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August 5, 2010

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"The Enthusiasm Gap"

Posted: 05 Aug 2010 01:08 AM PDT

Robert Reich tries to motivate the Democratic base:

The Enthusiasm Gap and You, by Robert Reich: A friend whom I'll call David raised a ton of money for Democrats in 2008 and now tells me they can go to hell. He's furious about the no-strings bailout of Wall Street, the absence of a public option in health reform, financial reform that doesn't cap the size of banks or reinstate the Glass-Steagall wall between investment and commercial banking, and a stimulus that was too small to do much good but big enough to give Republicans a campaign issue. He's also upset about tens of thousands of additional troops being sent to Afghanistan, a watered-down cap-and-trade bill that's going nowhere, and no Employee Free Choice Act. David won't raise a penny this fall and doubts he'll even vote. "I busted my chops getting them elected, and they caved," he fumes. ...

Tea Partiers are getting all the press. But the anger on the left, including much of the Democratic base, is almost as intense.

The pattern isn't new. I remember a gloomy fall 16 years ago when as secretary of labor I traveled around the country trying to rev up the base for the 1994 midterms. I found anger and disillusionment then, too. Of course, Clinton hadn't accomplished nearly as much as Obama. In fact, he'd pushed initiatives like NAFTA that infuriated the base.

When Republicans control Congress or the White House, their base can get restless but doesn't seem to suffer the same disillusionment. Republicans stood by Ronald Reagan in the 1982 midterms and rallied enthusiastically for his re-election in 1984. They were out in force for George H.W. Bush's 1990 midterm as well as George W. Bush's in 2002 and his 2004 re-election. ...

Average Americans are hurting. But their pain isn't coming from government. It's coming from an economy whose benefits are concentrating ever more at the top, whose giant corporations are controlling ever more of our democratic process, and whose costs and risks are becoming ever more burdensome for the middle class and the poor. Public schools, parks, and libraries are closing or reducing hours and staff. Median hourly wages are dropping. Unemployment is at levels not seen in decades; long-term joblessness hasn't been this bad since the 1940s. Social safety nets — unemployment insurance, Social Security, and Medicare — are endangered.

Yet corporate profits are reaching unprecedented levels, and the richest Americans — CEOs, other top corporate executives, investment bankers, and hedge-fund managers — are raking in as much or more than before the Great Recession. ...

I can understand your disillusionment with a president and representatives that seem to bend to the prevailing winds from the right. But if you and David and other progressives wallow in your cynicism we'll be in much bigger trouble as a nation than we are now.

Here's what I learned during my years in Washington: Nothing good happens there unless Americans outside Washington are sufficiently mobilized, energized, and organized to make sure it gets done.

Be angry, but channel your anger toward constructive change. This fall, work for the reelection of politicians, or for candidates to replace them, who support a genuinely progressive agenda. ...

Tax Cuts and the Stimulus Package

Posted: 05 Aug 2010 01:07 AM PDT

Fred Barnes either doesn't realize that just under 40% of the stimulus package was devoted to tax cuts, or he is intentionally misleading people:

Time for Tax Cuts, by Fred Barnes, Weekly Standard: The economic recovery, to the extent there's been one, has stalled. Unemployment remains stubbornly above 9 percent and may go higher. The housing crisis endures. What is President Obama's remedy? More jobless benefits, more money for governors to pay Medicaid bills, more funds for teachers and state and local government jobs. In other words, more of the same.
What ever happened to "bold, persistent experimentation"? ... [W]hy not experiment with tax cuts? It would be a new approach for Obama... But for reasons of ideology and inflexibility, he's stuck on spending as the cure for economic doldrums. ...

Is it possible that he doesn't realize that a sizable chunk of the stimulus package was devoted to tax cuts (many were included to appease Republicans who then voted against the package anyway)? Though he doesn't mention them at all in the article linked above, at one time Barnes certainly knew there were tax cuts in the stimulus package:

The measure had tax cuts, but not ones Republicans believe will spur the economy.

What Republicans believe isn't important, they believe all sorts of crazy things, what matters is the evidence. And the evidence has not been supportive of Republican beliefs (despite the evidence, their faith remains largely unshaken).

Any guess who Barnes thinks should get tax cuts? He doesn't say directly, but he gives us enough of a hint to guess where he stands:

those making more than $200,000 annually ... are exactly the folks most likely to react to tax cuts by investing in the economy and producing jobs.

The Obama stimulus package had $237 billion in tax cuts, and more than $100 billion of those were targeted at lower and middle class households, but Fred Barnes doesn't even acknowledge that (and it's okay if a large component was saved). There were also $51 billion in tax cuts for businesses that he fails to note.

If they aren't the right type of tax cuts, the type that give even more breaks to the wealthy -- even though there's no good evidence to suggest that this does much to generate new economic activity and job creation -- then they aren't worth even mentioning. Barnes does find plenty of space to whine about "Obama ... letting the Bush tax cuts lapse in 2011 for those making more than $200,000 annually," but somehow programs like the HIRE Act passed in June 2010 to provide payroll tax breaks to businesses that hire workers who have been unemployed for 60 days or more doesn't merit a word.

"Is Modern Macro Useful for Development Economics?"

Posted: 05 Aug 2010 01:06 AM PDT

The current generation of standard DSGE models"are not only ill-suited for prime-time policymaking in the developed world, they are also inadequate for the developing-country context":

Is Modern Macro Useful for Development Economics (and Economists)?, by Jamus Lim: One of the interesting byproducts of the global financial crisis has been the induced crisis in the economics profession. More precisely, there has been a minor intellectual crisis in macroeconomic thought...
There is little need to rehash many of the arguments here... However, Narayana Kocherlakota has a recent piece on the contribution of modern macro to economy policy, and perhaps it would be useful to add to his thoughts from the perspective of development economics and developing country policymaking. ...
Kocherlakota highlights three big problems that he sees with the ability of modern macro models to serve policy: (a) a piecemeal approach toward the inclusion of frictions, rather than a coherent strategy toward incorporating them; (b) a general neglect of financial markets;... and (c) a reliance on ad hoc exogenous shocks to create movements in the endogenous variables of the model.
In the context of developing macroeconomies, addressing (a) is not only desirable but central. Frictions are pervasive in the developing world---indeed, one useful way to understand the distinction between a standard versus development economics is to recognize the pervasiveness of informational frictions and market imperfections in developing countries. Useful macro models, therefore, need to explain such frictions above and beyond simple notions of credit constraints and labor market rigidities. We need to be able to account for the severe lack of credit access for micro, small, and medium enterprises, as well as the 20--25 percent unemployment rates common across the developing world. Attributing market failures of this magnitude to an abstract notion of "frictions" simply will not do, since it leaves too many central features of developing economies either unexplained or unsatisfactorily explained.
Bringing in the financial sector is certainly important, especially in light of recent events. But if there is something neglected from DSGE models that is key to development macro, it is the political sector. To some extent, DSGE models have already begun to allow voting mechanisms and legislative processes. But such models remain largely theoretical exercises, with policy implications and suggestions that are frustratingly scant for the degree of complexity their solutions require. Progress in capturing elements of heterogeneity in modern macro is also heartening, since political economy is about the resolution of conflicting preferences and demands. But such models remain at the periphery of the field...
Finally, while resolving (c) would certainly be desirable from an academic perspective, exogenous shocks---even large, unexpected ones---are quotidian in the developing world. If anything, a greater routinization of the open elements of macroeconomies---such as allowing current accounts to be driven by more than just simple consumption smoothing mechanisms, or interest rates to result from an interaction between global rates and domestic credit markets---will go a long way toward making DSGE models useful for developing economy users. With international flows of goods, services, and financial capital so important in many developing countries, permitting the financial account to be largely a residual of real concerns misses much of the manner by which movements in one can drive the other, and vice versa.
The verdict? It would seem that the current crop of modern macro models are not only ill-suited for prime-time policymaking in the developed world, they are also inadequate for the developing-country context. At some level, this is ironic. Developed economies are typically far more complex, with larger and more sophisticated product, financial, and labor markets. If anything, the relatively simple structure of DSGE models should be attractive to developing countries, since they are more likely to be successful in capturing the primary features of these economies. ...

links for 2010-08-04

Posted: 04 Aug 2010 11:05 PM PDT

Green Technology in America

Posted: 04 Aug 2010 07:23 PM PDT

I haven't had a chance to read the comments yet, so maybe this has already been covered, but I think I was a bit too harsh in my last post. I should have placed more emphasis on the need for government to support research and development in areas where the private market under-invests due to one market failure or another, and investment in green technology is certainly one of those areas.

As they say in blogland, that is all.

"Make it in America"

Posted: 04 Aug 2010 12:42 PM PDT

Still on the road, so no time to say much, but this caught my eye:

New Democratic strategy for creating jobs focuses on a boost in manufacturing, by Lori Montgomery and Brady Dennis, Washington Post: President Obama and congressional Democrats -- out of options for another quick shot of stimulus spending to revive the sluggish economy -- are shifting toward a longer-term strategy that promises to tackle persistently high unemployment by engineering a renaissance in American manufacturing.
That approach ... is still evolving and so far focuses primarily on raising taxes on multinational corporations that Democrats accuse of shipping jobs overseas.
The strategy also repackages policies long pursued by the White House -- such as investing in clean energy, roads, bridges and broadband service -- with more than two dozen legislative proposals aimed at developing a plan for promoting domestic manufacturing.
"We know manufacturing produces good jobs, high-paying jobs," House Majority Leader Steny H. Hoyer (D-Md.) said this week as Democrats released a report showcasing small gains in manufacturing since Obama took office. "We have committed ourselves to a long-term agenda aimed at enhancing the manufacturing capabilities in America." ...
Some independent analysts are also skeptical. U.S. manufacturing jobs have been disappearing since 1979, in part because of the heightened productivity of American workers but also because of cheaper labor abroad. During the past decade, the sector lost a third of its workers, falling to 11.7 million last year from 17.3 million people in 1999...
Asked Friday whether Obama will press for more stimulus spending, White House press secretary Robert Gibbs said no. "If you look at the politics of what's going on Capitol Hill right now," he said, "I think we got everything we could."
"Make It in America" offers Democrats a path forward. "It's a way to be prospective instead of retrospective," Democratic strategist Paul Begala said last week, after attending a luncheon for Senate Democrats focused on political messaging. "Every election is about the future, not the past." ...
The seeds of the "Make It in America" campaign were planted earlier this year, when Rep. Mark Critz (D-Pa.) won an unexpectedly large special-election victory by campaigning against tax breaks for companies that move jobs offshore. Then in late June, House Democrats were briefed on a poll conducted this spring for the Alliance for American Manufacturing, which found that voters are anxious about the nation's mounting debt to China. Key voting blocs -- including independents and older people with no college education -- named the loss of manufacturing jobs as a top worry, the survey found.
The poll "crystallized" Democratic thinking, said Rep. Chris Van Hollen (D-Md.), who leads the political committee in charge of electing Democrats to Congress. The poll's findings also helped to rebrand policies the administration was already pursuing, such as a federal restructuring of the auto industry. ...
"We have a vision of how to build a stronger economy," and "Make It in America" is "an essential element," White House senior adviser David Axelrod said. Without federal support for innovations in battery technology for electric vehicles, for example, "those jobs would be to going to China, they'd be going to India. They would not be going to American workers." ...

Gibbs says I think we got everything we could." Perhaps, but why isn't the administration making the point that what they got wasn't anywhere near enough, that more is very much needed, and that it's the Republicans and misguided, so-called centrist Democrats that are standing in the way?

As for Begala's "Every election is about the future, not the past," what about the present? Yes, making people believe the future will be better is important politically, but a long-term strategy devoted to enhancing domestic strategy doesn't do much for the millions that are unemployed right now. It dangles a carrot they might get in the future, but they are hungry now and need more immediate help. We need to worry about the long-run and do our very best to maximize the opportunities to create good jobs, but we also need to help those who are looking for jobs right now, those who can't help but be discouraged by the lousy prospects.

On the "Make It in America" initiative, I have a hard time getting excited about it, and it may leave the administration open to charges of protectionism (though I'm not sure how that charge would play with the Democratic base). I am not a big fan of industrial policy generally, it goes against the instincts that are beaten into economists during their training, but I don't have a better answer to the question of where will the good jobs come from in the future. If the intent and outcome of these policies is to level an unfair playing field, or to correct some problem with a particular market, that is one thing. I would support that unequivocally. But the practical outcome is one where many politically connected businesses are able to use this as a form of protectionism. However, with that said, Dani Rodrik has convinced me that industrial policy may be helpful for developing countries (debate on this), and I suppose there is a way to extend the argument to developing industries, e.g. those in the energy sector. But to me it's a bit of a stretch.

I'm glad the administration finally seems to be getting that it needs to worry about jobs, and that it needs to make that worry -- along with an actual fight for job creation policies -- as public as possible. But the particular strategy the administration has adopted is, to me, too focused on the long-run to suit our immediate needs, and I have doubts about how effective such long-run policies will be.

[I guess I said more than I expected during my lunch stop. Since I'm being pessimistic and wearing a mostly neoclassical hat, let me also give a more optimistic view from the EPI: "Make it in America" bills will advance U.S. manufacturing.]

Update: It's only a fraction of what is needed, but it's something: Senate Vote Clears Way for $26 Billion in Aid to States.

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