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June 9, 2010

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Latest Posts from Economist's View


Where Will the Good Jobs Come From?

Posted: 09 Jun 2010 02:34 AM PDT

I have emphasized short-run job creation quite a bit recently, and I have noted, implicitly at least, that we shouldn't be too picky about the quality of the jobs that are created. Most jobs will do.

But in the long-run the quality of jobs matters a lot, and when the private sector finally begins reabsorbing the unemployed, the underemployed, and the discouraged, we want people to be able to find jobs with decent wages and benefits -- jobs that are as good or better than the jobs they had before.

But where, exactly, will those jobs come from? I wish I had the answer.

Education is part of it, better education means better jobs on average, and it's easy to imagine a substantial fraction of the population benefiting from an educational advantage. So I won't back off prior calls to improve education at all levels.

But even if we substantially improve education, it won't fully solve the problem. There will still be a need for quality jobs that are not all that dependent upon knowledge based skills. However, it's harder to imagine an emerging set of industries that will provide the large number of quality jobs that we need to replace those lost from industries in decline.

If these jobs fail to be created in the next years and decades, the result will be an ever widening gap in the distribution of income with, as now, a group at the top doing relatively well, and everyone else treading water at best.

Is it overly pessimistic to worry that we may be headed in that direction?

"An 8-fold ROI for any Government is Quite Substantial"

Posted: 09 Jun 2010 02:07 AM PDT

Here's an unexpected argument for medically assisted reproduction:

Is IVF good value for money? Why funding of assisted reproduction is sound fiscal policy, EurekAlert: Children conceived by medically assisted reproduction (MAR) have fiscal implications for government both in terms of future government spending and tax revenue. Based on public funding to conceive a MAR child -- after factoring in education, future health and pension costs, and future tax contributions of this child - the discounted net tax revenue (the difference between future government spending and tax revenue) of a child born in 2005 is roughly €127,000 in today's value.
Considering an average treatment cost of approximately €15,000 to conceive an IVF-child, this represents an 8-fold return on investment (ROI) for governments.1 ...

However:

The European Society of Human Reproduction and Embryology (ESHRE) Task Force on 'Reproduction and Society' reviewed the economics of MAR to evaluate the benefits of funding of MAR for society and to inform policy makers... So far very few studies exist that have evaluated MAR children in terms of fiscal implications, and although an 8-fold ROI for any government is quite substantial, the ESHRE Task Force calls for caution 'these results need to be applied in a policy framework and in the broad context of other governmental policies. The creation of a child leads to increased government expenses in the short-term, and the ROI in future taxes is not received until more than 30 years later once these children enter the workforce.' ...

Their bottom line:

The authors conclude that ... MAR ... can make economic sense...

links for 2010-06-08

Posted: 08 Jun 2010 11:05 PM PDT

"Make Up Your Own Facts"

Posted: 08 Jun 2010 12:06 PM PDT

Barry Ritholtz takes on Art Laffer's recent opinion piece in the WSJ arguing that we're headed for economic disaster if the Bush tax cuts for the wealthy are allowed to expire:

Art Laffer: Make Up Your Own Facts Here, by Barry Ritholtz: To a man whose only tool is a hammer, pretty soon everything begins to look like a nail. I couldn't help but be reminded of that aphorism as I read the most popular article on WSJ.com yesterday — Tax Hikes and the 2011 Economic Collapse — a screed on the Laffer curve and Supply Side Economics by none then than Art Laffer.

If either the WSJ OpEd page or Mr. Laffer had foreseen the most recent economic collapse we just lived through, or the credit crisis, or the housing collapse, or the derivatives problem, or any of the other economic disasters that befell the country I might give their warnings some credence. (I give credit to Laffer for discussing the possibility of a recession in Feb 2008 — way ahead of most right wing economists) But considering all this occurred with their man in the White House for 8 years, and they somehow missed it, leads me to one of two conclusions: Either they are extremely bad economists, or they are extremely partisan observers. ... Let's not simply assume they are bad economists — instead, this looks like just another money-losing partisan screed.

In his OpEd, Mr. Laffer confuses causation with correlation, ignores market history, makes spurious argument, and simply make up crap as he goes along.

It is, to any thinking person, an embarrassment. ...[continue reading]...

In addition to the choice between keeping the tax cuts in place and letting them expire, another option is to shift the tax cuts from high income to lower income individuals.

The Fed Should Raise Rates Because Brazil has Low Unemployment?

Posted: 08 Jun 2010 11:07 AM PDT

Wow. Raghuram Rajan says the Fed should raise rates because hiring in Brazil is robust:

Moreover, even if corporations in the US are not hiring, corporations elsewhere are. Brazil's unemployment rate, for example, is at lows not seen for decades. If the Fed were to accept the responsibilities of its de facto role as the world's central banker, it would have to admit that its policy rates are not conducive to stable world growth.

The Fed has made it very clear that it worries about conditions in other countries only to the extent that they feed back upon conditions within the US. That is, while I think US should consider the welfare of other countries when implementing policy (though in this case, the effects of low interest rates on Brazil would not be much, if any, of a concern), the Fed has made it clear that's not how it operates. It's charter has different instructions and it must abide by them. Legislators would not stand for the Fed raising rates based upon conditions in Brazil and other countries in any case, that would be a sure way to lose independence.

Some parts of the essay are OK, e.g. the parts about the need to modernize the social safety net, but for the most part it is a complaint about the Fed holding rates too low:

Equally deleterious to economic health is the recent vogue of cutting interest rates to near zero and holding them there for a sustained period. It is far from clear that near-zero short-term interest rates (as compared to just low interest rates) have much additional effect in encouraging firms to create jobs when powerful economic forces make them reluctant to hire. But prolonged near-zero rates can foster the wrong kinds of activities.

His main arguments against low rates are that they distort investment toward high risk assets:

For example, households and investment managers, reluctant to keep money in safe money-market funds, instead seek to invest in securities with longer maturities and higher credit risk, so long as they offer extra yield. Likewise, money fleeing low US interest rates (and, more generally, industrial countries) has pushed up emerging-market equity and real-estate prices, setting them up for a fall (as we witnessed recently with the flight to safety following Europe's financial turmoil).

The problems in Greece and other countries were caused by low interest rate policies? I'll have to think about that, but with respect to the flight into long duration, risky assets he discusses, I thought the current problem was an excess demand for safe assets, not an excess demand for risk.

He is also not much of a fan of fiscal policy:

Much of what is enacted as stimulus has little immediate effect on job creation, but does have an adverse long-term effect on government finances. For example, the 2009 stimulus package enacted by the Obama administration had many billions of dollars devoted to cancer research, though such research employs few people directly and is spent over a long time horizon – far beyond that of even a prolonged recovery.

I think it's a bit disingenuous -- and perhaps telling that he doesn't have much of an argument -- that he points to such a small portion of the stimulus package as his big example (the spending for cancer research was $1.26 billion of the $787 billion package). He is also making an assertion about "little effect on job creation" that is contrary to the evidence. The CBO says (and these numbers are consistent with a wide range of other estimates) the stimulus package generated 2 million jobs (1.2 million to 2.8 million is the range they report). It could have been better with a larger, better constructed package, but 2 million is far from "little immediate effect."

We need more fiscal policy not less, and more aggressive monetary policy to combat unemployment, not an increase in rates. Monetary policy should stay on hold if more aggressive policy is not possible for political reasons or because of objections within the FOMC, but we should not give in to the immediate increase in rates that Raghuram Rajan and others are calling for. That's not the best possible path to recovery.

Lane Kenworthy: Social Spending and Poverty

Posted: 08 Jun 2010 09:00 AM PDT

Recent research suggests that social spending in the US is similar to or exceeds the expenditures in Denmark and Sweden, all things considered. But where does this spending go? Who are the main beneficiaries? The disadvantaged, or other groups?:

Social spending and poverty, by Lane Kenworthy: It's commonly thought that a market-liberal political economy is best for the rich while a social-democratic one is best for the poor. Some recent research suggests reason to question this. Analyses by Willem Adema of the OECD, by Adema and Maxime Ladaique, and by Price Fishback conclude that the quantity of social expenditures in the United States is similar to or greater than in Denmark and Sweden, two nations long considered large-welfare-state exemplars.*
How so? Government social transfers account for a much larger share of GDP in Sweden and Denmark. But the U.S. government distributes more benefits in the form of tax breaks rather than transfers than do the two Nordic countries; Denmark and Sweden tax back a larger portion of public transfers than the United States does; private social expenditures, such as those on employment-based health insurance and pensions, are greater in the U.S.; and America's per capita GDP is larger.
The standard indicator of social policy effort is gross public social expenditures as a percentage of GDP. Denmark and Sweden are much higher than the United States on this measure.
Now shift to net (rather than gross) public and private (rather than public alone) expenditures per person (rather than as a percentage of GDP, with purchasing power parities used to convert Danish and Swedish kroner into U.S. dollars). According to the calculations by Adema and Ladaique (Fishback's are similar), we get a very different picture. By this measure the U.S. is the biggest spender.
This looks like good news for the poor in the United States. Is it? Unfortunately, no. These adjustments change the story with respect to the aggregate quantity of resources spent on social protection in the three countries, but they have limited bearing on redistribution and on the living standards of the poor.
Begin with tax breaks. Researchers count as "social" those designed to provide support in circumstances that adversely affect people's well-being. In the United States these disproportionately go to the affluent and the middle class. The chief ones are tax advantages for employer and employee contributions to private health insurance and private pensions. These do little to help people at the low end of the distribution, who often work for employers that don't provide health or retirement benefits. One valuable tax benefit for low-income households is the Earned Income Tax Credit (EITC), but it is already included in the standard OECD data on government social expenditures. Another is the child tax credit, but it is non-refundable and so of limited value to low-income households, many of whom don't owe any federal income tax.
Next consider tax "clawbacks" in the Nordic countries. Public transfer programs in Denmark and Sweden tend to be "universal" in design: a large share of the population is eligible for the benefit. This is thought to boost public support for such programs. But it renders them very expensive. To make them more affordable, the government claws back some of the benefit by taxing it as though it were regular income. All countries do this, including the United States, but the Nordic countries do it more extensively. Does that hurt their poor? Very little. The tax rates tend to increase with household income, so much of the tax clawback hits middle- and upper-income households.
What's the impact of private social spending? In the U.S. this accounts for roughly two-fifths of all social expenditures. It consists mainly of employer contributions to health insurance and employment-based pension benefits. Here too the picture changes a great deal on average, but not much for the poor. Employer-based health insurance and pension plans reach few low-income households.
So how well-off are the poor in the United States, with its "hidden welfare state," compared to social-democratic Denmark and Sweden? One measure is average posttransfer-posttax ("disposable") income among households in the bottom decile of the income distribution. Here are my calculations using the best available comparative data, from the Luxembourg Income Study (LIS). (The numbers are adjusted for household size. They refer to a household with a single adult. For a family of four, multiply by two.)
This is a pretty big difference, not in America's favor. ...
Helping the poor is not, of course, the only thing we want from social spending. But it surely is one thing. The United States spends more money on social protection than is often thought, yet that spending doesn't do nearly as much to help America's poor as we might like.
For those interested, I'm finishing up a book manuscript that looks at this issue and related ones in more detail.

__________

* Related research: Adema, Garfinkel-Rainwater-Smeeding, Hacker, Howard. Blog commentary: Fishback, Salam, Schulz, Wilkinson, Yglesias.

I shortened this a bit, there's more in the original post. I'm wondering what this implies about all those studies that compared growth rates in Europe and the US and then, based upon a misleading measurement of social expenditures, concluded that higher social spending hurts growth. I suppose they could argue that higher spending on the poor rather that the middle class or affluent is harmful, or that it is due to differences in factors such as clawbacks (i.e. taxing the rich), but those explanations don't ring very true to me.

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