Archive for August, 2010

Stimulate some action

26 August 2010

Michael Grunwald of Time has an interesting new article about the specifics of the stimulus spending, which began with “shovel ready” projects that could employ people right away but is now about to move onto “shovel worthy” projects that required more advance planning and are more in line with the Obama Administration’s long-term policy goals on energy, education, etc.  The article differs from others I’ve read on the stimulus in that the focus is not on its impact on jobs or GDP but on how these programs may yield a greener energy policy, expanded scientific research and broadband access, and school reform.  There’s an analogy to be made with the New Deal, whose early jobs programs were sometimes derided as “leaf raking” or “ditch digging” but which came to include enduring projects like highways, bridges, buildings, and parks.

The $787 million stimulus bill that passed in early 2009 is by now unpopular with the public.  A recent poll I saw in The Washington Post this summer (I’ll try to find the link later) found that the public, by a 56-41% margin, actually thought the stimulus had made the economy worse.  This is perhaps understandable considering that the unemployment rate has not come down much, but still mind-boggling in the face of empirical estimates by nonpartisan economists that the stimulus saved three million jobs.

The only part of Grunwald’s piece I didn’t like was his claim that “liberals” think the stimulus was not large enough.  While that much is basically true, it’s not just political liberals who believe that.  Keynesian economists, not all of whom are liberal Democrats, would tend to argue that another big round of stimulus is necessary to push the economy back toward “full employment,” i.e., an unemployment rate of about 5%, maybe 6% (it’s now 9.5%).  Three million jobs saved is better than none, but the glass is less than half full considering that there still are eight million more unemployed Americans now than in 2007, before the recession began.

Matt Yglesias presents another poll that tends to suggest that the stimulus’s unpopularity reflects not the content of the stimulus bill but basically just the sad state of the economy and the usual tendency of the public to blame it on the president — i.e., if the stimulus bill was his bill, then it must have been a bad bill, because the economy stinks.  Yglesias cites a poll that asks people whether they would like certain measures to be taken.  Asked if they would favor “additional government spending to create jobs and stimulate the economy,” 60% said yes.  Politicians, take note.

P.S. Today’s title is from J.J. Cale’s “After Midnight,” but the song I felt like posting was this one by The Flamin’ Groovies:

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The Other 2%

15 August 2010

One of the big issues before Congress right now is whether and how to extend the Bush tax cuts, enacted in 2001 and scheduled to expire at the end of this year.  Congressional Republicans want to make them permanent.  President Obama and many Democrats want to extend the Bush tax cuts for everyone except the very wealthy, i.e., those in the top tax bracket (which would go from 35% back to 39.6%, where it was in 2001).

Throughout this debate I had agreed with the Democratic position, for reasons of both equity and economics.  Over the past thirty years, incomes and wealth in this country have become much more skewed in favor of the rich, so as long as we have a progressive tax system why not use it to push back against that trend?  (I’m not saying let’s equalize incomes, just that trying to check the increase in inequality is a reasonable thing to do.) Only about 2-3% of households — those earning over $373,651 —  are in the top tax bracket, and even then their first $373,651 of income would be taxed at the same rate as before, so the pain associated with raising the top tax rate seems small.  On the economic side, cutting taxes for the wealthy provides a smaller boost to consumer spending than just about any other tax cut or benefit increase you can think of.  See, for example, the “stimulus bang for the buck” table on page 5 of this testimony by Mark Zandi, Chief Economist of Moody’s Analytics back in April.  In the case of making the Bush tax cuts permanent, a dollar of tax cuts would raise GDP by 32 cents, compared with, say $1.41 from an increase in aid to state and local governments or $1.61 for an extension of unemployment benefits.  (The logic is that wealthy taxpayers save much of their income, so small differences in their after-tax income won’t affect their spending much, at least not compared with other taxpayers.  And increases in government spending increase GDP directly and can, if the government starts jobs programs, employ people directly.) And then there are the tax revenues to consider — those top 2-3% of taxpayers have a huge amount of taxable income, so a 4.6% difference in that top tax rate makes a big difference in the government’s deficit and debt.

But equity and economics are unlikely to carry the day in Washington, D.C.  Today’s New York Times has a remarkable op-ed by the same Mark Zandi, titled “A Tax Cut We Can Afford,” in which he argues for extending the Bush tax cuts, sort of.  He says they should be extended for the wealthy, too. His reasoning is political:  Yes, it would be ideal to let the top rate go back to 39.6% and use the new revenue to pay for jobs programs or bigger jobs tax credits, but that option is not on the table.  Republicans and conservative Democrats would undoubtedly block it.  Another truly sizable spending stimulus is not on the table either.  What is feasible, besides minor measures like the jobs bill passed this month, is . . . extending the Bush tax cuts.

Although extending tax cuts on those making $374,000+ a year is not a great option, Zandi says, raising their taxes and (with effective stimuli off the table) doing nothing with it is a worse option.  Most of U.S. GDP is people’s consumption, and even though the rich consume less of their income than other people do, they still consume a lot, so much that their consumption may determine the fate of GDP over the next few years.  The Times recently reported that rich Americans have cut back on their spending.  The article quotes Zandi yet again: “One of the reasons that the recovery has lost momentum is that high-end consumers have become more jittery and more cautious.”  The top 5% of Americans account for one-third of consumer expenditures, according to the piece.

Generally speaking, you don’t raise taxes in a recession.  That’s one of the endlessly repeated lessons of the Great Depression (Hoover and Congress raised taxes in 1932, Roosevelt and Congress did so in 1936), and it still applies.  Again, if you could raise upper-income taxes and use them to pay for well-targeted stimulus programs, that would be fine, but to quote Zandi again, “it is asking too much of our political system now to get it just right. I’m skeptical that a politicized Congress would be able to pull it off, and failure to do so would leave us next year with higher taxes and a hobbled recovery.”

Zandi says the tax-cut extension for wealthy households should be temporary, to be removed when “the economy is off and running,” with the increase phased in perhaps over a three-year period.

I am pretty well convinced.  I’ve been arguing in this space that the severe slump we’re in makes this a terrible time for drastic spending cuts.  By the same token, this is not a good time to raise taxes on anyone.

Dispatches from a runaway American dream

3 August 2010

Edward Luce’s recent Financial Times feature, “The crisis of middle-class America,” is a must-read.  It seems to be excerpted (lots of “. . .”), but it still contains a ton of detail about two seemingly comfortable middle-class families who’ve seen their living standards fall gradually and then, after the 2008 crisis, abruptly.  The piece is mostly a human-interest article, light on statistics and technical explanations, but there is this illuminating quote from Harvard economist Larry Katz:

‘“Think of the American economy as a large apartment block,” says the softly spoken professor. “A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.”’

Here’s hoping this article is part of a much longer series.  Although the early verdict on the 2000s seems about right — two recessions with a bubble-driven recovery in between — people still tend to view the 1980s and 1990s as Prosperity Decades.  Based on aggregates like rising real GDP and falling unemployment rates, they were, especially the ’90s.   And as the long economic expansion of the Clinton years took hold, the warnings of some economists of a “silent depression” of eroding real wages and disappearing middle-class jobs (especially for non-college-educated workers) became increasingly ignored.  Ditto for the wave of warnings about “downsizing” in the mid-’90s, as eloquently reported by The New York Times (and followed up a decade later in a book by William Baumol, Alan Blinder & Edward Wolff that seems to have gotten far too little attention).

Macroeconomics is the study of economic aggregates, so macroeconomists and the macro debate tend to focus on aggregate statistics, even though the bottom line would seem to be how individual people (be they rich, poor, middle class, black, white, old, young, etc.) are doing.  The debate over the economy’s performance during the 1980s, which inevitably took a partisan cast as a debate over Reaganomics, generally came down to aggregates.  On the pro side, an eight-year economic expansion, falling unemployment, low inflation, a booming stock market, and faster productivity growth than in the 1970s.  On the con side, unemployment and poverty rates that skyrocketed in the early ’80s recession and stayed high for much of the decade, rising inequality, and stagnant median real incomes.   Either way, people looked to aggregates, which left a lot out.  For example, were median incomes stagnant because the incomes of most people were stagnant or because there was a relative increase in the number of poor households even as other people’s incomes rose?  And how much of the decade’s prosperity trickled down to families who were at the bottom and middle rungs on the economic ladder when the decade began?  Based on the standard aggregated data, including the Census data on income percentiles, we don’t know, because we’re not comparing the same people over time.  Reagan defenders and others inclined to ignore the issue of inequality make that excuse again and again:  “It’s not the same people!”  Which is true but raises the question, So why don’t we just study the same people over time?

An ideal study would combine scores of case studies like the ones in the FT article with analysis of longitudinal data on particular families surveyed over time. There are longitudinal data sources out there (e.g., the National Longitudinal Study, the Panel Survey of Income Dynamics), but I confess I haven’t seen whatever macro studies have been done with them.  Seems to me way too much of what we “know” about the macroeconomy is based on aggregates like per-capita GDP and way too little on studies of actual households.  But the only to measure the American dream, I think, is one household (or one person) at a time.

Now here’s something you’ll really like . . . a July 1974 live version of the rock classic that inspired the title of this post: