A guy walks into a car dealership. The dealer shows him a car that looks nice and assures the guy it is perfect. The guy drives out of the lot and a half mile down the road, the transmission falls out. When the guy goes back to the dealer, the dealer says "caveat emptor man."
Alternate scenario. A guy walks into a car dealership. The dealer shows him a car that looks nice, but standing next to the dealer is an agent from the National Car Consumer Agency who tells the guy he cannot buy the car. "We have determined it is not the right car for you."
I think we all would agree that neither scenario works. However, it seems to me this is the either/or argument we are debating. Progressives oppose the first scenario and conservatives oppose the second yet neither seem to look for the common ground. An overly regulated society leaves no room for innovation and progress, but an underregulated society leads to instability as the financial crisis demonstrated.
A tea-party type person told me he doesn't like taxes, but then how do we pay for roads, police, and national defense? Many Tea-Party-backed candidates have called for the elimination of the Department of Education at a time when we are in an education crisis.
The fundamental question goes back to the Declaration of Independence. We have unalienable rights and "That to secure those rights, Governments are instituted among Men, deriving their just Powers from the Consent of the governed..." (Thank you Cato Institute). We must have government to protect us and our property, and we determine how much power government should have. The question is simply how much power do we want government to have.
A final point, we can increase or reduce that power as the need requires. During World War II, we gave the Executive Branch increased power, but after Watergate we reduced it.
Sunday, October 3, 2010
Wednesday, September 1, 2010
Extending Unemployment Insurance
Robert Barro of Harvard has an interesting op-ed piece on the Wall street Journal website about extending unemployment insurance. His view is that it has done more harm than good by keeping the unemployment rate high. He postulates that the unemployment rate would only be 6.8% instead of 9.5% if benefits were not extended to 99 weeks. His reasoning is that this extension subsidizes unemployment. He notes that in March 2009, 3.9 million jobs were created and 4.7 million Jobs lost, a net 800,000 job loss. Put that way, it does not sound so bad, but it is when compared to a healthy economy.
Professor Barro bases his calculations on a comparison of this recession to the 1981-1982 recession. the impact of the 1981-82 recession was a mean duration of 17.6 weeks of unemployment and a share of long-term unemployment (greater than 26 weeks) of 20.4%. The recent recession had a mean duration of 27.2 weeks and a share of long-term unemployment of 36%. To Prof. Barro the 'culprit' is the extension of unemployment benefits to 99 weeks.
He states that had the extension in benefits not occurred and assumes the 'share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983' then unemployment would be 6.8% instead of 9.5%.
This is a spurious assumption. The nature of the recent recession is not directly comparable to the 1981-82 recession, but is more comparable to the Great Depression. We saw a major mortgage and credit market collapse forced business to begin massive layoffs. State tax revenues dried up. As Alan Blinder and Mark Zandi recently showed, the job losses would have been 3.6 million higher without the stimulus package, producing an unemployment rate of about 11.8% rather than the 10.1% of this recession and even the 10.5% of the 1981-82 recession.
Prof. Barro makes another claim of which I am skeptical. He claims that the Bush tax policies were 'well-conceived and effective.' In what way, By giving significantly lower tax rates to the wealthiest Americans, the wealthy gained a great deal in terms of real income growth while the rest of population saw marginal gains at best. It is obvious that, like other periods of low interest rates, consumer spending was driven by increases in debt that eventually sent the savings rate close to zero if not below. And then there is the deficit itself which was driven in great part by the tax cuts along with reckless government spending.
The Bush policies clearly were not well-conceived, unless of course you were already wealthy.
Professor Barro bases his calculations on a comparison of this recession to the 1981-1982 recession. the impact of the 1981-82 recession was a mean duration of 17.6 weeks of unemployment and a share of long-term unemployment (greater than 26 weeks) of 20.4%. The recent recession had a mean duration of 27.2 weeks and a share of long-term unemployment of 36%. To Prof. Barro the 'culprit' is the extension of unemployment benefits to 99 weeks.
He states that had the extension in benefits not occurred and assumes the 'share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983' then unemployment would be 6.8% instead of 9.5%.
This is a spurious assumption. The nature of the recent recession is not directly comparable to the 1981-82 recession, but is more comparable to the Great Depression. We saw a major mortgage and credit market collapse forced business to begin massive layoffs. State tax revenues dried up. As Alan Blinder and Mark Zandi recently showed, the job losses would have been 3.6 million higher without the stimulus package, producing an unemployment rate of about 11.8% rather than the 10.1% of this recession and even the 10.5% of the 1981-82 recession.
Prof. Barro makes another claim of which I am skeptical. He claims that the Bush tax policies were 'well-conceived and effective.' In what way, By giving significantly lower tax rates to the wealthiest Americans, the wealthy gained a great deal in terms of real income growth while the rest of population saw marginal gains at best. It is obvious that, like other periods of low interest rates, consumer spending was driven by increases in debt that eventually sent the savings rate close to zero if not below. And then there is the deficit itself which was driven in great part by the tax cuts along with reckless government spending.
The Bush policies clearly were not well-conceived, unless of course you were already wealthy.
Saturday, August 7, 2010
Edmund Phelps Op-Ed Piece at the New York Times
Today Edmund Phelps has an Op-Ed piece in the Times about the economy and stimulus. He contends that the problem is not with aggregate demand. He states that there are "no symptoms of deficient demand, like deflation, and no signs of anything like a huge liquidity shortage that could cause a deficiency." While he is right about a liquidity shortage, the recent lackluster trends in retail sales show that aggregate demand is actually deficient. In addition, price trends have several economists concerned about deflation. Finally, corporations are sitting on bundles of cash. There are indications they are becoming more willing to spend that cash, but uncertainty over consumer demand is still a concern. My take on Phelps piece is that he supports a supply side solution,business tax cuts, but without consumers willing to buy, whay would they bother?
Saturday, July 31, 2010
John Stuart Mill is not Forgotten
Here is an interesting post by J. Bradford DeLong on the current push toward austerity in light of the current soft economy. He first makes the point that there is no "bedrock set of economic principles" like in Biology or Chemistry. One type of economist relies on theory and an answer can be determined by the assumptions the theorist applies until the 'right' conclusion is reached. He then notes that there is a second type of economist who relies more on history. He places Mill in the latter type. DeLong notes Mills conclusion that excess demand for financial assets corresponds to excess supply for goods and services as well as an excess supply of labor. This is certainly the case today. DeLong notes that if the demand is for long term assets, the Mills solution is for the government to borrow more (fiscal policy) or guarantee private assets (banking policy).
Given the historic low yields on bonds such as the US treasury 10-yr note, Delong may have a good point here. If we focus too much on the 'theoretical' implications of the growth in government debt, governments could pursue the wrong policy, extending the current economic softness.
Of course the next question is what about Greece and the other European counties facing default? The EU has a long term problem from moving to the Euro and in the end the long run feasibility of the Euro is questionable. But a 'banking policy' for Greece etc. may be the best solution in the short run as the weak countries get their fiscal house in order. Then a higher tax policy like the 1990s in the US would move things back to a better fiscal balance. For those who argue that higher taxes will slow the economy should remember that in the 1990s, higher tax revenue (along with constrained spending) reassured investors that debt would not be monetized and inflationary expectations would be held in check, keeping interest rates from rising offsetting the negative effects of taxes.
History may be the best guide for policymakers after all.
Given the historic low yields on bonds such as the US treasury 10-yr note, Delong may have a good point here. If we focus too much on the 'theoretical' implications of the growth in government debt, governments could pursue the wrong policy, extending the current economic softness.
Of course the next question is what about Greece and the other European counties facing default? The EU has a long term problem from moving to the Euro and in the end the long run feasibility of the Euro is questionable. But a 'banking policy' for Greece etc. may be the best solution in the short run as the weak countries get their fiscal house in order. Then a higher tax policy like the 1990s in the US would move things back to a better fiscal balance. For those who argue that higher taxes will slow the economy should remember that in the 1990s, higher tax revenue (along with constrained spending) reassured investors that debt would not be monetized and inflationary expectations would be held in check, keeping interest rates from rising offsetting the negative effects of taxes.
History may be the best guide for policymakers after all.
Republican View on Tax Cuts
Several Republicans have claimed (for example Sen. Jon Kyl and Rep. Paul Ryan) that the tax cuts they proposed do not require offsets. Their claim seems to be that the cuts pay for themselves (the Supply Sider position). So if cutting taxes say 10% will generate the economic activity to raise tax revenues to offset the losses, does that mean that cutting taxes 100% generates the kind of economic activity to raise tax revenue offsetting the tax cut? In other words, zero taxes would generate maximum revenues?
Of course, this shows the flaw in their logic. At some point tax cuts will not raise overall tax revenue enough to offset the losses from the cuts. Research has shown that this is the current situation.
Of course, this shows the flaw in their logic. At some point tax cuts will not raise overall tax revenue enough to offset the losses from the cuts. Research has shown that this is the current situation.
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