Archive for September, 2011

The American Jobs Act. sigh.

Thomas Masterson | September 9, 2011

Well, I commented last night on President Obama’s speech to Congress on WGXC, my local radio station. I thought it worth putting down my thoughts on silicon, since I’ve already done all the thinking about it.

First of all, I thought that the delivery was one of the better that I’ve heard from President Obama since he took office. It reminded me more of candidate Obama. Maybe that’s because this speech, more than the official announcement that he was running for re-election a while back, was the kick-off to his re-election campaign. He had that whole preacher cadence down, punctuating sections of the speech with the phrase “that’s why you should pass this bill now.” A nice touch, but one that was clearly not directed at the politicians in front of him, many of whom wouldn’t support kibble for kittens if it was an Obama proposal.

Moving on to substance is a bit depressing. The American Jobs Act is equal parts weak tea and bitter pill. The weak tea is that as a job creation proposal it does too little, too ineffectively. Much of the proposal the President outlined in the speech sounds a lot like the American Recovery and Reinvestment Act, the stimulus passed early in 2009. I will talk about that bill’s effectiveness in a bit, because I think a lot of people think very lazily about how to assess that policy’s impact. But the parts are all there: lots of tax cutting; state aid; unemployment insurance; and infrastructure spending. There is also some mortgage finance relief thrown in for good measure.

Tax cuts will be welcome to most people, of course. Who doesn’t want more of their paycheck going directly into their pockets (other than Warren Buffet, of course)? The proposal to cut payroll taxes in half is great in a couple of ways. It will add some stimulus to the demand for goods and services (people will buy more stuff if they get their hands on a bigger chunk of their paychecks). And the payroll tax is one of the more regressive federal taxes, since people pay a flat rate on their first $100K or so of wage and salary income and nothing above that cap, which means that people who make less than $100K (most of us) put a bigger percentage of our salaries into the Social Security system than those who make more.

The employer reduction in the payroll tax isn’t going to be as helpful. Some small business owners will see that as a small bump to their bottom line, but it certainly isn’t going to create a lot of jobs. Nor will the tax credits for hiring the long-term unemployed or veterans, although those are certainly worthy targets for encouraging employment. But businesses aren’t making hiring decisions based on the tax implications of hiring more workers. Certainly, they take taxes they have to pay into account, but these are a small portion of the cost of hiring someone. The point is that businesses aren’t hiring people because there is not enough demand for goods and services in the economy. Until demand for the stuff businesses produce or provide goes up, hiring will remain slow.

State aid is a simpler case to make. continue reading…


Creating Millions of Jobs on a Shoestring

Pavlina Tcherneva | September 8, 2011

Expect one thing from President Obama’s speech on Thursday: a mini ARRA, a smaller version of essentially the same stimulus plan as that of 2009. He will probably call for putting the unemployed construction workers to work on infrastructure projects, he will propose tax incentives to firms to hire the unemployed, he will keep pushing for the weatherization of buildings and more funding to teachers and schools. He will keep advocating a free trade agenda, whatever form that might take. And if informed pundits are correct, he will ask for about a third of the ARRA funds, around $300 billion.

In 2009 ARRA passed a total of $787 billion (which was extended to $840 billion). About a third was allocated to tax cuts, another third went to entitlements and the remaining third (about $275b of which $205b have been disbursed) went to finance various projects through grants, loans and contracts—yes, the same weatherization projects he was advocating at the beginning of his presidency, the same teacher retention programs, school renovations, the same subsidies to firms for (true, mostly green) energy production.

It does not appear that we will see much that is new tomorrow, but the approach will be much more timid, given the deficit phobia that has gripped Washington.  To be clear, the Recovery Act worked, but had a rather small impact on jobs for two reasons: 1) the actual direct job creation component was far too small (for the most part it was contained in that third, which went to grants, contracts and loans); and 2) it was poorly targeted (not all of these funds actually created new jobs for the unemployed—a topic for a different post).

With such a small direct job creation component, it is no surprise that ARRA created only 1.2 million jobs in direct employment. If we consider the secondary, tertiary and subsequent effects from the entire ARRA spending (including tax rebates and entitlements) and account for a multiplier effect, whose high estimate according to the CBO is $2.50, we are looking at 3.3 million jobs created from ARRA in 2 years (2009-q2 to 2011-Q1). So yes, the ARRA did create jobs, but too few and at a time when the economy was experiencing its fastest private sector job loss since the Great Depression.

In January 2009, I argued that what the president should do in his ARRA proposal is offer direct employment to the jobless immediately and without delay. If instead of all the tax cuts, subsidies, and entitlement extensions he had offered full-time employment to the unemployed in transitional public sector jobs at a living wage, we would have prevented the precipitous increase in the unemployment rate that followed. Furthermore, had we targeted the ARRA better (a topic for another discussion) we could have created 10-20 million jobs for the same price tag!

But we did not embrace the bold approach then and we will definitely not embrace it now. continue reading…


Going Big

Michael Stephens |

Leading up to today’s jobs speech the internal debates in the administration (or so the leaks tell us) have been over whether to propose something minimal that might have a chance of passing, or something bold, knowing that nothing has a chance of getting through Congress anyway.

Randall Wray and Stephanie Kelton demonstrate what it would look like to “go big”:

The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.

The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers.

Read the rest here.


WaPo on recession gender gap

Thomas Masterson | September 7, 2011

In a post on Ezra Klein’s blog entitled “The recession’s gender gap: from ‘man-cession’ to ‘he-covery’,” Suzie Khimm notes that the recovery is happening for men but not so much for women. She quotes an Institute for Women’s Policy Research paper that refers to our research, found in this policy brief. Early childhood education and home health care represent great opportunities for improving quality of life for the care recipients as well as for the people who would become employed under these proposals. I will be listening for some mention of them by President Obama tomorrow night.


The world’s debt trap

Greg Hannsgen | September 6, 2011

“There’s a 60 percent probability that most advanced economies will fall into a recession, while authorities are running out of options to provide emergency support.” — Bloomberg News today, describing the views of Nouriel Roubini

This forecast from a sometimes-prescient and widely quoted economist brings to mind a question that many people now find irrelevant.

Which should we policymakers choose, option A or option B? How about doing whatever is necessary to balance the government’s budget? Increasingly, policymakers believe that is their only option. In some countries, these policymakers may be right. For them, options A through Z are to raise taxes or cut spending. This is what happens when (1) tax revenues are weak, (2) money is needed to make payments on government debt, and (3) the country in question does not or cannot print its own currency and cannot make reserves for its own banks.

Here in the United States, point (3) above does not apply. Hence, the federal government can issue any amount of securities, with the Fed purchasing them if necessary, as long as Congress is willing to keep increasing the debt limit. Unfortunately, however, the stimulus package of 2009 is wearing off, and Congress and the President have not acted quickly enough to increase spending or reduce taxes. As a result, combined government employment at the local, state, and federal levels has been falling. Unemployment remains ultra-high. Hence, we look forward with great concern to President Obama’s upcoming address on jobs creation. Many constructive proposals are likely to be on offer.

On the other hand, all three points in the third paragraph of this post seem to apply to most of the countries in the Eurozone. They are in some kind of a trap, perhaps a debt trap. continue reading…


Hot Porridge and More Fiscal Stimulus

Michael Stephens |

Economist:  “The economists who studied this were quite surprised to find that fiscal policy in recessions was reasonably effective.  It is just that folks tried a first punch that was too light and that generally we didn’t get big measures until well into the recession.”

Congressman:  “That is precisely my point.  That is why I like my porridge hot. I think we ought to have this income tax cut fast, deeper, retroactive to January 1st, to make sure we get a good punch into the economy, juice the economy to make sure that we can avoid a hard landing.”

The identities of these tiresome Keynesians?  Kevin Hassett of the American Enterprise Institute and Congressman Paul Ryan of Wisconsin—speaking in 2001.

From a purely predictive standpoint, it makes one wonder:  assuming that control of Congress doesn’t change much, are the odds of additional fiscal stimulus higher if there is a Democratic or a Republican President in 2013?


Job Creation Ideas in HuffPo

Michael Stephens | September 2, 2011

Thomas Masterson and Pavlina Tcherneva were interviewed by the Huffington Post for an article on job creation policy.  Tcherneva discussed the idea of a modern-day WPA, echoing a call she made at the outset of the Obama administration (in this policy note) for the government to provide an explicit employment guarantee targeting the unemployed.  Masterson highlighted his research with a team at the Levy Institute on the employment and distribution benefits of investing in social care services like early childhood care and home health care for the elderly, and poured cold water on the idea of providing tax incentives for new hiring (“If they can’t sell the stuff that they can make now, then why are they going to hire more people?”).


Mandelbrot and the August S&P 500 close

Greg Hannsgen |

According to, the S&P 500 stock price index stood at 1,218.89 at the close of the trading day on Wednesday afternoon, after a month that saw much turmoil in the financial markets. Combining monthly data from the website for Robert Shiller’s book Irrational Exuberance with the average unadjusted closing value for August (closes from Yahoo! Finance), last month’s percentage drop of –10.6 percent was the 26th largest in the 1,687-month period from February 1871 to August 2011.  Shiller’s dataset includes some very large drops, including –26.5 percent for November 1929, the worst in the sample.

Some basic theories in finance rest upon the assumption that returns and/or changes in prices can be modeled as random draws from a normal distribution, the familiar bell-shaped curve used by statisticians. The late scientist and mathematician Benoît Mandelbrot showed that many financial data series had so many large increases and decreases that they could not be modeled in this way. (For a posthumous appreciation of Mandelbrot’s work, see science writer James Gleick’s article in the New York Times Magazine.) Mandelbrot hypothesized that many data sets could instead be modeled with the “heavy-tailed” distributions referred to as alpha-stable or stable-Paretian. These distributions allow for many “outliers,” or extreme observations. continue reading…


Consequences of a Eurozone Breakup, German Edition

Michael Stephens | September 1, 2011

Conversations surrounding eurozone disintegration have largely focused on the prospect of Greece making its exit, but the publication of this Hans-Olaf Henkel op-ed in the Financial Times puts the possibility of a German departure front and center.  For an analysis of the consequences should Germany revert to a national currency, see this Levy Institute policy note put together by Marshall Auerback.