Clowns to the Left of Me, Jokers to the Right

There may be more than one point on which the Tea Party and the Occupy Wall Street folks converge, but the most prominent one is the populist notion that Wall Street (big banks, etc.) should not have been bailed out. The Tea Party folks base their position on some amalgamation of free market economics and hatred of government, while the OWS protestors decry the bailouts as an inequitable wealth transfer. While there may be some truth to both strains of anti-bailout vitriol, they are each dangerously wrong in their policy prescriptions.

What would TP and OWS have the US government done instead? Simply let large banks and investment houses fold? Regardless of one’s policy views, it is impossible to envision a scenario in which the Bush administration (and the Obama administration) allowed Wall Street to fail without causing an economic collapse much greater than the Great Recession. In fact, it would have been more like the Great Depression. The losers would have been spread far and wide, and would have included tens of millions of middle and working class Americans. Would the Tea Party and the Occupiers really have wanted that?!

Look, I get the angst and outrage over Wall Street. I get that we have a financial elite in our country who have stacked the deck so much in their favor that they simply cannot lose (too big to fail, anyone?). But the same forces that allow them to stack the deck have also allowed them to become so entwined in our country’s economic well-being that allowing them to fail would have had enormous collateral damage.

I think that many who support the Occupy Wall Street movement (I count myself among them) get that the solution to reducing the power of the financial elite lies not in allowing them to fail and taking the rest of the economy down with them. Rather, we need to reform and re-arm our regulators to ensure there are no more too big to fail institutions. We need to eliminate the outsized influence of financial elites on the US government (better campaign finance disclosure laws, lobbying reform/end the revolving door).

I also believe that this is where the Tea Party and OWS part company, which gives me some hope. I have never been comfortable with populism, whether its roots are on the left or the right.

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Let Them Eat Dirt

The poverty numbers out today are not only discouraging, but they highlight the growing chasm between the haves and have-nots in our society. Sure, it is hardly surprising that in a time of deep recession that poverty would increase. But we should be cautious not to write this off as a mere side effect of the Great Recession.

The problem we face is not merely poverty itself, but the yawning gap in income inequality. And while some of the policies we might enact to reduce poverty are short term in nature, the real effort must be focused on reducing income inequality. Programs such as unemployment insurance and food assistance are stop gap measures that do very little to ensure that a person, or family, remains above poverty. (In fact, such assistance programs do not even get a person or family up to the poverty level.)

What we really need are programs and policies that will reduce the enormous, and unsustainable, gap between the super rich and the poor. Adequate funding for primary and secondary education, scholarships and reduced tuition for public colleges and universities, public housing, and other social safety net programs must be strengthened. These types of programs help to promote upward mobility and poverty reduction over the long run.

Unfortunately, we live in a society and political climate where such investments are viewed as budget busters, despite their long term benefits. An entire political movement is fueled by the idea that someone, somewhere is getting something for nothing. And propelled by the rhetoric of personal responsibility, such that the poor are solely at fault for their plight. Never mind our legacy of discrimination, never mind an economic landscape tilted in favor of those who already have so much, never mind a political system bought and paid for by corporate cash. The true reason you’re poor or homeless or hungry is because you have some inherent character flaw, some type of malignant laziness.

And so we fail not only to address poverty in the short term, but we ignore or even exacerbate income inequality. The same people who refuse to adequately fund poverty reduction are the same who want to renew an enormous tax cut to the wealthiest Americans. And while they try to paper over the true motivation with economic arguments, the reality is that there is scant evidence that the Bush tax cuts created jobs. Yet there is loads of evidence that shows pumping those same dollars into poverty reduction efforts will increase aggregate demand now, and reduce poverty (thus ensuring economic growth) in the future. There is simply no sound policy argument to be made for extending the Bush tax cuts for the wealthy.

But the real rank hypocrisy on fiscal policy is that these same people who wish to continue a tax cut for the rich are the same ones who crowed about the impact on the deficit of extending unemployment benefits. So, increasing the deficit hundreds of billions of dollars so Paris Hilton can get a tax cut is good, ponying up $34 billion to help those without a job is going to break the bank?

The old saying, attributed to Marie Antoinette, about eating cake showed how out of touch an aristocrat was with the peasants. The GOP and the Tea Party have turned that into something even more despicable- let them (the poor, jobless and hungry) eat dirt.

Getting Past Econ 101

(In general, I use the space here to indulge in writing that is a bit more philosophical than what I had done on my prior blogs, where sarcasm and mockery were often the order of the day. Today I am going to revert to form, if only a little. )

Kevin Hassett, Director of Economic Policy Studies at AEI, has a piece up on Bloomberg that is so profoundly ignorant of reality and of economics. It seems the product of an overconfident C student in econ101, crossed with a pathological blindness to reality. Let’s dig in.

Hassett’s main contention is that unemployment levels remain high because of sticky wages. It’s unremarkable that wages are sticky. We know this, just as we know prices can be sticky. But wages are always sticky, so why should their stickiness be to blame for our current crisis? Wages were sticky during the recession in the early 2000’s, in the early 90’s and during every other recession in modern American history.

For Hassett, the central problem is that the sticky wages are preventing the labor market from clearing. Because every C student of micro101 understands that perfectly competitive markets should clear. (Of course, the A and B students also realize that there is no such thing, really, as perfect competition. And that there are a number of assumptions baked into the model that are nearly impossible to attain in the real world.) According to Hassett, the labor market is not clearing due to several factors- plain old wage stickiness, minimum wage laws, unemployment insurance, and union contracts (apparently non-union contracts, like those of managers and executives are not so pernicious).It should be noted that the latter three contribute to the former, but there is a type of stickiness that has nothing to do with minimum wage or contract issues.

Let’s take a look at each of these in turn.

1. Wage stickiness- Hassett argues that, “A $60,000-a-year office worker might have an extra-hard time coming to terms with becoming a $40,000-a-year worker.” I’m not sure what world Hassett is living in, but I don’t think anyone would gleefully accept a 1/3 pay cut. However, in the real world we live in, hundreds of thousands (millions?) of workers have accepted pay cuts, benefit cuts and unpaid furloughs in order to retain their jobs.

2. Minimum wage- Hassett would like us to believe that the increase in the minimum wage has increased unemployment, especially among teens. In order to believe that, you’d have to ignore the fact that teens possess less skills and are often not as good as workers as their adult competitors. The real driving force for teenage unemployment is the high number of unemployed adults, whose work experience makes them much more attractive candidates. Though, in fairness to Hassett, he probably believes that the absence of a minimum wage would open the floodgates to teenagers working for $1.25/ hour.

3. Unemployment insurance- Hassett posits that the reason for geographic mismtach is unemployment insurance- “So why isn’t there a traffic jam of job-seekers trekking from Las Vegas to Fargo, and from other high-unemployment areas to high-employment ones? One reason is unemployment insurance.” This is similar to Casey Mulligan’s notion that the unemployed are just taking unpaid vacations in its foolishness and lack of understanding reality. Unemployment insurance provides, at best, roughly 40% of what a person earned while employed.

This raises two points. First, to imagine that unemployment provides some sort of strong incentive to not work is beyond silly. How many people can afford to subsist on 40% of their former wage rate? Second, how does Hassett expect people receiving a fraction of their former wages to be able to afford to move? Remember that bit above about perfect competition? Well, one of the assumptions is perfect mobility. Ooops.

4. Union contracts- Hassett writes, “because union contracts generally cover multiple years, adjusting wages in response to economic circumstances would require a return to the bargaining table, which rarely happens.” Sure, contracts generally do cover multiple years. Yet examples abound of unionized workers accepting wage and benefit cuts and furloughs (as noted above). Though a good deal of this has been in the public sector, the folks in the UAW and other large unions have accepted wage concessions during this recession.

Either Hassett is truly this dumb, or he thinks Bloomberg’s readers are too dumb to see through his trope. This is standard issue conservative economics- blame unions and the government for the minimum wage and unemployment insurance- that is trotted out no matter what the economic situation. They will say it when the economy is humming and when it’s mired in recession and every point in between.

What is astounding is that Hassett seems intent on making this argument despite ample evidence to the contrary. Does he not know anyone currently unemployed? Does he not read a paper to see that plenty of people have taken pay cuts in some form?

Perhaps most troubling, though, is his inability to think through his argument. There is at least some reason to believe that large scale downward wage adjustments could crater aggregate demand. Even if we assume unemployment is reduced under his plan, it’s unclear that it would offset the decline in consumption caused by lower wages. And, of course, there is always price stickiness to deal with. Not to mention deflation.

It’s almost as if Kevin Hassett puts his ideology ahead of his intellectual honesty. At AEI? Quelle surprise!

Dear Prudence, Can We Have Good Fiscal Policy?

(For the sake of my argument, I will assume two things- (1) Democrats are willing to go to the mat for good policy; (2) Republicans are actually willing to govern and not just obstruct. Neither of these assumptions are true.)

The United States currently faces two major crises- (1) a stagnating economic recovery, and (2) a staggeringly large, and growing, budget deficit. Not only do both portend continued and future trouble for the US economy, but they generally run in opposite directions. Injecting additional dollars into the economy, via some type of stimulus, will grow the deficit. And, cutting spending, in order to shrink the deficit, will only further strangle what is a weak recovery.

Given what seems an impossible situation (addressing both problems simultaneously), there are limited fiscal policy options available. Of course, one could go full Keynesian and simply prime the pump with additional stimulus, regardless of whether or not it is financed by debt. Given the extremely low rates on Treasuries, such an option ought not be entirely ruled out of order. In fact, this is the argument made by Krugman and others. And while it is true that the cost of borrowing is near zero, our addiction to debt (going on close to ten years now, thanks to the Bush administration) needs to be checked at some point. One might argue that now is not the right time to do so, and it is a valid point.

What I would suggest is something that finds a compromise between the deficit hawks and the Keynesians. Allow the Bush tax cuts for the wealthy to expire, as they are scheduled, and use this revenue to finance other stimulative activity. It is important to note that it is only the tax cuts for the wealthy that would be allowed to expire. Those targeted at the middle class should be extended another two years.  What exactly would this revenue finance?

1. Off the top, some of the additional revenue must be used to finance the middle class tax cuts and a fix to the AMT.

2. Payroll tax holiday. I’m open as to the exact length of such a holiday, but feel that it needs to be long enough that people will not just smooth their consumption. Too short of a holiday will not provide much stimulus because people will either smooth consumption or use this short term increase in income to pay off debt. My best guess is that a holiday needs to be longer than 6 months.

3. Infrastructure investment. The President has called for a $50 billion investment in roads, rails and runways. While this is a good start, it is inadequate to really bring our transportation system into the 21st century. Decades of neglect cannot be remedied in a year or two. We must make a long-term commitment to modernizing our infrastructure, including transportation but also our power grid.

4. Backstop state revenues. One of the major shortcomings of the original stimulus bill was that it did not provide enough revenue to states. Unlike the federal government, states must maintain a balanced budget. Certainly, some creative accounting can be done, and personnel is sometimes moved over to the capital budget in order to avoid cuts, but it’s no secret that state budgets have been wracked by this recession. The original stimulus also structured aid to states the wrong way. Instead of providing a temporary increase in FMAP and money for education (and other minor support), the package should have been an open-ended commitment to close state budget gaps, for at least two fiscal years. (Obviously, there would need to be a maintenance of effort requirement so that federal funds were supplementing, not supplanting, state revenues.)

A key feature of all these proposals is their fixed term duration, with the exception of a permanent AMT fix. This ensures that any increase in the deficit will be temporary and not baked into out years. In addition, the final three recommendations all have a stimulative effect, which means more people working, less people collecting unemployment, and more income and sales tax revenues for state and federal governments.

It is clear that we should not simply spend our way out of the recession, but we must not cut our way out of the deficit. A prudent fiscal policy attempts to address both of these concerns, or is at least mindful of both. What I have offered here is such a plan. It’s not my ideal, nor is it perfect. But it is a reasonable attempt to jump start our economy while narrowing our deficit.

Prudence Should Trump Politics

When my boss came back to the office from a briefing this morning, he told me about the December revenue numbers and my comment was something to the effect of you know they’ll spend it ASAP. Apparently, I was right. While I am overjoyed that MA revenues have exceeded projections, especially in December, I don’t think that now is the time to restore some of the 9c cuts. Between the Governor’s commitment to restore regional school transportation and the $14 million restoration of TAFDC, the money is already spent.

Now, it should come as no surprise that I favor spending on social safety net programs and believe that we (in MA and nationally) spend far too little money on these programs. So then why do I think that restoring some cuts is bad policy? Well (and hopefully I am not speaking out of school) close to half of the increase in the December revenue numbers is due to tax settlements. This is not actual revenue growth, but merely one time events. And, one or two months of okay revenue numbers does not make a healthy fiscal year. There are no guarantees that January through June will meet, let alone exceed, the October projection (new revenue projection for FY10 is due out about the 15th and it will be interesting to see how DOR/ANF view the world).

The danger here, in case it is not yet obvious, is that the state’s fiscal picture could worsen between now and the close of the fiscal year. Then what? Do we go back and make further 9c cuts? Do we take back the money we restored in January?

What the administration ought to do is put the higher revenue into the stabilization fund. I do not advocate that as a means of replenishing, but rather as a safe place to store cash in the event that it becomes necessary between now and July 1. Of course, as we get closer to the end of the FY, if revenue numbers continue to improve then we ought to consider restoring some of the painful cuts that have been made. But only insofar that those funds are not going to be needed simply to provide level services in FY11.

Alas, this just is not politically feasible. First, everyone on Beacon Hill likes to spend money. Especially given the drastic cuts that have been made this year. Plus, it’s an election year and putting money into the stabilization fund, though prudent fiscal policy, is not sexy politics. It’s really just that simple.

Valuing Altruism

It is no secret that economics gets some things wrong. Despite my own fairly heterodox views, I find that neoclassical economics offers one of the best tool kits for analyzing public policy. Unlike others, I am not averse to using dollars to capture what are non-monetary values.

A case in point is determining the value of altruism to the individual. First, I should mention that for the uber-rational folks, there is very little room for altruism; it simply does not fit into their model of rational maximization. Let us leave that aside for now for other questions. Particularly, why do we need to measure altruism and how can we measure it.

I would argue that without some understanding of how people value altruism, we can not estimate labor markets in general, and the public and not for profit sectors specifically. It’s common sense to assume that people select careers and specific jobs for a whole host of reasons, including salary, benefits, prestige, fit, and so on. Some of these values are fairly idiosyncratic and beyond measurement. Others are more difficult to measure, like altruism.

People enter careers in the public and not for profit sectors for various reasons, but most, if not all, do so for what I shall call its altruistic premium. The altruistic premium is that amount of non-monetary benefit received from working in these sectors. It should be obvious that the AP is not a specific amount, and will vary both with the individual as well as the job. In other words, it is extremely difficult to quantify.

But just because something is tough to measure does not mean we ought not endeavor to do so. What I would argue is that, in some measure, people are revealing their preference for altruism by accepting employment in a job whose wage is below that which their skills and education would receive in the labor market. Herein lies another layer of difficulty- how do we specify the labor market, do we include everything but the public and not for profit sector or do we include the entire labor market? If we opt for the latter, we might underestimate the value of altruism as the lower wages in the public and not for profit sector will push the market wage down. Though, if we instead look only to the private sector wage rate, we could overstate the value of the altruistic premium. This is so because there may be some other characteristic/trait of the person working in the public or not for profit sector that would diminish their market value.

Another measurement problem is that what I have labeled the altruistic premium might also include some other idiosyncratic values. For example, in some segments of the population, public service is highly valued as an end in itself. Therefore, people who are so motivated might be willing to take a lower than market wage more for the prestige of the position than for its altruistic premium.

Again, I am under no illusion that the altruistic premium would be easy to measure. But the value of such a measure is that it allows us a richer understanding of  labor market decisions. I would argue that it also has some carry over to the private sector. Some individuals for are altruistically inclined might opt for the private sector, yet choose an employer who has volunteer friendly policies. Or one that simply keeps the work week to forty hours, rather than sixty. Understanding how people make their labor market decisions has wide implications not only for public policy, but also holds pertinent information for private firms.

Now, back to the rational maximizer. I would argue that altruism is not in conflict with notions of maximization. We already assume that people include leisure time in their utility functions. I am not convinced that we ought to lump altruism into leisure, as I think the trade off is more complex than one of leisure/altruism v. work. Altruism could come at the price of both or either, really.

Hopefully the methodological difficulty does not keep mainstream economics for placing more emphasis on altruism.

DooDoo Economics

George H.W. Bush famously stated that Ronald Reagan was proposing voodoo economics. Time has proven the elder Bush at least somewhat wrong. The supply-siders did get some things right, among them the idea that marginal tax rates (at some point) do matter. But their notion that tax cuts would pay for themselves is as laughable today as it was nearly 30 years ago.

Today we have many economic charlatans peddling what are essentially Neo-Hooverian ideas. Whether it is Casey Mulligan writing that people are voluntarily unemployed because they want leisure time to Barro famously mistaking an accounting identity for a behavioral relationship, the freshwater folks sure are peddling snake oil. Mulligan and his ilk would have you believe that not only should there not be a second stimulus, but that we should have ended the first stimulus sometime over the summer.

As if they have not done enough damage to economics and its reputation, these same jackals are now peddling the idea of a minimum wage (MW) cut to spur job growth. Like I wrote a couple of days ago, the idea is absurd on multiple levels. But something else came to me earlier today that I had not touched on in my previous post.

Wage stickiness! Now, let us assume that, contra to what I wrote before about wages being pushed downward, wages were sticky. It’s a reasonable assumption and I’m not sure why it hadn’t dawned on me before. Anyway… if wages are sticky and we cut the minimum wage, what would be the effects? Folks who are now working for the MW would earn less income, obviously. But if other wages were sticky (let alone price stickiness) other wages would not go down. Thus, at least some of the prices of good and services that a MW worker purchases or consumes would remain at their pre-MW cut level.

In that case one or two things could happen. MW workers, or at least those who have access to consumer credit, would continue their current consumption patterns, in the process running up debt. Or, they could cut back their consumption to reflect their new budget constraint. One might argue that the first option is not necessarily bad, but given our abysmal national savings rate and the cratering of subprime mortgages, it’s an awfully tenuous argument. And I assume that we can all agree that the second option, less consumption spending, would be horrible for an economy with slow growth in GDP and a double digit unemployment rate.

The only motivation, that I can surmise, for cutting the minimum wage is some folks’ general antipathy towards it. Card and Krueger have already debunked the old notion that increases in the MW would result in increased unemployment. And we were able to pass a decent MW increase in 2007. But for people like Mulligan and others, this moment is too good to pass up. They know their arguments are disingenuous. Or at least they should. I’m not saying they’re bad people, they just choose to practice DooDoo Economics.