LOOK almost anywhere in the recent economic data and the signs point to an accelerating recovery. A solid fourth quarter GDP report contained a truly blockbuster increase in real final sales. Manufacturing activity is soaring. Consumer spending is up and the trade deficit is down. Markets are trading at their highest level in over two years. And so economists anxiously awaited the first employment figures for 2011, hoping that in January firms would finally react to better conditions by taking on lots of new help.
Instead, the Bureau of Labour Statistics has dropped a puzzler of an employment report in our laps—one which points in many directions but not, decidedly, toward strong job growth. In the month of January, total nonfarm employment grew by a very disappointing 39,000 jobs. This was not at all what forecasters were expecting. Earlier this week, an ADP report indicated that private sector employment rose by 187,000 in January; the BLS pegged the figure at just 50,000. There were some compensating shifts. December’s employment gain was revised upward from 103,000 to 121,000. November’s employment rise, which was originally reported at 39,000, has been revised to a total gain of 93,000.
But there is bad news, as well. The BLS included its annual revision of the previous year’s data in this report, and while job growth over the year looks stronger than before, the level of employment looks worse. In March of last year, 411,000 fewer Americans were working than originally reported. And thanks to a weaker employment performance in April through October, 483,000 fewer Americans were on the job in December than was originally believed to be the case. For now, the economy remains 7.7m jobs short of its previous employment peak.
The BLS press release makes this very clear in a box right at the top, which says that
“Changes to The Employment Situation news release tables are being introduced with this release. In addition, establishment survey data have been revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors. Also, household survey data for January 2011 reflect updated population estimates.”
The effects here are large and unpredictable: the total number of people holding jobs in December 2010, for instance, was revised down by a whopping 452,000 — but despite that, the official December 2010 payrolls number now shows an even bigger month-on-month rise than it did before. More generally the size of the total civilian labor force was revised downwards by 504,000, almost half of which came from the Latino population. That has all manner of knock-on effects: the BLS warns that “data users are cautioned that these annual population adjustments affect the comparability of household data series over time.”
This is a messy report, then — even messier than you’d expect from a monthly data series which is mainly valued for its speed as opposed to its accuracy. At the margin, it’s bad for markets, which concentrate on the headline payrolls number, and it’s good for politicians, who tend to concentrate on the headline unemployment number. But for anybody who’s neither a trader nor a politician, it’s a noisy series which is best treated with a whopping great amount of salt — especially in January, and especially also when any big-picture message is so murky.
Does this mean that most of the “fall” came from discouraged workers dropping out of the workforce? That would explain the difference between this and the Gallup survey, which showed unemployment rising to 9.8% instead of falling. Or am I missing something?
At first glance I thought that was people dropping out of the labor force, but it seems instead to be the conjunction of two different things. One is upward revisions of the last couple of months’ worth of jobs data. The other is a downward revision to the baseline estimate of how many people there are. Basically, more people had jobs a month ago than we thought had been the case, and also there were fewer unemployed people than we thought had been the case.
The upshot is that the new data looks a lot better than the old data. But the new data doesn’t say the situation improved dramatically over the past month, it merely says that last month’s take on the situation was too pessimistic.
This morning we have another answer–in the form of a 576-page book–from the congressionally appointed panel charged with investigating the roots of the meltdown. Were it not for corporate incompetence, inadequate government regulation, and excessive risk-taking by Wall Street banks in the housing market, the commission concludes, the country could have avoided financial calamity.
At long last, here is the dissent filed by Vice Chairman Bill Thomas, Dr. Doug Holtz-Eakin, and me to the Financial Crisis Inquiry Commission Report. (I know, you’ve been holding your breath waiting for this.) This dissent will be transmitted to the President and the Congress later today (Thursday, January 27th) along with the majority’s document and Peter Wallison’s separate dissent.
Our dissent is 27 pages long as a PDF. The majority’s document is 20 times longer. Their endnotes are 98 pages. I am not making this up. The full report will be available on FCIC.gov tomorrow around 10 AM EST. Peter Wallison’s dissent is available now.
Since I know that 27 pages is too long for the overwhelming majority of readers on the web, I’ll try to suck you in by telling you that our core argument is in the first seven pages. The last twenty flesh out in more detail each of our “ten essential causes of the crisis.” You could stop after seven pages (I hope you won’t) and have our basic argument.
If you have followed any of the press coverage of the FCIC over the past six weeks, you may think you know what we’re going to say. This dissent, however, makes a fundamentally different argument than the four-man document I signed onto in December. For me this document supersedes that December document, which I looked on as a temporary placeholder.
We recognize that … other … narratives have popular appeal:… Had the government not supported housing subsidies (the first narrative) or had policy makers implemented more restrictive financial regulations (the second) there would have been no calamity.
Both of these views are incomplete and misleading. … We believe the crisis was the product of 10 factors. Only when taken together can they offer a sufficient explanation of what happened:
Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers’ ability to pay.
However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles—the dot-com bubble of the 1990s, for example—that were not nearly as devastating… Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed? Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.
These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. … We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing…
A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in the U.S. and Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10). …
[I]t is dangerous to conclude that the crisis would have been avoided if only we had regulated everything a lot more, had fewer housing subsidies, and had more responsible bankers. Simple narratives like these ignore the global nature of this crisis, and promote a simplistic explanation of a complex problem. Though tempting politically, they will ultimately lead to mistaken policies.
I don’t think the conclusion that better regulation would not have stopped the crisis follows from the factors they list.
By their own admission, the reason that factors 1 and 2 led to factor 3 was “an ineffectively regulated primary mortgage market.” So right away better regulation could have stopped the chain of events the led to the crisis.
Factor 3 was “nontraditional mortgages that were in some cases deceptive, in many cases confusing, and often beyond borrowers’ ability to pay.” Sure seems like regulation might help to prevent deception and confusion (through, among other things, a financial protection agency). One thing is clear in any case. The market didn’t prevent these things on its own.
On to factor 4: Securitizers lowering credit standards, a failure of credit agencies, and buyers failing to do their own due diligence. Once again, regulation can help where the private market failed. The ratings agencies exist because they help to solve an asymmetric information problem. The typical purchaser of financial assets does not have the resources needed to assess the risk of complex financial assets (which is why saying that they should have performed their own due diligence misses the mark). Instead, they rely upon ratings agencies to do the assessment for them. Unfortunately, the ratings agencies didn’t do their jobs — perhaps due to bad incentives arising from to how they were paid — and this is where regulation has a role to play.
Factor 5 is the accumulation of correlated risk — again something a regulator can stop once the accumulation or risk is evident. This seems like an easy one — when regulators see this type of risk building up, they should do something about it. The question, however, is how to give regulators better tools for assessing these risks. Backing off on regulation, as implied above, won’t help with this.
IT IS not the most promising script for a whodunit. Ten experts are brought together to solve a mystery, but they can’t get along and ultimately reach three different conclusions. That, sadly, is the story of America’s Financial Crisis Inquiry Commission, whose book-length report was released on January 27th.
When the six Democratic and four Republican appointees began their work, there was hope that they could clarify the causes of the financial crisis in the same way as the authors of the 9/11 commission’s report had shed light on the terrorist attacks of September 2001.
It was, though, evident well before they had finished 19 days of public hearings and over 700 interviews that ideological spats would get in the way. By November Republican members were moaning that the Democrats were more interested in crafting a document that would bolster their party’s attacks on the new Republican majority in the House of Representatives than in revealing the truth. When a majority of the panel voted to push the report’s release beyond the December 15th deadline, the four Republicans produced their own preliminary report. Then they began to fracture too.
The result is an unfortunate loss of credibility and, confusingly, three competing narratives. The main report, endorsed by the Democrats only, points to a broad swathe of failures but pins much of the blame on the financial industry, be it greed and sloppy risk management at banks, the predations of mortgage brokers, the spinelessness of ratings agencies or the explosive growth of securitisation and credit-default swaps.
The report takes swipes at politicians, too, for overseeing a long period of deregulation that allowed Wall Street to run riot; and at regulators for not using the powers they had to curb risk-taking and for blithely assuming that markets could police themselves. It points to the Federal Reserve’s “pivotal failure” to rein in reckless mortgage lending, and to the Securities and Exchange Commission’s lax supervision of investment banks. It also fingers an over-reliance on short-term debt. These, however, are hardly novel conclusions.
his report has had a long and sometimes challenging history. But to paraphrase an old gospel song, it “may not be here when you want it, but it’s right on time.”Useful Utopians
Over three decades, our government was captured by a libertarian-inspired economic philosophy that had previously been considered radical and impractical — correctly so, as it turns out. That philosophy’s most prominent spokesman, former Ayn Rand acolyte Alan Greenspan, was celebrated as a “maestro,” until the house of cards he came to symbolize finally collapsed.
The prevailing economic myth, of an impossibly wise and genuinely free market, was as useful as it was Utopian. It provided ideological cover for the deregulation that both parties embraced. Government leaders were compromised by the lure of huge campaign contributions, and by a revolving door that ensured future wealth for cooperative politicians and regulators from both parties. The result enriched Wall Street and the Washington elite and left the rest of the country wounded.
The deregulation of the 90s allowed banks to take risks they couldn’t possibly survive. But they had been rescued in previous crises, and the cozy relationship between government and bankers assured them they’d be bailed out again. Freed from the consequences of their own actions, they gambled… and we lost.
Money for Nothing
The most surprising thing about the FCIC hearings for me personally was the lack of competence shown by so many top bankers. The Wall Street executives I worked for were smart, demanding, and driven, but bankers like Citi’s Robert Rubin and Chuck Prince… not so much. Their FCIC testimony displayed a shaky grasp of their business and a lack of concern about the risks facing their own organizations. Many of them seemed to lack even the most basic level of intellectual curiosity. A big bank is a fascinating, complex entity, but one executive after another seemed to shrug off the details of their own banks’ operations with bored indifference.
Sure, their testimony may have been especially vague because of their understandable desire to avoid self-incrimination. But even allowing for that, the low level of managerial skill they displayed was disconcerting. Today’s generation of financial executives may be enjoying the greatest disparity between income and executive performance since indolent princes inherited vast kingdoms through the divine right of kings.
Yet despite this embarrassing record, these executives want to be pampered and flattered by Washington again — and they’re getting their wish. The president and his party took some steps toward genuine financial reform with last year’s bill, but a great deal of work is still needed and their recent appointments aren’t encouraging. Meanwhile, the Washington consensus is pressuring the administration to assuage the “hurt feelings” of CEOs with some success, despite record profits that should provide more than adequate compensation for any injuries to their pride.
The president only mentioned financial reform in passing, in his comments about regulations:
When we find rules that put an unnecessary burden on businesses, we will fix them. But I will not hesitate to create or enforce commonsense safeguards to protect the American people. That’s … why last year we put in place consumer protections against hidden fees and penalties by credit card companies, and new rules to prevent another financial crisis…
Last year’s bill was a start, but more reform is urgently needed — to break up “too big to fail” banks, end runaway speculation, protect consumers, and end the incestuous relationship between banks and government. Prosecutions are needed, too. They’re the only way to ensure that bankers can’t violate laws with impunity, knowing that even if they’re caught their shareholders will pay the fines.
The NYT devotes two paragraphs to Peter Wallison — they mention he was “chief lawyer for the Treasury Department and then the White House during the Reagan administration” and that he is “now at the conservative American Enterprise Institute.”
But nowhere do they mention that he was co-director of the AEI’s Financial Deregulation Project. This is a serious omission by a major publication.
The New York Times should be much better than this . .
The unemployment-insurance program involves a balance between compassion—providing for persons temporarily without work—and efficiency. The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.
In a recession, it is more likely that individual unemployment reflects weak economic conditions, rather than individual decisions to choose leisure over work. Therefore, it is reasonable during a recession to adopt a more generous unemployment-insurance program. In the past, this change entailed extensions to perhaps 39 weeks of eligibility from 26 weeks, though sometimes a bit more and typically conditioned on the employment situation in a person’s state of residence. However, we have never experienced anything close to the blanket extension of eligibility to nearly two years. We have shifted toward a welfare program that resembles those in many Western European countries.
The administration has argued that the more generous unemployment-insurance program could not have had much impact on the unemployment rate because the recession is so severe that jobs are unavailable for many people. This perspective is odd on its face because, even at the worst of the downturn, the U.S. labor market featured a tremendous amount of turnover in the form of large numbers of persons hired and separated every month.
For example, the Bureau of Labor Statistics reports that, near the worst of the recession in March 2009, 3.9 million people were hired and 4.7 million were separated from jobs. This net loss of 800,000 jobs in one month indicates a very weak economy—but nevertheless one in which 3.9 million people were hired. A program that reduced incentives for people to search for and accept jobs could surely matter a lot here.
Moreover, although the peak unemployment rate (thus far) of 10.1% in October 2009 is very disturbing, the rate was even higher in the 1982 recession (10.8% in November-December 1982). Thus, there is no reason to think that the United States is in a new world in which incentives provided by more generous unemployment-insurance programs do not matter much for unemployment.
Another reason to be skeptical about the administration’s stance is that generous unemployment-insurance programs have been found to raise unemployment in many Western European countries in which unemployment rates have been far higher than the current U.S. rate. In Europe, the influence has worked particularly through increases in long-term unemployment. So the key question is what happened to long-term unemployment in the United States during the current recession?
To begin with a historical perspective, in the 1982 recession the peak unemployment rate of 10.8% in November-December 1982 corresponded to a mean duration of unemployment of 17.6 weeks and a share of long-term unemployment (those unemployed more than 26 weeks) of 20.4%. Long-term unemployment peaked later, in July 1983, when the unemployment rate had fallen to 9.4%. At that point, the mean duration of unemployment reached 21.2 weeks and the share of long-term unemployment was 24.5%. These numbers are the highest observed in the post-World War II period until recently. Thus, we can think of previous recessions (including those in 2001, 1990-91 and before 1982) as featuring a mean duration of unemployment of less than 21 weeks and a share of long-term unemployment of less than 25%.
These numbers provide a stark contrast with joblessness today. The peak unemployment rate of 10.1% in October 2009 corresponded to a mean duration of unemployment of 27.2 weeks and a share of long-term unemployment of 36%. The duration of unemployment peaked (thus far) at 35.2 weeks in June 2010, when the share of long-term unemployment in the total reached a remarkable 46.2%. These numbers are way above the ceilings of 21 weeks and 25% share applicable to previous post-World War II recessions. The dramatic expansion of unemployment-insurance eligibility to 99 weeks is almost surely the culprit.
To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment-insurance coverage to 99 weeks had not occurred and—I assume—the share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983. Then, if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.
Based on Cable News and a notable NYT column one might think that economists are perpetually at one another’s throats. This is far from the truth. The hierarchical nature of the economics profession lends an ecclesiastical air to many of our interactions. Brilliant figures are treated with enormous reverence.
To wit, when an eminent figure like Robert Barro says something that strikes most of as inane the most common reaction is shoe staring
For better or worse the blogosphere has changed that. Economists of all stripes will descend upon Barro over the next 36 hours. If he replies, which I suspect he will not, this will be an interesting moment.
Robert Barro has a good article in yesterday’s WSJ, titled “The Folly of Subsidizing Unemployment.” In it, he argues reasonably that “the expansion of unemployment-insurance eligibility to as much as 99 weeks from the standard 26 weeks” has made the economy less efficient “because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment.” My chart above helps illustrate the numbers he uses in his article, making it clear that we have never before seen such a large number of people receiving unemployment compensation. The 1981-82 recession saw a higher unemployment rate than we have seen in the recent recession, but one-third fewer people were subsidized for not working. This undoubtedly helps explain why this recovery has proceeded at a very disappointing pace.
I have the questionable distinction of appearing on Larry Kudlow’s CNBC program several times a week, arguing with people whose positions under normal circumstances would get no serious attention, and defending policies I would have thought so clearly and obviously defensible they should need no justification. But we are living through strange times. The economy is so bad that the social fabric is coming undone, and what used to be merely weird economic theories have become debatable public policies.
Tonight it was Harvard Professor Robert Barro, who opined in today’s Wall Street Journal that America’s high rate of long-term unemployment is the consequence rather than the cause of today’s extended unemployment insurance benefits.
In theory, Barro is correct. If people who lose their jobs receive generous unemployment benefits they might stay unemployed longer than if they got nothing. But that’s hardly a reason to jettison unemployment benefits or turn our backs on millions of Americans who through no fault of their own remain jobless in the worst economy since the Great Depression.
Yet moral hazard lurks in every conservative brain. It’s also true that if we got rid of lifeguards and let more swimmers drown, fewer people would venture into the water. And if we got rid of fire departments and more houses burnt to the ground, fewer people would use stoves. A civil society is not based on the principle of tough love.
In point of fact, most states provide unemployment benefits that are only a fraction of the wages and benefits people lost when their jobs disappeared. Indeed, fewer than 40 percent of the unemployed in most states are even eligible for benefits, because states require applicants have been in full-time jobs for at least three to five years. This often rules out a majority of those who are jobless – because they’ve moved from job to job, or have held a number of part-time jobs.
So it’s hard to make the case that many of the unemployed have chosen to remain jobless and collect unemployment benefits rather than work.
Anyone who bothered to step into the real world would see the absurdity of Barro’s position. Right now, there are roughly five applicants for every job opening in America. If the job requires relatively few skills, hundreds of applicants line up for it. The Bureau of Labor Statistics says 15 percent of people without college degrees are jobless today; that’s not counting large numbers too discouraged even to look for work.
Barro argues the rate of unemployment in this Great Jobs Recession is comparable to what it was in the 1981-82 recession, but the rate of long-term unemployed then was nowhere as high as it is now. He concludes this is because unemployment benefits didn’t last nearly as long in 1981 and 82 as it they do now.
He fails to see – or disclose – that the 81-82 recession was far more benign than this one, and over far sooner. It was caused by Paul Volcker and the Fed yanking up interest rates to break the back of inflation – and overshooting. When they pulled interest rates down again, the economy shot back to life.
…Two Fed studies suggest that [extensions of UI] may have contributed 0.4 to 1.7 percentage points to current unemployment. But a closer look at this research makes me skeptical that the effects have been so large.
…The incentive effects of UI extension must also be weighed against the stimulative effects of paying UI benefits. For some reason it’s become almost taboo to note this on the Right, but UI recipients tend to be highly inclined to spend funds they receive immediately, meaning that more UI payments are likely to increase aggregate demand. UI extension also helps to avoid events like foreclosure, eviction and bankruptcy, which in addition to being personal disasters are also destructive of economic value.
As a result, I am inclined to favor further extension of UI benefits while the job market remains so weak. I am not concerned that this leads us down a slippery slope to permanent, indefinite unemployment benefits (which historically have been one of the drivers of high structural employment in continental Europe) as the United States has gone through many cycles of extending unemployment benefits in recession and then paring them back when the economy improves, under both Republican and Democratic leadership.
He claims that the unemployment rate would be much lower now if Congress had not passed any extensions of unemployment benefits. I have not gone through his analysis, but I suspect that I, like Alex Tabarrok, would not find it persuasive. Nonetheless, I think there is a case to be made for allowing people to continue to collect unemployment benefits after they find a new job, until their benefits are scheduled to expire. We can argue about how generous the unemployment benefits should be overall, but for any level of benefits it is possible to reduce the disincentive to find work.
IN our society, cars receive considerable attention and study — whether the subject is buying and selling them, the traffic congestion they cause or the dangerous things we do in them, like texting and talking on cellphones while driving. But we haven’t devoted nearly enough thought to how cars are usually deployed — namely, by sitting in parking spaces.
Is this a serious economic issue? In fact, it’s a classic tale of how subsidies, use restrictions, and price controls can steer an economy in wrong directions. Car owners may not want to hear this, but we have way too much free parking.
Higher charges for parking spaces would limit our trips by car. That would cut emissions, alleviate congestion and, as a side effect, improve land use. Donald C. Shoup, professor of urban planning at the University of California, Los Angeles, has made this idea a cause, as presented in his 733-page book, “The High Cost of Free Parking.”
Many suburbanites take free parking for granted, whether it’s in the lot of a big-box store or at home in the driveway. Yet the presence of so many parking spaces is an artifact of regulation and serves as a powerful subsidy to cars and car trips. Legally mandated parking lowers the market price of parking spaces, often to zero. Zoning and development restrictions often require a large number of parking spaces attached to a store or a smaller number of spaces attached to a house or apartment block.
If developers were allowed to face directly the high land costs of providing so much parking, the number of spaces would be a result of a careful economic calculation rather than a matter of satisfying a legal requirement. Parking would be scarcer, and more likely to have a price — or a higher one than it does now — and people would be more careful about when and where they drove.
The subsidies are largely invisible to drivers who park their cars — and thus free or cheap parking spaces feel like natural outcomes of the market, or perhaps even an entitlement. Yet the law is allocating this land rather than letting market prices adjudicate whether we need more parking, and whether that parking should be free. We end up overusing land for cars — and overusing cars too. You don’t have to hate sprawl, or automobiles, to want to stop subsidizing that way of life.
As Professor Shoup wrote, “Minimum parking requirements act like a fertility drug for cars.”
Under a more sensible policy, a parking space that is currently free could cost at least $100 a month — and maybe much more — in many American cities and suburbs. At the bottom end of that estimate, if a commuter drives to work 20 days a month, current parking policy offers a subsidy of $5 a day — which is more than the gas and wear-and-tear costs of many round-trip commutes. In essence, the parking subsidy outweighs many of the other costs of driving, including the gasoline tax.
In densely populated cities like New York, people are accustomed to paying high prices for parking, which has helped to encourage a relatively efficient, high-density use of space. Yet even New York is reluctant to enact the full social cost of the automobile into policy. Proposals to impose congestion fees have failed politically, and on-street parking is priced artificially low.
I am not sure that the argument is correct. I worry that there is a lot of confusion between fixed costs and marginal costs. Creating a parking place carries fixed costs. However, the marginal cost of using a parking space is often zero.
The marginal cost of using a cell phone network is often zero, so your cell phone company tries to offer you a plan that makes the marginal cost feel like zero to you. It could be that free parking emerges for the same reason.
If we abolished free parking, would parking spaces be scarcer? Keep in mind that if the price of parking went up, this would cause movement along the supply curve as well as along the demand curve. Maybe the total number of parking places would decline (it depends on elasticities), but the one result you can predict with certainty is that the number of unused parking places would go up. Is that necessarily welfare-improving?
Suppose I have a piece of land that could be used for parking or for other purposes. You might argue that having a price for parking would send me a clearer signal about the best use.
However, the cost of converting that land from one use to another is very high, so I have to choose one purpose or the other and stick with it. One exception to high conversion cost is lanes that change from parking lanes to traffic lanes during rush hour. There, the price of parking during rush hour is very high (you get ticketed and towed), and that seems to work.
Once I have decided to use land as a parking place (say, land in front of a store), then there is no reason for me to want to deter people from parking in empty spaces. That suggests charging a price of zero other than at peak times.
The problem is one of congestion pricing. You need paid lots to charge people to park at peak times, such as concerts or sporting events.
The key is not to “abolish” free parking, but to a) abolish minimum parking requirements, and b) put prices or higher prices on congested municipal-owned parking spaces. Both a) and b) will lower the demand for parking and a) will lower the supply of parking, so why should the number of unused parking spaces necessarily go up? If you treat something as an appropriately scarce resource, it should be used more effectively.
There are plenty of DC restaurants which don’t have their own parking lots, but they use paid valet parking and find ingenious ways to store cars more effectively. The parking fee means that some people walk there or use the Metro, rather than driving and parking. No one finds this arrangement especially objectionable and while valet parking is at a discount to market still it is priced. At lunch time valet parking is less likely but still people pay to park, usually in nearby lots. No one would suggest that these restaurants be forced to put in minimum parking. Nor would anyone suggest that mandated minimums would be neutral with respect to parking efficiency.
I’m simply asking for the same switch in reverse, namely to do away with minimum parking requirements. Very likely, such a change will have a bigger impact on future developments than on past developments (it can be hard to reconfigure a parking lot), although some malls might sell off or rent their now-liberated parking spots to other commercial ventures.
I don’t have much to say about this in particular, just a general point about moving to market based allocations of some goods and services, particularly those controlled by government.
As the price of a good or service rises, it begins to price some people out of the market. I don’t mean that they choose to consume other things instead, I mean that no matter how much they want it, they can never have it. It’s not a matter of desire, or willingness to pay, they simply cannot raise the needed funds — it’s just not possible to afford the good or service in question.
Because of this there are some goods and services controlled by government, national parks come to mind, where we choose to allocate goods by other means than the price system, lotteries, waiting time, random draws, that sort of thing. It generally occurs when we think equity is a primary consideration, i.e. that everyone should have a relatively equal shot at consuming a good or service.
For example, suppose we believe that everyone should at least have a chance to swim in the ocean. Willingness to wait indicates desire for the good in the same way that willingness to pay does, and this can be used to allocate the good or service. That is, willingness to circle for a period of time looking for a parking place so you can go to the beach — which varies with demand for parking in that area — indicates the depth of desire to do this activity and thus has desirable allocative properties — and we can eliminate the externalities Tyler is worried about through a tax on carbon and congestion at the pump. The supply of parking, which is controlled by government, could be determined by the carrying capacity of the beach, which is itself influenced by considerations such as habitat protection that private markets may not handle well in any case. And, of course, public transportation could be provided as an alternative, but that’s not available to everyone so some parking would likely be needed. Perhaps parking wouldn’t be all that expensive, or maybe it would given the prices Tyler cites in the article for places like California, but the example is intended mainly to illustrate that prices aren’t the only allocation mechanism available, and that sometimes other alternatives are desirable. There are certainly cases where price is a barrier and we choose to allocate goods by other means.
Re Mark Thoma, if we were concerned about overall equity of utility, we’d just give the poor more money and let them buy what beach trips they wanted. If we paternalistically thought poor folk irrationally buy too few beach trips (why?!), we might give them beach travel vouchers. But surely the vast majority of free parking is not well explained by our thinking the poor irrationally take too few car trips.
Re Arnold Kling, I didn’t see Tyler saying to force prices above marginal cost; he just opposed laws requiring excess supply. Why should we treat parking spots much different than thousands of other familiar products whose average costs are often above marginal costs? Should we require every mall to have enough movie theaters seats to handle the premier of a record blockbuster, all because since theatres are rarely full their marginal cost is near zero? How about similarly requiring a vast supply of restaurant tables which would then rarely be full?
Sometimes good economic analysis says that the world should be different than it is. Yes you should wonder if such an analysis is missing something important. But you shouldn’t strain too much just to justify the status quo. We require the creation of way too much parking, and we’d be better off to coordinate to stop it.
a. How much land should be devoted to parking spaces?
b. Given the answer to (a), what should be the price for parking?
I argue that for (b) the answer is often zero. A higher price would simply result in unused parking places, which does not increase welfare. Robin is falling back on issue (a), and here the thinking is that the state provides, either directly or through regulation, more parking spaces than are optimal.
Suppose there were no state provision of parking places. What would the equilibrium look like? Some possibilities:
1. You get Berlin, where the public transit is highly efficient and lots of people ride bicycles, even in the rain.
2. Individual housing developments and businesses undersupply parking. The thinking is that if parking runs out in front of your business, your customers will use the parking spaces in front of the business next door. This leads to stores putting up warning signs that say, “unless you patronize my store, your car will be towed.” Neighborhoods put up signs that say, “unless you have a residential permit, your car will be towed.” This imposes all sorts of enforcement costs as well as inefficient use of space. The warning signs often deter people from parking in places where they impose no cost at that particular time.
3. Land use responds, but not toward the Berlin scenario. On the contrary, businesses relocate farther away from cities, to locations where parking is cheap to supply and you don’t get into fights with other businesses about towing rules. Housing developments are built without street parking but instead with large driveways–in effect, each household requires its own oversized parking lot to accomodate its peak demand . As a result of these sorts of adaptations, it takes more parking places to accommodate the same number of cars.
4. After a lot of Coasian bargaining, businesses agree to each provide a minimum number of parking places and housing developers agree to provide streets wide enough to allow parking.
The point is, you don’t necessarily get (1). And you might get (4).
In response to Robin Hanson, I think Arnold Kling makes some good points about why government intervention in parking may be necessary to resolve externality problems. Arnold doesn’t say that government intervention is necessary, and he would likely resist that interpretation, a Coasian bargaining solution is the outcome in his scenario. But the usual sorts of considerations, i.e. transactions costs, unclear property rights regarding street parking in front of residences — some people, for example, use cones and other devices to save parking spots — and other barriers may prevent the Coasian bargaining outcome. (Robin Hanson doesn’t like what I wrote either, though, again, I was trying to make a general point about equity versus efficiency and probably should have chosen another example besides parking near the ocean to make that point
I am disappointed that the distinguished George Mason University economist, TylerCowen, has fallen for the “high-cost-of-free-parking” arguments of UCLA urban planner Donald Shoup. Shoup is an excellent scholar, but like many scholars, he has the parochial view that the city that he lives in is a representative example of what is happening everywhere else.
Shoup’s work is biased by his residency in Los Angeles, the nation’s densest urban area. One way L.A. copes with that density is by requiring builders of offices, shopping malls, and multi-family residences to provide parking. Shoup assumes that every municipality in the country has such parking requirements, even though many do not, and that without such requirements there would be less free parking. This last assumption is extremely unlikely, as entrepreneurs everywhere know that (outside of New York City) 90 percent of all urban travel is by car, and businesses that don’t offer parking are going to lose customers to ones that do.
Shoup portrays such free parking as a “subsidy” because not all people drive and so the ones who don’t drive end up subsidizing the ones who do. But any business offers a variety of services to its customers and employees, and no one frets about subsidies just because they don’t take advantage of every single service. How often do you actually swim in the swimming pools or work out in the exercise rooms of the hotels you stay at?
Shoup also supposes (and Cowen accepts) that universal parking fees would greatly reduce the amount of driving people do. “Minimum parking requirements act like a fertility drug for cars,” Cowen quotes Shoup as saying. Metro, Portland’s regional planning agency, submitted this question to its transportation model and concluded that requiring all offices, shopping malls, and multi-family residences to charge for parking would reduce driving by about 2 percent. The model showed that charging for parking has a greater effect on driving than spending billions on light rail, building scores of transit-oriented developments, or increasing the urban area’s population density by 20 percent. But 2 percent still isn’t going to do much to relieve congestion or solve any of the other problems Cowen associates with driving. Plus he never really explains why he thinks reducing mobility is a good idea in the first place.
A key point to emphasize here is that parking mandates aren’t just a subsidy to car ownership, they’re also a burden on pedestrians, who must trek across parking lots to get to almost any building. So not only does walking mean giving up the state-mandated subsidy of free parking, but it also means walking significantly further than you’d have to in a city where the availability of parking was determined by market forces.
And this results in the opposite of the virtuous cycle I wrote about a few weeks ago: as density falls, you get fewer pedestrians, which depletes the market for small, pedestrian-friendly establishments. And fewer pedestrian-friendly businesses establishments means that even fewer people walk. The result is the situation in most cities in the Midwest and the Sun Belt, where even people who strongly prefer to live in a “walkable” neighborhood find there are few if any neighborhoods that cater to that preference.
First, this is a very difficult conversation to have because of the radical differences in reference frames of the two sides. Aside from economists, anti-free parking types are invariably urban dwellers where parking is difficult and the demand for every square foot of space is high. People who live in suburbs, especially those that don’t regularly drive into the handful of dense urban centers where any of this matters, are befuddled. Nobody would pay to park at the Hamilton Place mall on the outskirts of Chattanooga. At the Pentagon City mall, nobody thinks twice.
Second, while ordinances requiring the allocation of parking spots for apartment buildings, storefronts, and the like are doubtless a boon to car owners, they are mostly an attempt to limit negative externalities. If I build an apartment complex in a major downtown center and provide no parking, I’m obviously less competitive than those who do. But, at the same time, those who live in my building who own cars are going to have to park somewhere, and they’ll therefore occupy spaces — often for hours and days on end — that could otherwise be used by short-term parkers who want to patronize the local merchants, taverns, and restaurants. Similarly, if I run a downtown business that caters to clients who don’t need to come to my storefront, I’d never pay to construct parking spaces for my employees, as it’d be cheaper to subsidize their parking elsewhere. But, again, that means my employees, who arrive before the shops open, are taking up spots that could be used by customers of service-oriented businesses.
Taking both of these into consideration, then, it seems to me that the key good to control is street parking in crowded downtown areas at peak hours. We want residents of apartment buildings and houses and employees of businesses to be out of the way to accommodate short-term parking that allows commerce to take place. So, in places where street parking is scarce, charge variable rates at meters and limit the number of hours that can be parked there. (A tangentially related pet peeve: And delivery vehicles can’t be allowed to take up these spaces, much less double park, which means that those activities have to be time-shifted to the early morning or late evening hours.)
These regulations would be anathema in most of the United States, which simply isn’t crowded enough to have that kind of government intervention in the lives of citizens. But it makes sense in New York, Boston, DC, San Francisco, and a handful of other metro areas long since accustomed to the need for state to smooth over daily interactions.
But the main point is that it’s very difficult to make a positive case for government provision of parking spaces or mandated parking minimums. Given the existence of government provided spaces, it’s harder still to argue against market parking pricing. We have many examples of private firms building and operating parking lots or decks, charging positive prices, and doing a lovely business that seems to work well for operator and driver alike. How does one justify government intervention?
Now you might argue that there are public good considerations involved; that parking spots are like other bits of transportation infrastructure in that there is a role for government provision. Personally, I think parking spots are more like gas stations than roads, and meanwhile roads should be congestion priced (as many transit systems already are — and then some, in some cases). You’d think that libertarians making the public good argument would have no problem defending government provision of and subsidy for transit, but of course they don’t. They get around this by arguing that people want to drive and they don’t want to ride transit. This is strange in that in few other cases would a libertarian claim to know what markets want, and while they might refer to mode shares, those shares are themselves determined by decades of heavy subsidies for all things auto.
But the phrasing at the end of Cowen’s column is unfortunate, as it seems to imply that someone out there should be raising fees: “Imposing higher fees for parking may make further changes more palatable by helping to promote higher residential density and support for mass transit.” It’s clear from the beginning of the article that Cowen is speaking of removing the zoning laws and street parking procedures that keep the cost of parking artificially low in places, but I could see how a too-quick reader might wrongly infer that the column argues for high parking costs as a policy goal regardless of market prices.
Weirdly, several libertarians have taken issue with Cowen’s article. Randal O’Toole is pretty sure that “free parking is a free-market choice,” and thinks Cowen should support it. Well, I’m sure there are plenty of places where it will make a lot of sense for businesses to build large parking lots, but it’s strange to me that a libertarian would be all right with regulations that make this decision for the businessmen. Perhaps he sniffs out an urbanist agenda behind the argument…
Arnold Kling suspects that if we didn’t like state-mandated free parking, we won’t necessarily get the low-driving paradise we desire. Perhaps the American people, accustomed to driving, will simply embrace further sprawl as businesses relocate to exurbs where land is cheap. Or maybe local governments will be faced with skyrocketing enforcement costs as people cheat aggressively on parking. (Cowen thinks Kling’s microeconomic logic is a little bit off.)
Neither of Kling’s scenarios seems particularly likely to me, but then again I don’t study this stuff and I don’t really have the first clue what would happen if cities aimed at more robust markets for parking. All I can really provide is one lonely data point: having arranged my life so I can do most of what I want to do without having to drive, I can say for sure that if parking prices went up in Baltimore, I’d sell my car. At any rate, I am a huge fan of sidewalk cafes and not having to walk through parking lots to get to stores, so I’d love it if more city businesses were given the opportunity to do without parking lots.
The job market has been stagnant so far this summer. Although the U.S. economy lost 131,000 net jobs in July, that was due in large part to a loss of 143,000 temporary government Census workers. The net number was worse than the 60,000 lost economists expected. Meanwhile, the unemployment rate was unchanged in July at 9.5%, reports the Bureau of Labor Statistics. The number of unemployed Americans also remained at 14.6 million. Today’s report shows just how week the job market has been over the past few months, with a significant downward revision to June’s jobs number.
For the current employment recession, employment peaked in December 2007, and this recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only early ’80s recession with a peak of 10.8 percent was worse).
This is a very weak report, especially considering the downward revision to June. The participation rate declined again, and that is why the unemployment rate was steady – and that is bad news. I’ll have much more soon .
Many observers are looking for “glimmers of hope” in the report and pointing to private sector job growth of 71,000, which is higher than in previous months and thus evidence of acceleration in job growth, to an increase in hours worked, an increase in wages, and a fall in workers involuntarily working part-time.
However, as noted in the “glimmers of hope” link, and as I have noted many, many times, we need 100,000-150,000 jobs per month just to keep up with population growth, and even more than that if we want to make up for past losses. That is, we need faster growth than 100,000-150,000 per month if we want the economy to do more than just keep up with population growth and reemploy the millions and millions of people who are now out of work. So job growth of 71,000 still represents a declining labor market, and does nothing to offset past losses.
Politically speaking, the difficulty for Democrats is that there are only two more job reports between now and the November elections, so they’re running out of time to change minds about their stewardship of the economy. And at this point, it’s increasingly unlikely that even one gangbusters report would change public attitudes — it would probably take a series of several months, or even quarters, of economic data.
THERE is no getting around it—today is a bad day for the White House. They lose one of their top economic staffers, have the Senate reject one of their Fed nominees, and suffer a gut-wrenching employment report. Of course, the news is worse for the nation’s 14.6 million unemployed workers. In July, payroll employment fell by 131,000, while the unemployment rate held steady at 9.5%. Economists had expected a negative number in July, due to the continued decline in temporary employment associated with the decennial census. The loss of census jobs amounted to a hit to payrolls of 143,000. But the forecast was for other employment categories to perform better.
The real bright spot in the report is the increase in private payroll employment, of 71,000 jobs. Private payrolls have risen in every month of 2010, adding over 600,000 workers all told. Growth there undercuts the argument that economic uncertainty is proving an obstacle to private hiring. But that private payroll growth was largely offset by the loss of 48,000 jobs at the state and local government level. One recent estimate indicated that state and local governments could shed 500,000 workers over the next two years. Democratic leadership has sought to reduce the negative impact of these cuts with aid to states, but has faced stiff opposition. A $26 billion state aid bill passed out of the Senate yesterday only made it through the body after tweaks were made to pay for the cost of the bill—by cutting funding for food stamps.
There were other positive signs in the report. Hours worked and earnings ticked upward for the month. Both the mean and median duration of unemployment declined, as did the number of long-term unemployed. Of course, some of that shift is likely due to the exit of long-term unemployed workers from the labour force. The labour force shrank by 181,000 workers in July, and both the participation rate and the employment-population ratio edged down slightly. And meanwhile, the June payroll figure was revised from a loss of 125,000 jobs to a decline of 221,000 jobs.
This isn’t a Recovery Summer. It’s a slow slide, certainly better than the rapid disintegration of 2009, but we haven’t replaced those jobs yet, either. Job losses are cumulative. In a normal recovery with proper economic policies of lower barriers to investor entry, we would see a rapid replacement of jobs in this time frame that would take us back to somewhere around 80% of what was lost, with the remaining 20% being the most difficult to recover. We have not yet even begun that ascent. I’ll update this with a couple of slides later this morning to demonstrate the problem.
Expect the White House to hail the best private-sector job creation numbers since March, but economists won’t get fooled. We’re still descending, and will until we get job creation solidly above 100,000 new additions per month.
IN many countries, including the United States, there are calls for the government to spend more to jump-start the economy, and to avoid the temptation to cut back as debts mount.
Germany, however, has decided to cast its lot with fiscal prudence. It has managed rising growth and falling unemployment, while putting together a plan for a nearly balanced budget within six years. On fiscal policy and economic recovery, Americans could learn something from the German example.
Twentieth-century history may help explain German behavior today. After all, the Germans lost two World Wars, experienced the Weimar hyperinflation and saw their country divided and partly ruined by Communism. What an American considers as bad economic times, a German might see as relative prosperity. That perspective helps support a greater concern with long-run fiscal caution, because it is not assumed that a brighter future will pay all the bills.
Even if this pessimism proves wrong more often than not, it is like buying earthquake or fire insurance: sometimes it comes in handy. You can’t judge the policy by asking whether your house catches on fire every single year.
Keynesians have criticized fiscal caution at this point in the economic cycle, arguing that fiscal stimulus will give economies more, not less, protection against adverse events. But is that argument valid?
Certainly, in Germany, the recent history of fiscal stimulus wasn’t entirely positive. After reunification in 1990, the German government borrowed and spent huge amounts of money to finance reconstruction and to bring East German living standards up to West German levels. Millions of new consumers were added to the economy.
These policies did unify the country politically but were not overwhelmingly successful economically. An initial surge was followed by years of disappointing results for output and employment. Germany’s taxes remain high, and overall West German living standards failed to rise at the same rate as those of most other wealthy countries.
Persuading former East Germans to spend more as consumers turned out to be less important than making sure that they had the skills to mesh with the economic expansion of the country. It is no surprise that many Germans are now skeptical about debt-financed government spending or excessive reliance on domestic consumers.
In recent times, Germany has shown signs of regaining a pre-eminent economic position. Policy makers have returned to long-run planning, and during the last decade have liberalized their labor markets, introduced greater wage flexibility and recently passed a constitutional amendment for a nearly balanced budget by 2016, meaning that the structural deficit should not exceed 0.35 percent of gross domestic product.
1. I am not sure why the American left so near-unanimously lines up behind Keynesian recommendations these days. (Jeff Sachs is an exception in this regard.) There are other social democratic models for running a government, including that of Germany, and yet a kind of American “can do” spirit pervades our approach to fiscal policy, for better or worse. Commentators make various criticisms of Paul Krugman, but putting the normative aside I find it striking what an American thinker he is, including in his book The Conscience of a Liberal. Someone should write a nice (and non-normative) essay on this point, putting Krugman in proper historical context.
2. You sometimes hear it said: “Not every nation can run a surplus,” or “Can every nation export its way to recovery?” Reword the latter question as “Can every indiviidual trade his way to a higher level of income?” and try answering it again. Productivity-driven exporting really does matter, whether for the individual or the nation. It stabilizes the entire global economy,
4. The phrase “fiscal austerity” can be misleading. Contrary to the second paragraph here, even most of the “austerity advocates” think that the major economies should be running massive fiscal deficits at this point. (And Germany had a short experiment with a more aggressive stimulus during the immediate aftermath of the crisis.) They just don’t think it works for those deficits to run even higher.
5. The EU is an even less likely candidate for a liquidity trap than is the United States. That said, how to distribute and implement additional money supply increases would be a serious political problem for the EU. Simply buying up low-quality government bonds would work fine in economic terms, but worsen problems of moral hazard, perceived fairness, and so on. This problem should receive more attention.
This is all very nice, but it’s worth pointing out that Germany’s programme of fiscal stimulus was among the largest in Europe (across developed nations). Germany’s unemployment rate is low, and it declined through some of the worst portions of the recession, but it’s important to point out that this is due in part to an ambitious work-sharing arrangement, in which employers are encouraged to reduce individual hours worked rather than lay off employees. This policy certainly helps to mitigate job losses during a downturn (which makes for great countercyclical policy, and which reduces the fiscal cost of recession) but it’s more likely to delay necessary structural reforms than accelerate them.
And finally, as you can see at right, Germany is one of the few large European economies to increase its deficit from 2009 to 2010. And its planned deficit reduction in 2011 is among the smallest in the euro area. If Germany is more successful than other economies at pulling through recession, it may be because it’s better at performing the ideal policy move—a move the that Mr Cowen appears to criticise when it’s urged by members of the American left—bigger short-term deficits followed by a credible switch to fiscal tightening down the road.
Mr Cowen’s point still stands, to some extent; other countries shouldn’t berate Germany for having the good sense to do what they ought to be doing. But I don’t think it’s quite accurate to sell the German experience as one of a triumph of structural savvy over countercyclical good sense.
Certainly, in Germany, the recent history of fiscal stimulus wasn’t entirely positive. After reunification in 1990, the German government borrowed and spent huge amounts of money to finance reconstruction and to bring East German living standards up to West German levels. Millions of new consumers were added to the economy.
These policies did unify the country politically but were not overwhelmingly successful economically. An initial surge was followed by years of disappointing results for output and employment.
This passage makes me want to stick a pencil in my eye. Let’s consider the case:
1. This was not an effort at fiscal stimulus; it was a supply policy, not a demand policy. The German government wasn’t trying to pump up demand — it was trying to rebuild East German infrastructure to raise the region’s productivity.
2. The West German economy was not suffering from high unemployment — on the contrary, it was running hot, and the Bundesbank feared inflation.
3. The zero lower bound was not a concern. In fact, the Bundesbank was in the process of raising rates to head off inflation risks — the discount rate went from 4 percent in early 1989 to 8.75 percent in the summer of 1992. In part, this rate rise was a deliberate effort to choke off the additional demand created by spending on East Germany, to such an extent that the German mix of deficit spending and tight money is widely blamed for the European exchange rate crises of 1992-1993.
In short, it’s hard to think of a case less suited to tell us anything at all about fiscal stimulus under the conditions we now face. And the fact that a prominent commentator on current events apparently doesn’t know that, after a year and a half of debating this issue — well, as I said, I’m feeling fairly despairing.
Concerning Krugman’s first and second points, while no one was concerned about the West German unemployment rate post-unification, there certainly were concerns about the East German unemployment rate, which means that there were, at the very least, regional deflationary concerns specific to East Germany; note Krugman’s own comment that high unemployment brings about deflation as a “proximate risk.” As noted here, the unemployment rate in East Germany in 1992 was a whopping 15%. It went up to 16% in 1993, and remained steady in 1994. It was between 7-8% in West Germany during those periods. Unemployment in the former East Germany remains higher than it does in the West. Thus, contra Krugman, there were very real unemployment concerns post-unification, as East Germany struggled on the labor front, which helped raise legitimate deflationary concerns. The German government’s spending, as a consequence, did take place in depressed demand conditions, with high unemployment in East Germany haunting German policymakers.
But what about Krugman’s third point, which is that the Bundesbank’s decision to raise rates showed that there was no zero bound? Krugman makes it sound as though inflationary concerns stemmed from the fact that the German economy was doing well and did not have unemployment concerns, but as the above paragraph shows, the German economy was suffering significant unemployment in the East, which naturally raised deflationary concerns. To the extent that deflation was avoided, it was not because the employment situation was ideal. Rather, it was because of policies concerning the post-unification exchange rate, which Wikipedia actually covers (and Krugman does not):
When a customs union was created between the former East Germany (German Democratic Republic) and West Germany (the “old” Federal Republic of Germany), there was a dispute over the rate of exchange for conversion of East German money to Deutschmarks. The Chancellor (Helmut Kohl) decided to ignore the advice of the Bundesbank, and chose an exchange rate of 1:1. The Bundesbank feared that this would be excessively inflationary as well as very significantly impairing the economic prospects of the area of the former East Germany. This dispute was particularly public because of the Bundesbank policy of communicating openly on such matters. Although public opinion normally supported the Bundesbank in matters of combating inflation, in this case Helmut Kohl prevailed, and the President of the Bundesbank, Pöhl, resigned. The Bundesbank had to use monetary measures to offset the inflationary effect.
So deflation was avoided, and rates had to be raised. But they weren’t raised because the German economy had reached anything resembling full employment, with low demand. No one could argue that it had, with East German unemployment rates hovering in the 15-16% range. Yet, reading Krugman, one would naturally think that East German unemployment simply was not a factor.
All of this shows, of course, that Cowen has the better of the argument, both in terms of the debate over the German economy in the immediate post-unification stage, and in the debate over what Germany–and the United States and other developed countries–ought to do with regard to future fiscal and economic policies. I understand that Krugman is loath to admit that Keynesian stimulus policies don’t work, and anytime anyone brings forth an example of them not working, Krugman tries to argue that said example is not apt. It should surprise no one that his arguments on this issue have a tendency to be highly misleading.
About to hit the road for a long travel day, so don’t have time to do anything except point to the latest debate on fiscal policy: Tyler Cowen says the US could learn some things about fiscal policy from Germany, see here for his summary. But as Paul Krugman points out, it’s not clear what there is to learn since key conditions for fiscal policy effectiveness such as high unemployment and interest rates at the zero bound are not present in one of the key examples from Germany given in the column.
A senior research economist with the Federal Reserve Bank of Richmond, Mr. Kartik Athreya, recently penned an essay “to open-minded consumers of the economics blogosphere” in which he argued that bloggers, and other economics writers, who portray macro-economic policy as simple matters are doing us all a disservice. In short (with apologies to Douglas Adams), Athreya asserts that “Economics is hard. Really hard. You just won’t believe how vastly hugely mindboggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy. In fact, we would all be better off if we just ignored these clowns.”
Or at least, that’s what I took from it anyway.
As examples, he specifically cites not only Matt Yglesias, John Stossel, Robert Samuelson and Robert Reich, but also the hugely popular Paul Krugman and Brad DeLong. For the most part, these are leading lights of the politically liberal point of view, but Athreya’s critique does not appear to be aimed at either left or right commentators. Instead, he questions why we should listen to anyone who assumes complicated economic matters can be so easily dispensed with:
But why should it be otherwise? Why should anyone accept uncritically that Economics, or any field of human endeavor, for that matter, should be easy either to process or contribute to? To some extent, people don’t. Would anyone tolerate the equivalent level of public discussion on cancer research? Most of us readily accept the proposition that Oncology requires training, and rarely give time over to non-medical-professionals’ musings. Do we expect advances in cell-biology to be immediately accessible to anyone with even a college degree? Science journalists routinely cite specific studies that have appeared in specific journals. They generally do not engage in passing their own untrained speculations off as insights. But economic blogging and much journalism largely does not operate this way. Naifs write books, and sell many of them too. People as varied as Matt Ridley and William Greider make book-length statements about economics. I’ve never done that, and this is my job. This is, to say the very least, bizarre.
Although there is a bit of a “don’t cast pearls before swine” attitude to his essay, as someone who likes to write about and analyze economics, I think Athreya has a good point. It certainly isn’t uncommon for writers such as myself (not to mention those with vastly more expertise than I) to opine about economic policy in a way that assumes certain underlying premises are unassailable fact, rather than difficult and sometimes contentious theory. Whether it’s a discussion of how the Community Reinvestment Act is responsible for the collapse of Wall Street, or why universal health care would boost our GDP in the long-term, bloggers/writers of both left and right are surely guilty of assuming too much at times.
By the same token, I think Mr. Athreya is missing an important distinction. Although economics lies at the heart of what many of these writers discuss, it is in fact politics that is the real subject. As opposed to laymen arguing the finer points about advances in cell-biology, Yglesias, et al., are making political policy arguments and supporting them with economic reasoning. Even when writers such as Krugman or Delong tackle macro-economic subjects head on, they are typically doing so in order to advance a specific policy position that they prefer, rather than seeking to refine our knowledge about economics itself.
In other words, while the economic principles may be oversimplified to an extent, the same came be said about computer science when arguing the pros and cons of owning an Apple or PC. You don’t need to be a computer expert to make a choice.
Let me start by noting that the essay is not even digitized in a convenient form — it is a pdf — and to me that says a lot about the writers knowledge of how the digital world works. Why not make it available in a convenient form (unless the goal is to overcome the fact that federal reserve work cannot be copyrighted by making it difficult to reproduce)? (This is an irritation more generally, and the Kansas City Fed is the worst. Even the president’s speeches are offered only as pdfs — and they are locked to prevent copying — rather than in a more convenient digital form. Are they trying to discourage this information from more general circulation? If so, why?) [Update: I added a few follow up comments on pdfs at the end of the post.]
That’s right; no need to pay attention to Gary Becker, John Taylor, Paul Krugman, and all the other quacks who lack Athreya’s sophisticated understanding of the “science” of economics. BTW, any time someone wields the term ’science’ as a weapon, you pretty much know they are an intellectual philistine. Am I being defensive yet?
To get serious for a moment, in this essay Athreya is confusing a bunch of unrelated issues:
1. The style of bloggers; are they polite or not?
2. The ideology of bloggers
3. The views of bloggers on methodological issues
4. Are bloggers competent to opine on important public policy issues?
I don’t recall ever reading a Greg Mankiw post that I didn’t feel knowledgeable enough to write. On the other hand I’ve read lots of Mankiw posts that I didn’t feel clever enough to write. That’s an important distinction. Mankiw is a great economist in the “scientific” tradition, and he’s a great blogger—but for completely different reasons. He’s a great blogger for the same reason he is a great textbook writer. There are other bloggers who are also very clever; Krugman, Tyler Cowen, Robin Hanson, Steve Landsburg, Nick Rowe, etc, etc. Several on that list also wrote textbooks.
I don’t know if Krugman has done a lot of recent research on macro, but he knows enough about the literature to offer an informed opinion. I often disagree with the views of Krugman, DeLong, Thoma, et al, on fiscal policy, but they can cite highly “scientific” papers by people like Woodford and Eggertsson for all of their fiscal policy views. There must be dozens of economics bloggers who either teach at elite schools, or have a PhD from elite schools, and who are qualified to comment on current policy issues.
He is suggesting that bloggers supply more noise than signal on economic topics. I understand his point, but I disagree with it.
It is a fair point that it is tempting when writing for an audience that includes non-professionals to try to oversimplify, to make your views sound more well-grounded than they are, and to make others’ views sound sillier than they are. If you read just one economics blogger, you will get that blogger’s prejudices and blind spots along with whatever insights might be on offer.
It is possible, however, for the collective efforts of many bloggers to produce more signal and less noise. That would be the case if the competitive market serves as a check on the more unsound ideas. I am not saying that it works that way, but it might.
Athreya takes the view that the academic process of refereed journals is more rigorous and works well. I do not fully share that view. The peer-reviewed journal process may be the better than anything else someone has come up with, but it is a deeply flawed process. It rewards ritual over substance, and trend-following over originality. The process failed badly in the area of macroeconomics over the past thirty years, an era which I believe Paul Krugman is justified in describing as a Dark Age.
Athreya draws an interesting contrast between reactions to the economic crisis and reactions to natural disasters. He points out that the tsunami in East Asia and the earthquake in Haiti combined to kill hundreds of thousands and to impose hardships on many others that are far worse than what has been inflicted by the recession. Yet neither of those disasters was met by a denunciation of seismology for failing to predict them nor an outpouring of ill-informed speculation about what happened. He may be forgetting the “God’s revenge” explanation proposed for the Haiti earthquake, but his point is well taken.
My pushback would be that economists have claimed to know more about the process of recessions than seismologists have claimed to know about earthquakes and tsunamis. No seismologist has ever said that we have “conquered” such events the way that economists have in the past claim to have conquered the business cycle.
I agree with Athreya that non-economists should express opinions about macroeconomics only with great humility. Where I disagree is that I think that economists, too, need to show humility.
I’m going to duck out of this one, and leave it to Federal Reserve Bank of Minneapolis President Narayana Kocherlakota.
He will explain to Kartik Athreya that someone who has taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams) is unlikely to be able to say anything coherent about our current macroeconomic policy dilemmas:
Why do we have business cycles? Why do asset prices move around so much? At this stage, macroeconomics has little to offer by way of answer to these questions. The difficulty in macroeconomics is that virtually every variable is endogenous – but the macro-economy has to be hit by some kind of exogenously specified shocks if the endogenous variables are to move. The sources of disturbances in macroeconomic models are (to my taste) patently unrealistic. Perhaps most famously, most models in macroeconomics rely on some form of large quarterly movements in the technological frontier. Some have collective shocks to the marginal utility of leisure. Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities). None of these disturbances seem compelling, to put it mildly. Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility in endogenous variables…
If Narayana is right, Kartik is wrong. I’m betting on Narayana.
I think there’s a lot that’s wrong about Athreya’s essay, much of it explained by Scott Sumner, but most of all I think his argument hinges on two category errors, one about what I’m doing and one about what he’s doing.
First me. Do I have anything interesting to say about economics? Well, “interesting” is relevant to audience. I should hope that PhD economists working in central banking systems aren’t learning about economics from my blog! That’s what grad school, conferences, the circulation of academic papers, etc. is for. But perhaps you’re a citizen of a liberal democracy who speaks English and tries to keep abreast of political controversies. Well you’ve probably heard politicians talking a lot about jobs and the economy. You’ve probably noticed that voters keep telling pollsters that jobs and the economy matter to them. Jobs and the economy may matter to you! You may have seen that political scientists have found that presidential re-election is closely linked to economic performance, and thus deduced that the fate of a whole range of national policy issues hinges on economic growth. Well then I bet you are probably interested in the fact that a wide range of credible experts (with PhDs, even) believe the world’s central banks could be doing more to boost employment. Is Athreya interested in this? Well, I hope he would know it whether or not he reads my blog—he’s working at a central bank somewhere and probably knows a lot more about this than most people.
But now to Athreya. His essay seems to partake of the conceit that what economic policymakers do is just economics and that for political pundits to second-guess their decisions would be on a par with me trying to second-guess someone doing particle physics. Completely apart from the fact that the “science” of economics is a good deal less developed than what you see in real sciences, the fact is that economic policy is economics plus politics. For example, according to Ben Bernanke, the Fed could reduce unemployment by raising its inflation target but this would be a bad idea because it runs the risk of causing inflation expectations to become un-anchored. That’s a judgment that contains some “economics” content but it’s largely a political judgment. It’s part of his job to make those judgments, but it’s the job of citizens to question them.
At any rate, the next time anyone finds me claiming to have broken original ground in macroeconomic theory I hope someone will call the expertise police. But you don’t need a PhD in sociology to see how it might be the case that the Federal Reserve Board of Governors would be unduly attuned to the interests of college educated Americans to the exclusion of the working class, or that the European Central Bank might be unduly attuned to the needs of Germans to the exclusion of Spaniards and Italians.
My view is a little different than Brad’s. I would say that economics is really, really, really, really, really, really, really hard. And that’s leaving out a few of the “reallys.”
It’s so hard that experts don’t always do it well. The experts are constantly prone to correction by non-experts, by practitioners, by people who are self-educated economic experts but not professional economists, and by people who know some economics and a lot about some other field(s). It is very often that we — at least some of us — are wrong and at least some of those other people are right. Furthermore those other people are often more meta-rational than a lot of professional economists.
Even very simple problems can be quite hard, such as why nominal wages are sometimes sticky or why particular markets don’t always clear, in the absence of legal impediment. Why doesn’t the restaurant charge more on a Saturday night? You can imagine how hard the hard problems are, such as what level of public expenditure is consistent with an ongoing and workable democratic equilibrium.
Putting aside agreement and ideology, and just focusing on how one understands an issue, I’ll take my favorite non-Ph.d. bloggers over most professional economists, six out of seven days a week. Not to estimate a coefficient, but to judge public policy, thereby integrating and evaluating broad bodies of knowledge? It’s not even close.
I got bored pretty quickly with that essay, a poorly written combination of “people I agree with are smart, people I disagree with are stupid” and “elites know what they’re doing so shut up Shut Up SHUT UP SHUT UP SHUT UP SHUT UP.”
There’s little reason to believe the high priests at the Fed had any clue what they were doing as the housing bubble was happening. More than that, there’s plenty of reason to believe that they are much more concerned with inflation than unemployment, and millions will continue to suffer because of it.
Economics provides a framework for thinking about certain problems, but there’s rarely any one “right” answer. Too often the existence of tradeoffs are unacknowledged or completely ignored. If the priests knew what they were doing we wouldn’t have 9.7% unemployment. They, uh, failed.
Never, and I mean never, during the financial crisis, where we’d leave work on Friday and wonder whether or not the world would collapse during that weekend or what kind of market we’d walk into on Monday, did I think “man I wish there were more academic economists around.” Academic economists had very little language with which to describe the crisis. Most of our narratives come straight from journalism or sociology. There are no “toxic assets” in economics, that evocative description comes to us from business world and journalism. Same with the culture and pitfalls of high mathematical finance, math predicated on the efficient markets hypothesis. Even now it feels kind of sad to see them try and shoehorn the entire financial crisis into agency problems. The last time we had one of these it changed economics completely with the Keynesian revolution. I am really rooting for INET to change some paradigms, but it’s going to be an uphill battle. You can barely move old-school Keynesian thought into academia, and I can easily see the journals publishing as if this crisis was just us “forgetting” some technology.
I think he took down the essay, but he mentioned how bloggers who haven’t taken the first year of Economics PhD coursework, and passed the prelim exam, shouldn’t be writing. I think I’ve pieced together the first year between some coursework and self-study, and here are my thoughts: My very first economics class ever was auditing a graduate macroeconomics class where we went through the Lucas/Stokey “Recursive Methods in Economic Dynamics” and Ljungqvist and Sargent “Recursive Macroeconomic Theory.” I still remember asking my classmates “no seriously, this isn’t what macroeconomics is, is it?” It was like they were training to be electrical engineers, but could do no actual engineering. I still am terrified of what macro graduate students are cooking.
And speaking as someone who has taken graduate coursework in “continental philosophy”, and been walked through the big hits of structural anthropology, Hegelian marxism and Freudian feminism, that graduate macroeconomics class was by far the most ideologically indoctrinating class I’ve ever seen. By a mile. There was like two weeks where the class just copied equations that said, if you speak math, “unemployment insurance makes people weak and slothful” over and over again. Hijacking poor Richard Bellman, the defining metaphor was that observation that if something is on an optimal path any subsection is also an optimal path, so government just needs to get out of the way as the macroeconomy is optimal absent absurdly defined shocks and our 9.6% unemployment is clearly optimal. (An unfair description perhaps, but I wasn’t an actual student. This is a better, though mathy, take on the problems.)
While I agree with Athreya that economics is very hard, it is not so hard to understand why it is so hard. His argument for why it is so hard –economics is full of phenomena ”pathologically riddled by dynamic considerations and feedback effects”– sounds to my ear like an argument for the unreliability of pathologically oversimplified economic models, and for the proposition that economists will more often than not fail to converge on a consensus position on which the rest of us can rely.
Economics is a grab bag of theories, just like psychology, sociology, biology, and so on. Any intelligent person with a taste for abstraction and some degree of critical acuity can perfectly well grasp, explain, even cogently criticize most scientific theories. When it comes to formal training, I find that the rigorous standards of argumentation taught in good philosophy programs are useful generally, and certainly have enabled me to detect and explain defects in the arguments of even highly esteemed economists. More specifically, a solid background in the philosophy of science is especially useful when it comes to explaining why many economic theories fail to meet the basic standards of adequate science. Most economists, sad to say, have a woefully poor grasp of the ways the idealized assumptions of their models affect the relevance of those models to the explanation of the real economy and the evaluation of economic policy. And here we arrive at the real the issue: economic policy and who governs.
It seems to have escaped Athreya that this here country is a liberal democracy, and not some kind of bloated Singapore. His response to worries about the rule of experts seems to be that there is no reason to worry because of peer review. Yet as far as I can tell, there is no reason at all to believe that academic peer review in economics favors work relevant to policymaking in the real, embodied political economy as opposed to clever mathematical accounts of phenomena in fictional worlds that bear at best some tenuous structural similarities to this world. I guess it’s not all that surprising when someone who labors inside a technocratic institution with limited democratic accountability fails to wonder whether technocracy on average delivers better policy than democracy. (I don’t know, but I wonder!) And it’s not all that surprising that he would assume that free and open public discussion of economic policy by amateurs threatens to undermine the authority of quiet experts who, as we all know, have a stellar track record of wrangling professional consensus and truth from topics “pathologically riddled by dynamic considerations and feedback effects.”
The stupidest part of Athreya’s essay is its title: “Economics is Hard,” which automatically summons up the memory of Teen Talk Barbie’s “Math class is tough” utterance. (Sadly, Wikipedia tells me that Barbie never actually said “math is hard,” and call me a crazy mob-trusting fool, but I’m going to go with the group mind fact check on this one.) The reason why many women were upset with Teen Talk Barbie was obvious: It played into stereotypes that assumed women just couldn’t do the math. So why even bother try?
I will be the first to acknowledge that I stumble flat on my face when I hit the math sections included in cutting-edge economic theory. But that doesn’t mean I am discouraged from trying to learn more, an important part of which means learning who to trust in the cacophony of econoblogospheric debate. Whose articulations of the problem more closely resemble reality, and resonate with history? Who is best able to take the economic data of the day and slot it into a narrative that makes sense? Who is obviously a cynical, ideologically shuttered fool? I marvel every day at the power of the Internet to put me in the middle of conversations between trained economists and a vast universe of interpreters and filters. I once called the econoblogosphere an ongoing graduate-level seminar in economics, open to everyone, and see no reason to back off on that now. Sure, the democratization of information means that there is a lot of silliness out there — Sturgeon’s 90 percent of everything is crap law undoubtedly applies to Internet discussions of economics.
But pay enough attention, do your homework, and you will find yourself more able to educate your more thoroughly on topics relevant to the pressing matters of the moment than ever before.
The good stuff floats to the top. That, I fear, is not likely to be the fate of “Economics is Hard.”
SO HERE’S A QUESTION: Would a default on Treasuries accomplish what the Balanced Budget Amendment was supposed to achieve, by forcing the government to spend no more than it takes in? With more collateral damage, of course. . . .
There are an absurd number of false assumptions and premises inherent in this point that I don’t have time to go through, but here are a few.
1. The Treasury can never default on the debt; it’s simply impossible. (Editorial note appended below.) Here are some reasons.
— First, unlike private borrowers who are constrained by the amount of interest they are willing to pay, the Treasury has no such constraint. It will always pay whatever the market requires, crowding out all private borrowing if necessary.
— Second, the Federal Reserve will always step in to ensure the success of a Treasury bond sale. Although by law the Fed cannot buy Treasury securities directly from the Treasury, it can assure primary dealers that it will soak up any excess supply in the secondary market.
— Third, long before we ever came even remotely close to a situation in which markets even suspected the possibility of default we would have economic conditions that would guarantee some sort of massive fiscal tightening. In particular, interest rates would be vastly higher than they are today, which would make even the most painful deficit reduction measures—crippling tax increases, in particular, as I have explained elsewhere—seem painless by comparison.
2. Even if the Treasury somehow defaulted—that is, failed to make a timely interest payment—it would not achieve what Reynolds and other conservatives wish: an end to all federal borrowing and de facto imposition of a balanced budget by cutting all spending in excess of revenues. Unless one also posits that all federal taxes would simultaneously cease, the Treasury will still have cash flow with which to make interest and other payments required by law.
Not being an expert on the law regarding federal spending I don’t know the precise priority of claims. But certainly, interest on the debt would be first in line for whatever cash flow the government had. (See Stan’s comment here.) That means that interest on the debt would have to be close to 100% of federal revenues before the possibility of default would occur.
Keep in mind also that the Federal Reserve is, in essence, the federal government’s bank. When one cashes a federal check, the Fed pays it from funds the Treasury holds on deposit. In theory, the Fed could simply decide to give the Treasury some float and continue to cash federal checks even if sufficient funds were not immediately available. Since the Fed turns over all its earnings to the Treasury anyway, it could call this float an advance to get around legal restrictions. Keep in mind also that given the Fed’s vast holdings of Treasury securities, with which it conducts open market operations, any rise in interest rates will necessarily increase the Fed’s income enormously.
3. The disruption to financial markets, commerce and the well-being of all Americans from a Treasury default are really beyond my ability to fully describe. But here are a few points to ponder. Interest rates would skyrocket to unprecedented levels, which would cause a collapse of private borrowing and massive capital losses for all bond holders, which include pension funds, insurance companies and foreign central banks, among others. It might be impossible for pension funds to make payments to millions of individuals depending on them for life itself.
The economy would really grind to a halt long before interest rates got so high that default was even on the radar screen. And insofar as the Fed was forced to monetize the debt in order to support the bond market it would lead to hyperinflation. Is Reynolds really willing to turn the U.S. into Zimbabwe just to make a point?
In conclusion, the idea that we should default on the debt rather than raise taxes to deal with a looming fiscal crisis is simply absurd and, frankly, irresponsible. But considering how many absurd and irresponsible ideas are now common currency among the sorts of people who read “Instapundit,” I have to worry whether dimwits like Glenn Beck, Sarah Palin and Michele Bachmann won’t soon be parroting the idea that a default on the debt is preferable to any tax increase whatsoever. This is an idea that needs to be nipped in the bud.
Bruce Bartlett counters “a number of conservatives” who “suggest that defaulting on the national debt wouldn’t be such a bad thing.” But I think he takes this too literally, and in doing so misses one point of these suggestions. Those making the claims don’t necessarily want default on the debt or believe that default will actually happen. The goal is to add to the deficit hysteria, to oppose tax increases with every ounce of effort they can muster, and force cuts in government programs that they oppose
First, interest on the national debt is paid as a result of a permanent appropriation and is the most mandatory of all mandatory parts of the federal budget. It was enacted at the insistence of Alexander Hamilton (yes, THAT Alexander Hamilton), who convinced Congress that no one would lend the new United States government money unless they were sure that they would get it back when the time came. Hamilton wanted to make it clear to the would be lenders (as I recall, it was mostly the Dutch at the time), that a future president and Congress couldn’t refuse to pay because there were new priorities such as making sure that Saddam Hussein was out of Iraq, that no child was left behind, or that taxes were cut.
Because of this permanent appropriation, the only way a default could occur would be if Congress passed and the president signed legislation repealing it and making the interest payments discretionary. While that’s technically possible, the political likelihood of members of Congress voting for legislation that would be characterized as the “Let The United States Default And Instantly Become A Banana Republic Act” is relatively small. This especially would be the case because of the virtually immediate increase in interest rates that would occur.
Second, there’s no guarantee that spending would be cut as Reynolds is assuming if the U.S. defaulted on its current debt and found itself unable to borrow. Tax increases would be at least as likely.
UPDATE: Well, I was hoping for a thoughtful email from an expert, but instead I got a typically intemperate blog post from Bruce Bartlett. Bruce, I’m not trying to turn the United States into Zimbabwe. That would be the guy in the White House, whom you seem surprisingly anxious to defend.
Ah, yes, Obama is trying to create Zimbabwean levels of inflation and collapse, a year after inheriting a massive debt, trillions in unfunded Bush-created liabilities, and a recession deeper than anything in decades.
When Bush was in the White House, all Reynolds was interested in was cutting pork to “balance” the budget
Reynolds’ response is rich since Bartlett said nothing about Obama in his reply, and Reynolds spent eight years carrying water for the Bush administration. What Bartlett doesn’t understand is that he should only respond to an Instapundit post as glibly as the post was made. Thought, reflection and substantive arguments aren’t fair.
In a related matter, the Howard Baker Center at the University of Tennessee will be sponsoring a lecture by Reynolds on “Blogs, Social Media and Political InCivility” next month.
UPDATE: I got to thinking about how Reynolds described Bartlett’s response as “typically intemperate” and did a search to see how often Reynolds found need to chide Bartlett for that failing and found that most previous Instapundit links to him are neutral or positive. It would seem that Bartlett only becomes “intemperate” when he criticizes Glenn Reynolds. My question is, what took you so long Bruce?
For the past several months, talk has been heating up about the imminent creation of a bipartisan debt commission, seeking to reduce the deficit and national debt. Pretty much everyone is in agreement that Washington’s tab is like a runaway train. But almost everyone with any sense also agrees that trying to force that train a sudden, grinding halt right now would throw the economy into chaos. But some concrete plans of how to tackle the problem once the economy can handle it would be nice, and that’s why a debt commission sounds like a pretty good idea. But several challenges lie ahead.
The first is fundamental: who should create it? The Obama administration is ready to do so with an executive order. But some fiscal responsibility advocates in Congress don’t think that’s such a good idea. The Wall Street Journal’s Real Time Economics blog reports that a group, including Sen. George Voinovich (R-OH), is urging the President not to go the executive order route. RTE explains the worry:
The commission is expected to be the centerpiece of a fiscal 2011 budget blueprint, out Feb. 1, that will be swimming in red ink. Voinovich, along with more than a dozen other senators, wants to create the commission with legislation, not the stroke of a presidential pen. That way, the commission’s mandate would have the force of law, and that mandate can force an up-or-down vote on the commission’s recommendations in Congress. An executive order cannot force a vote, and therefore, the senator believes, will be toothless.I think that’s right. There are a few ways to make this commission worthless. One way would be for it to be seen as having no Congressional authority. Why does President Obama want to go this route? If giving him the benefit of the doubt that he actually wants an effective commission, then the reason must be that an executive order is the only thing that he feels will work.
The article goes on to say that the White House believes Democratic leaders Nancy Pelosi, David Obey and Charles Rangel will fight such a commission, because they won’t want their power watered down. After all, such a commission might actually (gasp!) force them to spend responsibly. Naturally, without a commission, they would exert little effort in striving to reduce the deficit.
And I don’t mean to single out the Democrats: the Republicans aren’t any better on the deficit front. They’ve developed deficit reduction as a major platform position — recently. You might remember that the Republican-controlled Congress under George W. Bush squandered the Clinton budget surpluses through tax cuts. They could have used that money to pay down the debt, but declined to do so. Then the U.S. became embroiled in a war in the Middle East and even more was spent, with less tax revenue to pay for it. That was all before the Great Recession added even more to Congress’s tab.
In Gregg’s budget commission, a debt reduction bill would require super-majorities to pass in the House and Senate. That’s strange, because super-majorities are scarce in Congress and non-existent for bills that deal with tax increases and entitlement reforms — both of which are necessary parts of any serious deficit reduction plan. Oh wait … that’s exactly the point! Gregg rigged his budget commission to fail so he can grab credit for proposing deficit reduction without actually having any unpopular deficit reduction ideas pegged to his reputation. And this guy has the audacity to use the word “fraud.”
I don’t necessarily trust the White House panel to accomplish any more than Gregg’s ploy to play deficit doctor. I’m pretty down on serious deficit fighting in general because Democrats won’t propose service cuts in election years and Republican aren’t likely to support tax hikes in any year that, well, begins with the month of January. It seems to me that the only difference between the panels is that Gregg doesn’t get any credit for the empty gimmick if the White House picks all the panelists.
I’m not opposed to a deficit commission, but making a major push to announce it the morning after Scott Brown’s election seems like a pretty good way to further demoralize the liberal base.
Faced with growing alarm over the nation’s soaring debt, the White House and congressional Democrats tentatively agreed Tuesday to create an independent budget commission and to put its recommendations for fiscal solvency to a vote in Congress by the end of this year.
Under the agreement, President Obama would issue an executive order to create an 18-member panel that would be granted broad authority to propose changes in the tax code and in the massive federal entitlement programs — including Medicare, Medicaid and Social Security — that threaten to drive the nation’s debt to levels not seen since World War II.
If I’m reading this right, the plan is to force Congress to take a vote on a package of tax increases and cuts in entitlements spending by the end of the year? I guess that might mean after the election, but if it doesn’t, well, good luck with that.
On the other hand, I wouldn’t worry too much about anything coming from this. Judd Gregg, the Senate Republican who actually supports a bipartisan deficit commission, is calling this “a fraud.” And without Republican support, it isn’t going anywhere.
The Washington Post doesn’t seem to think they will. In an article on the creation of a special deficit commission that will issue a report that will be voted on after the November election, the Post tells readers that:
“the commission would deliver its recommendations after this fall’s congressional elections, postponing potentially painful decisions about the nation’s fiscal future until after Democrats face the voters.”
If the purpose of this arrangement is to allow members of Congress to support positions like cutting Social Security and Medicare, which are highly unpopular, then the point is that the commission’s proposals will be voted on after members of both parties have faced voters. It is hard to understand why the Post just noted that the commission proposal will be voted on by Congress after Democrats face voters.
This front page article is littered with adjectives more appropriate for an editorial. For example, the first sentence begins: “faced with growing alarm over the nation’s soaring debt.” There is no reason for the word “soaring,” to appear in this article. It expresses the paper’s opinion, it does not provide information to readers.
In the second paragraph the Post tells readers that the proposed commission would be: “granted broad authority to propose changes in the tax code and in the massive federal entitlement programs — including Medicare, Medicaid and Social Security.” The word “massive” also expresses the Post’s opinion, it is not providing information to readers.
Remarkably, the article never once mentions the collapse of the housing bubble, the fallout from which is projected to add more than $3 trillion to the nation’s debt. It is worth noting that all the proponents of this special commission dismissed concerns about the housing bubble when there was still time for the government to take action to prevent the damage it has now caused to the economy and the government’s finances.
My prediction is that it will amount to exactly nothing, although there is a possibility it could turn out badly. I simply don’t see how any plan can get the agreement of fourteen commission members–meaning all the Democrats and four of eight Republicans, or all the Republicans and six of ten Democrats, or something in between.
Some people like to point to the Social Security commission of the early 1980s, but Jackie Calmes’s article in the New York Times showed that that commission was a failure. We only got Social Security reform because (a) the administration negotiated with commission members after the commission itself broke down (remind me again, why was Alan Greenspan appointed Fed chair in the first place?) and (b) Congressional Democrats added a provision to increase the eligibility age. (b) is the rough equivalent of Congressional Republicans adding a tax increase today, meaning it ain’t gonna happen now.
Others point to the commission to close military bases. But that was a very different issue, because base closure was a district-by-district, state-by-state issue–not a Democrat-Republican issue like taxes and government spending.
So my prediction is that the administration, meaning Orszag’s brainiacs, will put forward some sensible solutions that include tax increases and modest entitlement reductions; Congressional Democratic appointees will oppose the entitlement reductions but go along grudgingly because they want to accomplish something while Obama is in office; Congressional Republican appointees will oppose the tax increases and not go along; and we’ll end up with gridlock. Even if by some miracle something comes out of the commission, if it contains a single dollar of tax increases (or even something that can be spun as a tax increase, like allowing any of the Bush tax cuts to expire on schedule), it will be rejected by Republicans in Congress, who will probably have more votes next year than they have now.
The deficit hawks on the right have their sights set on Medicare and Social Security, and the administration seems far too willing to allow these programs to be used as bargaining chips in negotiations (and to give into the right’s insistence that spending cuts – except for the military – take precedence over tax increases). Unless the administration takes a turn away from the tendencies it has shown in the past, this seems to be headed in that direction.
We could choose to do nothing about inequality. After all, the yawning gap between rich and poor has not led to protest marches. It doesn’t appear to be causing bread shortages. And it’s highly debatable whether it has any effect on our physical or mental well-being. But economic inequality does not exist in isolation: The elite also wield disproportionate influence on the political process. Where money intersects politics, inequality perverts democracy — and by extension, the public interest.
The lion’s share of attention about the corrupting effects of inequality on politics has been focused on issues like campaign donations that grant plutocrats access to politicians. But big money tends to find another way to keep flowing once we put the public thumb over a given spigot, whether through campaign-finance reform or lobbying bans for ex-government workers. Sometimes combating the negative effects of inequality requires thinking politics rather than economics. One way to fix a political system that kowtows to rich donors at the expense of the public good is to amplify the power of small donors who came out in record numbers during the last election. Many localities, such as New York City, already do this through very generous matches on the order of 6-to-1.
Or we could bring back old-fashioned shoe-leather politics by making districts much more local. Today, the average congressperson speaks for about 700,000 Americans. Back in 1790, the ratio was a mere 60,000-to-1. In 1913, it was roughly 200,000-to-1. If we were to restore that proportionality of representation, campaigns would be cheaper, the political value of donations would greatly decrease, and the salience of grass-roots campaigning would rise dramatically. In proposing such a reform, political scientist Jacqueline Stevens points out that nothing in the Constitution stops us from increasing the ranks of Congress as long as each member speaks for at least 30,000 people.
Nowhere is the linkage between inequality and political power starker than in the realm of finance — now one-fifth of the nation’s gross domestic product. The so-called regulators have been totally captured by the regulated, and the notion of the free market has become risible in the very geographic center of global capitalism. Hence the unusual alliance between the far left and the far right in opposing last year’s bank bailout. Even if very few voters actually comprehend the messy details of the greatest political swindle in history, at least the public smells something fishy on Wall Street.
The answer, then, is to not decry inequality in and of itself. That’s a losing proposition in the United States. Anyway, it distracts from the real issue: opportunity. Whether that’s the inadequate health care that the poor disproportionately receive, the dearth of human capital investment at the bottom, or the lack of political voice that most of us have, the game itself is hardly fair in America. Overhauling this rigged system — not decrying its winners — is a much more effective (and politically wise) strategy to ensure a prosperous and just society for all.
In essence, I am arguing for exactly the opposite of what Christopher Jencks advocated in Inequality 37 years ago. Whereas he and his co-authors ultimately resigned themselves to unequal pathways and thus focused on relative shares of the pie, instead, I maintain that inequality is epiphenomenal as long as we focus on maximizing opportunity for all. Let’s worry about making sure the circuitry of the American dream isn’t shorted, rather than whether some folks draw more current from the grid.
Normally, when one reads a proudly left-wing magazine like The American Prospect one expects to read vocal denunciations of inequality. So there’s a certain man-bites-dog quality to a recent article by Dalton Conley, dean of social sciences at NYU and card-carrying liberal. He argues that those on the left should stop worrying so much about inequality per se–its costs are overstated, as well as the benefits of greater equality. Instead, he argues, liberals should concentrate more on helping the poor and less on beating up on the rich.
At the risk of getting Conley’s membership in the liberal club revoked, I think he is right. I have never understood how I am worse off if the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is unchanged. It may be aesthetically displeasing, but it doesn’t impose any actual costs on anyone as long as the pie is not fixed. Of course, were that the case it would be different. Gains by the wealthy would necessarily come at the expense of everyone else.
Implicitly, liberals tend to believe the pie is fixed. But, generally speaking, it isn’t. A rising tide does tend to lift all boats even if those at the top get lifted a lot more. But Conley is also right to ridicule the view, common among many conservatives, that enriching the wealthy somehow automatically benefits the poor. That’s obviously nonsense. But neither does it follow that there is no limit to how much we can soak the rich without average people suffering some of the consequences. We really don’t want the rich spending all their time figuring out how to hide their wealth from the tax man or engaging in conspicuous consumption; we’d rather that they invested their wealth in businesses that will increase their wealth but also create jobs and income for the rest of us, too.
For this reason, I have always been more sympathetic to programs that aid the poor than other conservatives. It’s not so much that it’s the right thing to do as that it’s a necessary price that has to be paid to maintain democracy, open markets, private property, a stable currency and a tax system that doesn’t punish success too much. To be sure, there is a heavy price to be paid when social welfare programs go too far. But at the same time I don’t think the social Darwinist, Randian state in which people are left to die if they don’t work is the one that maximizes growth or well-being for the producer class.
Where I think the left is mostly wrong about inequality is in thinking that taxes level the playing field. But the only way taxes really create equality is by discouraging the rich from earning income. The nation is not enriched when this happens. In fact, it is undoubtedly the case that the distribution of wealth today is vastly more equal than it was a year ago. But who wouldn’t turn back the clock if they could even if it meant that the wealthy would benefit disproportionately? It’s also worth noting that almost all of our data on income distribution are based on before-tax income, so by definition taxes don’t equalize income.
A hidden assumption in Bartlett’s comments is that the income received by those at the top is justified because it matches their contribution to society (i.e., it is justified by their high productivity). But much of the high productivity that financial executives were rewarded for wasn’t really there, something that the financial crisis has made all too apparent. And looking at executive compensation outside of the financial sector, it’s hard to believe that it is only due to their productivity, i.e. that their pay is not augmented substantially by some sort of market failure. Thus, in general, there’s a strong case that pay at the top levels exceeds the contribution to society To the extent that progressive taxes represent a claw-back of these false rewards or a claw-back of rewards for something other than productivity, the taxes are justified.
Finally, if market power is present to a significant degree, as I’d argue it is in many markets, that will distort the flow of resources and distort profits. In this case rewards will reflect, in part, market power and pay will exceed productivity. If progressive taxation removes these distortions, then the taxes are justified. In some sense, it simply returns the income to its rightful owners.
When the flow of profits is distorted and some people fail to get what they deserve while others get more than they’ve earned, when opportunity is limited and people fail to reach their potential, when the burden of taxes is unequal, and when the distribution of the costs and benefits of globalization or some other economic change is unequal, there is harm from inequality — social welfare can be improved through redistribution — so I don’t buy the argument that there are no economic costs associated with inequality, or that taxes cannot level the playing field. Some of it, e.g. the creation of opportunity, can be accomplished on the spending side as Bartlett suggests. But someone has to pay for that spending, and I see no reason why the burden shouldn’t be progressive.
Rising inequality, then, is just a symptom of the real problem: sluggish middle class wages in a country that’s been growing energetically for decades. That’s the core problem. Get median wages growing at the same rate as the country itself and inequality will take care of itself because there will automatically be less money left over for the rich.
I don’t pretend to know all the reasons why middle income wages have risen so slowly for the past three decades — globalization probably plays a role, as do declining union density and the rising importance of cognitive labor — but I can certainly point a finger at a symptom: the widespread idea that workers don’t really deserve to share in national productivity gains because it’s management that’s really responsible for them. This is one of those conceits that the rich use to rationalize their enormous income growth, but it’s plainly specious. Ask an economist what’s responsible for increased productivity, and the most likely answer you’ll get is: new technology. So if we really wanted to reward the people who are responsible for productivity growth, we’d shower riches on engineers and scientists. But we don’t. We shower riches on the CEOs who buy their products and make use of them.
But buying a new inventory control system is hardly a sign of managerial brilliance. It’s just something that every company eventually does once a better one is invented, and the CEO who signs the purchase order to buy it is no more responsible for productivity growth than the workers who use it. They’re both piggybacking off of someone else’s invention, and there’s no special reason why either one should be thought more deserving of sharing in the rewards. They both should.
Long story short, workers in thriving economies should thrive too. When they don’t, countries almost inevitably decline, and bread and circuses can never make up for it. I think the key insight here is one that FDR knew well: people want to earn money, not have it given to them, and that’s what we should focus on: getting middle class earnings growing again. A whole lot of other problem will take care of themselves if we do.
I wish Bruce wouldn’t perpetuate caricatures of so-called social Darwinists and Randians, but that’s not my concern here. I want to address the claim that “programs that aid the poor” aren’t so much “the right thing to do” as “a necessary price that has to be paid to maintain democracy, open markets, private property, a stable currency and a tax system that doesn’t punish success too much.” I don’t agree with this.
All the items that Bruce says programs for the poor help buy are immensely valuable parts of the very best kind of actually-existing social order. If programs that aid the poor are a necessary element of that kind of order, it’s worth asking why they are. Here’s one idea I favor. The failure to have such programs violates a widely-shared sense of fairness, reciprocity, mutuality, solidarity, or what have you. That violation endangers many peoples’ sense of the larger system’s legitimacy. That, in turn, threatens the larger system’s peaceful stability — that is, threatens to disqualify it from counting as an order at all. If poorer people were just holding richer people hostage (”Nice system of private property and open markets you have here. Would hate to see something happen to it.”), it would seem right to see the ransom as a “price” to pay for all these other great liberal goods. But I don’t think this is the best way to think of it. One could likewise see relatively low tax rates as the “price” the less wealthy have to pay to guarantee access to jobs and the many other goods of innovation and wealth creation. But that’s not the best way to think of it either. I think it’s better to evaluate socio-economic systems holistically and say that, since they are both elements of the best feasible scheme of institutions, aid to the poor and relatively low tax rates are both demands of justice — “the right thing to do.”