Laurence S. Moss Dies

The History of Economics Society has announced that Larry Moss died on February 24, cause unknown, although he had suffered from various illnesses for several years. Larry had served as editor of the American Journal of Economics and Sociology (AJES) for a number of years, and did an admirable job in my view, even though I did not see eye to eye with him on a variety of topics. That journal has long had a link with "Georgist" economics, although Larry's own interestes tended towards the libertarian and Austrian, having written books on both Joseph Schumpeter and Ludwig von Mises, and having coauthored with Israel Kirzner more than once.

Nevertheless, Larry always was open-minded and published papers that he clearly disagreed with. Thus, he was the editor who accepted the paper, "Keynesian Comparative Economics: The Iconoclastic Vision of Lynn Turgeon (1920-1999)," published in AJES in 2003 62(3), 491-508, Tim Canova, Ric Holt, Bob Horn, me, and Marina Rosser as coauthors. Turgeon, who died a decade ago tomorrow (and Canova has just issued a revised version of the paper on SSRN) held dramatically idiosyncratic views, but there is no way that they could be described as either libertarian, Austrian, or conservative. In any case, I guess this post is in memory and respect for both of these individuals, neither with us anymore.

Making Government Efficient

The Sacramento Bee reports that California's Employment Development Department spent $1.1 million to Verizon, which played a recorded message for jobless people who couldn't reach operators at the organization's call center, charging five cents for each call. The brain-dead assembly decided something has to be done. Naïvely I expected that they would recognize that the call centers were understaffed. Instead, they offered three options: reducing the number of hours that the message is available; offering other targeted toll-free numbers for specific inquiries; or just using a standard busy message.

Rogoff on Government Deficits and Interest Rates

Kenneth Rogoff is worried about how rising government debt will lead to higher interest rates:

No one yet has any real idea about when the global financial crisis will end, but one thing is certain: Government budget deficits are headed into the stratosphere. In the coming years, investors will need to be persuaded to hold mountains of new debt. Although governments may try to cram public debt down the throats of local savers (by using, for example, rising influence over banks to force them to hold a disproportionate quantity of government paper), they eventually will find themselves having to pay much higher interest rates as well. Within a couple of years, interest rates on long-term U.S. Treasury notes could easily rise 3 per cent to 4 per cent, with interest rates on other governments' paper rising as much, or more ... In research that Carmen Reinhart and I have done on the history of financial crises, we find that public debt typically doubles, even adjusting for inflation, in the three years following a crisis. Many nations, large and small, now are well on the way to meeting this projection.

As of March 5, the interest rate on 30-year Treasury notes was only 3.5%. Unless the market is unaware of this fiscal forecast, one would think that the market has priced in its view on these matters and apparently does not share Rogoff’s pessimism.

Mark Thoma is not so full of “gloom and doom”:

So I want to emphasize one more time that stabilization policy does not have to change the size of government in the long-run (and see pgl for a debunking of some of the claims about the size of government. i.e. he notess that "Federal spending as a share of GDP was about as high in 1985 as it is projected to be for 2019"). Fiscal policy can increase the size of government, but it can also shrink the size of government (lower taxes in the downturn, then cut spending when things are better to eliminate the deficit and government will shrink). So the criticism is not about the use of stabilization policy to help people during the downturn and to give the economy a boost, instead it's a claim about the long-term political aims of the administration with respect to the size of government. However, according to pgl's calculations, the projections are that the size won't exceed what we had under that well known socialist sympathizer Ronald Reagan.

While Mark was kind enough to mention this post, all I noted was the White House’s own projections of Federal spending, which do not indicate that President Obama has some big government agenda (as Greg Mankiw tried to suggest).

Rogoff is worried that Federal debt may double. It will certainly rise relative to GDP over the next few years. We have seen a doubling of the Federal debt to GDP ratio before. This chart shows the gross Federal debt to GDP ratio from 1792 to today and projected through the end of 2010. From 1913 to 1921, the ratio rose from less than 7.5% to more than 32.5% - but then fell to 16.3% by 1929. Then we had the Great Depression followed by World War II and this ratio skyrocketed to more than 120% by 1946. U.S. fiscal policy had a period of long-run fiscal responsibility, which lowered this ratio to less than 32% by 1981. Alas, we had an era of fiscal irresponsibility that saw this ratio to more than double by 1995. The Clinton era fortunately was a return to fiscal responsibility which allowed this ratio to decline to 57.34%. Alas, this was short-lived as the fiscal irresponsibility of George W. Bush tenure in office allowed this ratio to rise to almost 70%.

Our chart shows the interest rate on AAA long-term corporate bonds from January 1919 to February 2009. Interest rates did not skyrocket after World War I or World War II. One reason is that long-term fiscal policy turned to retiring the Federal debts generated by these two wars. It is true that the Reagan fiscal fiasco led to higher real interest rates – even as supply-side worshipers of St. Ronnie love to talk about what happened to nominal rates. Long-term interest rates have been relatively low in recent years even in the face of Bush43’s fiscal irresponsibility. I would suspect that if the Obama Administration delivers on its promise of long-term fiscal responsibility, we can avoid Rogoff’s pessimistic forecast.

The Case for Working Less

by the Sandwichman

The Sandwichman steps out and guest posts at the Relentlessly Progressive Economics Blog.

Health Care Reform and Supply-side Arguments

Greg Mankiw and Sally Pipes note what CBO director Doug Elmendorf said about the use of a supply-side argument by Democratic proponents of health care reform:

The point is that for employers, health care is merely a part of total compensation: It reduces cash compensation for employees but it does not increase costs of employment. To argue otherwise is to argue for lower total U.S. compensation -- that is, lower wages for U.S. workers. Said Mr. Elmendorf, "the costs of providing health insurance to their workers are not a competitive disadvantage to U.S.-based firms."

If one assumes that the labor supply curve was perfectly inelastic, then any increase (decrease) in the amount of employee health care cost borne by the employer would be fully passed onto employees in the form of lower (higher) wages. The analysis is similar to an analysis of the effect of reducing the payroll tax - a proposal that Greg Mankiw has made. If the labor supply curve is perfectly inelastic, reducing either the payroll tax or the amount of employee health care cost borne by the employer would have no effect on the cost of employment to employers or the amount of workers hired.

But wait a second - I thought moderate supply-siders such as Greg Mankiw (Dr. Mankiw is not one of those lunatic supply-siders like Art Laffer) argue for reductions in the payroll tax in order to induce an increase in employment as if the labor supply curve were not perfectly inelastic. So why wouldn’t a reduction in the amount of employee health care cost borne by the employer have at least modest benefits for the US economy?

Update: CBO provides Elmendorf’s testimony on February 25, 2009. On the last two pages of this 31 page document, there is a brief discussion entitled “Effects on the Economy”. While Elmendorf did make the sensible statement that any cost of employer provided health care would at least be borne in the form of lower wages, this section also begins with:

Proposals that made large-scale changes affecting the provision and financing of health insurance could also have an impact on the broader economy. Because most health insurance is currently provided through employers, proposals could affect labor markets by changing individuals’ decisions about whether and how much to work and employers’ decisions to hire workers.

Glass Houses Alert

by the Sandwichman

Paul Krugman groans about the news media's penchant for one-sided debate

One major sin of news coverage, especially on TV, is the way certain points of view just get excluded from consideration — even if many of the best-informed people hold those views. Most famously and disastrously, the case against invading Iraq was just not heard in the months before the war.

And one major sin of economics education and the public discourse of economics is the way certain points of view just get excluded from consideration. The perspective that work time reduction might be a key part of a progressive economic recovery strategy — as Keynes pointed out, one of three ingredients of a cure and the ultimate solution — is not only excluded, it is ridiculed by economists as a lump of labor fallacy. I’ve researched the alleged fallacy and I’ve found the claim to be fraudulent. The results of my research have been published in the Review of Social Economy as “Why Economists Dislike a Lump of Labor”. I’ve even offered a $10,000 prize if someone could refute my rebuttal and get it published in a leading economics journal. No takers of course.

Meanwhile, Dean Baker has offered a policy proposal for reducing working time as part of an economic recovery package. Just listen to the spirited discussion among economists of Dean’s proposal! What’s that you say? Silence? Oh.

What Would James Tobin Say About Today’s GOP Fiscal Stance?

AP reports:

The top Republican in the House is seizing on the latest spike in unemployment to call for a freeze on government spending and to urge President Barack Obama to veto a $410 billion spending bill. Rep. John Boehner, R-Ohio, said the jump in unemployment to 8.1 percent and the loss of 651,000 jobs in February is a sign of a worsening recession that demands better solutions from both parties. Boehner criticized the spending bill as chocked full of wasteful, pork-barrel projects. The Senate postponed a vote on the bill until Monday amid the criticism. Boehner said he hoped Obama would veto the bill. He urged the president to work with House Republicans to impose a spending freeze until the end of this fiscal year.

Josh Marshall calls this proposal a joke:

I'm not even sure it's fair to say that this is a replay of the disastrous decisions the magnified the Great Depression between 1929 and 1933. It's more a parody of it. When the crisis is a rapid and catastrophic drop off in demand, you handcuff the one force that can create demand (i.e., the federal government) in the throes of the contraction. That's insane.

As the recession during the early 1980’s worsened, one of the calls from certain supply-side types was that we could increase aggregate demand by cutting government spending. In a speech echoing this insane theme by one of the practitioners of a large econometric model of the US economy, James Tobin asked the speaker a simple question. He asks the practitioner to tell the audience the sign of his fiscal policy multiplier. In other words – as Dr. Tobin explained – what would be the predicted effect on output if the model entertained an increase in government spending? The practitioner thought about the question for a moment and replied that the predicted impact on output from an increase in government spending would be positive. To which – Dr. Tobin politely noted that the entire speech made no sense.

Now if Congressman Boehner can point to a credible econometric model of the US economy where the fiscal policy is negative, maybe he can defend his spending freeze proposal. Otherwise, as Josh notes:

DC Republicans are simply not part of the discussion when it comes to repairing the US economy or arresting our slide into deep economic misery. And any reporters who aren't clear about this are just lying to their readers or viewers.

Request for comments on the new intro for my book

I just completed a nearly final version of The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers. I have put earlier versions here, but this one is very different. The second half is totally new.

I would very much appreciate any comments.

This site would not let me upload the file for some reason. I put here:

http://michaelperelman.wordpress.com/2009/03/07/request-for-comments-on-new-introduction-for-my-new-book/

Thanks in advance.

First the "Good" News...

by the Sandwichman

According to the BLS, nonfarm payrolls fell by "only" 651,000 last month. This was "not as horrific as many traders feared."

Meanwhile, back on earth,

The change in total nonfarm employment for December was revised from -577,000 to -681,000 and the change for January was revised from -598,000 to -655,000. Monthly revisions result from additional sample reports and the monthly recalculation of seasonal factors.

Let's do the math. 651,000 + 161,000 = 812,000 (not counting next month's likely upward revision of this month's 651,000). Not as horrific as many traders feared?

Quote of the week

A monetary crisis rapped inside a liquidity crisis; all rapped inside a quality crisis;

All rapped inside a fiscal crisis rapped inside a financial crisis;

All rapped inside a confidence crisis rapped inside a crisis in the dominant growth paradigm;

All rapped inside a contradiction rapped inside an enigma.

Travis Fast

Fujita on Krugman

I have suggested here that Masahisa Fujita deserved to share the Nobel Prize with Paul Krugman. Fujita has coauthored with Krugman in the late 1990s, after Krugman published his 1991 paper that was cited in his prize. However, Fujita has now published a paper with Jaques-Francois Thisse in Regional Science and Urban Economics (RSUE), "New economic geography: An appraisal on the occasion of Paul Krugman's 2008 Nobel prize in economic sciences," March 2009, 39(2), 109-119. The abstract is as follows:

Paul Krugman has clarified the microeconomic underpinnings of both spatial economic agglomerations and regional imbalances at national and international levels. He has achieved this with a series of remarkably original papers and books that succeed in combining imperfect competition, increasing returns, and transportation costs in new and powerful ways. Yet, not everything was brand new in New Economic Geography. To be precise, several disparate pieces of high-quality work were available in urban economics and location theory. Our purpose in this paper is to shed new light on economic geography through the lenses of these two fields of economics and regional science.

The paper provides quite a list of these predecessors, and although the paper does not highlight them too much, they include his paper in 1988 in RSUE that pretty much fully covered what is in the 1991 paper by Krugman, "A monopolistic competition model of spatial agglomeration: a differentiated product approach." The extensive literature he cites includes two important papers in 1980 and 1982 by him with H. Ogawa, as well as highlighting the foundational work in the 1940s and 1950s by the "Father of Regional Science," the still-living at 90 years old, Walter Isard, also one of the founders of "Peace Economics."

Is Brad DeLong Going To The US Treasury?

If one visits Brad DeLong's blog, one will find photos he took on Monday while visiting the US Treasury in Washington, including one of his nose, :-). Brad was a Deputy Assistant Secretary of the Treasury in the early years of the Clinton administration. He was also a student of Larry Summers at Harvard and his most famous papers were coauthored with Summers. Summers was reportedly the person who brought him to Treasury under Clinton, and is now reportedly the top adviser to Obama, with Geithner as Treasury Secretary also a protege and presumably knowing DeLong quite well. All of the positions just below the Secretary level are unfilled, with no public reports of who the candidates are: Deputy plus the Undersecretary and Assistant Secretary positions. All this rather looks to me like Brad may well be a candidate for one of these. Of course, if he takes one, that will probably mean at least a temporary end to his widely read blog.

Mankiw’s GOP Talking Points on Obama’s Budget

Greg Mankiw writes:

Rahm Emanuel, the incoming White House chief of staff, has said, “You don’t ever want to let a crisis go to waste: it’s an opportunity to do important things that you would otherwise avoid.” What he has in mind is not entirely clear. One possibility is that he wants to use a temporary crisis as a pretense for engineering a permanent increase in the size and scope of the government. Believers in limited government have reason to be wary.

He precedes this suggestion that President Obama is a big government liberal (at least he did not use the term socialism) with:

Federal Outlays as a Percentage of GDP
Average over the past half century: 20.2 percent
In 2007, the year before the crisis: 20.0 percent
In 2009, from the Obama budget: 27.2 percent
Average 2010-19, in Obama budget: 22.6 percent
In 2019, last year of Obama budget: 22.6 percent

This presentation is misleading in a couple of ways – which is why I’ve presented two graphs (both using data from this source). The first graph shows Federal expenditure (both total and current) as a percent of GDP. Notice that Federal spending as a share of GDP was about as high in 1985 as it is projected to be for 2019. Also notice that Federal spending as a share of GDP fell during the term of our last Democratic President only to rise under that Republican President that Greg Mankiw served. To be fair – much of this variation came from changes in the defense spending to GDP ratio and not from changes in domestic Federal spending as our second graph shows.

Our second graph also show Federal health spending as a share of GDP, which has risen from 0.5% of GDP in the early 1960’s to over 5% in the last few years. Part of this increase is attributable to changes in what the Federal government covers during George W. Bush’s tenure in office but we should also note that total U.S. health expenditure (public and private) as a share of GDP has been rising and is expected to continue to rise. Given this reality – I’m surprised that the projected share for 2019 is not higher than 22.6%.

Update: A New Era of Responsibility - Renewing America’s Promise does show that the projected Federal outlay to GDP ratio for 2019 under President Obama’s proposed changed in the budget will be 22.6% as Greg claims but what Greg did not tell us is that the baseline budget projected Federal outlays to be 23.2% of GDP by 2019. The document has all sorts of details including the projected increases in Medicare and Medicaid as well as the proposals to reduce defense spending relative to what is in the baseline budget.

Reduce consumption says head of IPCC

The 2007 report of the Intergovernmental Panel on Climate Change (IPCC), issued last year, highlights "the importance of lifestyle changes," said Rajendra Pachauri [head of the IPCC] at a press conference in Paris. "This is something that the IPCC was afraid to say earlier, but now we have said it....tame carnivorous impulses". Don't buy things "simply because they're available..." [*]

Also some excerpts from the State of the World 2009 report:
** Approximately two-thirds of the energy fed into the world's power plants is wasted-released into the environment as heat. (p. 142)

** it is technically and economically feasible to reduce greenhouse gas emissions fast enough .

** The process of tilling soil releases CO2 into the atmosphere.

** Perennial crops store more carbon in the soil than annually planted ones.

The report can be downloaded here.


[*] Lifestyle changes can curb climate change: IPCC chief
Jan 15, 2008
http://afp.google.com/article/ALeqM5iIVBkZpOUA9Hz3Xc2u-61mDlrw0Q

Anticipatory Revisionist History

Right now in some of the most important right-wing think tanks of the country, well-paid hacks are churning out definitive histories of the current crash. Obviously, market forces are part of the solution rather than the problem. We can agree with many of them that the Federal Reserve played a role.

This work follows in a long tradition. For example, their forefathers already figured out that the Smoot-Hawley tariff caused the Great Depression.

We know how innovative this school of thought can be. They've already figured out that government mandates to lend to poor people caused the subprime crisis.
Surely, excessive taxes will be part of the story, but I can't figure out how they will spin that.

What other kinds of regulations and interference with the market is responsible for the debacle?