Posts Tagged ‘barack obama’

The wage is too damn high?

19 February 2013

I don’t think so. But first, some background.

President Obama proposed raising the minimum wage in his State of the Union address. Specifically he called for it to go up to $9 an hour by the end of 2015, up from $7.25 now, and then to index it to the rate of inflation in subsequent years. Is this a good idea?

Economists are famous for being against the minimum wage, with introductory microeconomics textbooks typically using it as an example of a price floor that creates a surplus of the good in question – in this case, a surplus of labor, or unemployment. And that is valid if the market for labor is perfectly competitive and if the rest of the economy is held constant. (Two rather big ifs, yes.) Economists call this “partial equilibrium analysis,” as opposed to “general equilibrium analysis,” which looks at the repercussions in all markets. In the economy as a whole, firms can’t always sell all they want to at the going price, and too-high wages are not the only source of unemployment – recessions cause unemployment, and so does falling demand in specific sectors of the economy. It’s also possible that higher minimum wages could increase the total income of the lowest-paid workers, resulting in more demand for goods and services in general and a higher level of employment. The White House clearly believes that last part (more about that here).

Who’s right? It all depends on which effect is stronger – the micro effect (higher wages mean less output and employment) or the macro effect (higher wages mean higher incomes and higher aggregate demand). And that is an empirical question. For decades, most economic studies found that minimum wages reduced employment among the least educated, least skilled workers, i.e., the people most likely to be working at low wages. But an influential study by economists David Card & Alan Krueger in the 1990s found either no effect or, surprisingly, a positive effect of higher minimum wages on low-skill or teenage employment. In their 1995 book, Card & Krueger further found that the earlier studies omitted important variables, like teenage high school attendance rates, and that controlling for those variables caused the minimum wage’s estimated effect to be insignificant. Their work has had its own critics and would-be debunkers, but it remains influential.


We’re caught in a trap

15 November 2011

This just in: The Federal Reserve does not control the universe.

Stated differently: The economy is in a liquidity trap (macroeconomists). Or, monetary policy has shot its wad (Pres. Obama to economic adviser Christina Romer in their first meeting, according to Ron Suskind’s Confidence Men). Krugman has been saying this for three years now, and so have a lot of other economists. But until today, I had yet to hear it from a Fed official. Fed Chairman Ben Bernanke has called for Congress to pursue a more expansionary policy fiscal policy, thus implying but not explicitly saying that the Fed has done just about all it can. But in a speech today, Chicago Fed President and Federal Open Market Committee member Charles Evans had the guts to state the obvious:

I largely agree with economists such as Paul Krugman, Mike Woodford and others who see the economy as being in a liquidity trap: Short-term nominal interest rates are stuck near zero, even while desired saving still exceeds desired investment. This situation is the natural result of the abundance of caution exercised by many households and businesses that still worry that they have inadequate buffers of assets to cushion against unexpected shocks. Such caution holds back spending below the levels of our productive capacity. For example, I regularly hear from business contacts that they do not want to risk hiring new workers until they actually see an uptick in demand for their products. Most businesses do not appear to be cutting back further at the moment, but they would rather sit on cash than take the risk of further expansion.”

Evans went on to suggest a number of measures the Fed should still take, like buying up more mortgage-backed securities to get the housing market going (I’m still on the fence on that one — yes, this is the economy’s weakest sector, but how do you do this without reinflating the housing bubble?), while keeping mum on the subject of whether this would do anything more than just nudge the economy forward, as opposed to bringing us anywhere near full employment. I suppose the question is moot, as long as nobody else is willing to act. Congress is not only unwilling to consider fiscal stimulus but seems to be on the verge of massive budget cuts, either by following the “super committee’s” blueprint or letting an autopilot crash the plane.

Hat tip to Judith Osofsky for today’s video:

How dead is Keynes? Very.

3 September 2011

Eric Alterman hits the nail right on the head right here. Just as E. Cary Brown concluded about New Deal fiscal policy in the 1930s, the problem wasn’t that Keynesian fiscal stimulus was tried and found wanting, it’s that it wasn’t tried. Or was barely tried. In the 1930s the federal deficits were too small, were largely offset by budget cutting at the state and local level, and were reversed by a misguided attempt at budget balancing in 1936-37. Sound familiar? A key difference between then and now, however, is that Pres. Roosevelt and the Democratic Congresses of the 1930s believed in direct government job creation. The New Deal added an average of 3.5 million workers per year to the federal payroll. Pres. Obama was under great political pressure to keep that number at zero, and to hope that job creation would come from tax cuts (not promising, since much of that money gets saved or spent on imports) and government contracts (also not promising, since profit-maximizing contractors try to economize on labor costs).

For the last few quarters the government has actually been cutting spending and as a result its contribution to GDP growth has actually been negative. Yes, that’s from too little government, not too much.

Alas, this famous passage by Keynes no longer seems to be true:

‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.’

One could argue that Keynesian economics gave way to another academic branch of economics, like monetarism or new classical economics, but I see little in recent political or policy debates to suggest that either of those schools is being consulted. What about supply-side economics, you ask? It’s not really an academic school of economics, more a fig leaf for certain vested interests. Consider for, example former Reagan budget director David Stockman’s famous admission that the Kemp-Roth/Reagan “supply side” tax cuts were really just a Trojan Horse for cutting taxes on the rich.

Speaking of Reagan, his declaration thirty years ago that “government is the problem” seems to have become the  guiding light for economic policy-making in America. Score one for “the power of vested interests.”

Alan Krueger, impeccable choice

29 August 2011

. . . to be the new chair of President Obama’s Council of Economic Advisers. Krueger is a world-class economist who has produced much fascinating, groundbreaking research, and he has ample Washington policy experience. Although Krueger is typically classified as a labor economist, not a macroeconomist, his research is far-ranging and his opinions on macro issues, as expressed in his columns and Economix blog posts for the New York Times, look sensible and well supported.

On the other hand (and there has to be an “other hand” — I’m an economist, after all!), will Obama listen to him? Christina Romer and Austan Goolsbee, Krueger’s predecessors at CEA, gave Obama excellent advice about the need for a strong fiscal stimulus but he ignored it, opting for a stimulus only about half as large as they urged. Neither of them could possibly have agreed with this summer’s bizarre pivot away from jobs toward deficit reduction at a time of 9% unemployment, not to mention the way it opened up the president to Republican debt-default brinkmanship.  No wonder Goolsbee was so delighted to leave the job.

The usually excellent Ezra Klein was on “The Rachel Maddow Show” tonight, and for once I’d say he got it wrong. He said Krueger’s policy work experience with Larry Summers in the Clinton and Obama administrations and his tennis partnering with Tim Geithner make him just another insider, not a real change. I see no evidence that Krueger is as willing as Summers or Geithner to kowtow to Wall Street interests, and at this point even Summers seems to be calling for a fiscal stimulus instead of short-term deficit reduction. It looks to me like Krueger is cut from similar nuanced-Keynesian cloth as Romer and Goolsbee, but better connected. The CEA chair who plays doubles with Geithner has a better shot of making a difference.

Taxes — not lonely enough at the top?

20 August 2011

Bruce Bartlett offers a fine economic history lesson on the U.S. top marginal tax rate. Most people know that the top rate has changed quite a bit over time. (For those keeping score: 91% from WW2 to the early 1960s; 70% till the early 1980s; 50% for most of the Reagan administration; 28% in the late 1980s; raised to 31%, then 36%, then 39.6% in the early 1990s; lowered to 35% in 2001). Bartlett compares the top tax rate with the economic growth rates during those intervals and finds basically no correlation. That, too, is not really news (and a more careful study would take other factors into account).

What is striking, however, is how the threshold level of income for the top rate has changed over time. The original income tax, at the height of the Progressive Era during the Wilson administration, set the threshold at $500,000, which is not only higher than today’s $374,000 but was in 1913. The price level has increased more than 20 times since then; adjusting for inflation, the 1913 top tax rate kicked in at $11 million.

The famous tax cuts engineered by Harding-Coolidge-Hoover Treasury Secretary Andrew Mellon in the 1920s lowered that threshold considerably (to $100,000, or $1.2 million in today’s dollars) but in real terms left it still well above today’s. Pres. Franklin Roosevelt raised both the top tax rate and the threshold to sky-high levels (79%, and a threshold that would be $80 million in today’s dollars and may have only affected one person; some called it “the Rockefeller tax”).  The threshold fell to $200,000 (equivalent to about $3 million today) during WW2 and basically stayed there till the early 1980s. The “Reagan tax cuts” of 1981 lowered the threshold to $85,600 (not quite $200,000 today). The Tax Reform Act of 1986, which Reagan signed, flattened the tax system further, with a top rate of 28% that kicked in at just $30,000 (about $50,000 today). The “Clinton tax increase” raised the threshold from $86,000 to $250,000, and inflation adjustments have raised it to $374,000 today.

Notice a partisan pattern here? It’s no secret that Republicans think the rich are overtaxed and Democrats think the rich are undertaxed, but the discussion almost always focuses on the top tax rate. What’s often missing is just where the definition of “rich” begins. In the historical record, Democrats (Wilson, Franklin Roosevelt, Clinton) have tended to set the top tax threshold high, whereas Republicans (Harding, Reagan) have tended to lower it. Much of this comes down to different notions of fairness: Democrats tend to favor a progressive income tax in which richer people pay a larger share of their income and poor people pay little or none; Republicans tend to favor a flat income tax (or no income tax), in which everyone pays the same marginal rate. Having the top rate kick in at very high levels of income tends to go hand in hand with a multiplicity of different tax rates and a highly progressive tax structure, whereas having it kick in at low levels of income means a much flatter tax.

Ever since the “Bush tax cuts” of 2001 were passed, many Democrats have talked about raising the top tax from 35% back to 39.6%, but until recently I’d  heard surprisingly little talk about raising the threshold.This was surprising to me, because, as Bartlett points out, many people do not regard $250,000 or even $374,000 as particularly rich — at least not if, say, you live in New York City and have a family of four. It’s rather unclever politics to talk about raising the top rate without reassuring upper-middle class people that you’re not going to raise their taxes too. Republicans, with clever simplicity, typically truncate “tax increase on the wealthy” to “tax increase,” implying that it’s a tax increase on everybody. Lately Pres. Obama has called for raising the threshold to $1 million, so that people making $374,000-$999,999 would still pay 35 cents on their last dollar of income but people would pay 39.6 cents on every dollar of income above $1 million.

It is still debatable whether raising anyone’s taxes in a depression is ever a good idea, but ideally whatever major long-term deficit reduction plan Congress passes will go into effect only when recovery is well underway and unemployment is down to, say, 7% or less. When that happens, I agree with Bartlett that raising revenues efficiently and equitably will entail raising taxes on the top brackets (either through raising rates or, better yet, closing loopholes) and raising the top tax threshold.

The deficits between politicians’ ears

17 August 2011

‘This isn’t hard. Hire people to build things with the free money the world is offering us.’

— Jay Ackroyd, at Eschaton (Hat tip: Brad DeLong)

Well, yeah. We should worry about the long-term deficit, but when the world is ready to lend us more money at zero real interest rates, the world clearly has other priorities. And so should we — like the 16% of the labor force that’s either unemployed or underemployed. What might we do with all this money the world is so eager to lend us?

The closest thing to a proposal to build things that’s come out of Washington lately is an infrastructure bank, to fund various improvements in the nation’s roads, bridges, levees, and such. A recent Bloomberg editorial praises the idea, and Pres. Obama is urging Congress to create such a bank. The obstacle, not surprisingly, is Congressional Republicans who view all domestic spending as “pork.” In this case, however, the pork is more like bacon bits. From the WSJ:

‘Under the White House plan, the infrastructure bank would augment current highway and transit programs. The bank would receive $30 billion over six years and would issue grants, loans and other financial tools.’

$5 billion a year? Barely a drop in the giant bucket that is the U.S. output gap. And barely a dent in our nation’s gaping infrastructure needs, which the American Society of Civil Engineers (ASCE) estimates as costing $2.2 trillion over 5 years. Way to think big, Mr. President. As Krugman wrote recently, the battle in Washington is between Republicans who want to do nothing and Democrats who want to do very, very little. And outside the beltway, we have a Republican presidential front-runner who thinks that doing anything to help the economy before November 2012 is not only wrong but treasonous.

But heroically assuming for a minute that Washington actually wanted to employ people to fix the nation’s infrastructure, the ASCE’s website provides ample details about where to do it. Talk about “shovel-ready projects.” Meanwhile, my former professor David F. Weiman recounts some of the infrastructural marvels of the New Deal. Even a longtime Great Depression researcher (me) was amazed:

‘The New Deal’s Public Works and Works Progress administrations spurred rapid productivity growth in the midst of the Depression. New roads and electrical power networks paved the way for post-World War II economic expansion built around the automobile and the suburban home. Astonishing 21st-century innovations such as next-day FedEx deliveries and Wi-Fi still rely on these aging investments. We associate FDR with massive hydroelectric dam projects — including the Grand Coulee and Hoover dams in the West, and the Tennessee Valley Authority in the South — but the New Deal also electrified rural America through cooperatives that distributed cheap, reliable power. Nearly 12 percent of Americans still belong to these collectives. Without the New Deal, they would be stuck in the much darker 1920s.

‘As would modern travelers. Without the New Deal, New York commuters would be without the FDR Drive, the Triboroughand Whitestone bridges, and the Lincoln and Queens-Midtown tunnels. There would be no air traffic at LaGuardia and Reagan National airports. D.C.’s Union Station, wired for electricity during the New Deal, would have a very different food court. Between New York and Washington, Amtrak runs on rails first electrified during the New Deal.

‘Out West, the New Deal gave us Golden Gate Bridge access ramps, the Oakland-San Francisco Bay Bridge, the first modern freeways, and San Francisco and LAX airports. Between the coasts, it brought more than 650,000 miles of paved roads, thousands of bridges and tunnels, more than 700 miles of new and expanded runways, improvements to railroad lines, and scenic routes such as the mid-South’s Natchez Trace Parkway. Without the New Deal, of course, some of these would have eventually been built by state and local governments or the private sector — years after America’s recovery from the Depression.

‘Moreover, private infrastructure improvements would have bypassed poor regions such as the South. Because of its vision and virtually unlimited borrowing capacity, the New Deal underwrote Southern modernization with new roads, hospitals, rural electrification and schools. These public investments paid off. After 50 years of stagnation, average Southern incomes began to catch up with the national average during the New Deal era.’

Granted, economic historians have long criticized FDR’s New Deal deficits as being too small to restore the economy to full employment, but neither were they insignificant. An average of 3.5 million workers a year worked in New Deal jobs. From the above it’s clear that a great many of those jobs produced great gains for America’s infrastructure, economy, and society.

Self-inflicted wounds: Nov. 23 edition

14 August 2011

Another Kabuki dance has commenced in Washington, now that Congressional leaders of both parties have made their selections for the Gang of Twelve charged with crafting $1.5 trillion in savings in 2013-2022. They have until Nov. 23 to agree on a package of savings. If Congress can’t pass that package, then $1.2 billion of automatic, across-the-board spending cuts (no tax increases) would kick in.

I’d place my bets on none of those things happening. Here’s what I foresee:

1. Negotiations among the twelve constantly are on the verge of breaking down along party lines, especially on the issue of tax increases. Possibly they are unable to reach a compromise at all. Even if they do, few of them will throw much weight behind it.

2. If a budget plan emerges, getting majority support in the House and 60 votes (or 51 votes, if nobody filibusters it) in the Senate will prove impossible. The partisan acrimony will look like open warfare.

3. With the specter of $1.2 trillion in across-the-board cuts, including maybe $500 billion in Pentagon cuts, the Secretaries of Defense, Homeland Security, and other agencies, joined by citizens and interest groups all over the nation, will howl that these cuts would devastate our country. Congress’s approval rating will plummet even further, to about the same level as the Taliban’s.

4. Congress will pass a new bill that says, um, nevermind about all those spending cuts. (This is an inherent problem in trying to tell future Congresses what to do, or even telling oneself what to do a little ways down the road.) Republicans will continue to pummel Obama and the Democrats for overspending, but neither side will be able to push a new deficit-reduction plan through both houses of Congress.

Now, what about the reaction of the markets to all this? I think that most of the market already expects something like this and has basically priced it in. It’s decades-old news that Congress has no stomach for long-term deficit reduction, and obvious by now that the partisan split in this Congress is among the worst ever. If the above predictions come to pass, then the markets and economy will get worse, as this failure becomes definite. As I’ve written before, I think the market is reacting less to the U.S. debt burden than to continued evidence that U.S. politicians are simply not doing their job when it comes to dealing with the Little Depression. I think they’re appalled that Congress and the White House are wasting so much time on this doomed debt deal and have basically painted themselves into a corner with this Nov. 23 deadline and automatic-spending-cuts mechanism. They see the writing on the wall; either Obama, Boehner, Reid, et al. don’t or each side is cynically thinking that they can spin this fiasco-in-waiting to their advantage. Either way, they’re not doing their job. They’ve set themselves up to fall, each side hoping that the other falls further.

Don’t look to us

12 August 2011

Households, that is.

Household consumption has long been the mainstay of U.S. GDP, and asset-bubble-driven consumption in turn helped drive the expansions of the 1990s and 2000s. But consumption spending has been weak in this so-called recovery, growing at only about 2% (annualized and inflation-adjusted) since its trough in spring 2009, and it fell in each of the last three months for which we have data (see graph). On top of that, today’s consumer sentiment numbers are the worst in three decades. To find worse, you’d have to go back to a month that included recession, double-digit inflation, Americans held hostage in Iran, long gas lines, and the eruption of Mount St. Helen’s (this is starting to sound like a pub trivia quiz . . . the answer is May 1980).

(Graph from

File under “Outraged and paying attention”: From the press release accompanying the consumer sentiment survey data (from Thomson Reuters / University of Michigan):

‘”Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role,” survey director Richard Curtin said in a statement.

‘The Obama administration received poor ratings from 61 percent of respondents, the worst showing among all prior heads of state. [I could not find a rating for Congress, but in recent polls Congress gets even lower ratings than Obama.]

‘”This was more than the simple recognition that traditional monetary and fiscal policy measures were largely spent; it was the realization that the government was unable or unwilling to act,” Curtin added.’

Yes. Imagine if the government had spent this year looking for ways to stimulate the economy rather than contract it through spending cuts. Failing that, imagine if if Obama had forcefully and publicly told the Republicans that it was absolutely unacceptable for them to hold the debt ceiling hostage to their root-canal economics. (It worked for Bill Clinton in 1995-96 with the government shutdown.) At least one branch of government would be seen as more focused on jobs than deficits.

Instead, as Curtin implies, the public rationally concludes that jobs take a back seat to deficit cutting on all major politicians’ agendas. And the attention given to the debt-ceiling debacle has much of the public expecting more of the same in connection with the budget appropriations deadline on Sept. 30, the deadline for the Group of Twelve’s long-term budget-cutting proposal on Nov. 23,  and the expiration of the Bush tax cuts on Jan. 1, 2012. It’s easy to imagine the entire rest of the year devoted to partisan trench warfare, isn’t it? Be glad these guys are on vacation.

P.S. Title inspired by The Clash, of course. Alas, poor London. Feels weird to read about traditional looting for a change instead of the financial variant.

The beatings will continue until morale improves

4 August 2011

The stock markets are looking pretty Keynesian today. A 512-point (4.3%) drop in the Dow Jones average today, and drops of 4.8% and 5.1% in the S&P 500 and Nasdsaq; overall a drop of more than 10% (a.k.a. a “market correction”) in the past 10 days. Might it have something to do with the fact that Washington is obsessed with deficit-cutting while the rest of the world is obsessed with jobs and economic growth, or the lack thereof?

Jeff Macke of Yahoo! Finance’s Breakout blog puts it this way:

‘There’s a growing realization among even the most optimistic investors that the United States is entering a new recession — a dreaded “double-dip.” Adding to the pain is the sense that the government and Federal Reserve are out of both ideas and ways to stimulate the economy. Corporate America is sitting on record amounts of cash but is refusing to make new investments with so little end demand for its products. Consumers and corporations are hoarding cash, and the economy appears to be seizing. The debt ceiling debate was a fiasco, snuffing any remaining confidence traders had for help from Washington, D.C.’

Yes, Mr. President (and happy birthday, by the way), the time-suck that was the debt-ceiling negotiations was a “self-inflicted wound,” as you said last night. Now why couldn’t you have said the same about the debt ceiling itself? Worldwide investor confidence could not possibly have been inspired by this fight over a redundant institution that no other democratic country (besides Denmark) has and which serves no purpose besides political grandstanding. You may have looked like the only grownup in the room during that whole travesty, but I think the world would like to see a grownup with a clue. You’re talking about focusing on jobs now, but how on earth are you going to do that having just committed yourself to cutting government spending? If you were a Republican, the (specious) answer would be deregulate the hell out of everything, but traditionally Democrats have looked to fiscal stimuli, be they spending programs (Roosevelt), tax cuts (Kennedy-Johnson), or both (you in 2009). It looks to me like you’ve let the Republicans box you into a corner, and you’ve boxed yourself in even further by parroting their rhetoric about the primacy of deficit reduction and how government, like a family, has to spend less in hard times.

The Budget Control Act of 2011 took another hit today when Defense Secretary Leon Panetta said that the Pentagon could not absorb any more cuts beyond the $350 billion over 10 years in the first round of cuts. The second round calls for across-the-board cuts of $1.5 trillion, including $600 billion from the defense budget, if Congress can’t agree on specific cuts. Panetta said that would “do real damage to our security, our troops and their families, and our ability to protect the nation.” I’ll pass on whether or not he’s right, but I’m pretty sure his objection and the military-industrial complex will carry the day. Which makes it more likely that (a) the budget ax falls even harder on ordinary families who would spend the money they’d receive from the government, or (b) the spending cuts just don’t happen, which is better for the economy but bad for the government’s credibility. The battle over that second round of cuts looks to be nasty, brutish, and horrifying.

Not shaken, not stirred

25 July 2011

So far, the Treasury bond market seems remarkably unconcerned about Washington politicians’ abject failure to reach an agreement on raising the debt ceiling. As of 3:20 pm Monday, after a weekend of dashed hopes for a bipartisan agreement for deficit reduction, the interest rate on 10-year T-bonds was 3.00%, up just 4 basis points from Friday’s close of 2.96%. I admit, I woke up expecting more of a negative reaction from the bond market. What gives?

From what I’ve read, there seem to be two factors at work here, of which the bond market is well aware:

(1) The debt ceiling drama has happened before, and those in the bond market expect Congress to raise the ceiling in time, just as they always have before (with the exception of 1979*). In all, Congress has raised the debt ceiling 74 times since 1962, including an average of once a year since 2001. Barry Ritholtz provides an excellent compendium of newsbites about past debt ceiling votes.

(2) Washington tends to go down to the wire on these deals, and this year “the wire” is Aug. 2, i.e., eight days away. Again, history suggests they’ll get a deal done this time, too.

* The 1979 episode has oddly disappeared down the memory hole, despite two months of hostage-taking over the current debt ceiling and despite the fact that the temporary default of 1979 — it lasted two weeks and was caused by a combination of Capitol Hill shenanigans and computer problems at the Treasury — caused Treasury interest rates to be an estimated 50 basis points higher for years, costing taxpayers billions in increased interest payments on the debt and slowing the economy. (Hat tips: Andrew Sullivan, Bruce Bartlett. The 50-basis-points estimate is from finance professors Terry Zivney & Dick Marcus.)

So is this summer’s repugnant, reckless, Republican posturing over this issue all that different from past obstruction by Democrats and Republicans over the necessary and obvious business of raising the debt limit so that the government can honor its commitments to creditors, employees, contractors, retirees, etc.? I haven’t seen anything this extreme since I started following politics, but then again that’s only been 30 years, and this time-wasting exercise that is the debt-ceiling vote has been around since 1917. (It probably served a purpose back then, as we were entering a world war.) If this time is different, the difference may be the simple fact that a great many Republicans (not just Michele Bachmann and the Tea Partiers but 53% of all Republicans, according to a Pew Research Center poll) think it will be no big deal if the debt limit is not raised by Aug. 2, or perhaps if it is not raised at all. Since President Obama clearly does and is unwilling to press for a clean vote to raise the debt limit with no strings attached, they’ve got him over a table.

shaken, not stirred