Archive for July, 2010

Property rules

Thomas Masterson | July 30, 2010

Are we a nation of property owners? Michael Barone, of the American Enterprise Institute, says we are:

The fact is that we are once again, as in the days of the early republic and not in the heyday of the Progressives and the New Dealers, a republic of property owners. Most Americans have accumulated — or will, during the course of their working years, accumulate — significant amounts of wealth. And that is why, I believe, American voters seem to be rejecting the policies of the Obama Democrats.

But Uwe Reinhardt in Are We a Nation of Property Owners?, uses research by Arthur Kennickell at the Federal Reserve and my colleague Ed Wolff of the Levy Insitute (and NYU) to argue that Barone is wrong.

Reinhardt contends that most Americans own very little property, since almost half of families have a net worth of $10,000 or less–including their homes. So Barone is just wrong to claim that most Americans have or will accumulate “significant” amounts of wealth. Of course, if you believe that significant in this context should mean more than zero, I can’t help you.

I think that Barone is onto something, though as is so frequently the case, it’s not what he intended. The definition of republic is:

a state in which the supreme power rests in the body of citizens entitled to vote and is exercised by representatives chosen directly or indirectly by them.

Barone is talking about a republic in the Jeffersonian sense, a republic of small property owners (or for Jefferson, yeoman farmers). What we have is a republic more in the Roman mold, where the property owners are the citizens entitled to vote.

But, you say, there are no property restrictions on voting in the U.S.! Right you are, but there are certainly property restrictions on who you get to choose from when you go to vote. More accurately there are property restrictions on who gets to decide who you get to choose from. In this unintended sense, Barone is right. Reinhardt is also right to say that we are not a nation of property owners. For we are not in fact a nation, but rather a Roman republic, of property owners.


No stimulus is better than negative stimulus

Thomas Masterson | July 27, 2010

In the Wall Street Journal, Stanford’s Robert Hall tells Jon Hilsenrath that last year’s stimulus just about made up for the cuts in state and local government spending forced by the recession (most states have balanced budget requirements, so when tax revenues dip, as they do in a recession, spending must follow).

So, there was no net stimulus from government spending last year! Still, it could have been worse. What David Leonhardt doesn’t say (in his take on the subject for the New York Times) is that the initial stimulus was too small. Certainly state fiscal support was too small. States have still had to cut their budgets, laying off teachers and police officers. These layoffs have not been helpful to recovery, to say the least.

continue reading…


Levy president appears on Fox among the hedgehogs

Daniel Akst |

With apologies to Isaiah Berlin, here is the link.


Why creating social-sector jobs is a great idea

Daniel Akst |

Writing for the New York Times Economix blog, Nancy Folbre of the University of Massachusetts cites the work of Levy Institute economists in suggesting that Uncle Sam fund more home-care jobs:

Four economists at the Levy Economics Institute of Bard College – Rania Antonopoulos, Kijong Kim, Thomas Masterson and Ajit Zacharias – have published a policy brief, “Why President Obama Should Care About ‘Care’: An Effective and Equitable Investment Strategy for Job Creation.”

There are many reasons this is a great way to battle unemployment. Check out the policy brief for the full story.


Cap and trade: a bearish outlook

Thomas Masterson | July 23, 2010

Two news items that arrived back-to-back in my feed-reader make for an unfortunate combination. The first, detailing the Senate’s abdication of responsibility on global warming, is depressing enough. The political reality is that our elected representatives will not vote for a bill that puts a price on carbon because a) they fear that voting to increase the cost of energy will lose them their jobs, b) they fear that voting to increase the cost of energy will lose them campaign contributions from the energy sector, or c) all of the above. I am leaving out of the equation legislators from coal states, who wouldn’t vote for any bill, not even the compromise that heavily favors coal over oil and natural gas.

The rhetoric has been all about scaring people into thinking they’ll be impoverished by the bill. A Cap and Dividend bill such as the CarbonLimits and Energy for America’s Renewal (CLEAR) Act , which would work something like Alaska’s Permanent Fund, would negate any distribution problems by refunding equal shares of 75% of the revenue directly to each person, more than offsetting the cost to low-income families. The point is, to reduce carbon emissions you either have to raise the cost of emitting carbon or regulate those emissions. The former is more easily done and more socially efficient.

The second story, which appropriately enough is from Alaska, is about increased polar bear sightings at the mouth of the Yukon River. This is far south of their normal range (normal meaning the “old” normal, of course), though the bears have been spotted there occasionally in the past. Why would polar bears be heading south? Because their usual hunting grounds (on the Arctic ice cap) are shrinking. Of course, a focus on polar bears sidesteps the broader implications of global warming. It is, nevertheless, a potent symbol of what we are doing, and apparently are determined to continue doing, to our planet’s environment.

But, really, don’t worry. It snowed in Washington D.C. this winter. Maybe the polar bears heard about it.


Who are these guys?

Greg Hannsgen | July 21, 2010

I seem to remember that there used to be a column in a magazine featuring contradictory newspaper headlines. One headline might say, “Fed Chair Says Interest Rates Likely to Rise,” while another in a different newspaper from the very same day would insist, “Fed Chair Says Interest Rates Likely to Fall.”

Something like this appears to have occurred in blogs and articles that have published lists of prognosticators who predicted the financial crisis, the Great Recession, and/or the housing crisis. In fact, some pairs of these lists have very few names in common. For example, David Warsh’s often-fascinating online column, “Economic Principals” published the following “Pantheon of Prescients” two days ago:

Raghuram Rajan
Kenneth Rogoff
Nouriel Roubini
Robert Shiller
William White

On the other hand, here are the winners of the heterodox Revere Award, “for the economist who first and most cogently warned the world of the coming Global Financial Crisis”:

Dean Baker
Steve Keen
Nouriel Roubini

All of the economists on both lists have had some very interesting things to say about the financial crisis, recession, and/or various other developments since 2007 or so. A major concern of mine with the first list is that, in my view, some on the list have greatly underestimated the role of weak financial regulation as a factor in the crisis. (Another intriguing list was recently removed from the web, hopefully by its author. Appropriately, it included the late Levy Distinguished Scholar Wynne Godley.)

All such lists are of somewhat limited usefulness and importance. But somehow many people (including this blogger) find them interesting, and they continue to appear.

It is remarkable that the two lists above would have only one name in common, though I think no economist would seriously claim that even both of them combined would be all-inclusive. Is this just an indication that there are borders between groups of economists (left versus right, Keynesian versus New Classical, European versus North American, heterodox versus neoclassical, etc.) that are rarely crossed? I have been wondering if anyone will step up to the plate with the most comprehensive list possible, one that might cross more of these and other boundaries. One bit of good news that might emerge from this exercise is that we have quite an impressive “competition” indeed, yielding far more insights than one might have at first anticipated.


A notable dissent

Daniel Akst |

A number of prominent economists have signed a letter calling for more economic stimulus from the United States government in order to put people back to work. Levy senior scholar James K. Galbraith and two other well-known Keynesians chose not to participate, and issued this comment explaining why.

A statement from Paul Davidson, James Galbraith and Lord Skidelsky

We three were each asked to sign the letter organized by Sir Harold Evans and now co-signed by many of our friends, including Joseph Stiglitz, Robert Reich, Laura Tyson, Derek Shearer, Alan Blinder and Richard Parker. We support the central objective of the letter — a full employment policy now, based on sharply expanded public effort. Yet we each, separately, declined to sign it.

Our reservations centered on one sentence, namely, “We recognize the necessity of a program to cut the mid-and long-term federal deficit… ” Since we do not agree with this statement, we could not sign the letter.

Why do we disagree with this statement?  The answer is that apart from the effects of unemployment itself the United States does not in fact face a serious deficit problem over the next generation, and for this reason there is no “necessity [for] a program to cut the mid-and long-term deficit.”

On the contrary: If  unemployment can be cured, the deficits we presently face will necessarily shrink.  This is the universal experience of rapid economic growth: tax revenues rise, public welfare spending falls, and the budget moves toward balance. There is indeed no other experience in modern peacetime American history, most recently in the late 1990s when the budget went into surplus as full employment was reached.

We agree that health care costs are an important issue. But health care is a burden faced by both the public and private sectors, and cost control is a job for health policy, not budget policy.  Cutting the public element in health care – Medicare, especially – in response to the health care cost problem is just a way of invidiously targeting the elderly who are covered by that program.  We oppose this.

The long-term deficit scare story plays into the hands of those who will argue, very soon, for cuts in Social Security as though these were necessary for economic reasons.  In fact, Social Security is a highly successful program which (along with Medicare)  maintains our entire elderly population out of poverty and helps to stabilize the macroeconomy. It is a transfer program and indefinitely sustainable as it is.

We call on fellow economists to reconsider their casual willingness to concede to an unfounded hysteria over supposed long-term deficits, and to concentrate instead on solving the vast problems we presently face.  It would be tragic if the Evans letter and similar efforts – whose basic purpose we strongly support – led to acquiescence in Social Security and Medicare cuts that impoverish America’s elderly just a few years from now.

Paul Davidson is editor of the Journal of Post Keynesian Economics and author of The Keynes Solution.

James K. Galbraith is a professor at the University of Texas at Austin and author of The Predator State.

Lord Robert Skidelsky is the author, most recently, of Keynes: The Return of the Master.


A case for public direct employment

Kijong Kim |

A recent New York Times article highlighted the inadequacy of job training programs in the face of massive unemployment. The programs do not reflect the demand for highly skilled workers, such as those who can handle high-tech equipment and service jet engines. Even highly regarded programs have less than a 60 percent job placement rate. It is hard to predict the economy’s next great job-producing sectors and develop programs that train for them.

We’ve reached the point, moreover, where the experience that come with age has become a roadblock to successful job hunting, and almost 39 percent of the long-term unemployed are men in their mid-40s or older. Unemployment checks barely covers their living expenses. Sometimes families break up or people move in with their elderly parents. It’s a sad story.

When passive labor policies are not working and the end of recession seems too far away, it’s time to consider more active steps, including public employment programs. Once upon a time in America, the Civilian Conservation Corps reached out to jobless young people. Perhaps we need another large-scale jobs program, only this time for older workers. Just as the Fed is our lender of last resort, government could take on the role of employer of last resort. It’s paying the jobless anyway, in the form of unemployment insurance (about to be extended again). Why not just go ahead and give jobs along with jobless benefits?

Are you worried that such a plan will intolerably increase the public debt? A study by Carmen M. Reinhart, a co-author with Kenneth Rogoff of This Time is Different: Eight Centuries of Financial Follies, says of the Great Depression: “Countries that were more consistent in keeping spending high tended to recover more quickly.” (Free but older version of the paper is here). Perhaps there is a lesson for us in this.


“Deficits Do Matter, But Not the Way You Think”

Daniel Akst |

That’s the headline for a defense of Modern Money Theory by Levy senior scholar L. Randall Wray, who complains that “even deficit doves like Paul Krugman, who favor more stimulus now, are fretting about “structural deficits” in the future.” Wray goes on to say:

There is an alternative view propounded by economists following what has been called “Modern Money Theory”, which emphasizes the difference between a currency-issuing sovereign government and currency users (households, firms, and nonsovereign governments) (See here and here). They insist that the notion of “fiscal sustainability” or “solvency” is not applicable to a sovereign government — which cannot be forced into involuntary default on debts denominated in its own currency. Such a government spends by crediting bank accounts or issuing paper currency. It can never run out of the “keystrokes” it uses to credit bank accounts, and so long as it can find paper and ink, it can issue paper currency. These, we believe, are simple statements that should be completely noncontroversial. And this is not a policy proposal — it is an accurate description of the spending process used by all currency-issuing sovereign governments.

Regular readers of this blog will recall the earlier debate on these issues between Krugman and Levy senior scholar James K. Galbraith.


The promise and peril of regulation, Indian energy version

Rachel! | July 20, 2010

Aside from the new symbol adopted for the rupee, the big economic news in India lately is the national government’s deregulation of petroleum prices. In the face of rising food prices, naturally there are concerns about whether deregulated (read: higher) oil prices will fuel inflation. Is this policy not anti-poor? What will happen if oil prices keep rising? How will the growing economy of India, with its growing energy demand, adjust to a future of oil-price volatility?

The success of Bhart Bandh (All-India Strike) on July 5th shows that the Aaam Admi (common man) did not take this new price deregulation kindly. People like having their energy subsidized, particularly people who are struggling financially. What’s more, administered prices—with their resulting distortion in the use of resources and corresponding economic loss—are not a visible, measurable macroeconomic variable like the inflation or interest rates. So no one cares if the distortion continues doing great harm to the economy for the simple reason that it’s invisible. It’s the old story: the costs are spread widely and hard to perceive, while the benefits are focused and tangible.

But one needs to take a dispassionate view to examine this new policy of energy deregulation and its implications for everyone. What you discover, when you take such a view, is that energy price regulation in India was a mess—one that illustrates the economic and political hazards of such market interventions, however well-intentioned.

A recent study by my colleagues and me at India’s National Institute of Public Finance and Policy found that the petroleum subsidy in our country is highly regressive. As estimated in this study, for the fiscal year 2006-07, while the average per-capita petroleum subsidy for major states was Rs. 450, it was only Rs. 226 for Bihar while as high as Rs. 623 for Maharashtra. In other words, subsidies are benefiting the regions where consumption is higher—and consumption is higher in regions where income is also high. By default, it is the richer regions of the country that benefit more from the petrol subsidy.

Then there is the issue of taxation. There is an urgent need for rationalization of the tax structure on this sector.  What comprises oil prices in India we really do not know, because there are multiple taxes on petroleum which make estimation of pre-tax oil prices a nightmare. Currently, national and state governments  together levy as much as 14 different types of taxes on the petroleum sectors. Take, for example, the imposition of octroi (entry) taxes by Maharashtra, Madhya Pradesh, Uttar Pradesh, Karnataka, Orissa and Bihar on gasoline and diesel fuel. Haryana has a local area development tax on crude oil at 4 percent.

Despite the high taxes on this sector and the fact that oil is an intermediate input, it remains outside the VAT system and thus ineligible for the input tax credit. This results in cascading taxes across sectors—and a big inflationary impact. The remedy here lies not in opposing deregulation, but in reforming the system of petroleum taxes. Before we pronounce deregulation to be inflationary, we really need to figure out how much inflation is due to the market price of oil and how much is due to the heavy taxes on it. One can safely say that, with proper tax reforms, oil price deregulation won’t be as inflationary as it is made out to be.

All of that said, we must also acknowledge that energy isn’t like telecom. Deregulating oil prices has to be thought through with extreme care so that the poor and vulnerable are protected. One cannot deny the fact that, despite leakage and corruption, subsidised kerosene and liquefied petroleum gas benefit the poor (a large section of the population in India), and eventual decontrol of the entire oil sector needs to be calibrated very carefully so that those who genuinely need this subsidy are not hurt. An alternative strategy should be put in place to insulate those who deserve protection from the volatility of oil prices.