McConnell is Partially Right About Government Employment

David Weigel listens to Senator McConnell so we don’t have to:

"Unemployment among government workers is about 4.5 percent," said McConnell. "Most of those government workers work for state and local government. The federal government over the last two years has added 100,000 employees. The only industry in America that's not sacrificing in this current downturn is government employees. I can't tell you some federal worker won't be affected by reducing government spending, but we have largely insulated the federal government from this recession."

I looked at the government employment data provided by the Bureau of Labor Statistics and it is true that most of those working for the government work for state and local government. As our table shows, total government employment during February 2011 was 22.217 million (down from 22.582 million as of January 2009) whereas Federal employment was only 2.856 million (up from 2.792 million as of January 2009). Federal employment grew by only 64,000 which was more than offset by the fall in state government employment. Local government employment fell by 352,000 and total government employment fell by 365,000. Not exactly consistent with the message that the Senator was trying to convey.

Economic Illiteracy: The Tyler Cowen Conundrum

Tyler Cowen, from what I can gather, is everyone’s favorite George Mason libertarian. His colleagues may be considered beyond redemption, but TC himself is provocative, interesting, worth a look. He throws in references to history and culture. He has a sense of humor. No doubt he is a nice guy and uncommonly smart. In spite of all that, shouldn’t it matter that he doesn’t understand the first thing about economics?

His column in today’s New York Times is a doozy. The subject is “fiscal illusion”, and here’s his example:

Say that you have $20,000 in Treasury bills. You probably believe that you own $20,000 in wealth. This will encourage you to spend and come up with ambitious plans. Yet someone — quite possibly you — will be taxed in the future to pay off the government debt. The $20,000 may be needed in order to do that.

The illusion is this: A government bond represents both a current asset and a future liability, yet for most people, those future tax payments feel less concrete and less real than the dollars they’re holding in a money market account.

What is lacking here is not a subtle grasp of cutting edge theory, but the sort of elementary knowledge my students are asked to learn in the first few weeks of introductory macro.

Except in unusual circumstances, government debt is not paid off. To pay off such a debt would mean running fiscal surpluses equal to deficits. No government anywhere does this. Our grandchildren will not be taxed to pay off the fiscal debt we are accruing today, any more than we are taxed to pay off the debt our grandparents ran up during WWII. Every country in the world has public debt, and there will never come a “year of reckoning” when the whole world has to start running budget surpluses to pay it off.

And suppose we decided to jack up our taxes like TC says we must, and we pay down the whole thing—what then? We would have no treasury bonds out there for people to stuff into their portfolios. The only assets you could buy would be the risky stuff: you know, stocks, commercial loans, mortgage-backed securities. People would be pleading with governments to please, please run deficits again so we can have at least a few low-yielding but safe assets.

You might be tempted to say at this point, isn’t there a limit to how much public debt we can ring up? The answer is a definite yes. We need to monitor the fiscal space available to our economy and avoid getting in over our head. There is a lot of economic analysis dedicated to figuring out what these limits are and how to detect them before it’s too late. The New York Times could perform a public service by publishing thoughtful pieces by economists that discuss these questions in an informed manner.

Alas, that has nothing to do with the column at hand. TC is not making an argument about fiscal space or debt sustainability. He is saying that our treasury bonds are illusory because we will have to be taxed in the future to remove them from circulation. We are not talking about shades of opinion here, but the difference between having a basic idea of how economies work and flat-out ignorance.

Sorry: someone has to say this.

Update On Oil And The Arab Uprising

So, Qaddafi apparently has lost in his effort to retake the major oil head and refinery at Brega against the rebels against his regime, meaning that they control about 80% of Libya's oil, with the refinery particularly crucial according to the generally reliable Juan Cole at http://www.juancole.com . Needless to say, the uncertainties about oil supplies, particularly since the uprising in Libya began, have helped push up the price of oil, past $100 per barrel on both West Texas Intermediate and the roughly $13 more expensive Brent crude, which is the price most of the world outside the US pays (this gap an oddity only around since December), although the general trend with the world economy growing while world oil production has not risen at all for the last half decade is clearly going to be for prices to rise over the foreseeable future, even if there is a downward correction when these uprisings settle down.

While Libya is a major oil exporter, and fellow OPEC member Bahrain continues to have major demonstrations by the Shi'i majority against the Sunni monarchy, it continues to be the case that generally major oil exporting Arab nations are having fewer and less severe uprisings than non-oil exporters. The main latter ones without uprisings continue to be Morocco and Syria, both of which have had some minor demonstrations, but apparently remain largely calm.

However, some other major oil exporters have either experienced demonstrations or are very nervous about the possibility of there being some. Much attention has focused on the big one, Saudi Arabia, where Shi'a are about 17% of the population and concentrated in the oil producing Eastern Province and have long been oppressed by the Sunni majority. There have been calls for reforms, although no demos yet. King Abdullah has responded with a $36 billion plan to spread around a bunch more money. Key blog on the Kingdom is John Burgess's Crossroads Arabia at http://xrdarabia.org . According to his links, probably Abdullah's move will work, and the majority Sunni population remains largely loyal to the royal family.

Another less-publicized but somewhat similar situation has arisen in the United Arab Emirates. There the problems are more with expatriate workers (as in Kuwait also), who make up a substantial portion of the labor force. The UAE rulers, who also have a lot of money, at least in Abu Dhabi (Dubai is banrkupt and kept afloat by the Abu Dhabi folks), are imitating the Saudis and have announced a major money handout. One can follow events there through John Chilton's The Emirates Economist blog at http://emirateseconomist.blogspot.com .

Finally, the latest Arab oil exporter to have demonstrations, fairly serious actually, has been Oman at the southeast corner of the Arabian peninsula. Unlike the previous two cases, they do not have nearly as much oil or money, but the traditions there have also been to be much more tolerant of dissnt. Part of the issue there is regional, with most of the unhappiness in the western areas of Dhofar near Yemen (which continues to be perhaps second to Libya in terms of the seriousness of its current uprising), an area much poorer than Muscat in the east where the oil is. There is a potential for greater trouble, as Dhofar rose up in the 1980s militarily and could do so again. However, the Omanis belong to the Ibadi sect of Islam that is neither Sunni nor Shi'i. having split off even prior to the division between those two. The Ibadis seem to be more tolerant and easy-going, in contrast to their more hardline Sunni neighbors (although in Yemen part of the issue is dominant Sunnis against rebellious Zaydi Shi'is in the northern mountains), and ruling Sultan Qaboos seems to be making conciliatory moves towards the demonstraters. One can follow events in Oman at Dhofari Gucci's blog at http://dhofarigucci.blogspot.com .

David Brooks - Misinformed Cheerleading for Mitch Daniels

David Brooks hearts the governor of Indiana:

Since 2004, the 49 other states in the nation increased their debt levels by an average of 40 percent. Indiana has paid down its debt by 40 percent. Indiana received its first Triple-A bond rating in 2008, and now it is one of only nine states to have the highest rating from all three rating agencies. At the same time, the business climate has improved significantly. Infrastructure spending is at record levels. The state has added jobs at twice the national average.

I was alerted to this fluff piece by Dean Baker who had a neat chart on how this last sentence is just factually incorrect. BLS provides its own neat charts on how employment has fallen and the path of the unemployment rate in Indiana. Where David Brooks got the idea that employment in Indiana has boomed under the tenure of Mitch Daniels is not clear.

Dean also reminded us of the tenure of Mitch Daniels as OMB director. But hey – George Bush was his boss back then. As far as paying down the Indiana debt – I wonder how much of this was from the front loading of receipts from the sale of toll roads:

Leasing or selling a public asset is a classic one-shot—a short-term measure that bolsters the balance sheet today but that can't be repeated … As a result, our tax revenues wind up in Beijing—as interest payments. At the state level, Indiana is relying on foreign companies to lease public infrastructure like toll roads. And under these arrangements, tolls—taxes people pay for driving—are being paid to foreign shareholders of foreign companies.

This is not long-term deficit reduction if the sale price is less than the present value of the lost future tax revenues. But I guess teaching finance to David Brooks will have to wait until he learns to read simple graphs from the Bureau of Labor Statistics.

What Krugman Did Not Say At The Easterns

The Eastern Economic Association held its annual meeting in New York this past weekend, and on Friday Paul Krugman delivered the presidential address to an overflow crowd on "The Profession and the Crisis." Although most of it he has written or said before, it was well put and generally well received. Among his points were that economists failed to forecast the crisis and were particularly remiss in failing to note the housing bubble, that poor policy analyses were given with much bad advice as the crisis unfolded, and that that the profession exhibited massive ignorance of both economic history (particularly regarding the Great Depression) as well as of the history of economic thought (particularly that of Keynes) before and even during the crisis.

There were two main items he left out, one brought up by a questioner, one not brought up at all. The first involved the role of income distribution. Krugman sort of fumbled this, going on at some length about how Princeton will have a conference on this very soon without saying who would participate or what they might say. He went on also about how this was not like in the GD, with underconsumption not playing a role, although he did think it interesting that peaks of inequality immediately preceded this crisis and the GD. He finally admitted that inequality might have had something to do with the financial part of the housing mortgage problems.

The unmentioned issue was corruption. Now, with Elizabeth Warren being appointed over strong opposition within the administration, something on this matter might be done. However, that little has been done may reflect how many people from Goldman Sachs have been (and still are) involved in both the last and current administrations at top economic policy making levels. I note that people who have emphasized this issue have included former regulator, Bill Black (the initial whisteblower on the Keating Five S&L scandal), and Jamie Galbraith. Of course, Minsky and Kindleberger both emphasized that corruption and scams are a common side accompaniment of most speculative bubbles.

merit pay

One of the knocks on collective bargaining is that employers should be able to pay people what they are worth. An interesting example of this phenomenon came in the realm of professional football. In January 2011, Pro Bowl cornerback Nnamdi Asomugha's contract was voided because his contract included a little-known clause allowed the team to void his contract if he didn't achieve his not-likely-to-be-earned incentives in 2010 -- and he didn't. One reason for his failure to earn his incentives was that he was so effective that quarterbacks would not to pass to someone near him. Consequently, he did not have any interceptions.

Along the Libyan Coast, the World is Anything but Flat

In case you were wondering whether globalization had erased the division between the colonizer and the colonized, you can relax: the old order is still in place. Especially in moments of crisis, the platitudes about a borderless world fall away, and we can see clearly who counts and who doesn’t.

Benghazi, Libya — American and British citizens have been evacuating for days. The Chinese workers were on their way, and the Bosnians stood ready with their bags on the shore. But from the milky windows of stifling rooms in a makeshift camp, the migrant workers from other, poorer countries, stranded by war and, in some cases, forsaken by their employers, watched cruise ships — and salvation — depart.

Read on.

Are Bosses Always Right?

Disagreements over the role of unions usually come down to this: do you believe that managers normally make the right decisions over how to run organizations? If you do, then “union rules” just get in the way, and unions need to be weakened or eliminated in order to increase efficiency, as supporters of Scott Walker (and his predecessor in Indiana) argue. If you think bosses can be wrong, or capricious or self-serving, you support unions as a way to reduce power differences and compel more dialog. The debate over the Wisconsin drive to eviscerate public sector unions is really about whether you think a world in which some give orders and others simply obey is the ideal.

Where does economics come down on this? There are nice models of information flows within organizations that support dispersion of power, but they are somewhat exotic and not what gets pulled off the shelf when economists reach for a simple representation of organizational dynamics. Instead, we have crude principle-agent models of the employment relationship in which bosses always seek greater efficiency and have to fine tune the carrots and sticks of employment contracts so that workers will go along. Williamsonesque transaction cost theory is built on the same assumptions: managers must defeat workers’ opportunism, just as shareholders must subdue the opportunism of managers. Does this bias follow from the deeper assumption of individual self-interest? I think not: manager opportunism could just as readily be directed down the ladder as up. Rather, what we see is an unspoken class bias, an expression of the same instincts that lead to identifying with order-givers rather than order-takers—the belief that hierarchy is a reflection of differences in competence and social commitment and not just an organizational form.

The Two Worlds of Trade

There are two longstanding narratives in economics about trade.

1. Trade is about comparative advantage. Two people or communities that specialize in what they can do best (relative to what they would be doing otherwise) and trade with each other are better off (enjoy higher levels of consumption) than they would be without trade. The story becomes more dramatic when you bring in specializations within communities: those who specialize in goods that have a comparative disadvantage (e.g. electronics assembly in the US) lose out when trade is opened up, although their losses are not as great as the gains experienced by the rest of the community. The lesson is clear: there are special interests who will try to impede trade liberalization, but they should be resisted (or bought off) by the rest of us. Economists, who know the score, have a particular obligation to expose and combat protectionism.

2. Trade, while essential for growth and development, is a potentially destabilizing aspect of national and global macroeconomics. The gold standard was doomed to fail, for instance, because the specie flow mechanism (outflows of gold resulting in reduced money supply and lower prices) did not, in practice, cause trade deficits to diminish over time. In the absence of other adjustment mechanisms, countries with persistent deficits were forced to adopt punishing austerity measures, and this imparted a contractionary bias to the global macroeconomy. In the current period of flexible exchange rates, it is still the case that unbalanced trade is not only the norm, but has even increased in scale and destabilizing potential. Deficit countries are particularly subject to financial crises, due to the accumulation of private and public debt. (This is the message of the fundamental macroeconomic identity.) On the national level, persistent trade deficits result either in chronic employment problems or addiction to Keynesian demand stimulus that should, in principle, be only temporary medicine. In a world of sovereign states, we are still far from establishing a financial architecture that can contain the destabilizing effects of capital mobility and unbalanced trade.

What is interesting is that there is almost no communication at all between these two narratives. In particular, the second invalidates the first: if trade does not balance at the margin (changes in imports exactly offset changes in exports), the microeconomic case for trade liberalization collapses.

Winners & Losers from Free Trade: the Boxer, the Economist & the Hot Girlfriend

Kash Mansori has resumed his economist blogging – something that makes all economist bloggers better off. Welcome back and thanks for making me laugh at the Uwe Reinhardt story about the boxer and the economist , which reminds us that not everyone necessarily gains from a movement towards free trade. But let me humbly suggests that this story needs something – a third player.

The usual economist parable as to why there are both winners and losers from free trade might go something like this. As we removed the trade restrictions from importing apparel from China, American households were able to buy quality clothing at lower prices. Chinese apparel workers also benefited from higher wages. But American apparel workers suffered reductions in their real income from the increase in competition from Chinese workers. While aggregate American income rises, some Americans suffer losses. The compensation principle suggests that it ispossible for the winners from free trade to compensate the losers in such a way that everyone is left better off. Of course in the real world this compensation is rarely executed.

Let me recast Kash’s and Uwe’s story by noting that one of my friends is indeed a former professional boxer and not is a personal trainer who I sometimes work out with (we’ll call him Jay). Jay is still in incredible shape and if he were to punch someone in the nose, it will really hurt. Let me be the economist and let’s pretend that I just start dating a very sexy lass (we’ll call this hypothetical hottie Kay). Kay decided to come watch one of my training sessions with Jay and afterwards Jay had an intense desire to punch me in the nose. So he asked Kay how much he would have to pay her to get permission to punch her new boyfriend out. Kay pulls me aside and say “honey, I really need $3000”. When I told her that Jay’s punches are devastating, she promised that she would more than make up for the pain later that evening. So I told her to go negotiate with Jay. She was elated that he actually offered her $5000 to let him punch me in the nose. The deal was consummated when he hit me so hard in the nose that it broke and I bled a lot. But he did give her the $5000. The only problem is that when she saw how awful my face looked, she said: “oh dear, you are now so ugly that I can’t go home with you. And we certainly are not having sex”.

So let’s recap on this notion that free trade supposedly makes everyone better off. Jay got want he wanted and Kay is now $5000 richer. But all I got was a broken nose. Compensation principle – FEH!

The Most Dangerous Union in the World

Several commentators have remarked about the sudden outbreak of class struggle in the United States. I see the brutal behavior of the state and federal governments as an indication of the failure of class struggle.

Let me explain. Back in the 1960s, when United States was enjoying the so-called Golden of economic prosperity, profits were weakening. By the late 1960s, the organized right wing began to harness the energy of the tea party of the day, which took hold with the defeat of Barry Goldwater. Using its almost unlimited source of funding, wealthy businesspeople and corporations began to create a solid network of organizations to remake the country by undoing the gains made during the and New Deal, and even emulating the political landscape of the late 19th century. The Cato Foundation, the Heritage Foundation, right wing legal offices, and a host of other activist operations led a systematic assault on anything and anybody who seem to know represent a barrier to profit maximization.

This movement was extraordinarily successful, so much so that they even co-opted the Democratic Party, which had previously offered a meek resistance to business demands. By the 1990s, the results were clear to anybody who bothered to take notice of the economy. On the eve of the Great Recession, the results were so obvious that only the most stubborn ideologues could fail to see that virtually all of the economic growth since 1970 had been captured by a very small elite. I told this story in a book entitled The Confiscation of American Prosperity: From Right-Wing Extremism and Academic Economics to the Next Great Depression, published in 2007, just as the stock market peaked.

The ideological justification of this confiscation was that business prosperity would create a tsunami of productivity by following the right-wing regimen. The entire population would benefit.

Productivity did increase — not spectacularly — but which is still stagnated. Job security eroded. Protections previously guaranteed by regulatory agencies or the law quickly disappeared.

Despite the idea that the economy somehow suffered from an over burden of taxes and regulations, the more these hindrances to prosperity fell by the wayside, the worse the economy performed. Profits became concentrated in the financial sector, but much of the rest of the economy faltered.

Scapegoats had to be found. Already, during the Nixon administration, the right wing became adept at recruiting working-class support, using racism and cultural discomfort as fuel. Ironically, one of the first groups successfully recruited were craft unions, a minority of whose members attacked antiwar demonstrators. A parade of scapegoats march across the political landscape. Braless hippies, Blacks, unwed teenage mothers, welfare recipients, immigrants, and now public workers, especially teachers.

The results were always the same. The right would win more victories. The overall economy would still perform sluggishly. And the next scapegoat would step forward. Even when the culprit is obvious, scapegoats still must be found. For example, with the collapse of the financial scams in 2007, blame was shifted to Fannie Mae and Freddie Mac, and even more ridiculously to an obscure rule that had been passed two decades earlier.

For example, private-sector unions became virtually powerless on the national scene. In this environment, jobs disappeared. Disappointed union members would be vulnerable to the relative prosperity of public sector workers, who had pensions and medical coverage. Similarly, people who had lost their pensions to fraudulent banking schemes often became more upset with the relatively comfortable conditions of public sector workers.

One union stood out by its successes. It is not generally called a union, but so long as we can abuse reality by calling corporations people, we can call the Chamber of Commerce a union. This union is so powerful that the present United States must come before as a humble supplicant. This union was at the forefront of the deconstruction of the New Deal.

The time has come to stop blaming the victim. Somehow, we have to learn to fight back in this one-sided class warfare. We have to learn to explain that more of the same medicine that made us sick is not going to cure us. We have to learn to identify the architects of this disaster — the political manipulators, the right wing foundations and their benefactors, and if we want to begin a legitimate fight against unions, let’s start with the Chamber of Commerce.

A Business in Decline?

With the end of unions, what can we do to help those good people who provide strike breakers?

http://www.modernindustrialservices.com/

Are Teachers Overpaid In The US?

An ongoing meme of those supporting Governor Walker's efforts to crush public unions in Wisconsin is the repeated claims that public workers are overpaid. There is plenty of evidence that this is not so, even with their greater benefits, but I think another piece of evidence may be useful, a cross-country comparison of teacher salaries. This is important given that at the state and local levels, teachers are the most numerous of public workers, and it is hard to compare them with private sector equivalents, who are not that numerous at the K-12 level.

So, according to OECD data reported by the New York Times for 2007, out of 33 OECD countries, the US is #26 in pay per GDP for primary school teachers with 15 years of experience. No, we are not overpaying our teachers, not at all.

OTOH, out of 18 countries listed for 2007, US general practitioners are #1 in pay per GDP. Big surprise.

While teachers are more likely to be publicly paid in all of these countries, doctors get a higher proportion of their pay privately in the US than in these other countries, although a substantial proportion is public. Yet, as has been widely reported, life expectancy and infant mortality rates in the US are way below those of other high income countries. We overpay our doctors while underpaying our teachers, and more generally there is no reason to believe that publicly paid teachers are somehow ripping off their fellow citizens.

Value of a Statistical Life

Peter mentioned that he wrote a book on the value of a statistical life. I wrote about the subject in two books, neither of which were exclusively devoted to the subject. In The Confiscation Economic Prosperity I showed how the right wing used the concept to lowball the value of regulation.

In The Invisible Handcuffs, I looked at the subject from a different perspective, showing how economists get blackballed for trespassing away transactions into the labor process. Richard Thaler, who did the original research on the subject had the good sense to reject the idea. His adviser would not talk with him after that.

I think both approaches are interesting. Maybe you will take a peak.

Ground Zero For American Labor: Madison, Wisconsin

I am watching the Ed Show, which is coming out of my hold hometown of Madison, Wisconsin. Big crowds are at the Capitol Square. Not sure how many were out today, but there were 30,000 yesterday. They are out to protest a completely unreasonable move by the new Republican Governor, Scott Walker, to eliminate collective bargaining for state workers. He claims that there is a budget crisis, which is wildly exaggerated, and has made no effort to negotiate with the workers. Both houses of the legislature went Republican in November, and he is trying to ram this change through, threatening to bring out the National Guard. But there has been a rising and peaceful demonstration against this. In response, 14 Dem state senators have left the state, causing a failure of quorum and blocking the move (they were led by Fred Risser, in the state senate since 1956, now the longest serving legislator in the US, who is completely articulate and on top of things).

Make no mistake, Ed Schultz is right. This is of significance across the country. The move in Wisconsin is the front edge of a major battle to crush the US labor movement. This is ground zero for American labor. There are apparently a few moderate Republicans in the senate holding back from backing Walker's plan, but so far Walker has not negotiated. We shall see what happens, and it is very important, whatever the outcome.