Archive for July, 2010

A grand bargain

Daniel Akst | July 19, 2010

In this morning’s Wall Street Journal, Princeton’s Alan Blinder suggests a way to increase fiscal stimulus, deliver aid to those who need it most and avoid increasing federal deficits–all at the same time. Here’s his plan, in his own words:

Let the upper-income tax cuts expire on schedule at year end. That would save the government an estimated $75 billion over the next two years. However, it would also diminish aggregate demand a bit. So, instead of using the $75 billion to reduce the deficit, spend it on unemployment benefits, food stamps and the like for two years. That would surely put more spending into the economy than the tax hike takes out, thus creating jobs.

How much more? Getting a numerical estimate requires the use of a quantitative model of the U.S. economy. In recent testimony before the House Budget Committee, Mark Zandi of Moody’s Analytics used his model to estimate that extending unemployment insurance benefits has almost five times as much “bang for the buck” as making the Bush tax cuts permanent.

Based on his estimates, the budgetary trade I just recommended would add almost $100 billion to aggregate demand over the next two years—without adding a dime to the deficit.


Are deficits EVER a problem?

Daniel Akst | July 18, 2010

Paul Krugman and James K. Galbraith agree that this is a time for fiscal stimulus, not austerity. But they differ on a larger question: do government deficits ever matter? Or is the government so special–by virtue of its ability to create money out of thin air–that its spending can exceed income forever, by any amount?

In an interesting blog post (warning: not safe for the equation-challenged), the New York Times columnist and Nobel laureate Krugman argues that, carried to extremes, deficit spending by government can lead to runaway inflation. But, he adds, “we’re nowhere near those conditions now. All I’m saying here is that I’m not prepared to go as far as Jamie Galbraith. Deficits can cause a crisis; but that’s no reason to skimp on spending right now.”

Krugman wrote this in response to testimony by Galbraith, a Levy senior scholar, to the federal Commission on Deficit Reduction. Galbraith responds in the comments by asserting that Krugman’s conclusion is the result of a modeling error. But his key graf comes earlier:

If the government spent but declined to “borrow,” what would happen? Nothing much. Banks would hold their reserves as cash rather than bonds, and their earnings would be a bit lower. It is *not* true, as a rule, that people (or banks) move readily to substitute lumps of coal for dollars, unless the price level is already moving up and out of control.

Randall Wray, also a Levy senior scholar, weighs in with this:

f you look at the data on tax revenue growth over the previous two cycles you will observe that in the upswing federal revenue grows at an annual rate above 15%–typically two to three times faster than GDP and government spending. This is why the deficit is reduced. Your scenario in which govt just keeps “pumping” money into the economy even as we reach full employment of resources is not plausible. In any case, your original case against the Modern Money Theory approach adopted by Galbraith had to do with insolvency, not inflation. Insolvency is a matter of inability to meet NOMINAL commitments as they come due. When govt spends by crediting bank accounts, there is no situation in which it cannot make its promised payments. You have tried to shift this to a case of full employment of all resources, when govt cannot move more resources to the public sector. But again that is not plausible–so long as there are any resources for sale for dollars, the federal govt can compete with the private sector for them, and can win by bidding up the price. Note I am not advocating such policy.


School matters (and so does school spending)

Ellen Condliffe Lagemann | July 16, 2010

The Harlem Children’s Zone is an organization bent on addressing all the problems of poor families in its Manhattan catchment area.  The project involves many government and nonprofit programs and services that aim to improve the environment for disadvantaged kids outside of school. Established in 1997, it also includes a network of charter schools called, collectively, Promise Academy.

Doctoral candidate Will Dobbie and economist Roland G. Fryer Jr., both of Harvard, recently published a careful study of the Zone’s  impact on student achievement. They’ve shown that high quality schools—with or without community investments in health, parenting, and early childhood program—boost student achievement, while community investments without high quality schooling have little effect.

They’ve shown, to oversimplify, that schools matter.

One is tempted to say: Of course they do! Then again, ever since James Coleman’s 1966 study, Equality of Educational Opportunity, which convinced people that family effects dwarfed anything schools could do to promote equality, the importance of schooling is always worth demonstrating.

Interestingly, though this was not their primary focus, Dobbie and Fryer have also shown that money (doubtless well spent) is also vital in creating high quality schools. The successful HCZ schools Dobbie and Fryer studied spent $19,272 per student, while the median school district in New York State spent $16,171 and those at the 95th percentile of achievement spent $33,521. The HCZ schools (like some other successful charter schools in New York City) were able to offer longer school days, after-school programs, and additional “wrap-around” programs.

While one must applaud Dobbie and Fryer’s work, I am not convinced that demonstrating the importance of high quality schooling in closing the race achievement gap will have much effect on policy. First the public needs to be convinced that the racial achievement gap really matters to each of us (whether we are white, black, or brown). Racial inequality is undemocratic and unjust, but is it also economically costly to all of us and not just to those whose life chances are diminished. What does the U.S. lose in overall productivity (or other measures of collective economic well-being) as a result of unequal educational outcomes? Those questions will have to be answered, I believe, before the public will invest what’s required to make high-quality schools available for all Americans

Philosophic arguments about the importance of democratic ideals like equality and justice seem to hold less appeal today than economic arguments having to do with the bottom line for taxpayers. Dobbie and Fryer are among the most imaginative economists currently studying questions related to the race achievement gap. I hope they move on from careful and important evaluation work to some of the larger, more difficult underlying issues.


A good mood based on a bad policy

Philip Arestis |

The sudden turn in the mood in Europe regarding the prospects of the global economy needs commenting. In this context, most European governments announced drastic cuts in government expenses in an effort to avoid following Greece to the precipice of default. It coincides with the outcome of the G20 deliberations a few days ago that dropped support for fiscal stimulus and emphasized the risk of having sovereign debts getting out of control. This turn is happening in an environment where the politicians seem to be incapable of directing stimulus to productive directions, while at the same time, the public continues to reject any tax increases to cover the future deficits that today’s stimuli may create.

The critical issue is whether we need more and cautiously directed stimulus to enable the global economy to retain current economic activity, or whether we need a fiscal exit. Nobody would disagree with safety nets or government support to post-secondary education, investment in clean energy and new transport infrastructure. After all, these are all Keynesian measures indeed. Keynes never claimed either that his proposed policies can provide deleveraging overnight, or that they can correct the excesses that “Madoff economics” and unregulated markets usually bring about. But Keynes’s way might make deleveraging smoother and with the least possible negative repercussions, especially if appropriate monetary accommodation complements systematic spending.

As for Greece, the main problem is the absence of an appropriate domestic monetary and exchange rate policy combined with an extremely hard euro, which eroded domestic competitiveness and increased demand for imports. The result was a ballooning current account deficit that reached 14% of GDP in Greece (2008), a deficit that requires corresponding capital inflows. These inflows could not be foreign direct investment in the context of falling domestic competitiveness. The government, thus, had to take over and sell bonds to finance a fast-deteriorating current account as the hard currency was fueling domestic consumption by making imports cheaper and more competitive.

In sum, if a contractionary, “post-Great Recession” era policy finally prevails globally and especially around Europe, Greece and similar countries might find it even harder to drive their economies through an export-led recovery. It would then be easy to predict what will happen to those banks keeping toxic skeletons in their closets.


We’ve had the tragedy. Is this the farce?

Daniel Akst | July 15, 2010

The Wall Street Journal reports on signs that risky lending is once again on the upswing. For example:

Credit-card issuers mailed 84.8 million offers of plastic to U.S. subprime borrowers in the first six months of this year, up from 43.7 million a year earlier, estimates research firm Synovate. Nearly 8% of loans for new cars in the latest quarter went to borrowers with the lowest range of credit scores, up from 6.2% in 2009’s fourth quarter, according to J.D. Power & Associates and Fair Isaac Corp.

The lenders say they’re being careful–really!–and of course things aren’t as bad as they once were. But there are disturbing anecdotes of people who are essentially broke getting credit-card solicitations, and apparently these aren’t isolated incidents:

Kathleen Day, a spokeswoman for the Center for Responsible Lending, said the consumer group is “seeing banks re-enter the subprime market at a steady clip and make loans to borrowers who don’t have the ability to repay.”


A Greek glimmer

Daniel Akst | July 13, 2010

A Wall Street Journal “Heard on the Street” item plays up the early good news from Greece’s austerity program:

In the first half, Greece’s budget deficit came in at €9.6 billion, down 46% from the same period of 2009, the Finance Ministry said this week. Revenues rose 7.2%, while spending fell by 12.8%. Revenue growth remains below target, but not all of the revenue measures have come into effect yet and spending cuts are well ahead. That continues the positive trend identified by the European Commission, IMF and European Central Bank in June’s interim review, and makes this year’s deficit target of 8.1% achievable.

The writer’s conclusion is that perhaps a Greek tragedy can be averted after all. This assumes, of course, that the numbers can be believed.


Better treatment for R&D?

Thomas Masterson | July 1, 2010

A post in the Wall Street Journal’s Real Time Economics blog notes that counting research and development as investment rather than as an expense would have increased gross domestic product by 2.7 percent between 1998 and 2007 (they refer to new numbers from the BEA). If this were standard national accounting practice, then measured GDP would have grown 0.2 percent faster, or an average of 3 percent annually. It makes some sense to treat R&D as an investment, but this item begs the question: would anyone have been better off if we did?