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September 4, 2011

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Posted: 03 Sep 2011 10:01 PM PDT

It's *Not* Regulatory and Tax Uncertainty

Posted: 03 Sep 2011 09:36 AM PDT

Gary Burtless explains why the complaint from conservatives that regulatory and tax uncertainty is holding back the economy doesn't make sense (via email):

A couple of hours after talking to an ABC correspondent about the woeful job numbers and what might be done to improve them, I was in the Bloomberg TV studios debating a guy from Heritage. He went on for several minutes about the damage being done by high taxes, excess regulation, business "uncertainty" about future tax hikes and regulatory burdens.  I asked Bloomberg's host whether he was aware that corporate profits relative to national income had just hit a 60-year peak?  He had heard rumors to that effect.  Was he aware that taxes on corporate earnings were at a 60-year low?  The Heritage guy had heard that might be the case.
Then why was uncertainty about taxes and the future burden of the Affordable Care Act holding back business investment and hiring right now?  If managers thought taxes or regulatory costs might go up in the future, wouldn't it make sense to take advantage of today's low taxes and lower burdens to invest and hire today?  According to the "uncertainty" argument, businesses are fearful they might face high taxes and extra health costs in 2016 or 2018.  Shouldn't they expand hiring right now and scale back employment when they actually face higher costs (if they ever do)?
The "tax uncertainty" and "regulatory uncertainty" arguments would make more sense if, say, taxes were already high and might be going higher or regulatory burdens were heavy and might be getting heavier. But when taxes are at a 60-year low and the regulations are pretty much the same as they were in the 1990s boom, the argument makes no sense at all.  As we used to say down on the farm, you should "make hay while the sun shines." In other words, if you think it's going to rain later in the week, it strengthens the case for cutting and baling right now.
The odd thing is, when businesses are asked why they're not expanding, "high taxes" and "heavy regulatory burdens" and "tax uncertainty" don't feature as prominent answers.  They mostly say they don't see good prospects for extra sales.  But right-wing economists have their talking points, even if they make little sense, and they're sticking with 'em.  Another of their favorites is "... executives tell me they can't find good candidates for the job openings they have."  Don't get me started on that one.

This McClatchy story also debunks the regulation and uncertainty argument.

[On the point that "executives tell me they can't find good candidates for the job openings they have," that  is not necessarily evidence for structural rather than cyclical problems, see here. As I explain, what this generally means is that at the wage the business can offer in a depressed economy, it can't find the workers it needs. If demand for the product was higher, i.e. if the economy was doing better, the firm could offer a higher wage and it could get people to relocate, switch jobs, etc. But workers are unwilling to do so at the low wage the firm is able to offer.

That story -- the wage is too low to attract workers -- is evidence of cyclical, not structural unemployment. Thus, complaints from businesses that they can't find the workers they need at the wage they are able to offer does not necessarily tell us that structural issues are holding back the economy. Lack of demand can cause the same problems, and many of these so-called structural problems disappear when the the economy is booming.]

The Austerity Economy

Posted: 03 Sep 2011 08:28 AM PDT

I've been meaning to raise this point, so I'm glad Paul Krugman saved me the effort. Is it an accident that just as the stimulus package is waning, the economy is stalling?:

The Austerity Economy, by Paul Krugman: Do the dismal economic numbers really reflect the turn to fiscal austerity? I keep hearing people say no, because austerity hasn't actually happened yet in America. But they're wrong.
The fact is that the fading out of the stimulus, and in particular of aid to state and local governments, is already and noticeably leading to substantial withdrawal of government demand. Look, in particular, at actual government purchases of goods and services — governments at all levels buying stuff — which is what standard macroeconomics says should have the highest multiplier, since unlike transfers and tax cuts it is by definition spent rather than saved. Here's the picture, showing changes in real spending over the previous year:
When the recession officially ended, spending was rising at an annual rate of around $60 billion; now it's declining at an annual rate of $60 billion. That difference is around 1 percent of GDP, and maybe 1.5 percent once you take the multiplier into account. That makes the turn toward austerity a major factor in our growth slowdown.
Still, I guess the beatings will continue until morale improves.

Let me continue the point via the CBPP:

State and Local Job Cuts Continue, Especially in Education, by Nicholas Johnson, CBPP: Today's jobs report shows that in August, cuts by states and local governments — especially school districts — wiped out private-sector job gains. ...
The state and local sector cut 15,000 jobs in August.  That comes on top of a whopping 66,000 jobs lost in July... — the worst single month of job loss for states and localities since the recession began in December 2007.  States and localities have eliminated 671,000 jobs since employment peaked in August 2008 (see ... graph).
Not coincidentally, July was also the first month of the new fiscal year for most states, one in which they are facing the double-whammy of weak revenues (which remain well below pre-recession levels) and the expiration of temporary federal aid.

Three Years of School Job Cuts

Some 14,000 of the state and local jobs lost in August were in local school districts, bringing to 293,000 the total decline in school-district employment since August 2008 (see second graph).
Cuts in state education funding are a big reason behind these education-related job losses. As we reported yesterday, the vast majority of states for which data are available are cutting basic education grants to local school districts to below pre-recession levels.  Some of the cuts exceed 20 percent.
These troubling numbers raise a disconcerting question:  What kind of an economic future will this country have if we keep cutting education?

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