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.

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 30^th.  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…

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…

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.

You might wonder if this question is a misguided satire of Keynesian proposals like the ones in this Institute one-pager for boosting employment in a time of weak economic growth. The question is not meant as a satire, though. In a time of increasing recession fears, policies specifically aimed at reducing the value of the dollar have gained some supporters. Many scholars see a deliberate weakening of the U.S. dollar and/or a moderate increase in the U.S. inflation rate as something to be sought after in itself, not just as an unfortunate side effect of monetary or fiscal stimulus.

Kenneth Rogoff, for example, recently reprised the classic argument that the burden of debt falls when prices rise across all industries. (Rogoff’s Financial Times article is here. The New York Times discusses his views here.)  To wit, moderately higher prices obviously allow firms that have debt in dollars to more easily meet their debt-service obligations. Furthermore, increases in prices often bring higher wages, albeit with a time lag, making it easier for consumers to pay off their debts on time. In the United States, this is a very salient point, in light of high debt levels in nonfinancial business and the household sector, which we documented in this recent post.

Meanwhile, on the other hand, John Plender skeptically reminds Financial Times readers (and perhaps proponents of modern monetary theory [MMT]) of the possible dangers associated with policies that intentionally or unintentionally invite a spurt of inflation. continue reading…

Senior Scholar James Galbraith’s recent article in The New Republic (“Stop Panicking About Our Long-Term Deficit Problem. We Don’t Have One”) has sparked some reactions from Paul Krugman and Arnold Kling (JG responds briefly to the latter in comments).

Galbraith, jumping off from his Levy Institute policy note, argues that there is a certain marked evasiveness in attempts to describe the dangers of the long-term deficit:

Exactly what that threat is remains elusive. Foggy rhetoric about “burdens” that will “fall on our children and grandchildren” sets the tone of discussion. The concept of “sustainability” is often invoked, rarely defined, never criticized; things are deemed unsustainable by political consensus, backed by a chorus of repetition from the IMF, headline-seeking academics, think-tankers, and, of course, the ratings agencies.

He takes issue in particular (in passing in TNR and in detail in the policy note) with the Congressional Budget Office’s estimates of the trajectory of long-term debt; estimates that depend upon assuming rising interest rates.  Galbraith argues that this assumption is hard to square with CBO’s concurrent assumptions of moderate growth and low unemployment and inflation.  At a bare minimum, his point here is:  whatever story you might tell about the long-term deficit and debt, CBO’s particular version (which has inspired a great deal of the public commentary about future budget peril) appears to contain some internal tension.

At least in the case of Krugman, it should be noted that this disagreement about the long-term deficit is occurring against the background of broad agreement about the negligibility of short-term deficits—and, one might add, agreement over the immediate need to make those short-term deficits bigger.

(This continues an earlier debate between Krugman and Galbraith).

While public discussion in the last several weeks has been absorbed by the debt ceiling saga, and in the coming weeks will probably focus on the S&P downgrade, employment (or lack thereof) is still a major problem. Our employment problem is one of the main factors contributing to a sizeable government deficit and growing public debt.

For all those who think that government has expanded wildly during the recession as a result of the fiscal stimulus, think again. The chart above shows that of the 7.3 million jobs lost since November 2007, 300,000 of those were lost in the government sector; more specifically in local government, which accounts for about 64% of the employment in the government sector. Local governments have to run a balanced budget, and when a recession hits and their tax receipts decline, they have to cut expenses—which means fewer jobs. If the federal government were to embrace similar balanced-budget policies, its ability to support a struggling economy would be severely curtailed.  It would not only be unable to create jobs directly; it would struggle to even maintain its existing workforce.

The chart below shows one measure of the employment rate, computed as a percentage of the working-age population. This share rose in the post-WWII period with the increase in the female participation rate. It stabilized in the twenty years before the Great Recession at around 63%, dropped to 58% during the recession, and has remained roughly stable in the last ten months. To see what the prospects are for employment going forward, we have made some simple calculations. continue reading…

Throughout the weekend, television news coverage dwelled on Friday’s downgrade of U.S. debt securities by Standard and Poor’s, one of the three main ratings agencies that assess the creditworthiness of the federal government. The meaning of S & P’s action remains somewhat uncertain, and we doubt that, as important as the story was, the downgrade will have strong economic repercussions, provided that it is well understood.

In Sunday’s early print edition of the New York Times, Nelson Schwartz and Eric Dash reported that “…many analysts say the impact [on interest rates] could be modest, in part because the other ratings agencies, Moody’s and Fitch, have not downgraded the government at this time.”

Indeed, yields on U.S. government debt instruments remained very low following the downgrade, after decreasing over the past few months. Investors seem unconvinced that the government could somehow fail to come up with the dollars it needed to meet its repayment and interest-payment commitments. Nonetheless, financial markets were jittery, if only because of the downgrade announcement itself.

Also, we remain convinced that there is no basis for a belief that the federal government will ever have to default on its debt. This statement applies to the United States or any other country with a sovereign currency and a floating exchange rate.

The real problem was probably a fear on the part of S & P that the government might not repay its debt, not that it could not. The debt level has been very high for a long time, but the S & P move did not occur before the near-stalemate over the debt limit. This was a real crisis. A failure to raise the ceiling might conceivably have led to a default. However, a U.S. government failure to pay interest or repay principal cannot occur, as long as national political leaders make it clear that they will permit routine debt issuance and money creation to continue.

What’s more, taxpayer advocates should be aware, as Ronald Reagan was, that the ability to run deficits conferred by a sovereign currency enhances the government’s powers to lower taxes as Congress and the President see fit. (As an aside, it follows that if all of the national governments in Europe had independent, unbacked currencies like the U.S. greenback, they could avoid the ineluctable defaults and ensuing austerity measures that come with a currency union, gold standard, or similar international system, though they would sacrifice the many advantages of a shared currency.)

It goes without saying that in any country, balance is required in decision-making about taxes and spending, bond issuance and money creation, and workers and corporations to go along with competing policy goals, such as low inflation, low unemployment, economic growth, income security, stability of the exchange rate, equity and the like. The U.S. government lost the mostly symbolic weight of its top S & P bond rating mostly because brinksmanship over the debt limit jeopardized its power to weigh these objectives and act upon them.

Following up on a previous item, Macroeconomic Advisers have updated their analysis in response to the most recent debt ceiling deal.  The results:  no good news, and some serious uncertainty in the probable effects on growth (though not the sort of “uncertainty” the conventional wisdom is persistently telling us we should care about).

In 2012, they estimate that the fiscal drag resulting from budget cuts is likely to hover around 0.1 percentage points.  If that strikes you as a minor blip, note that they have not included multiplier effects in their estimates.  The Economic Policy Institute, using standard multipliers, estimate that the ultimate damage in 2012 would amount to a reduction of 0.3 percentage points in GDP, or, if that still doesn’t get your attention, around 323,000 fewer jobs.

When adding in the effects of the expiration of the unemployment insurance extensions (528,000 fewer jobs) and the payroll tax cuts (972,000 jobs), EPI suggest that we should expect the economy to shed somewhere on the order of 1.8 million jobs as a result of these policy choices.

While the administration, via Tim Geithner op-ed, signaled today that it would like to extend both the unemployment insurance and payroll tax cut measures, as well as to initiate new infrastructure investments, it takes a certain amount of imagination to see how any of these measures—even the extension of tax cuts—could get through Congress in the current climate.

If that still doesn’t faze you, consider that in 2013, as a result of the debt ceiling deal, things really start to get dicey. continue reading…

A deal was reached over the weekend by congressional leaders and the President to resolve the debt-ceiling impasse. By that point, it was clear that the possible way out described by John Carney in a blog post to which we linked on Thursday would not be feasible. Nonetheless, the Fed’s ability to supply cash as needed if the deadline were missed had been made clear in official statements reported by the New York Times in Sunday’s early print edition. To wit, in response to concerns expressed by top banking executives,

“Mr. Geithner made it clear that the Treasury and the Federal Reserve had taken precautions so that payments for food stamps, military wages, and other federal obligations would not bounce, according to people involved in the call.”

An article posted to the Times website Saturday had phrased this point somewhat differently:

“Mr. Geithner assured [JPMorgan Chase CEO Jamie Dimon] that the Treasury and Federal Reserve had taken steps to keep the payment system functioning smoothly, according to individuals briefed on the call.”

The phrase “keep the payment system functioning smoothly” is a euphemism known by Fed observers to entail in practice the types of functions described  in the above quote of the print edition.

Obviously however, this use of overdrafts could not be continued very long, owing to the will of the negotiators and probably the relevant laws. These laws are intended to keep the Federal Reserve largely independent from the federal government.   Hence, while the Fed honors checks written by the Treasury Department and presented to it by banks, the use of this privilege is extremely limited in the U.S. system, compared to “overdraft systems” of the type I described in this earlier post.

On the other hand, if the somewhat artificial distinction between the central bank and the central government were to be eliminated in the United States, the federal government would gain access to the printing press, enabling it hypothetically to back a virtually unlimited amount of outlays. Of course, this process would not create new “debt,” but rather new currency and bank reserves. Of course, the Fed itself can currently use its “printing press,” mostly to stabilize the banking system, a role that led to a massive expansion of bank reserves during the financial crisis of 2007–08.

In current mainstream macroeconomic thought, which is carrying the day in most of the developed world now, a system in which the government has control of the printing press is thought to court intolerable levels of inflation. However, in an economy growing as slowly as this one, it is extremely doubtful that excessive inflation would necessarily follow if the impasse were to be resolved by creating new currency and bank reserves, rather than by selling bonds, increasing taxes, or cutting spending. Yet given the legal independence of the Fed, the latter two options were the only ones open to the negotiators last weekend. Moreover, new taxes were unacceptable to many, if not most, in Congress.  Hence, it now appears that the government may be about to make potentially devastating new cuts to key federal programs.