Archive for August, 2011

Stimulus funds, pens, and socks: where do they go?

Thomas Masterson | August 31, 2011

All to the same place? You might be excused for thinking so after perusing Tyler Cowen’s post Why didn’t the stimulus create more jobs?, but you would be wrong. First let’s look at Cowen’s post for some obvious red flags. About the number of people hired using stimulus funds who were already employed, Cowen says:

You can tell a story about how hiring the already employed opened up other jobs for the unemployed, but it’s just that — a story.  I don’t think it is what happened in most cases, rather firms ended up getting by with fewer workers.

OK, so the substance of this is he doesn’t like one story, he prefers another. I quite understand why, Cowen being who he is. I happen to like the other story, myself. However, one might want actual proof rather than preferences (dear as they are to neo-classical economists).

A second point requires reading the two studies Cowen refers to. Cowen says that “There are lots of relevant details in the paper but here is one punchline: ‘hiring people from unemployment was more the exception than the rule in our interviews.'” Interesting choice. Especially given that the first bullet point in their summary of results is: “ARRA funds led to worker hiring and retention.” And that is the point after all. The question of whether the ARRA funds went to directly hire unemployed workers or not is mostly beside the point.

The question that matters in job terms is: how many more people were employed because of the ARRA spending than would have been without it? It’s a question we can’t know the answer to, because we will never know what would’ve happened without the stimulus. The insinuation in Cowen’s post is that for a variety of reasons the stimulus wasn’t that stimulative. The proof offered is that Cowen doesn’t think workers hired away from other jobs were replaced, or that (from the paper itself, now) wages were mandated to be too high: “38.2 percent [of “organizations required to pay prevailing wages”] thought that they could have hired workers at wages below the Davis-Bacon prevailing wage.” The latter point misses the point of stimulus: its multiplier effect (where have I seen that phrase before?). The number of jobs directly created or saved by the stimulus isn’t the whole story. Those workers, having non-zero rather than zero money in their pockets, will spend more, saving or creating other jobs, and so on.

A final “damning” conclusion from the paper: “[h]iring isn’t the same as net job creation.” Indeed. But net job creation is never actually dealt with in the paper, let alone net job creation/saving relative to no stimulus. For an estimate of job creation under the first three years of the stimulus, you could look at this paper (self-serving, isn’t it?).

I sometimes wonder whether folks who think stimulus spending has little to no effect (or a negative effect!) on employment think the money is just piled up on the White House lawn for President Obama to (gleefully, I’m assuming in this fantasy) toss a lit match onto.


A Just-So Story About Money

Michael Stephens |

From an intriguing interview with David Graeber, author of Debt:  The First 5,000 Years, regarding the history of money and debt:

Yes there’s a standard story we’re all taught…  It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one.

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.


Who Needs Free Lunch Anyway?

Michael Stephens | August 30, 2011

There appears to be a standoff brewing over renewal of the federal gas tax.  The tax traditionally funds highway infrastructure projects and is due to be extended September 30th.  But a group in Congress, led by Senator Tom Coburn, is maneuvering to block the extension.  A delay of just ten days, Ron Klain writes in Bloomberg, would mean “the permanent loss of $1 billion in highway funding (and layoffs for thousands of workers).”

So not only must we accept the fact that there will be no new infrastructure or public works programs—certainly nothing on a large scale that might begin closing the current employment gap—but there will be an uphill political battle just to maintain existing funding.  In other words, the policy battleground has shifted, such that the choice is not between maintaining the inadequate status quo and investing in a new public works program, but between the status quo and less infrastructure investment.  It is difficult to come up with novel ways of explaining why this is ridiculous.  The fact that the real yield on Treasuries is negative gives us an excuse to rehash the case. continue reading…


How many Social Security checks fit inside one tax break?

Greg Hannsgen |

The Congressional deficit reduction committee has numerous government programs on the chopping block, and we may soon see some very severe spending reductions. The committee must agree upon, and Congress must pass, $1.2 trillion in spending cuts and/or tax increases by November 23, or automatic, across-the-board spending cuts will go into effect in 2013. I hope that cuts to Social Security are not among the committee’s recommendations, but fiscal hawks are beating the drum harder than ever with their insistence that spending on the program must be reduced soon.

The Social Security issue came to mind a week or two ago, when I read James B. Stewart’s article in the New York Times on possible changes in the way the federal government taxes certain kinds of investment income.  Stewart’s article makes the point that some of the wealthiest taxpayers benefit greatly from the special tax rate of 15 percent that currently applies to capital gains* and dividends:

“The IRS reports that for taxpayers with the top 400 adjusted gross incomes, capital gains in 2008 amounted to an eye-popping average of $154 million for each of these taxpayers…and this in a year when the stock market plunged.”

Suppose the government taxed capital gains at the same rate as “ordinary income” (wages, salaries, most interest payments, etc.). For the 400 ultra-wealthy taxpayers mentioned in the quote above, a marginal tax rate of 35 percent would have applied to this income, instead of the special rate of 15 percent. Hence, if all 400 had been required to count their capital gains as ordinary income for tax purposes, their tax bills would presumably have been about $31 million higher on average than they actually were. It seems that the special, reduced rate for capital gains yields a large amount of tax savings for these 400 income tax filers, along with others who report capital gains on their income tax forms—who make up a fairly wealthy group themselves.

This brings us back to Social Security and to the relatively modest benefits that it offers. Social Security literature available on the web  lists the 2009 primary insurance amounts (PIAs) for covered workers with various income levels. (By the way, 2010 numbers can be found at this link.) This is the monthly payment to which a worker is currently entitled if he or she retires at the current full retirement age of 65 years old (not including Medicare, any applicable spousal benefits, etc.). Here are three examples: continue reading…


Automatic Stabilizer Fail

Michael Stephens | August 26, 2011

If you believe the US political system is incapable of handling counter-cyclical policy and that we need to rely on automatic stabilizers, this CBPP graph is depressing:

In other words, Temporary Assistance for Needy Families (the result of the 1996 “welfare reform”), for whatever its other merits might be, has not been particularly sensitive to increases in poverty.  As the number of needy families grew during the recession, the TANF rolls barely budged.  More here.


MMT and Hyperinflation

L. Randall Wray | August 24, 2011

(via EconoMonitor)

In last week’s post, I responded to Paul Krugman’s critique of Modern Money Theory (MMT), which argues that a sovereign government that issues its own floating exchange rate currency cannot face an affordability constraint—which means it cannot be forced into involuntary default on its own currency debt. His criticisms really boiled down to a misunderstanding over operational details—how banks work, how the Federal Government really spends, and the role played by the Fed in making all these operations work smoothly. I won’t rehash any of that here.

But what we were left with is the argument that if a government operates along MMT lines, then we are on the path to ruinous hyperinflation. Of course Austrians have long argued that all fiat money regimes are subject to these dangers—even ones that don’t follow MMT’s recommendations. MMTers are commonly accused of promoting policy that would recreate the experiences of Zimbabwe or Weimar Republic hyperinflations. These were supposedly caused by governments that resorted to “money printing” to finance burgeoning deficits—increasing the money supply at such a rapid pace that inflation accelerated to truly monumental rates.

It is very easy to titillate audiences with graphs such as the following, which displays rapid depreciation of the Weimar Republic’s paper money in terms of gold:

Or with a picture of a Zimbabwe note—which shares the all-time record for number of zeroes:

No one wants to defend high inflation, much less hyperinflation. In his classic 1956 paper Phillip Cagan defined hyperinflation as an inflation rate of 50% or more per month. Clearly the zeroes would add up quickly, and economic life would be significantly disrupted.  To read the rest, click here…


A Comment on the Fight against Corruption and Indian Democracy

Rachel! |

The author is a Professor at the National Institute of Public Finance and Policy, New Delhi. His views are his own.

An anti-corruption movement in India, run by a set of elites primarily from Delhi, has put poor Anna Hazare out in front and called itself a national movement. Their key demand is an anti-corruption citizen ombudsman bill, the Jan Lokpal Bill (JLPB), which would create an independent body investigating corruption cases, completing the investigation, and holding a trial within a specific time frame.

Is the Jan Lokpal Bill (JLPB) the path toward a corruption-free India? Presumably, if the answer were a straight forward “yes,” we would probably have had a JLPB by now. The founding fathers of this nation have gifted us a Constitution which laid the foundation for a vibrant democracy, a secular republic, and a federal structure. This strong foundation has not only kept this country together despite its adversities, but it has also been able to accommodate the needs and aspirations of people of diverse cultures, ethos, and religion with a fair degree of success. If the JLPB or a law of such nature were so important, certainly our founding fathers would not have deprived us of that perceived magic wand to keep India corruption-free.  In the existing system itself there are sufficient institutional safeguards against corruption. Unfortunately, corruption continues to grow despite these safeguards. Public anger against corruption is justified, but Anna’s methods are not. continue reading…


“It’s a classic case of moral hazard.”

Michael Stephens | August 23, 2011

Levy Institute President Dimitri Papadimitriou, as quoted in the Huffington Post in reference to revelations of the Fed’s $1.2 trillion in “secret loans” to banks and other companies.

Papadimitriou told The Huffington Post that the Fed issued many of its biggest loans during the Bush administration, and that “they didn’t appear to have any difficulty supporting the financial sector, but very much difficulty supporting the real sector, households.” …

“One would assume banks are too interconnected, you have to help all of them,” Papadimitriou said. “But if you take households in total, they are also all interconnected. They are also too big to fail.”


A new “voodoo”?

Greg Hannsgen | August 22, 2011

The early phases of the 2012 presidential election season have already brought us a great deal of debate on fundamental economic policy issues. Greg Ip, in the Washington Post‘s PostOpinions, writes about the views of a number of Republican candidates (pointer via Economist’s View). Are they believers in the “voodoo economics” that many recall from past elections–tax cuts for the wealthy that supposedly spur growth and reduce deficits and at the same time?

Not according to Ip. He describes a risky, and somewhat novel, approach to economic policy emerging in this year’s political rhetoric. This approach rejects policies that have reduced the severity of the business cycle since the Great Depression.  Ip skewers the politicians’ critique of these Keynesian policies, which blames the country’s economic problems on excessive government action:

Many Republicans consider the tepid economic recovery an indictment of Keynesianism, and use the word as an epithet, as in “Keynesian Utopia” (Sarah Palin) or “Keynesian bubble” (Ron Paul). They argue that aggressive fiscal and monetary stimulus have made things worse by generating uncertainty among firms and investors, and that austerity would put things right.

They almost surely have it wrong. Uncertainty about fiscal and monetary policy was also rampant in the early 1980s: Taxes were cut and raised repeatedly and the Fed tried, then abandoned, efforts to target growth in the money supply instead of interest rates. Yet after a sharp recession in 1981-82, the economy took off, primarily because the recession had been induced by high interest rates and, once rates fell, demand sprang back.


Is There Bias at the Fed?

Michael Stephens | August 19, 2011

Rick Perry’s recent reflections/threats regarding quantitative easing have occasioned some speculation about whether his raising the political profile of the issue might actually affect Fed behavior; making the Fed less willing to engage in a third round of easing.  The question of political bias at the Fed has been raised before, here in this Levy Institute working paper (free of any implicit promises of lynching) authored by Galbraith, Giovannoni, and Russo.  The authors reveal that there is in fact an argument to be made for the existence of partisan bias, at least for the period 1984- 2003:

…we find that in the year before presidential elections, the term structure [of interest rates] deviates sharply from otherwise-normal values. When a Republican administration is in office, the term structure in the preelection year tends to be steeper, by values estimated at up to 150 basis points, and monetary policy is accordingly more permissive. When a Democratic administration is in office, the term structure tends to be flatter, by values also estimated at up to 150 basis points, and monetary policy is more restrictive. These findings are robust across model specifications and across time, though the anti-Democrat effect is smaller after 1983. Taken together, they suggest the presence of a serious partisan bias, at the heart of the Federal Reserve’s policymaking process.

Now, perhaps this trend has reversed itself, for some reason, under the leadership of Republican-appointed Ben Bernanke.  But determining whether or not the current Fed has been “playing politics” lately, as Perry alleges, is not as obvious as he might suggest.  continue reading…