Cutting Costs by Ending Private Military Contracts

A few years ago Peter W. Singer wrote on Outsourcing the Fight:

In 1992 a relatively little-known, Texas-based oil services firm called Halliburton was awarded a $3.9 million Pentagon contract. Its task was to write a classified report on how private companies, like itself, could support the logistics of U.S. military deployments into countries with poor infrastructure. Conspiracy theories aside, it is hard to imagine that either the company or the client realized that 15 years later this contract (now called the Logistics Civilian Augmentation Program or LOGCAP) would be worth as much as $150 billion.

The Secretary of Defense back then – Dick Cheney – went onto be the CEO of Halliburton. Whatever happened to that chap?

Michael Froomkin reports on a study that dares to suggest that such privatization actually may increase costs (hat tip to Mark Thoma).

The good news is that a couple of important players may be listening:

Feinstein argued that the crucial parts of intelligence operations - the collection, exploitation and analysis of information - are "inherently governmental functions that should be done by government employees at one-third less the cost per employee." One week into his new role as CIA director, David Petraeus testified Thursday that contractors are at the top of his list of potential cuts in the new era of belt-tightening.

Is Social Security Worse Than A Ponzi Scheme?

Since Rick Perry declared Social Security to be a Ponzi scheme, much debate has erupted, with some pointing out that even such SS supporters as Paul Samuelson (in 1967) and Paul Krugman (in 1996) described it as a "Ponzi scheme that works." See http://marginalrevolution.com/marginalrevolution/2011/09/is-social-security-a-ponzi-scheme.html for more detailed discussion. Samuelson said that "The beauty of social insurance is that it is actuarially unsound," and then argued that it was OK to promise current workers more after they retired than they were paying in due to the high growth rate of the economy and the growing population. As all that slowed down, the system was adjusted in 1983 to have people pay in more and retire later, thus putting off the date of "unsustainability." The argument that SS is a Ponzi scheme is based on the fact that current recipients are past payers and rely on new recruits to pay, which was a part of the original scheme by Charles (Carlo) Ponzi in 1919-20, although varying in an important way from Social Security.

Now, it has come to pass that while I have not actually seen any blogposts on this, some on Facebook who do blog, such as libertarian Steve Horwitz, are declaring that not only is SS like a Ponzi scheme, it is actually worse than one due to being mandatory. Even though participants in Ponzi schemes are being defrauded with phoney information, they participate voluntarily (and in the case of the original scheme got their money back plus 50% if they moved fast enough). That SS is not voluntary thus supposedly makes it worse, given that supposedly people are being deceived about its "true nature," although anyone is free to ignore the rantings of various politicians and read the Social Security Administration Trustee reports, which are not at all fraudulent, even if they are not always all that easy to understand. Is there anything to this?

I think it may be worth revisiting the original Ponzi scheme to understand crucial differences, with some similarities. The main one is indeed that future current people pay in and then they receive benefits paid in by later payers. That it is mandatory is what guarantees that there will be payments in the future, even if some of this must be adjusted from time to time as growth rates and so on may change. Otherwise it is different, and not just because of the lack of fraud, even though people are amazingly ignorant about the nature of SS, including many young people believing that if the system goes "bankrupt," they will get nothing, whereas according to the mainline projection by the SSA, such a bankruptcy would lead to recipients in 2037 receiving on the order of 120% more in real terms than current recipients, a fact known to very few people apparently.

The key to Ponzi's original scheme was that there was no ongoing source of income beyond the upfront contributions of new recruits (who were promised 50% returns within 90 days). Ponzi claimed he was making the money in arbitraging foreign currencies, but he never engaged in a single such transaction (although he did buy two firms with the money). Once people put money in, they put no more in, and could only get money from new recruits joining. In the case of SS, it is not just some upfront payment that people make and then sit back to receive. They keep on paying in through the taxes, even if this is mandatory. But then all taxes are mandatory.

In fact, Social Security really is best described as "social insurance," the term first used by von Bismarck when he first proposed it in Germany in 1881 and used by FDR when he proposed it in 1935. Yes, it has some differences with private insurance, and is at least partly a welfare plan for old people dressed up to make it look like an investment, but it does indeed serve the insurance function of guaranteeing people against falling below a certain income level when they are old.

Indeed, this is worth keeping in mind when people start going on about how its returns are not as good as other investments (maybe), an issue in some sense aggravated by Samuelson's old remarks from a different era, when in fact there were positive returns for one paying in (at least on average, obviously depending on how long one lived). In private insurance one does not expect on average to earn a positive return, which is how private insurers make a profit. Some make a positive return, but most do not. They are paying for peace of mind, and that is what one is getting from Social Security.

In any case, the discourse on this topic has become severely degraded. I hope that this can be overcome in the near future, and that people can be better informed about what really is going on with the system.

The Three Components of Investment Demand – How Barro & Mankiw Are Talking Past Baker and DeLong

Dean Baker is not happy with something Greg Mankiw wrote:

The most volatile component of G.D.P. over the business cycle is spending on investment goods. This spending category includes equipment, software, inventory accumulation, and residential and nonresidential construction. And the recent economic downturn offers this case in point about the problem: From the economy’s peak in the fourth quarter of 2007 to the recession’s official end, G.D.P. fell by only 5.1 percent, while investment spending fell by a whopping 34 percent.

Mankiw then uses this observation to promote a pro-business agenda as if restoring investment demand was the key to having a vigorous economic recovery. Robert Barro is making a similar argument (something we’ll come back to shortly):

The administration’s $800 billion stimulus program raised government demand for goods and services and was also intended to stimulate consumer demand. These interventions are usually described as Keynesian, but as John Maynard Keynes understood in his 1936 masterwork, “The General Theory of Employment, Interest and Money” (the first economics book I read), the main driver of business cycles is investment. As is typical, the main decline in G.D.P. during the recession showed up in the form of reduced investment by businesses and households. What drives investment? Stable expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on. And employment is akin to investment in that hiring decisions take into account the long-run economic climate. The lesson is that effective incentives for investment and employment require permanence and transparency. Measures that are transient or uncertain will be ineffective

.

Dean objects making a point that Brad DeLong also made:

American businesses are not scared and are not pulling in their horns--rather, they are investing for the future at a furious rate. Business investment in equipment and software is back to its pre-recession peak--it is investment in residential construction that is depressed

To be fair to Dr. Mankiw – he knows the part about depressed residential investment and he argued that non-residential investment is also lower than it was pre-recession. Then again: non-residential investment includes both business investment in equipment and software which has recovered and nonresidential construction, which has not recovered as well.

Paul Krugman is not at all pleased with this Barro-Mankiw argument noting:

investment is high when demand is strong and firms see a good reason to expand capacity. So the best thing we could do to spur business investment would be to get a recovery going by whatever means necessary, including fiscal stimulus.

In a way, the fact that business investment is equipment and software has recovered even though the economy has not is amazing. And I wish these debaters would focus on what is going on with respect to nonresidential construction. But I have a separate question for Dr. Barro who writes:

I propose a consumption tax, an idea that offends many conservatives, and elimination of the corporate income tax, a proposal that outrages many liberals.

This proposal strikes me as one that would be useful if the problem were too little nationals savings but my read of the current macroeconomy is that we have more national savings than investment even at very low interest rates. Is Dr. Barro really saying that if we save more we magically invest more? If so, I’m wondering how carefully he actually read the General Theory.

The Ideology of Creditor Countries, Starting with Germany

What are Germans supposed to make of this widely-reported analysis by USB?

Even if a stronger country like Germany were to leave [the Euro], UBS still thinks it is going to set every German back by about EUR6,000 to EUR8,000 in the first year and then around EUR3,500 to EUR4,500 per person in every year thereafter. A stronger euro-zone country wouldn't face sovereign default but it is still vulnerable to corporate default, recapitalization of the banking system and a collapse of international trade.

By contrast, each German would only have to cough up EUR1,000 just once to bail out Greece, Ireland and Portugal entirely, according to UBS's analysis.

If it were just a matter of self-interest, German politicians would be falling all over each other, promising to bail out the indebted European peripherals.  But this would contradict the fundamental world view shared by nearly every voter: saving is good and borrowing is bad.  The indebted countries borrowed too much, enjoying their decade of fun, and it would be immoral to ask the upright, productive citizens of the wealthier north to foot the bill.  Wouldn’t this just encourage even worse behavior in the future?

Put morality aside for a moment.  The economically rational solution is to wipe out the debt overhang as rapidly as possible, spreading the costs on the basis of ability to pay and the maintenance of political cohesion.  The peripherals, and especially their wheeler-dealer classes, would take a hit, and so would banks and investors in the north.  Taxpayers in the wealthier countries would have to dig into their pockets to recapitalize (and possibly take possession of) financial institutions unable to cope with big writedowns.  All of this would be done quickly, with the understanding that, once growth resumes, it will take only a few years to make everyone better off again.  After the mess has been cleaned up attention can be given to new rules, above all transparency, that will make it less likely that the worst credit excesses of the past decade will be repeated.

So much for rationality.  It is ideology that bellows the loudest, against the paralysis of a fragmented political system in Europe that makes it difficult to agree on any plan that entails big-stakes cost-sharing.

I can understand why Keynes is an epithet in German political discourse.  If you ask, people will say he was too tolerant of inflation, although Skidelsky’s biography makes it clear that Keynes could be an inflation hawk when hawks were needed in the aviary.  No, Keynes’ real sin, and his most radical element, is that he saw the credit relationship in morally neutral terms.  For him, lending and borrowing was not about vice, virtue or any other theological category.  It was simply a means, sometimes well-undertaken, sometimes not, for shifting resources to better uses, meeting human needs and promoting the development of economic life.  From The Economic Consequences of the Peace to the Bancor plan, Keynes called for a balanced, burden-sharing approach to credit crises: lenders and borrowers alike should adjust to cast off the effects of a bust and make possible a return to growth.  The wealth of the creditors may give them more clout, but there is no reasonable basis for the argument that those who borrowed foolishly must be squeezed to the limit, while those who lent foolishly should be made whole.

(In fairness, German political leaders, from Merkel and Schäuble on down, have made it clear that banks holding the sovereign debt of peripherals should take a hit—but their demands on the indebted countries make it clear that the balance of hittedness should fall mainly on the south.)

Keynes would not be surprised by the UBS numbers.  He would be horrified that his grandchildren (or their grandchildren), who should be enjoying a higher standard of living than any he had known, were still in the grips of atavistic economic doctrines.

Did the “Good Obama” Step Forward in the Jobs Speech?

So one would think after reading the opinions of party elders canvassed by the New York Times this morning.  It’s as though he has Harry Truman perched on one shoulder and Jimmy Carter on the other, and it was the Truman side that drafted his latest speech.

If only he keeps listening to the Truman avatar and eschews the other, wimpy one, say the elders, he has a chance to get reelected.

But recall this vaunted jobs program: it is too small by a factor four or five to close the demand gap, it relies more on tax cuts than spending, and it falls far short of stopping the loss of state and local public jobs.  Even its strongest supporters admit that it would be too little, too late to reverse the Great Recession if the Republicans allowed it to pass. Obama’s fighting side is apparently pretty soft too.

The silver lining in all of this is that Jimmy Carter has turned out to be a fantastic ex-president.

Political Economy and Financialization

This post is an attempt to explain in a little more detail what I have been saying (for instance, here and here) about the political economy of the Great Recession and its perverse response.  Of course, that would suggest an article or even a book, but who has time for that?  So a blog post will have to do.

Romney on Free Trade and the Trade Adjustment Assistance Program

The Trade Policy section of Mitt Romney’s Believe in America argues that:

Open markets have helped make America powerful and prosperous. Indeed, they have been one of the keys to our economic success since the country was founded … Every president beginning with Ronald Reagan has recognized this and acted upon it. President Reagan signed America’s first Free Trade Agreement (FTA), with Israel in 1985. George H. W. Bush and Bill Clinton both worked to negotiate and implement the North American Free Trade Agreement (NAFTA), which went into effect in 1994. George W. Bush successfully negotiated eleven FTAs, encompassing sixteen countries … Of course, opening markets must be a two-way street. For America truly to benefit in global commerce, we need to ensure there is access for our entrepreneurs to sell their high-quality products and services. This means that agreements must protect intellectual property from those who would violate the rules of free enterprise. Too often, trade agreements do not adequately address these concerns. Even when they do, actual enforcement lags.

Romney then accuses President Obama of stalling to put forth Free Trade Agreements with 3 nations. Let’s step back from his rhetoric to correct the record on several matters. President Reagan’s track record on free trade was not as great as Mr. Romney pretends. Neither was the free trade track record of George W. Bush.

As far as the delays in putting forth the most recent Free Trade Agreements, Ron Kirk notes:

We have also been insisting that Congress include the other element of our trade package – the Trade Adjustment Assistance program, which is a safety net for workers who, through no fault of their own, may be displaced from their jobs [because of increased imports]. Congress allowed that program to expire in February, and we've been working with them on a way to get it renewed. Democrats would prefer to move on the Trade Adjustment Assistance program first. The Republicans have insisted that we move on the [free trade agreements] first and do Trade Adjustment Assistance later. We've been trying to find a way to move everything forward at the same time. That's been the holdup.

Mr. Romney notes that this may be the holdup but then criticizes the program as if it were some sort of government dole to labor unions. Protection for corporations (they are people too) but not for workers – go figure!

But let’s recall that it was President Kennedy that first proposed this program as part of the “Kennedy Round”, which proposed to sharply curtail tariffs. When Mr. Romney claims that the White House recognized the benefits of open markets in the 1980’s, he was only off by 20 years.

Believe in America Is Not Going to Create 11 Million New Jobs by 2016

Did I really hear Mitt Romney say his economic plan will create 11 million new jobs in 4 years and witness 4 percent growth per year during this period? This story confirms as much:

Republican presidential candidate Mitt Romney announced his agenda for job creation Tuesday with a bold goal at its core: 11 million new jobs during the first four years of a Romney administration ... Specifically, Romney sketched his vision that the economy would grow at 4 percent a year under his watch, if elected in 2012. That would be significantly faster growth than the 3.6 percent pace predicted recently by the Congressional Budget Office for the years 2013 to 2016 (essentially the years of the next presidential term). And many economists say that even 3.6 percent growth may be an optimistic forecast.

This may sound very ambitious to some but even if the U.S. economy witnessed this type of GDP and employment rebound, we would still be far from full employment. During each of Clinton’s two years in the White House, we saw employment grow by more than 9 million per term as real GDP growth did average about 3.6 percent per year. When Clinton became President, the employment to population ratio was 61.4 percent. It is only 58.2 percent now. Romney’s goal seems to be to get this back to around 61 percent by the end of 2016. Not exactly believing in America!

Here is the plan. Besides a lot of Obama bashing, it has the usual GOP talking points about balancing the budget as we cuts taxes, regulations, and trade barriers. Glenn Hubbard wrote the Forward, which includes this:

America needs to get its growth groove back. And getting it back is about not just incomes, but jobs as well. To bring the unemployment rate back to its pre-financial-crisis level by the end of the next president’s first term would require real GDP growth averaging 4 percent per year over that period. That is an aggressive goal, but great progress can be made.

Growth groove? Of course, he notes that the 4 percent is an “aggressive goal” without predicting that any of these 59 proposals will actually achieve this goal.

Gold and Oil

Paul Krugman has a post on gold prices.  The basic idea is that if you have Hotelling pricing of gold (price rising at the rate of interest so that it reaches a backstop level at the moment the existing supply is exhausted), a fall in interest rates implies a higher initial price (initial effect) and a flatter price path (subsequent effect).  Since interest rates are in fact falling, the expectation is that gold prices should rise in the current period but remain a lousy investment for the future, since the downside potential for interest rates is itself being depleted.  One would have to flesh out this model with some parameters to see how well it performs for gold, but what about other commodities?  In particular, what about oil?

The Shrinking Public Sector

Matt Yglesias makes an important observation about the dismal recent labor market statistics:

Looks like we had 17,000 thousand new private sector jobs in August, which were 100 percent offset by 17,000 lost jobs in the public sector. The striking zero result should galvanize minds, but it’s worth noting that this has been the trend all year. The public sector has been steadily shrinking. According to the conservative theory of the economy, when the public sector shrinks that should super-charge the private sector. What’s happened in the real world has been that public sector shrinkage has simply been paired with anemic private sector growth.

Our graph shows total government employment since January 2007 as well as employment by state and local governments over the same period. Total government employment has actually been declining since the month Barack Obama became President. While Federal employment has risen very slightly on net during this period (it too has been falling of late), employment by state and local governments has declined by 650,000 over this same period. As far as the conservative theory that Matt alludes to, alas private employment has not risen to offset this Herbert Hoover fiscal policy.

The Free Market: Looting, Shooting, and Polluting

I uploaded a Youtube post. I used up my time before I was able to pull everything together. Here is the url:

http://www.youtube.com/watch?v=cuznKDUbemw

Schäuble: Bankrupt

Amazing.  Schäuble’s opinion piece in the FT is titled “Why austerity is only cure for the eurozone”, and his argument is

Piling on more debt now will stunt rather than stimulate growth in the long run. Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness – they need to start delivering on these now.

and

There is some concern that fiscal consolidation, a smaller public sector and more flexible labour markets could undermine demand in these countries in the short term. I am not convinced that this is a foregone conclusion, but even if it were, there is a trade-off between short-term pain and long-term gain. An increase in consumer and investor confidence and a shortening of unemployment lines will in the medium term cancel out any short-term dip in consumption.

Cutting employment and income will increase confidence in future employment and income—did I hear that right?  That must be why there is such a positive market reaction every time a new round of statistics points toward contraction.

And, incidentally, how are all the world’s governments going to simultaneously increase competitiveness?

It’s unfortunate, to put it mildly, that our economic futures depend on people like this.

Environmental Regulation and Jobs

The short answer is that it’s the wrong question.  Now for the longer answer.

A Further Sign of Academic Idiocy

I proposed a guest speaker for this semester. Our chair told me that I may not be able to extend the invitation. The University is exploring the possibility of charging for the use of rooms. I am reminded of Charles Davenant, one of the subjects of my new book, who wrote, "Everyone is on the scrape for himself, ... each cheating, raking, and plundering what he can, and in a more profligate degree than ever was known." Davenant 1701, pp. 300-301. At least the restrooms are still free for the moment.

Cutting Teacher Compensation: A Demand and Supply Model

Eric Kleefeld reports:

about double the number of Wisconsin public school teachers have retired this year when compared to the past two years, before Scott Walker's anti-union law -- which stripped away most collective-bargaining rights for public-sector unions, and required greater contributions by public employees for their healthcare and pensions -- was ever proposed or much less passed."It wouldn't make sense for me to teach one more year and basically lose $8,000," said Green Bay teacher Ginny Fleck, age 69, who has 30 years of experience.

I know some of these Republican governors cite the fact that total compensation for public school teachers is above the national average for all workers, but it is also true that their compensation is below the national average for college educated workers. A case can be made that school teachers were already undercompensated. Cut their compensation and the textbook demand and supply model would predict a shortage of workers as we move along the supply curve. OK – there may be unemployed workers in other sectors ready to take these vacancies but:

Many of these positions will be filled, though no comprehensive statistics are available. But the issue does remain that the school systems have spontaneously lost an unusual amount of total experience. "You can't get experience through a book, you've got to teach," said Green Bay teacher C.J. Peters, who for her own part has retired after 24 years. "I think a lot of talent has been lost."