ONE OF THE great barriers to a discussion of poverty and social policy in the 1980s is that so few people who talk about poverty have ever been poor.
That's the first sentence from Charles Murray's thought provoking essay What's so Bad about being Poor? I can't help but remember that sentence when I read of former senator Bill Frist's new initiative - State Collaborative on Reforming Education (SCORE). Who attended yesterday's announcement? Well, Bill Frist of course. He didn't attend public school. He attended the most exclusive (expensive) private school in the city. His offspring? Not sure but I bet they didn't attend the neighborhood public school. It is the same school that Mayor Karl Dean sent his children. Phil Bredesen sent his son to a swanky private school in Nashville, one just as exclusive. Former mayor Bill Purcell's kid went to a magnet school. The academic magnet schools look nothing, demographically speaking, like neighborhood public schools. This year only one in four students in the lottery got a slot at an academic magnet. Many of the teachers and administrators in Metro schools opt out of the public system just as our president did when he moved to Washington D.C. Is this reality not a barrier to any discussion of school reform? For such people school reform is an abstraction. There is no intensity to enact the most basic reform, to empower all parents to act as consumers of education. If people like Bill Frist, Karl Dean, Phil Bredesen, and all Metro teachers and administators had to send their kids to the neighborhood public school you'd get real reform.
Don't even begin to tell me about programs that have "worked" elsewhere in terms of graduation rates or test scores until you make clear that a fundamental goal of reform is to expand parental choice. Those who believe in the power of programs miss the point. It is the power of a system that is important. On the one hand you have a thriving market system that serves affluent consumers and on the other a public monopoly system that enjoys a captive market, those who can't afford the market system. That system serves various interests.
Update: After checking out the SCORE website I have to say that the thrust and direction of the Frist effort is very good. It is a step in the right direction.
Thursday, February 19, 2009
Wednesday, February 18, 2009
The influence and confusion...
... when considering John Maynard Keynes.
Our ignorance of what causes economic ailments -- and how to treat them -- is profound. Downturns and financial crises are not regular occurrences, and because economies are always evolving, they tend to be idiosyncratic, singular events.
That's Amar Bhide writing yesterday in the Wall Street Journal. Our ignorance is profound? That from a distinguished professor of business at Columbia? An exaggeration maybe but I like the humility. As he points out there are still debates with respect to how we sunk so low during the Great Depression and what brought us out. And, downturns are somewhat idiosyncratic, each downturn is somewhat unique.
On what leads to a downturn I think there is general agreement that energy price spikes and financial crisis that come after a speculative bubble bursts precede downturns. In 2001 there was the dot.com bursting then the real shock of 9/11 which that thwarted real trade in goods and services, in 1991 the spike in oil prices when Iraq invaded Kuwait, the mid-seventies and 1981 - again high oil prices. We agree on some basics about monetary policy; the Fed's failure at the onset of the Great Depression to act as a lender of last resort, to let so many banks fail, was a disaster. The Fed policy under Paul Volcker that brought inflation under control in 1979 and the early 80's required an adjustment (downturn).
The debates tend to focus on magnitudes - how much of a role did monetary policy play versus FDR's New Deal policies? Then there is confusion with respect to what is a "conservative" response versus what is a "liberal" response to a downturn. GDP began to grow fairly rapidly when FDR took over until the recession within a depression that occurred in 1937. Though unemployment did not fall dramatically in the early years of the New Deal it is hard to say that FDR's policies had no impact. And what of John Maynard Keynes? He's been identified as an economic liberal though that's hard to square with what he actually wrote. He believed strongly in free markets and thought that the government ought to back out quickly after a downturn was over. His influence is undeniable not only because his analysis supported, broadly, what FDR was trying to accomplish but because he provided a framework for viewing the macro economy that persists today. His influence is reflected in the current fiscal response...
The economic theory behind the nearly $800 billion stimulus package may be cloaked in precise mathematics but is ultimately based on John Maynard Keynes's speculative conjecture about human nature. Keynes claimed that people cope with uncertainty by assuming the future will be like the present. This predisposition exacerbates economic downturns and should be countered by a sharp fiscal stimulus that reignites the "animal spirits" of consumers and investors.
Indeed Keynes' diagnosis led to a logical prescription, that the government must step in to halt then reverse the downward spiral. This doesn't mean that we should all embrace what are considered to be "Keynesian" policies today. As professor Bhide points out...
... there is no consensus about why huge public-spending projects and a zero-interest-rate policy failed to pull the Japanese out of a prolonged slump.
He goes on to argue against the particular fiscal approach being employed today particularly the anxiety peddling that was a large part of getting the stimulus package passed. Encouraging anxiety works against reversing "animal spirits." It is worth reading. The alternative, as Bhide points out, isn't to shrug our shoulders and wait for markets to adjust.
The alternative isn't, as the stimulus scaremongers suggest, to turn our backs to the downturn. We do have mechanisms in place to deal with economic distress. Public aid for the indigent has been modernized and expanded to provide a range of unemployment and income-maintenance schemes. Bankruptcy courts and laws give individuals another chance and facilitate the orderly reorganization or liquidation of troubled businesses. The FDIC has been dealing with bank failures for more than 70 years, and the Federal Reserve has been empowered to provide liquidity in the face of financial panics for even longer.
In short an opponent of the huge fiscal stimulus should not be characterized as someone who objects to the state having any role whatsoever. I think Harvard economist Greg Mankiw spoke for many by saying that fiscal policy can work to mitigate the symptoms (suffering) of the downturn but we shouldn't rely on fiscal policy to shock the economy out of a recession.
Our ignorance of what causes economic ailments -- and how to treat them -- is profound. Downturns and financial crises are not regular occurrences, and because economies are always evolving, they tend to be idiosyncratic, singular events.
That's Amar Bhide writing yesterday in the Wall Street Journal. Our ignorance is profound? That from a distinguished professor of business at Columbia? An exaggeration maybe but I like the humility. As he points out there are still debates with respect to how we sunk so low during the Great Depression and what brought us out. And, downturns are somewhat idiosyncratic, each downturn is somewhat unique.
On what leads to a downturn I think there is general agreement that energy price spikes and financial crisis that come after a speculative bubble bursts precede downturns. In 2001 there was the dot.com bursting then the real shock of 9/11 which that thwarted real trade in goods and services, in 1991 the spike in oil prices when Iraq invaded Kuwait, the mid-seventies and 1981 - again high oil prices. We agree on some basics about monetary policy; the Fed's failure at the onset of the Great Depression to act as a lender of last resort, to let so many banks fail, was a disaster. The Fed policy under Paul Volcker that brought inflation under control in 1979 and the early 80's required an adjustment (downturn).
The debates tend to focus on magnitudes - how much of a role did monetary policy play versus FDR's New Deal policies? Then there is confusion with respect to what is a "conservative" response versus what is a "liberal" response to a downturn. GDP began to grow fairly rapidly when FDR took over until the recession within a depression that occurred in 1937. Though unemployment did not fall dramatically in the early years of the New Deal it is hard to say that FDR's policies had no impact. And what of John Maynard Keynes? He's been identified as an economic liberal though that's hard to square with what he actually wrote. He believed strongly in free markets and thought that the government ought to back out quickly after a downturn was over. His influence is undeniable not only because his analysis supported, broadly, what FDR was trying to accomplish but because he provided a framework for viewing the macro economy that persists today. His influence is reflected in the current fiscal response...
The economic theory behind the nearly $800 billion stimulus package may be cloaked in precise mathematics but is ultimately based on John Maynard Keynes's speculative conjecture about human nature. Keynes claimed that people cope with uncertainty by assuming the future will be like the present. This predisposition exacerbates economic downturns and should be countered by a sharp fiscal stimulus that reignites the "animal spirits" of consumers and investors.
Indeed Keynes' diagnosis led to a logical prescription, that the government must step in to halt then reverse the downward spiral. This doesn't mean that we should all embrace what are considered to be "Keynesian" policies today. As professor Bhide points out...
... there is no consensus about why huge public-spending projects and a zero-interest-rate policy failed to pull the Japanese out of a prolonged slump.
He goes on to argue against the particular fiscal approach being employed today particularly the anxiety peddling that was a large part of getting the stimulus package passed. Encouraging anxiety works against reversing "animal spirits." It is worth reading. The alternative, as Bhide points out, isn't to shrug our shoulders and wait for markets to adjust.
The alternative isn't, as the stimulus scaremongers suggest, to turn our backs to the downturn. We do have mechanisms in place to deal with economic distress. Public aid for the indigent has been modernized and expanded to provide a range of unemployment and income-maintenance schemes. Bankruptcy courts and laws give individuals another chance and facilitate the orderly reorganization or liquidation of troubled businesses. The FDIC has been dealing with bank failures for more than 70 years, and the Federal Reserve has been empowered to provide liquidity in the face of financial panics for even longer.
In short an opponent of the huge fiscal stimulus should not be characterized as someone who objects to the state having any role whatsoever. I think Harvard economist Greg Mankiw spoke for many by saying that fiscal policy can work to mitigate the symptoms (suffering) of the downturn but we shouldn't rely on fiscal policy to shock the economy out of a recession.
Monday, February 16, 2009
What if we could "out" the elites?
Suppose that we could "out" the top policy wonks and leaders of both parties. My guess is that we would see a Democratic elite that views poor people with more disgust than sympathy. And I suspect that we would see a Republican elite that finds religious fervor more disturbing than congenial.
That's economist Arnold Kling commenting on something from Ross Douthat. I'll buy that in general. Which is more objectionable? Is it more objectionable to exploit the poor or the fervently religious?
That's economist Arnold Kling commenting on something from Ross Douthat. I'll buy that in general. Which is more objectionable? Is it more objectionable to exploit the poor or the fervently religious?
Friday, February 13, 2009
Is being critical of the stimulus synonomous with being conservative?
Is being critical of the stimulus synonomous with being conservative?
I'd have to answer no. This story that Drudge linked has economists speaking critically of the stimulus.
"I think (doing) nothing would have been better," said Ed Yardeni, an investment analyst who's usually an optimist, in an interview with McClatchy.
So far so good but then this...
He argued that the plan fails to provide the right incentives to spur spending.
So it is not the idea of fiscal stimulus that is the problem but the particulars that are the problem. Then this...
"It's unfocused. That is my problem. It is a lot of money for a lot of nickel-and- dime programs. I would have rather had a lot of money for (promoting purchase of) housing and autos . . . . Most of this plan is really, I think, aimed at stabilizing the situation and helping people get through the recession, rather than getting us out of the recession.
Is that - subsidies for home and auto purchases - conservative? Helping people get through the recession, presumably by helping them stay fed and reasonably healthy, is not conservative but helping them buy cars and houses is? Then there's this...
"All this is 25 years of government expansion jammed into one bill and sold as stimulus," said Brian Riedl, the director of budget analysis for the Heritage Foundation, a conservative policy research group.
That's plausible. That represents a legitimate conservative objection. What about this?
"While the stimulus bill is a necessary condition for economic stabilization and recovery, it is hardly sufficient," Galston wrote. "As the lesson of Japan in the 1990s shows, fiscal stimulus without financial rescue yields stagnation — at best."
That's William Galston who is at the center-left Brookings Institution. Now conservatives can tend to agree with that. In fact I'd say it is a major point that center-right economists have been making, that until the financial system is reformed and working efficiently a fiscal stimulus is not going to yield a recovery. Conservatives would tend to argue more strongly against the fiscal stimulus but agree that it is no silver bullet.
Then to demonstrate that forecasters don't know what the hell they're talking about, and neither does anyone else, half the time...
"Something is better than nothing, and bigger was better than smaller in terms of the stimulus needed," said Chris Varvares, president of prominent forecaster Macroeconomic Advisers in St. Louis. "The economy needs a fiscal jolt."
There is more agreement among economists then most people realize. Perhaps it is a matter that there is less agreement and understanding now with respect to what defines and constitutes conservatism/liberalism.
I'd have to answer no. This story that Drudge linked has economists speaking critically of the stimulus.
"I think (doing) nothing would have been better," said Ed Yardeni, an investment analyst who's usually an optimist, in an interview with McClatchy.
So far so good but then this...
He argued that the plan fails to provide the right incentives to spur spending.
So it is not the idea of fiscal stimulus that is the problem but the particulars that are the problem. Then this...
"It's unfocused. That is my problem. It is a lot of money for a lot of nickel-and- dime programs. I would have rather had a lot of money for (promoting purchase of) housing and autos . . . . Most of this plan is really, I think, aimed at stabilizing the situation and helping people get through the recession, rather than getting us out of the recession.
Is that - subsidies for home and auto purchases - conservative? Helping people get through the recession, presumably by helping them stay fed and reasonably healthy, is not conservative but helping them buy cars and houses is? Then there's this...
"All this is 25 years of government expansion jammed into one bill and sold as stimulus," said Brian Riedl, the director of budget analysis for the Heritage Foundation, a conservative policy research group.
That's plausible. That represents a legitimate conservative objection. What about this?
"While the stimulus bill is a necessary condition for economic stabilization and recovery, it is hardly sufficient," Galston wrote. "As the lesson of Japan in the 1990s shows, fiscal stimulus without financial rescue yields stagnation — at best."
That's William Galston who is at the center-left Brookings Institution. Now conservatives can tend to agree with that. In fact I'd say it is a major point that center-right economists have been making, that until the financial system is reformed and working efficiently a fiscal stimulus is not going to yield a recovery. Conservatives would tend to argue more strongly against the fiscal stimulus but agree that it is no silver bullet.
Then to demonstrate that forecasters don't know what the hell they're talking about, and neither does anyone else, half the time...
"Something is better than nothing, and bigger was better than smaller in terms of the stimulus needed," said Chris Varvares, president of prominent forecaster Macroeconomic Advisers in St. Louis. "The economy needs a fiscal jolt."
There is more agreement among economists then most people realize. Perhaps it is a matter that there is less agreement and understanding now with respect to what defines and constitutes conservatism/liberalism.
Thursday, February 12, 2009
Perhaps a way to increase support for English First in places like Green Hills
Egads!
The median price of a single family home rose from $30,600 in 1940 to nearly $120,000 in 2000 (in 2000 - inflation adjusted - dollars).
O.K. we worry more in a recession but we can still strive to be happy
Nurture your relationships, be charitable, and be grateful
Sonja Lyubomirsky, professor of psychology at the University of California–Riverside and author of The How of Happiness: A Scientific Approach to Getting the Life You Want, suggests cultivating a sense of appreciation through something like a gratitude journal, where you write down three to five things for which you are thankful.
Like it Centurion, like it, like it
This is worth proposing just to observe how support and resistence breaks along party and other demogrpahic lines. I like the idea, always have. On what basis does one object? (via Marginal Revolution)
“All you need to do is grant visas to two million Indians, Chinese and Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper. “We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate — no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans.”
Would an increase of doctors and other professionals change the demographic mix with respect to who would support English First type policies?
The median price of a single family home rose from $30,600 in 1940 to nearly $120,000 in 2000 (in 2000 - inflation adjusted - dollars).
O.K. we worry more in a recession but we can still strive to be happy
Nurture your relationships, be charitable, and be grateful
Sonja Lyubomirsky, professor of psychology at the University of California–Riverside and author of The How of Happiness: A Scientific Approach to Getting the Life You Want, suggests cultivating a sense of appreciation through something like a gratitude journal, where you write down three to five things for which you are thankful.
Like it Centurion, like it, like it
This is worth proposing just to observe how support and resistence breaks along party and other demogrpahic lines. I like the idea, always have. On what basis does one object? (via Marginal Revolution)
“All you need to do is grant visas to two million Indians, Chinese and Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper. “We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate — no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans.”
Would an increase of doctors and other professionals change the demographic mix with respect to who would support English First type policies?
Wednesday, February 11, 2009
More steps...
Newt Gingrich is promoting 12 steps that would lead to recovery and prosperity. Positive Spillover took a look at four of those steps. Time for to look at a few more... but first a word from Milton Friedman via Harvard economist Greg Mankiw:
The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is "politically feasible" and then to recommend it.
1. Control spending so we can move toward a balanced budget:
A balanced budget amendment is not the only way to achieve this. We could, and should, impose rules on spending. When tax revenue is strong there is tremendous pressure to spend, to introduce new programs and initiatives. These new programs and initiatives give rise to new interest groups who advocate for more spending. Then, when tax revenue falls or grows more slowly we're caught with a "shortfall." The process of proposing a budget should be changed and that will lead to a change in thinking and language. Currently a "shortfall" is reported even when revenues are growing. It is only a shortfall to the extent that revenues aren't increasing as rapidly as projections, projections that were used to come up with the current budget.
2. Abolish taxes on capital gains:
The objection here is, typically, based on an equity argument. Affluent people realize capital gains. Why should we cut taxes to benefit the affluent? True enough but there are other, better ways, to address equity. Making affluent people less affluent doesn't help those who are not affluent. Income and wealth inequality tend to decrease during recessions. Are they good for less affluent people? The best thing you can do for low-income people is to expand opportunity. Investment, which will increase if we stop taxing it, provides opportunity. Overall there should be less focus on income distribution and more on growth. It is not relative improvements that we should concern ourselves with but absolute improvements. Some numbers will help...
Suppose two households, one making $500 per week and the other making $1,000 per week. They both realize a 10% increase in income. Both are better off even as their incomes become more unequal - from a $500 difference to a $550 difference. Do you think the lower income household would trade this change for one in which incomes fell to $450 and $800 respectivley? In such a case the income inequality would be only $350.
3. Abolish the death tax:
A simple question... Why should a person who saved money to leave to his children be taxed at a higher rate than a guy who spent all his money on himself?
The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is "politically feasible" and then to recommend it.
1. Control spending so we can move toward a balanced budget:
A balanced budget amendment is not the only way to achieve this. We could, and should, impose rules on spending. When tax revenue is strong there is tremendous pressure to spend, to introduce new programs and initiatives. These new programs and initiatives give rise to new interest groups who advocate for more spending. Then, when tax revenue falls or grows more slowly we're caught with a "shortfall." The process of proposing a budget should be changed and that will lead to a change in thinking and language. Currently a "shortfall" is reported even when revenues are growing. It is only a shortfall to the extent that revenues aren't increasing as rapidly as projections, projections that were used to come up with the current budget.
2. Abolish taxes on capital gains:
The objection here is, typically, based on an equity argument. Affluent people realize capital gains. Why should we cut taxes to benefit the affluent? True enough but there are other, better ways, to address equity. Making affluent people less affluent doesn't help those who are not affluent. Income and wealth inequality tend to decrease during recessions. Are they good for less affluent people? The best thing you can do for low-income people is to expand opportunity. Investment, which will increase if we stop taxing it, provides opportunity. Overall there should be less focus on income distribution and more on growth. It is not relative improvements that we should concern ourselves with but absolute improvements. Some numbers will help...
Suppose two households, one making $500 per week and the other making $1,000 per week. They both realize a 10% increase in income. Both are better off even as their incomes become more unequal - from a $500 difference to a $550 difference. Do you think the lower income household would trade this change for one in which incomes fell to $450 and $800 respectivley? In such a case the income inequality would be only $350.
3. Abolish the death tax:
A simple question... Why should a person who saved money to leave to his children be taxed at a higher rate than a guy who spent all his money on himself?
12 step elaboration
Yesterday I referred to 12 American solutions for jobs and prosperity. A reader has asked me to elaborate. Let's start with this; there has been recent attention given to the conflicting commentary provided by economists and President Obama joked (or was it scoffed) that everyone in Washington is an economist now. Well actually the level of disagreement among economists, has been a bit exaggerated. News coverage tends to try to provide a narrative and a story highlighting differences sells better than one that focuses on broad agreement. There do remain some significant disagreements, some unsettled questions, with respect to the efficacy of stimulatory fiscal policy - can deficit spending shock the economy back to full employment? It is not unsettled that fiscal policy also has the potential to de-stabilize the macro economy, to exascerbate the business cycle. Everyone recognizes that there are lags associated with fiscal policy - time, in this case a year, before we realize we're in a recession, time before fiscal stimulus is passed, time before it is implemented, and time before it has any impact. The economy might be recovering just as the impact of fiscal policy is felt which helps explain why the question, of the efficacy of fiscal policy, remains unsettled. It is comparable to going to the doctor after being ill for three or four days. If you start to feel better it remains unclear whether what the doctor prescribed had any impact at all or whether you were starting to recover even as you sat in the doctor's office. Paul Krugman, Nobel economist and perhaps the strongest fiscal stimulus enthusiast, highlighted his agreement with a Financial Times columnist...
Unfortunately, what is coming out of the US is desperately discouraging. Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused.
That's another way of saying that fiscal stimulus might work in theory but a bunch of vote maximizing elected representatives are not theoretical. The foundational assumption of economics is that people are self-interested, and it is helpful to remember that elected officials are people.
It would also be helpful to remember what another Nobel economist said. Friedrich von Hayek in his 1974 Nobel address...
It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to outright error...
...If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.
Translation: A person or group of persons is not competent, does not have the capacity, to "manage" the economy. The effort should be on establishing and maintaining the conditions that we know are conducive to the production and flow of goods and services.
So what of some of Newt Gingrichs' proposed solutions?
1. Reduce the payroll tax by 50%: That is no attempt to directly manage the economy but rather a move to improve the conditions that will tend to increase employment. And, it highlights an area where all economists agree - that payroll taxes distort the labor market, that it reduces the level of employment. There may be disagreement with respect to magnitude - how much will it change employment - but no disagreement that the result will be lower unemployment and higher levels of consumption.
I am converted to your proposal… for varying rates of contributions in good and bad times.
(June 16, 1942). Keynes, Collected Writings, vol. 27, p. 208.…[Y]ou are able to show fluctuations in income of an order of magnitude which is significant in the context… So far as employees are concerned, reductions in contributions are more likely to lead to increased expenditure as compared with saving than a reduction in income tax would, and are free from the objection to a reduction in income tax that the wealthier classes would benefit disproportionately. At the same time, the reduction to employers, operating as a mitigation of the costs of production, will come in particularly helpfully in bad times.
Not sure but I think John Maynard Keynes could be considered a Keynesian. So, the first solution is not controversial. There is a consensus among economists that lowering the payroll tax will stimulate the labor market.
2. More American Energy Now: We have imposed a constraint on ourselves by reducing our access to energy. With fewer resources our productive capacity is diminished. Any of my students in introductory economics understand that after the first week of class. But, there is a tradeoff you might argue; lower energy prices will contribute to climate change and getting the resources has a negative impact on the beauty of the land. If you take the positon that climate change is real then you should also understand that air and water quality improves with growth in per capita GDP. Poor countries tend to have dirtier air and water; when you are concerned with what you will eat next week or how you will pay the rent then whether or not a bit of sludge, or tons of sludge, leaks into the creek falls way down on your list of concerns. Americans, polls show, are not nearly as concerned with climate change as they were 18 months ago. As for diminishing the beauty of the land - soup lines don't look very good either. But, all energy is not the same. We should move to expand alternatives. That is part of the solution, but when we are becoming poorer our capacity to bring new forms of energy to market is diminished. The economics here is not controversial.
3. Protect Americans' rights to a secret ballot: Don't listen to me, listen to Larry Summers. He is a highly respected economist who works for President Obama...
Another cause of long-term unemployment is unionization.
Again, strong support among economists that unemployment is positively correlated with the level of unionization. This solution is not to suggest that efforts be made to thwart the right to form a union. Not at all, but we understand from behavioral ecoconomics that people are not nearly as likely to voice their true and sincere preference if they must do so publicly. Don't we want a situation where voting reflects the true preferences of the people voting?
4. Invest in energy and transportation infrastructure:
Public spending is not anathema to economists who favor limited government. This is about providing the public physical capital that is conducive to economic growth in a situation where conditions exist so that the market, on its own, will tend to yield an inadequate supply. This is not contraversial. It is not about "shocking" the economy back to full-employment directly.
Later today I'll address the other solutions that Newt Gingrich is promoting.
Unfortunately, what is coming out of the US is desperately discouraging. Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused.
That's another way of saying that fiscal stimulus might work in theory but a bunch of vote maximizing elected representatives are not theoretical. The foundational assumption of economics is that people are self-interested, and it is helpful to remember that elected officials are people.
It would also be helpful to remember what another Nobel economist said. Friedrich von Hayek in his 1974 Nobel address...
It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to outright error...
...If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.
Translation: A person or group of persons is not competent, does not have the capacity, to "manage" the economy. The effort should be on establishing and maintaining the conditions that we know are conducive to the production and flow of goods and services.
So what of some of Newt Gingrichs' proposed solutions?
1. Reduce the payroll tax by 50%: That is no attempt to directly manage the economy but rather a move to improve the conditions that will tend to increase employment. And, it highlights an area where all economists agree - that payroll taxes distort the labor market, that it reduces the level of employment. There may be disagreement with respect to magnitude - how much will it change employment - but no disagreement that the result will be lower unemployment and higher levels of consumption.
I am converted to your proposal… for varying rates of contributions in good and bad times.
(June 16, 1942). Keynes, Collected Writings, vol. 27, p. 208.…[Y]ou are able to show fluctuations in income of an order of magnitude which is significant in the context… So far as employees are concerned, reductions in contributions are more likely to lead to increased expenditure as compared with saving than a reduction in income tax would, and are free from the objection to a reduction in income tax that the wealthier classes would benefit disproportionately. At the same time, the reduction to employers, operating as a mitigation of the costs of production, will come in particularly helpfully in bad times.
Not sure but I think John Maynard Keynes could be considered a Keynesian. So, the first solution is not controversial. There is a consensus among economists that lowering the payroll tax will stimulate the labor market.
2. More American Energy Now: We have imposed a constraint on ourselves by reducing our access to energy. With fewer resources our productive capacity is diminished. Any of my students in introductory economics understand that after the first week of class. But, there is a tradeoff you might argue; lower energy prices will contribute to climate change and getting the resources has a negative impact on the beauty of the land. If you take the positon that climate change is real then you should also understand that air and water quality improves with growth in per capita GDP. Poor countries tend to have dirtier air and water; when you are concerned with what you will eat next week or how you will pay the rent then whether or not a bit of sludge, or tons of sludge, leaks into the creek falls way down on your list of concerns. Americans, polls show, are not nearly as concerned with climate change as they were 18 months ago. As for diminishing the beauty of the land - soup lines don't look very good either. But, all energy is not the same. We should move to expand alternatives. That is part of the solution, but when we are becoming poorer our capacity to bring new forms of energy to market is diminished. The economics here is not controversial.
3. Protect Americans' rights to a secret ballot: Don't listen to me, listen to Larry Summers. He is a highly respected economist who works for President Obama...
Another cause of long-term unemployment is unionization.
Again, strong support among economists that unemployment is positively correlated with the level of unionization. This solution is not to suggest that efforts be made to thwart the right to form a union. Not at all, but we understand from behavioral ecoconomics that people are not nearly as likely to voice their true and sincere preference if they must do so publicly. Don't we want a situation where voting reflects the true preferences of the people voting?
4. Invest in energy and transportation infrastructure:
Public spending is not anathema to economists who favor limited government. This is about providing the public physical capital that is conducive to economic growth in a situation where conditions exist so that the market, on its own, will tend to yield an inadequate supply. This is not contraversial. It is not about "shocking" the economy back to full-employment directly.
Later today I'll address the other solutions that Newt Gingrich is promoting.
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