coupled with the plunge in housing prices, discouraging news about economic growth, and what’s likely to be a paltry jobs report Friday, will be enough to force Washington to give up – or at least postpone – its games over the budget and debt ceiling, and take immediate action.
Maybe – especially now that Wall Street and big business have to face reality. The stock market is beginning to feel the effect of an American middle class at the end of its rope.
Even if Wall Street and big business don’t care about plummeting housing values, they do care about plunging stock prices. ... [T]hose who take a slightly longer view clearly worry the economy is running out of steam – and they’re right.
Never underestimate the power of Wall Street and big business to set the terms of the economic debate in Washington. Wall Street and big business pay the tab of politicians on both sides of the aisle.
If the leaders of Wall Street and big business begin to see that the troubles of the vast American middle class are pushing the American (and much of the world) economy back toward a deep recession, they’ll let Washington know.
Even if the middle class can’t get the attention our representatives in Washington, those who fund their campaigns can.

Unfortunately, I don't think Wall Street and big business will come to the conclusion that the problem with the economy is that workers need to be paid more. The solutions they'll promote will most likely be tax cuts for business and trickle down policies rather than policies targeted directly at middle class households.

Wednesday, June 01, 2011

A Rescue Worth Fueling?

Tim Geithner defends the auto bailout.

Monday, May 23, 2011

Paul Krugman: When Austerity Fails

Is the ECB trying to provoke a financial crisis?:

When Austerity Fails, by Paul Krugman, Commentary, NY Times: ...In Europe,... the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer to all problems. Underlying this insistence have been economic fantasies, in particular belief in the confidence fairy — that is, belief that slashing spending will actually create jobs, because fiscal austerity will improve private-sector confidence.
Unfortunately, the confidence fairy keeps refusing to make an appearance. And a dispute over how to handle inconvenient reality threatens to make Europe the flashpoint of a new financial crisis.
After the creation of the euro in 1999, European nations that had previously been considered risky, and that therefore faced limits on the amount they could borrow, began experiencing huge inflows of capital. After all, investors apparently thought, Greece/Portugal/Ireland/Spain were members of a European monetary union, so what could go wrong?
The answer to that question is now, of course, painfully apparent... What to do? European leaders offered emergency loans to nations in crisis, but only in exchange for promises to impose savage austerity programs, mainly consisting of huge spending cuts. ...
But ... Europe’s troubled debtor nations are, as we should have expected, suffering further economic decline thanks to those austerity programs, and confidence is plunging instead of rising. It’s now clear that Greece, Ireland and Portugal can’t and won’t repay their debts in full, although Spain might manage to tough it out.
Realistically, then, Europe needs to prepare for some kind of debt reduction, involving a combination of aid from stronger economies and “haircuts” imposed on private creditors... Realism, however, appears to be in short supply.
On one side, Germany is taking a hard line against anything resembling aid to its troubled neighbors, even though one important motivation for the current rescue program was an attempt to shield German banks from losses.
On the other side, the E.C.B. is acting as if it is determined to provoke a financial crisis. It has started to raise interest rates despite the terrible state of many European economies. And E.C.B. officials have been warning against any form of debt relief...
If Greek banks collapse, that might well force Greece out of the euro area — and it’s all too easy to see how it could start financial dominoes falling across much of Europe. So what is the E.C.B. thinking?
My guess is that it’s just not willing to face up to the failure of its fantasies. And if this sounds incredibly foolish, well, who ever said that wisdom rules the world?

Wednesday, May 18, 2011

"The True Cost of Carbon"

A reminder that, all things considered, energy costs are too low:

The True Cost of Carbon, by David Leonhardt: Michael Greenstone and Adam Looney, economists at The Hamilton Project, are releasing a new paper on the costs of American energy policy. They argue:

… our energy choices are based on the visible costs that appear on utility bills and at the gas pump. This system masks the social costs arising from those energy choices, including shorter lives, higher health care expenses, a changing climate, and weakened national security. As a result, we pay unnecessarily high costs for energy.

For example, Mr. Greenstone and Mr. Looney estimate that a coal plant must spent 3.2 cents to produce a kilowatt hour of electricity (and consumers then pay slightly more than this). This price appears to be a bargain, the economists write, but the true costs — once health costs, military costs and the like are taken into account — are more than twice high: 8.8 cents per kilowatt hour.

The paper calls for four steps that will be familiar to anyone who follows climate policy: a carbon tax or cap-and-trade system; more money for research and development; more efficient regulations; and negotiations with foreign countries over similar steps elsewhere. In the foreseeable future, all these steps all seem to be an enormous long shot. But the climate problem is not going away. ...

Describing the chances of action on climate policy as "an enormous long shot" seems optimistic in this political environment.

Monday, May 16, 2011

"Reasons to be Cheerful" about Climate Change

John Quiggin says the arrival of "peak gasoline" is good news:

Reasons to be cheerful, Part I, by John Quiggin: There are plenty of reasons to be gloomy about the prospects of stabilizing the global climate. ... But there’s also some striking good news. Most important is the arrival of ‘peak gasoline’ in the US. US gasoline consumption peaked in 2006 and was about 8 per cent below the peak in 2010. Consumption per person has fallen more than 10 per cent.

There are a couple of ways to look at this. One is in the standard economics terms of supply and demand. Given that oil production reached a plateau some time ago, and that demand from China and other developing countries is growing fast, equilibrium can only be reached if prices rise enough to limit the growth in Chinese consumption and generating an offsetting reduction in consumption elsewhere (I’m assuming little or no supply response, which seems consistent with the evidence).

We have of course seen oil prices rise substantially. The effect on demand depends on the percentage change in fuel prices and on the elasticity (a measure of responsiveness) of demand. Because the US has very low taxes on gasoline and other fuels a given change in oil prices produces a much larger percentage change in fuel price than in other developed countries. ... So, the US is the place to look for big price effects.

The big question is the elasticity of demand, that is the percentage change in demand arising from a 1 per cent change in price. In the short run, this elasticity is quite low, reflecting the fact that fuel is a small part of the running costs of a car. The short run elasticity (measured over periods less than a year) is relatively easy to estimate and is about -0.25, that is, a 1 per cent price increase will reduce demand by 0.25 per cent, and a 40 per cent increase will reduce demand by 10 per cent. That’s roughly in line with the observed outcome. However, given that factors such as income growth tend to raise demand, the observed reduction is a bit more than would have been expected with constant prices.

The long run elasticity is much higher, since in the long run people can change their driving habits, reduce their stock of cars, and choose more fuel-efficient cars. ... A sustained upward trend in prices will induce the development of energy-saving innovations... I suspect that the full long-run elasticity, including induced innovation, is near 1...

Finally, what does peak US gasoline imply about Peak Oil, which I’ll interpret as the point at which the current plateau in oil production turns into a clear, though gradual decline?

  • First, we won’t really notice it happening (except as it’s manifested as a further increase in oil prices). Rather, we’ll have to look back at the stats to identify when the decline began
  • Second, the adjustment will be a combination of many different processes (less travel altogether, less of that by car, more fuel-efficient cars) rather than one big shift
  • Third, given that oil accounts for something like a third of all CO2 emissions, the sooner Peak Oil arrives, the better.
  • Finally, oil output per person peaked in 1979. For most purposes, it’s output per person that matters. And the evidence is that, over the last 30 years, output of goods and services per person has risen substantially even as output of oil per person has fallen. That seems pretty conclusive as far as apocalyptic versions of the Peak Oil hypothesis are concerned.

See also "Good News on the Regulatory Front," by Robert Stavins. Good news or not, overall I remain pessimistic and hope that this type of thinking does not turn into an excuse to delay making the hard choices we will need to make to solve the climate change problem.

Saturday, May 07, 2011

"We Dare Not Let This Happen" (But Don't Support Doing Anything About It)

Dean Baker is frustrated with a Washington Post editorial telling the public there's nothing we can do about the unemployment problem, a problem it cannot even characterize correctly (see Dean on this point). Me too.

The editorial starts by noting that:

unemployment remains well above what it should be; the longer this persists, the more we risk a “new normal” of structural unemployment, which is a fancy term for elevated human suffering and snowballing economic waste. We dare not let this happen. The question, though, is how to generate the new jobs.

We dare not let that happen! We need to do something! Unless, according to the editorial, fear of what might happen if we try to help the unemployed gets in the way.

First, fiscal policy is ruled out as a solution to this urgent problem. As Dean Baker notes, "The Post tells readers that we can't try to create jobs through fiscal stimulus" because bond vigilantes might drive interest rates up. However, the "interest rate on 10-year Treasury notes is now 3.14 percent, much lower than it was in the budget surplus days of the late 90s" even though we've heard these warnings for some time now.

Well, if the problem is so urgent, certainly the editorial will support money policy instead? Nope. Here, the worry is inflation. But, as Greg Mankiw notes this morning, he agrees with Paul Krugman that "the price of labor does not show any significant inflationary pressures right now," and hence there is little to worry about in terms of inflation (and other signs of inflation are absent as well).

So what should we do about the unemployment problem given that (according to the Post, not me) both monetary and fiscal policy are off the table? The editorial concludes that businesses aren't the answer because of "a lack of attractive business opportunities" (without quite understanding how monetary and fiscal policy could help here). The only thing that is supported is increasing exports -- it's describes this as a "promising strategy." The editorial notes that lowering the value of the dollar would help, but gives no indication of how policy might achieve this goal (especially given its position against using monetary policy to try to help with the unemployment problem).

So, given that we "dare not let this happen," where "this" is high and persistent unemployment, what should we do?

"The costs, human and economic, of high unemployment are heartbreaking. But it will take a measure of patience as well as a sense of urgency to prevent it from becoming a permanent feature of the U.S. economic landscape."

A sense of urgency to do what? With both fiscal and monetary policy off the table, what, exactly, is the government supposed to do? Apparently, the millions and millions of people who are unemployed, some of whom won't be reemployed until years from now if we do nothing to help, are supposed to be patient because people with power over policy are worried about inflation and higher interest rates. But there's no evidence of these problems in the data, and if the problem is truly urgent -- and I agree it is -- then we need to take action. Yes, there are risks. I don't think they are large, but both inflation and interest rates could go higher as a result of more active policy. However, our willingness to take those risks depends upon who will be hurt if these problems do emerge (hint, it's not the unemployed) versus how much we care -- how much urgency there is -- about the unemployment problem. I think the potential benefits of trying to do something exceed the costs by a safe margin. But unfortunately for those who are told to be patient for a few more years why the economy works this out, the people with the power to set policy do not agree.

Friday, April 22, 2011

The Economics of a Parable, Explained

Follow up on this post: Dani Rodrik explains his "bedtime story":

The economics of a parable, explained

Paul Krugman: Patients Are Not Consumers

Who is in the best position to make the difficult decisions that will be required to control health care costs?:

Patients Are Not Consumers, by Paul Krugman, Commentary, NY Times: Earlier this week, The Times reported on Congressional backlash against the Independent Payment Advisory Board, a key part of efforts to rein in health care costs. ...
The board, composed of health-care experts, would be given a target rate of growth in Medicare spending. To keep spending at or below this target, the board would submit “fast-track” recommendations for cost control that would go into effect automatically unless overruled by Congress.
Before you start yelling about “rationing” and “death panels,” bear in mind that we’re not talking about limits on what health care you’re allowed to buy with your own (or your insurance company’s) money. We’re talking only about what will be paid for with taxpayers’ money. ...
And the point is that choices must be made; one way or another, government spending on health care must be limited.
Now, what House Republicans propose ... is that we replace Medicare with vouchers that can be applied to private insurance, and that we count on seniors and insurance companies to work it out somehow. This, they claim, would be superior to expert review because it would open health care to the wonders of “consumer choice.”
What’s wrong with this idea (aside from the grossly inadequate value of the proposed vouchers)? One answer is that it wouldn’t work. “Consumer-based” medicine has been a bust everywhere it has been tried. ...
But the fact that Republicans are demanding that we literally stake our health, even our lives, on an already failed approach is only part of what’s wrong here. As I said earlier, there’s something terribly wrong with the whole notion of patients as “consumers”...
Medical care, after all, is an area in which crucial decisions — life and death decisions — must be made. Yet making such decisions intelligently requires a vast amount of specialized knowledge. Furthermore, those decisions often must be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.
That’s why we have medical ethics. ... The idea that ... doctors are just “providers” selling services to health care “consumers” — is, well, sickening. And the prevalence of this kind of language is a sign that something has gone very wrong not just with this discussion, but with our society’s values.

Saturday, April 16, 2011

"Our Hands Become Dirty When We Help a Terrorist or a Dictator"

Dani Rodrik:

...I have had intensive economic-policy discussions with Prime Minister Meles Zenawi [of Ethiopia]. ... I have no illusions about Meles’ commitment to democracy – or lack thereof. But I also believe that he is trying to develop his economy, and I offer policy advice because I believe it may benefit ordinary Ethiopians. ...
But choosing an action for the greater good does not absolve us from moral culpability. Our hands do become dirty when we help a terrorist or a dictator. ... In the end, an adviser to authoritarian leaders cannot escape the dilemma. ... But when the adviser believes his work will benefit those whom the leader effectively holds hostage, he has a duty not to withhold advice.
Even then, he should be aware that there is a degree of moral complicity involved. If the adviser does not come out of the interaction feeling somewhat tainted and a bit guilty, he has probably not reflected enough about the nature of the relationship.

With large consulting fees at stake, it would be easy to convince yourself that the advice will benefit a large segment of the population, i.e. that it is not "engagement only to legitimize" the position of the rulers. In cases where such moral questions are present, it might be best to refuse compensation for offering advice. That would help to ensure that the person giving the advice really does believe that it is in the best interests of ordinary citizens rather than what's best for the individual's pocketbook. On the other hand, the quantity of advice given would be smaller without compensation, and that might, on net, hurt those we'd like to help. Thus, another way to guard against individuals convincing themselves that it is morally correct to take the money would be to leave the decision to a relatively neutral third party.

How would you make this choice?

Tuesday, April 12, 2011

No, They Can’t Just Get Along

Here's another column:

No, They Can’t Just Get Along

Wednesday, March 30, 2011

"Where the Bailout Went Wrong"

The special inspector general for the Troubled Asset Relief Program delivers his verdict:

Where the Bailout Went Wrong, by Neil Barofsky, Commentary, NY Times: ... Though there is no question that the country benefited by avoiding a meltdown of the financial system, this cannot be the only yardstick by which TARP’s legacy is measured. The legislation that created TARP, the Emergency Economic Stabilization Act, had far broader goals... These Main Street-oriented goals were ... a central part of the compromise with reluctant members of Congress to cast a vote that in many cases proved to be political suicide. ...
But it has done little to abide by this legislative bargain. Almost immediately,... Treasury’s plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation’s largest financial institutions...
In the final analysis,... Treasury’s broken promises ... have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives. ...
Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals ... may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises. This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.

This is from back in October:

The false belief that free markets will always magically transform into ideal competitive markets was one of the problems that led to the financial crisis. Markets that should have been regulated due to the presence of asymmetric information, monopoly power, moral hazard, fraud, political influence, and other problems were left to regulate themselves with disastrous consequences. ...

With a financial system teetering on the edge of collapse, there was no choice but to bailout systemically important banks that were in trouble. However, the manner in which the bailout was executed has caused a public backlash. The problem is that the people who had a hand in creating the crisis, and profited so much as the housing bubble inflated, were rewarded handsomely when too-big-to-fail financial firms were bailed out. ... The understandable lack of public support for such policies will make it very difficult for Congress to act ... the next time it’s needed, and it very well could, the result could be disastrous

The crisis should have taught us that government has an essential role to play in preventing problems from occurring in the economy, and in correcting problems when they occur despite our attempts to prevent them. But, unfortunately, due to poorly executed policy, political posturing, obstructionism in Congress, and ineffective rebuttal from the administration, that’s not the lesson that has been learned.

And, back in the present, Yves Smith is incredulous about a voice from the past, Alan Greenspan, who has an op-ed warning about the dangers or financial regulation.

Sunday, February 06, 2011

The Slow Recovery of Unemployment

I don't like to make economic forecasts. Though I do it on occasion, I generally leave that to Tim Duy -- he's much more of a data grubber than I am so he's better at it anyway. I do try to comment on what data says when it's released, mostly at MoneyWatch, but I don't generally consider those to be formal forecasts of where the economy is headed.

There's a good reason why I try to avoid forecasts. In the past, whenever I've tried to predict the path the economy would take, I've found myself reading subsequent data releases in a way that supports the forecast. I think that once you make a forecast, it affects your objectivity, and I think that applies generally, not just to me.

Perhaps that's why I'm feeling more and more alone in talking about the current state of the economy. Though the worries began long before this, in June of 2008 I did a MarketPlace segment where I predicted that the recovery of unemployment would lag output, and I said that policy should begin addressing the problem immediately due to the long lags between the time when policy begins is first considered and the time it actually has an impact on the economy. Ever since, I've found myself watching to see if that forecast was correct (which is another reason why I don't like to make forecasts -- you hope you are correct, but being correct in this case means people will struggle to find jobs, so it brings on an internal contradiction -- how can you hope people will struggle?).

As I said above, I don't think I'm alone in reading data in a way that supports previous forecasts, and others are much more bullish about the latest data releases than I have been. Part of my point has been that the data can be read another way. When people say, for example, that there's nothing in the latest employment report to change the relatively optimistic forecasts they've made recently, I try to say that there's nothing in the data to reject the alternative forecast either, i.e. that we are still headed for a very slow recovery of employment. Whatever your null hypothesis or prior beliefs were, the latest data did little to change that outlook.

My reason for noting that the data can be read another way goes beyond trying to show that I was right and others were wrong about how long it would take for employment to recover. I am very worried that we are, for all intents and purposes, about to abandon the millions who are still unemployed. Once we conclude that a robust recovery is underway, we will turn our attention to other things. All of the social services that we need to provide for the unemployed, simple and important things like making it possible for their kids to get dental care to name just one example, will be ignored. We devote little if any effort to job creation. We will simply turn our backs and move on.

I fully understand the desire to have a perfect landing, to get policy just right. But just right when the costs of unemployment are so much higher than the costs of inflation means that we should bias policy toward the unemployment problem. If we are going to make a mistake, it should be too much employment, and the inflation that comes with it, rather than too little. However, with the inflation hawks writing almost daily in the WSJ and elsewhere that we need to raise interest rates immediately to avoid inflation, and with all of the pressure to address the budget deficit, if anything the bias in policy seems to be in the other direction. Thus, while I acknowledge the fact that I am probably reading the data in a way that is favorable to previous statements, there was a good reason to worry back in 2008 that this would be a problem, and I believe there's still good reason for worrying about it today. If I have read the data more pessimistically than others, the reason for it is simple -- to push against the chance that we will forget about all the households that continue to struggle. If Ben Bernanke's right, even with current policy we are looking at years until employment gets back to normal and we must do all that we can to help people find jobs or, failing that, provide the social services they need to get by until the employment picture improves.

Until I am sure that the economy is on firmer footing than it's on now, and that employment prospects have improved substantially, I will continue to be the one who pushes back against optimistic reading of the data. And I will make no apologies for it beyond what I've said here.

Monday, January 31, 2011

Is Short-Time Work a Good Way to Fight Unemployment?

I know there are some big fans of using short-time work programs to combat unemployment during recessions. Here's some mostly favorable evidence:

Is short-time work a good method to keep unemployment down?, by Pierre Cahuc and Stéphane Carcillo, Vox EU: Short-time compensation (or short-time work) aims at reducing lay-offs by allowing employers to temporarily reduce hours worked while compensating workers for the induced loss of income. At present, short-time work schemes are widespread among OECD countries, having grown in popularity during the Great Recession. As shown by Figure 1, they are now used in 25 of the 33 OECD countries.1

Figure 1. Short-time work take-up rates in the OECD countries (as a percentage of employees) 

Vox500

Source: OECD (2010), Hijzen and Venn (2010), data completed by the authors.

And these short-time work schemes appear to have been successful. European countries with widespread and generous short-time compensation experienced a smaller rise in unemployment in the recent recession than those without. The leading example is Germany that makes a particularly intensive use of a short-time work program (the Kurzarbeit).

This success has renewed interest in short-time work. But the idea itself is nothing new. The suggestion that it could be more efficient and more equitable to share jobs with short-time compensation rather than destroying jobs during has been repeatedly put forward by advocates of work-sharing. For instance, Abraham and Houseman (1994) argued that short-time work arrangements can be more equitable since they spread the costs of adjustment more evenly across members of the work force instead of concentrating it on a small number of laid-off workers.

But short-time compensation programs are no panacea. They can induce inefficient reductions in working hours. Moreover, workers in permanent jobs have incentives to support such schemes in recessions in order to protect their jobs. Employers also have incentives to support short-time compensation programs in countries where stringent job protection induces high firing costs. Therefore, there is a risk attached with using these programs too intensively. The benefits of insiders can be at the expense of the outsiders whose entry into employment is made even more difficult.

Continue reading "Is Short-Time Work a Good Way to Fight Unemployment?" »

Sachs: America's Ungovernable Budget

Jeff Sachs argues that we must raise taxes:

America’s Ungovernable Budget, by Jeffrey D. Sachs, Commentary, Project Syndicate: ...In his recent State of the Union address, President Barack Obama ... rightly emphasized that competitiveness in the world today depends on an educated workforce and modern infrastructure. ...
That is why Obama called for an increase in US public investment in three areas: education, science and technology, and infrastructure... He spelled out a vision of future growth in which public and private investment would be complementary, mutually supportive pillars. ...
But Obama’s message lost touch with reality when he turned his attention to the budget deficit. Acknowledging that recent fiscal policies had put the US on an unsustainable trajectory of rising public debt, Obama ... called for a five-year freeze on what the US government calls “discretionary” civilian spending.
The problem is that more than half of such spending is on education, science and technology, and infrastructure – the areas that Obama had just argued should be strengthened. After telling Americans how important government investment is for modern growth, he promised to freeze that spending for the next five years! ...
The truth of US politics today is simple. ... Both political parties ... would rather cut taxes than spend more on education, science and technology, and infrastructure. And the explanation is straightforward: the richest households fund political campaigns. Both parties therefore cater to their wishes.
As a result, America’s total tax revenues as a share of national income are among the lowest of all high-income countries..., not enough to cover the needs of health, education, science and technology, social security, infrastructure, and other vital government responsibilities.
One budget area can and should be cut: military spending. But even if America’s wildly excessive military budget is cut sharply (and politicians in both parties are resisting that), there will still be a need for new taxes..., and that – as George H. W. Bush learned in 1992 – is no way to get re-elected.

Thursday, January 27, 2011

DeLong: Intelligent Economic Design

Brad DeLong on the "debate over whether its economy evolves or is designed":

Intelligent Economic Design, by J. Bradford DeLong, Commentary, Project Syndicate: As Stephen Cohen, with whom I wrote The End of Influence: What Happens When Other Countries Have the Money, likes to say, economies do not evolve; they are, rather, intelligently designed. He also likes to say that, though there is an intelligence behind their design, this does not mean that the design is in any sense wise.
The first claim is, I think, incontrovertible. Since long before Croesus, King of Lydia, came up with the game-changing idea of standardized “coinage,” what governments have done and not done to structure, nudge, and put their thumbs on the scales has been decisively important for economic development.
Just look around you. Notice the hundred-fold divergence across political jurisdictions in relative levels of economic productivity and prosperity? I dare anyone to claim that the overwhelming bulk of that disparity springs from causes other than history and the current state of governance.
The second claim is also, I think, true. To say that economies are the products of intelligent design means only that some human intelligence or intelligences lies behind the design. It does not mean that the design is smart or optimal. ...[continue reading]...

Tuesday, January 11, 2011

Inequality and Redistribution

Continuing the discussion on inequality and what might be done about it, here's Paul Krugman:

Economics and Morality, by Paul Krugman: ...Eric Schoeneberg ... argues that the right is winning economic debates because people believe, wrongly, that there’s something inherently moral about free-market outcomes. My guess is that this is only part of the story... Still, Schoeneberg is right about the tendency to ascribe moral value to market values, and the need for a counter-narrative. I’m going to think about that; but right now, let me describe how I see the US income distribution in terms of justice or the lack thereof.

The first thing one should say is that our system does reward hard work, up to a point. Other things equal, those who put more in will earn more.
But a lot of other things are, in fact, not remotely equal. These days, America is the advanced nation with the least social mobility (pdf), except possibly for Britain. Access to good schools, good health care, and job opportunities depends on lot on choosing the right parents.
So when you hear conservatives talk about how our goal should be equality of opportunity, not equality of outcomes, your first response should be that ... they must be in favor of radical changes in American society. For our society does not, in fact, produce anything like equal opportunity (in part because it produces such unequal outcomes). Tell me how you’re going to produce a huge improvement in the quality of public schools, how you’re going to provide universal health care..., and then come back to me about the equal chances at the starting line thing.
Now, inequality of opportunity is only one reason for the inequality in outcomes we actually see. But of what remains, how much reflects individual effort, how much reflects talent, and how much sheer luck? No reasonable person would deny that there’s a lot of luck involved. ... So ... the social and economic order we have doesn’t represent the playing out of some kind of deep moral principles.
That doesn’t mean the order we have should be overthrown: the pursuit of Utopia, of perfect economic justice, has proved to be the road to hell, while welfare-state capitalism — a market economy with its rough edges smoothed by a strong safety net — has produced the most decent societies ever known. The point, though, is that anyone who claims that transferring some income from the most fortunate members of society to the least is a vile injustice is closing his eyes to the obvious reality of how the world works.

And, in a follow up:

More Thoughts on Equality of Opportunity, by Paul Krugman: ...I think there’s a bit of an intellectual trap lurking here. As I pointed out, the typical conservative line about equality of opportunity, not results, really implies the need for a radical restructuring of our society, which doesn’t offer anything remotely resembling equal opportunity. At this point, however, there’s a tendency to think about what that restructuring would involve — and because it’s basically impossible, to throw up one’s hands.
The point is that you don’t, in fact, have to be that radical once you drop the rigidity of the conservative position. If you admit that life is unfair, and that there’s only so much you can do about that at the starting line, then you can try to ameliorate the consequences of that unfairness.
My vision of economic morality is more or less Rawlsian: we should try to create the society each of us would want if we didn’t know in advance who we’d be. And I believe that this vision leads, in practice, to something like the kind of society Western democracies have constructed since World War II — societies in which the hard-working, talented and/or lucky can get rich, but in which some of their wealth is taxed away to pay for a social safety net, because you could have been one of those who strikes out.
Such a society doesn’t correspond to any kind of abstract ideal, whether it’s “people should be allowed to keep what they earn” or “from each according to his ability, to each according to his needs”. It’s a very non-Utopian compromise. But it works, and it’s a pretty decent arrangement...
That decency is what’s under attack by claims that it’s immoral to deprive society’s winners of any portion of their winnings. It isn’t.

My point here is that economic inequality is growing, so we need to consider enhancing programs that can stop or at least attenuate the growing divide between those at the top and everyone else. But, instead, we appear to be headed in the other direction.

Saturday, January 01, 2011

"Why Cancun Trumped Copenhagen"

Robert Stavins seems happy with the progress of the recent climate talks in Cancun:

Why Cancun Trumped Copenhagen, by Robert Stavins: ...After the modest results of the climate change talks in Copenhagen a little more than a year ago, expectations were low for the follow-up negotiations in Cancun last month. ...
But a funny thing happened on the way to that much-anticipated failure: During two intense weeks of discussions..., the world’s governments quietly achieved consensus on a set of substantive steps forward. And equally important, the participants showed encouraging signs of learning to navigate through the unproductive squabbling between developed and developing countries that derailed the Copenhagen talks.
The tangible advances were noteworthy: The Cancun Agreements set emissions mitigation targets for some 80 countries, including all the major economies. That means that the world’s largest emitters, among them China, the United States, the European Union, India, and Brazil, have now signed up for targets and actions to reduce emissions by 2020.
The participating countries also agreed – for the first time in an official United Nations accord – to keep temperature increases below a global average of 2 degrees Celsius. ... The Cancun Agreements on their own are clearly not sufficient to keep temperature increases below 2 degrees Celsius, but they are a valuable step forward...
The progress was as much about changing the mindset of how to tackle climate disruption. ... That they met this challenge owes in good measure to ... the tremendous skill of Mexican Foreign Minister Patricia Espinosa in presiding over the talks.
For example, at a critical moment she took note of objections from Bolivia and a few other leftist states, and then ruled that the support of the 193 other countries meant that consensus had been achieved and the Cancun Agreements had been adopted. She pointed out that “consensus does not mean unanimity.” Compare that with Copenhagen, where the Danish prime minister allowed objections by five small countries to derail the talks.
Mexico’s adept leadership also made sure smaller countries were able to contribute fully..., avoiding the sense of exclusivity that alienated some parties in Copenhagen. ...
It’s also vital to note that China and the United States set a civil, productive tone, in contrast to the Copenhagen finger-pointing. From the sidelines in Cancun, I can vouch for the tremendous increase in openness of members of the Chinese delegation.
The acceptance of the Cancun Agreements suggests that the international community may now recognize that incremental steps in the right direction are better than acrimonious debates over unachievable targets.

With Republicans taking control of the House, I will be pleasantly surprised if we make any progress on this issue domestically (I can imagine the GOP perhaps buying into tax cuts designed to encourage investment into research in this area, but not much else).

Thursday, December 30, 2010

Who Should Replace Larry Summers?

Noam Scheiber defends Gene Sperling as "a leading candidate or the leading candidate to replace Larry Summers as head of Obama’s NEC":

Is the Favorite to Replace Larry Summers Too Close To Wall Street?, by Noam Scheiber, TNR: ...Gene Sperling, a counselor to Secretary Tim Geithner,... was director of Bill Clinton’s National Economic Council (NEC) in the late ‘90s, a period when the White House got pretty good marks for its understanding of business and the broader economy. But ... Sperling often speaks up for the little guy in internal deliberations—he was one of the administration wonks most concerned about executive pay, and he argued passionately for saving Chrysler...
Sperling’s record has suddenly become highly relevant because, depending on who you talk to, he’s either a leading candidate or the leading candidate to replace Larry Summers as head of Obama’s NEC. In light of the forgoing, you might also think he’d be a liberal favorite for the job. But Sperling has recently taken some lumps in the Huffington Post for his alleged sympathy for bankers and his ties to former Clinton Treasury Secretary Robert Rubin. ...
Sperling was NEC director when the Clinton administration ushered in some unfortunate deregulatory changes, pretty much every account I’ve either read or heard from people involved confirms that ... Sperling was a marginal player at best. ...
What about his instincts when he did work on issues of interest to Wall Street? ... Sperling turns out to be the Treasury official who was most influential in helping persuade Geithner to embrace a fee on large financial firms to make the government whole after TARP, the vehicle for its various bailouts. The president unveiled the 10-year, $90 billion fee in January of 2010. Wall Street promptly howled. ...
Long story short: This hardly strikes me as the profile of a man out to do the banks’ bidding. Sperling may not be the kind of populist who makes the average HuffPo reader swoon. But I doubt his record as a policymaker inspires much chuckling on Wall Street.

I still think a break from the Wall Street connected side of the Clinton administration would have political value. Even better, no matter the choice, would be to show through action that the administration is, in fact, determined to reduce the chances of another meltdown by being tough on the financial sector. But, so far as I can tell, that doesn't seem to be the direction Obama intends to go.

Monday, December 20, 2010

Paul Krugman: When Zombies Win

Why is free-market fundamentalism exerting a growing influence on economic policy?:

When Zombies Win, by Paul Krugman, Commentary, NY Times: When historians look back at 2008-10, what will puzzle them most, I believe, is the strange triumph of failed ideas. Free-market fundamentalists have been wrong about everything — yet they now dominate the political scene more thoroughly than ever. ...
It’s ... worth pointing out that everything the right said about why Obamanomics would fail was wrong. For two years we’ve been warned that government borrowing would send interest rates sky-high; in fact, rates have fluctuated with optimism or pessimism about recovery, but stayed consistently low by historical standards. For two years we’ve been warned that inflation, even hyperinflation, was just around the corner; instead, disinflation has continued...
The free-market fundamentalists have been as wrong about events abroad as they have about events in America — and suffered equally few consequences. “Ireland,” declared George Osborne in 2006, “stands as a shining example of the art of the possible in long-term economic policymaking.” Whoops. But Mr. Osborne is now Britain’s top economic official.
And in his new position, he’s setting out to emulate the austerity policies Ireland implemented after its bubble burst. After all, conservatives on both sides of the Atlantic spent much of the past year hailing Irish austerity as a resounding success. “The Irish approach worked in 1987-89 — and it’s working now,” declared Alan Reynolds of the Cato Institute last June. Whoops, again.
But such failures don’t seem to matter. To borrow the title of a recent book by the Australian economist John Quiggin on doctrines that the crisis should have killed but didn’t, we’re still — perhaps more than ever — ruled by “zombie economics.” Why?
Part of the answer, surely, is that people who should have been trying to slay zombie ideas have tried to compromise with them instead. And this is especially, though not only, true of the president.
People tend to forget that Ronald Reagan often gave ground on policy substance — most notably, he ended up enacting multiple tax increases. But he never wavered on ideas, never backed down from the position that his ideology was right and his opponents were wrong.
President Obama, by contrast, has consistently tried to reach across the aisle by lending cover to right-wing myths. He has praised Reagan for restoring American dynamism (when was the last time you heard a Republican praising F.D.R.?), adopted G.O.P. rhetoric about the need for the government to tighten its belt even in the face of recession, offered symbolic freezes on spending and federal wages.
None of this stopped the right from denouncing him as a socialist. But it helped empower bad ideas, in ways that can do quite immediate harm. Right now Mr. Obama is hailing the tax-cut deal as a boost to the economy — but Republicans are already talking about spending cuts that would offset any positive effects from the deal. And how effectively can he oppose these demands, when he himself has embraced the rhetoric of belt-tightening?
Yes, politics is the art of the possible. We all understand the need to deal with one’s political enemies. But it’s one thing to make deals to advance your goals; it’s another to open the door to zombie ideas. When you do that, the zombies end up eating your brain — and quite possibly your economy too.

Saturday, December 04, 2010

Resolving Uncertainty About Future Growth

Christina Romer:

It’s the Big Questions That Slow Growth, by Christina Romer, Commentary, NY Times: Uncertainty is frequently blamed for the sorry state of the economy — for why businesses are not investing strongly in new equipment or hiring more workers, and for why consumers are not spending freely. On Wall Street, it’s even said that government meddling is the main culprit and that political gridlock is the cure.
This is a serious misreading of the situation. Uncertainty is likely holding back the recovery. But its sources are far more fundamental than the tax and environmental issues that typically top the list of complaints. And the solution is certainly not for the government to do less. Rather, it needs to do much more. ...
The deepest and most destructive uncertainty we face centers on the overall health of the economy and its prospects for growth. ... Because we are in largely uncharted territory, figuring out how and when the economy will recover is much harder than usual. ...
How do we resolve uncertainty about future growth? The Federal Reserve, Congress and the president need to reaffirm that they will do whatever it takes to restore the economy to full health. They could take a lesson from President Franklin D. Roosevelt, who declared in his 1933 inaugural address that he would treat the task of putting people back to work “as we would treat the emergency of a war.”
They should follow up with powerful fiscal and monetary actions to create jobs — coupled with a concrete plan for tackling our long-run budget problems. We are at a critical moment. With many in Congress opposed to further jobs measures and tax increases of any kind, the chances of prolonged gridlock are high.
But such policy paralysis would be a disaster. It would make uncertainty more acute by leaving us to the unpredictable forces of natural recovery and with no prospect of resolving our unsustainable deficits. Aggressive action to restore growth and face up to our long-run challenges is the only true and lasting solution.

Tuesday, November 30, 2010

Expected TARP Cost: $25 Billion

The estimated cost of TARP falls again:

TARP expected to cost U.S. only $25 billion, CBO says, by Lori Montgomery, Washington Post: The Troubled Asset Relief Program, which was widely reviled as a $700 billion bailout for Wall Street titans, is now expected to cost the federal government a mere $25 billion...
A new report released Monday by the nonpartisan Congressional Budget Office found that the cost of the program, known as TARP, has plummeted... "Clearly, it was not apparent when the TARP was created two years ago that the cost would turn out to be this low," the CBO report says. ...
The TARP was conceived in the final days of the Bush administration and pushed through a reluctant Congress in less than three weeks. It is widely thought to have helped stabilize a financial sector on the verge of collapse, though it remains hugely unpopular with the public. ...
All told, $389 billion has been distributed through the TARP, which expired in October. The CBO estimates that an additional $44 billion is still waiting to go out the door, primarily to troubled insurance giant American International Group and federal mortgage programs. That would bring total TARP outlays to $433 billion, of which about half - $216 billion - has been repaid. The rest of the TARP investments, meanwhile, have become markedly less risky, according to the CBO, and in many cases even profitable. ...
While the cost of the TARP is coming in far below expectations, it is just one of several massive government programs aimed at propping up the financial industry. The Federal Reserve and the FDIC have together guaranteed billions of dollars in bank debt.

Thursday, November 25, 2010

"The Retreat of Macroeconomic Policy"

Brad DeLong:

The Retreat of Macroeconomic Policy, by J. Bradford DeLong, Project Syndicate: One disturbing thing about studying economic history is how things that happen in the present change ... our understanding of the past. For decades, I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. But the political reaction to the Great Recession has changed the way we should think about this issue.
Governments before World War I – and even more so before WWII – did not embrace the mission of minimizing unemployment during economic downturns. There were three reasons...
First, there was a hard-money lobby... Second, the working classes that were hardest-hit by high unemployment generally did not have the vote. ... Third, knowledge about the economy was in its adolescence. ...
All three of these factors vanished between the world wars. ... Today, we have next to no hard-money lobby, almost all investors have substantially diversified portfolios, and nearly everybody suffers mightily when unemployment is high and capacity utilization and spending are low. Economists today know a great deal more – albeit not as much as we would like... And the working classes all have the vote.
Thus, I would confidently lecture only three short years ago that the days when governments could stand back and let the business cycle wreak havoc... No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10% and inflation was quiescent without doing something major about it.
I was wrong. That is precisely what is happening.
How did we get here? How can the US have a large political movement – the Tea Party – pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line? How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register to vote? Why are politicians not terrified of their displeasure?
Economic questions abound, too. Why are the principles of nominal income determination, which I thought largely settled since 1829, now being questioned? Why is the idea, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?
It is now clear that the right-wing opponents to the Obama administration’s policies are ... objecting to the very idea that government should try to serve a stabilizing macroeconomic role.
Today, the flow of economy-wide spending is low. ... Yet..., here we are. The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.

I wrote about something similar here: The Return of the Laissez Faire Economy.

Tuesday, November 09, 2010

A "Platform for the Bipartisan Technocrats of the Center"

Brad DeLong:

Here is the platform for the bipartisan technocrats of the center:

  • Ten-Year PAYGO: a 2/3 supermajority in both houses commitment to ten-year PAYGO starting now, and a pledge by every president and presidential candidate that they will veto all bills that do not meet ten-year PAYGO standards. Everything Congress passes must be projected to reduce the outstanding national debt within ten years.
  • "Starting now" means starting now: no middle-class tax cut this month or next month without a pay-for within ten years. Taking current law rather than current policy as our baseline and requiring PAYGO for everything gets our 25-year fiscal gap down to 1.2% of GDP (as opposed to 4.8% of GDP) and gets our 50-year fiscal gap down to 0.8% of GDP (as opposed to 6.9% of GDP). Our long-run deficit problem is overwhelmingly due to things that Congress is about to do, not things that Congress has done.
  • Carbon tax: a 1.0% of GDP carbon tax is the best policy to provide American businesses with the incentives they need to invent the clean energy technologies of the future. Half of it should be channeled into the Social Security Trust Fund to improve its solvency. Half should be used to help close our remaining operating fiscal gap.
  • Pick-your-poison: Additional stand-by tax increases and stand-by spending cuts to close the remaining 0.3% of GDP long-run fiscal gap.
  • Private add-on Social Security accounts: At their option, all Americans can add up to 2% of their Social Security wages to a private Social Security account run through the U.S. government's Thrift Savings Program. Private contributions will be matched two-for-one by the federal government out of carbon tax revenue
  • Recovery: when every fired local, state, and federal worker takes a private sector job down as well and when the U.S. government can borrow at today's absurdly-low terms, it is criminal stupidity not to pull government spending forward into the present and push taxes back into the future (all within the ten-year PAYGO rule, of course). Since the macroeconomic situation is worse now than it was ever projected to get when the first Recovery Act was passed and since the U.S. government can borrow on better terms now than it could at the time of the first Recovery Act, it is time for a second Recovery Act--fifty percent federal government purchases and aid to the states, fifty percent tax cuts--somewhat larger than the first was.
  • Certainty: The principal sources of uncertainty in American economics right now are three: we don't know how the long-run fiscal gap will be closed (but we think it will be), we don't know how our health-care system will be reformed and transformed (but we know it will be), and we don't know what our policy toward global warming will be in a generation (but we know that we will have one). The best things the government could do to diminish uncertainty would be to: (1) commit immediately to the full implementation of the version of RomneyCare-plus-cuts-in-Medicare-and-taxes-on-gold-plated-health-plans that was this year's PPACA, (2) commit immediately to a long-run climate policy in the form of a carbon tax coupled with research incentives for future energy technologies, and (3) commit immediately to a plan to cover the long-term fiscal gap.

That's a seven-point plan. That's a seven-point plan that everybody centrist and deficit-hawkish in the reality-based community should be willing to commit to today.

Tuesday, November 02, 2010

Rogoff: Beware of Wounded Lions

Kenneth Rogoff says the rest of the world should not ignore the recent threats of protectionist measures coming from the US:

Beware of Wounded Lions, by Kenneth Rogoff, Commentary, Project Syndicate:  G-20 leaders who scoff at the United States’ proposal for numerical trade-balance limits should know that they are playing with fire. ...
According to a recent ... report..., fully 25% of the rise in unemployment since 2007, totaling 30 million people worldwide, has occurred in the US. If this situation persists, as I have long warned it might, it will lay the foundations for huge global trade frictions. The voter anger expressed in the US mid-term elections could prove to be only the tip of the iceberg..., the ground for populist economics is becoming more fertile by the day. ...
True, today’s trade imbalances are partly a manifestation of broader long-term economic trends, such as Germany’s aging population, China’s weak social safety net, and legitimate concerns in the Middle East over eventual loss of oil revenues. And, to be sure, it would very difficult for countries to cap their trade surpluses in practice: there are simply too many macroeconomic and measurement uncertainties.
Moreover, it is hard to see how anyone – even the IMF, as the US proposal envisions – could enforce caps on trade surpluses. The Fund has little leverage over the big countries that are at the heart of the problem.
Still,... world leaders ... must recognize the pain that the US is suffering in the name of free trade. Somehow, they must find ways to help the US expand its exports. Fortunately, emerging markets have a great deal of scope for action.
India, Brazil, and China, for example, continue to exploit World Trade Organization rules that allow long phase-in periods for fully opening up their domestic markets to developed-country imports... A determined effort by emerging-market countries that have external surpluses to expand imports from the US (and Europe) would do far more to address the global trade imbalances ... than changes to their exchange rates or fiscal policies. ...
American hegemony over the global economy is perhaps in its final decades. China, India, Brazil, and other emerging markets are in ascendancy. Will the transition will go smoothly and lead to a global economy that is both fairer and more prosperous?
However much we may hope so, the current rut in which the US finds itself could prove to be a problem for the rest of the world. Unemployment in the US is high, while fiscal and monetary policies have been stretched to their limits. Exports are the best way out, but the US needs help. Otherwise, simmering trade frictions could suddenly throw globalization sharply into reverse. It wouldn’t be the first time.