The Blur Between Spending and Taxes
By N. GREGORY MANKIW, www.nytimes.com, November 20, 2010
SHOULD the government cut spending or raise taxes to deal with its long-term fiscal imbalance? As President Obama’s deficit commission rolls out its final report in the coming weeks, this issue will most likely divide the political right and left. But, in many ways, the question is the wrong one. The distinction between spending and taxation is often murky and sometimes meaningless.
Imagine that there is some activity — say, snipe hunting — that members of Congress want to encourage. Senator Porkbelly proposes a government subsidy. “America needs more snipe hunters,” he says. “I propose that every time an American bags a snipe, the federal government should pay him or her $100.”
“No, no,” says Congressman Blowhard. “The Porkbelly plan would increase the size of an already bloated government. Let’s instead reduce the burden of taxation. I propose that every time an American tracks down a snipe, the hunter should get a $100 credit to reduce his or her tax liabilities.”
To be sure, government accountants may treat the Porkbelly and Blowhard plans differently. They would likely deem the subsidy to be a spending increase and the credit to be a tax cut. Moreover, the rhetoric of the two politicians about spending and taxes may appeal to different political bases.
But it hardly takes an economic genius to see how little difference there is between the two plans. Both policies enrich the nation’s snipe hunters. And because the government must balance its books, at least in the long run, the gains of the snipe hunters must come at the cost of higher taxes or lower government benefits for the rest of us.
Economists call the Blowhard plan a “tax expenditure.” The tax code is filled with them — although not yet one for snipe hunting. Every time a politician promises a “targeted tax cut,” he or she is probably offering up a form of government spending in disguise.
Erskine B. Bowles and Alan K. Simpson, the chairmen of President Obama’s deficit reduction commission, have taken at hard look at these tax expenditures — and they don’t like what they see. In their draft proposal, released earlier this month, they proposed doing away with tax expenditures, which together cost the Treasury over $1 trillion a year.
Such a drastic step would allow Mr. Bowles and Mr. Simpson to move the budget toward fiscal sustainability, while simultaneously reducing all income tax rates. Under their plan, the top tax rate would fall to 23 percent from the 35 percent in today’s law (and the 39.6 percent currently advocated by Democratic leadership).
This approach has long been the basic recipe for tax reform. By broadening the tax base and lowering tax rates, we can increase government revenue and distort incentives less. That should command widespread applause across the ideological spectrum. Unfortunately, the reaction has been less enthusiastic.
Pundits on the left are suspicious of any plan that reduces marginal tax rates on the rich. But, as Mr. Bowles and Mr. Simpson point out, tax expenditures disproportionately benefit those at the top of the economic ladder. According to their figures, tax expenditures increase the after-tax income of those in the bottom quintile by about 6 percent. Those in the top 1 percent of the income distribution enjoy about twice that gain. Progressives who are concerned about the gap between rich and poor should be eager to scale back tax expenditures.
Pundits on the right, meanwhile, are suspicious of anything that increases government revenue. But they should recognize that tax expenditures are best viewed as a hidden form of spending. If we eliminate tax expenditures and reduce marginal tax rates, as Mr. Bowles and Mr. Simpson propose, we are essentially doing what economic conservatives have long advocated: cutting spending and taxes.
Yet another political problem is that each tax expenditure has its own political constituency. If Congressman Blowhard ever got his way, the snipe hunters of the world would surely fight to keep their tax break.
One major tax expenditure that the Bowles-Simpson plan would curtail or eliminate is the mortgage interest deduction. Without doubt, many homeowners and the real estate industry will object. But they won’t have the merits on their side.
This subsidy to homeownership is neither economically efficient nor particularly equitable. Economists have long pointed out that tax subsidies to housing, together with the high taxes on corporations, cause too much of the economy’s capital stock to be tied up in residential structures and too little in corporate capital. This misallocation of resources results in lower productivity and reduced real wages.
Moreover, there is nothing particularly ignoble about renting that deserves the scorn of the tax code. But let’s face it: subsidizing homeowners is the same as penalizing renters. In the end, someone has to pick up the tab.
THERE are certain tax expenditures that I like. My personal favorite is the deduction for charitable giving. It encourages philanthropy and, thus, private rather than governmental solutions to society’s problems.
But I know that solving the long-term fiscal problem won’t be easy. Everyone will have to give a little, and perhaps even more than a little. I am willing to give up my favorite tax expenditure if everyone else is willing to give up theirs.
The Bowles-Simpson proposal is not perfect, but it is far better than the status quo. The question ahead is whether we can get Senator Porkbelly and Congressman Blowhard to agree.
2010 m. lapkričio 22 d., pirmadienis
2010 m. lapkričio 14 d., sekmadienis
Dar ir dar apie nelygybę JAV
Who Will Stand Up to the Superrich?
By FRANK RICH, November 13, 2010, www.nytimes.com
In the aftermath of the Great Democratic Shellacking of 2010, one election night subplot quickly receded into the footnotes: the drubbing received by very wealthy Americans, most of them Republican, who tried to buy Senate seats and governor’s mansions. Americans don’t hate rich people. They admire and often idolize success. But Californians took a hearty dislike to Meg Whitman, who sacrificed $143 million of her eBay fortune — not to mention her undocumented former housekeeper — to a gubernatorial race she lost by double digits. Connecticut voters K.O.’d the World Wrestling groin-kicker, Linda McMahon, and West Virginians did likewise to the limestone-and-steel magnate John Raese, the senatorial hopeful who told an interviewer without apparent irony, “I made my money the old-fashioned way — I inherited it.”
To my mind, these losers deserve a salute nonetheless. They all had run businesses that actually created jobs (Raese included). They all wanted to enter public service to give back to the country that allowed them to prosper. And by losing so decisively, they gave us a ray of hope in dark times. Their defeats reminded us that despite much recent evidence to the contrary the inmates don’t always end up running the asylum of American politics.
The wealthy Americans we should worry about instead are the ones who implicitly won the election — those who take far more from America than they give back. They were not on the ballot, and most of them are not household names. Unlike Whitman and the other defeated self-financing candidates, they are all but certain to cash in on the Nov. 2 results. There’s no one in Washington in either party with the fortitude to try to stop them from grabbing anything that’s not nailed down.
The Americans I’m talking about are not just those shadowy anonymous corporate campaign contributors who flooded this campaign. No less triumphant were those individuals at the apex of the economic pyramid — the superrich who have gotten spectacularly richer over the last four decades while their fellow citizens either treaded water or lost ground. The top 1 percent of American earners took in 23.5 percent of the nation’s pretax income in 2007 — up from less than 9 percent in 1976. During the boom years of 2002 to 2007, that top 1 percent’s pretax income increased an extraordinary 10 percent every year. But the boom proved an exclusive affair: in that same period, the median income for non-elderly American households went down and the poverty rate rose.
It’s the very top earners, not your garden variety, entrepreneurial multimillionaires, who will be by far the biggest beneficiaries if there’s an extension of the expiring Bush-era tax cuts for income over $200,000 a year (for individuals) and $250,000 (for couples). The resurgent G.O.P. has vowed to fight to the end to award this bonanza, but that may hardly be necessary given the timid opposition of President Obama and the lame-duck Democratic Congress.
On last Sunday’s “60 Minutes,” Obama was already wobbling toward another “compromise” in which he does most of the compromising. It’s a measure of how far he’s off his game now that a leader who once had the audacity to speak at length on the red-hot subject of race doesn’t even make the most forceful case for his own long-held position on an issue where most Americans still agree with him. (Only 40 percent of those in the Nov. 2 exit poll approved of an extension of all Bush tax cuts.) The president’s argument against extending the cuts for the wealthiest has now been reduced to the dry accounting of what the cost would add to the federal deficit. As he put it to CBS’s Steve Kroft, “the question is — can we afford to borrow $700 billion?”
That’s a good question, all right, but it’s not the question. The bigger issue is whether the country can afford the systemic damage being done by the ever-growing income inequality between the wealthiest Americans and everyone else, whether poor, middle class or even rich. That burden is inflicted not just on the debt but on the very idea of America — our Horatio Alger faith in social mobility over plutocracy, our belief that our brand of can-do capitalism brings about innovation and growth, and our fundamental sense of fairness. Incredibly, the top 1 percent of Americans now have tax rates a third lower than the same top percentile had in 1970.
“How can hedge-fund managers who are pulling down billions sometimes pay a lower tax rate than do their secretaries?” ask the political scientists Jacob S. Hacker (of Yale) and Paul Pierson (University of California, Berkeley) in their deservedly lauded new book, “Winner-Take-All Politics.” If you want to cry real tears about the American dream — as opposed to the self-canonizing tears of John Boehner — read this book and weep. The authors’ answer to that question and others amounts to a devastating indictment of both parties.
Their ample empirical evidence, some of which I’m citing here, proves that America’s ever-widening income inequality was not an inevitable by-product of the modern megacorporation, or of globalization, or of the advent of the new tech-driven economy, or of a growing education gap. (Yes, the very rich often have fancy degrees, but so do those in many income levels below them.) Inequality is instead the result of specific policies, including tax policies, championed by Washington Democrats and Republicans alike as they conducted a bidding war for high-rolling donors in election after election.
The book deflates much of the conventional wisdom. Hacker and Pierson date the dawn of the collusion between the political system and the superrich not to the Reagan revolution, but to the preceding Carter presidency and its Democratic Congress. They also write that contrary to the popular perception, America’s superhigh earners are not mostly “superstars and celebrities in the arts, entertainment and sports” or the stars of law, medicine and real estate. They are instead corporate executives and managers — increasingly (and less surprisingly) financial company executives and managers, including those who escaped with outrageous fortunes as their companies imploded during the housing bubble.
The G.O.P.’s arguments for extending the Bush tax cuts to this crowd, usually wrapped in laughably hypocritical whining about “class warfare,” are easily batted down. The most constant refrain is that small-business owners who file in this bracket would be hit so hard they could no longer hire new employees. But the Tax Policy Center found in 2008, when checking out similar campaign claims by “Joe the Plumber,” that only 2 percent of all Americans reporting small-business income, regardless of tax bracket, would see tax increases if Obama fulfilled his pledge to let the Bush tax cuts lapse for the top earners. The economist Dean Baker calculated that the yearly tax increase at the lower end of that bracket, for those with earnings between $200,000 and $500,000, would amount to $700 — which “isn’t enough to hire anyone.”
Those in the higher reaches aren’t investing in creating new jobs even now, when the full Bush tax cuts remain in effect, so why would extending them change that equation? American companies seem intent on sitting on trillions in cash until the economy reboots. Meanwhile, the nonpartisan Congressional Budget Office ranks the extension of any Bush tax cuts, let alone those to the wealthiest Americans, as the least effective of 11 possible policy options for increasing employment.
Nor are the superrich helping to further the traditional American business culture that inspires and encourages those with big ideas and drive to believe they can climb to the top. Robert Frank, the writer who chronicled the superrich in the book “Richistan,” recently analyzed the new Forbes list of the 400 richest Americans for The Wall Street Journal and found a “hardening of the plutocracy” and scant mobility. Only 16 of the 400 were newcomers — as opposed to an average of 40 to 50 in recent years — and they tended to be in industries like coal, natural gas, chemicals and casinos rather than forward-looking businesses involving the Green Economy, tech or biotechnology. This is “not exactly the formula for America’s vaunted entrepreneurial wealth machine,” Frank wrote.
As “Winner-Take-All Politics” documents, America has been busy “building a bridge to the 19th century” — that is, to a new Gilded Age. To dislodge the country from this stagnant rut will require all kinds of effort from Americans in and out of politics. That includes some patriotic selflessness from those at the very top who still might emulate Warren Buffett and the few others in the Forbes 400 who dare say publicly that it’s not in America’s best interests to stack the tax and regulatory decks in their favor.
Many of the countless tasks that need to be addressed to start rebuilding an equitable America are formidable, but surely few, if any, are easier than eliminating a tax break that was destined to expire anyway and that most Americans want to see expire. Two years ago, Obama campaigned on this issue far more strenuously than he did on, say, reforming health care. Now he and what remains of his Congressional caucus are poised to retreat from even this clear-cut battle. You know things are grim when you start wishing that the president might summon his inner Linda McMahon.
By FRANK RICH, November 13, 2010, www.nytimes.com
In the aftermath of the Great Democratic Shellacking of 2010, one election night subplot quickly receded into the footnotes: the drubbing received by very wealthy Americans, most of them Republican, who tried to buy Senate seats and governor’s mansions. Americans don’t hate rich people. They admire and often idolize success. But Californians took a hearty dislike to Meg Whitman, who sacrificed $143 million of her eBay fortune — not to mention her undocumented former housekeeper — to a gubernatorial race she lost by double digits. Connecticut voters K.O.’d the World Wrestling groin-kicker, Linda McMahon, and West Virginians did likewise to the limestone-and-steel magnate John Raese, the senatorial hopeful who told an interviewer without apparent irony, “I made my money the old-fashioned way — I inherited it.”
To my mind, these losers deserve a salute nonetheless. They all had run businesses that actually created jobs (Raese included). They all wanted to enter public service to give back to the country that allowed them to prosper. And by losing so decisively, they gave us a ray of hope in dark times. Their defeats reminded us that despite much recent evidence to the contrary the inmates don’t always end up running the asylum of American politics.
The wealthy Americans we should worry about instead are the ones who implicitly won the election — those who take far more from America than they give back. They were not on the ballot, and most of them are not household names. Unlike Whitman and the other defeated self-financing candidates, they are all but certain to cash in on the Nov. 2 results. There’s no one in Washington in either party with the fortitude to try to stop them from grabbing anything that’s not nailed down.
The Americans I’m talking about are not just those shadowy anonymous corporate campaign contributors who flooded this campaign. No less triumphant were those individuals at the apex of the economic pyramid — the superrich who have gotten spectacularly richer over the last four decades while their fellow citizens either treaded water or lost ground. The top 1 percent of American earners took in 23.5 percent of the nation’s pretax income in 2007 — up from less than 9 percent in 1976. During the boom years of 2002 to 2007, that top 1 percent’s pretax income increased an extraordinary 10 percent every year. But the boom proved an exclusive affair: in that same period, the median income for non-elderly American households went down and the poverty rate rose.
It’s the very top earners, not your garden variety, entrepreneurial multimillionaires, who will be by far the biggest beneficiaries if there’s an extension of the expiring Bush-era tax cuts for income over $200,000 a year (for individuals) and $250,000 (for couples). The resurgent G.O.P. has vowed to fight to the end to award this bonanza, but that may hardly be necessary given the timid opposition of President Obama and the lame-duck Democratic Congress.
On last Sunday’s “60 Minutes,” Obama was already wobbling toward another “compromise” in which he does most of the compromising. It’s a measure of how far he’s off his game now that a leader who once had the audacity to speak at length on the red-hot subject of race doesn’t even make the most forceful case for his own long-held position on an issue where most Americans still agree with him. (Only 40 percent of those in the Nov. 2 exit poll approved of an extension of all Bush tax cuts.) The president’s argument against extending the cuts for the wealthiest has now been reduced to the dry accounting of what the cost would add to the federal deficit. As he put it to CBS’s Steve Kroft, “the question is — can we afford to borrow $700 billion?”
That’s a good question, all right, but it’s not the question. The bigger issue is whether the country can afford the systemic damage being done by the ever-growing income inequality between the wealthiest Americans and everyone else, whether poor, middle class or even rich. That burden is inflicted not just on the debt but on the very idea of America — our Horatio Alger faith in social mobility over plutocracy, our belief that our brand of can-do capitalism brings about innovation and growth, and our fundamental sense of fairness. Incredibly, the top 1 percent of Americans now have tax rates a third lower than the same top percentile had in 1970.
“How can hedge-fund managers who are pulling down billions sometimes pay a lower tax rate than do their secretaries?” ask the political scientists Jacob S. Hacker (of Yale) and Paul Pierson (University of California, Berkeley) in their deservedly lauded new book, “Winner-Take-All Politics.” If you want to cry real tears about the American dream — as opposed to the self-canonizing tears of John Boehner — read this book and weep. The authors’ answer to that question and others amounts to a devastating indictment of both parties.
Their ample empirical evidence, some of which I’m citing here, proves that America’s ever-widening income inequality was not an inevitable by-product of the modern megacorporation, or of globalization, or of the advent of the new tech-driven economy, or of a growing education gap. (Yes, the very rich often have fancy degrees, but so do those in many income levels below them.) Inequality is instead the result of specific policies, including tax policies, championed by Washington Democrats and Republicans alike as they conducted a bidding war for high-rolling donors in election after election.
The book deflates much of the conventional wisdom. Hacker and Pierson date the dawn of the collusion between the political system and the superrich not to the Reagan revolution, but to the preceding Carter presidency and its Democratic Congress. They also write that contrary to the popular perception, America’s superhigh earners are not mostly “superstars and celebrities in the arts, entertainment and sports” or the stars of law, medicine and real estate. They are instead corporate executives and managers — increasingly (and less surprisingly) financial company executives and managers, including those who escaped with outrageous fortunes as their companies imploded during the housing bubble.
The G.O.P.’s arguments for extending the Bush tax cuts to this crowd, usually wrapped in laughably hypocritical whining about “class warfare,” are easily batted down. The most constant refrain is that small-business owners who file in this bracket would be hit so hard they could no longer hire new employees. But the Tax Policy Center found in 2008, when checking out similar campaign claims by “Joe the Plumber,” that only 2 percent of all Americans reporting small-business income, regardless of tax bracket, would see tax increases if Obama fulfilled his pledge to let the Bush tax cuts lapse for the top earners. The economist Dean Baker calculated that the yearly tax increase at the lower end of that bracket, for those with earnings between $200,000 and $500,000, would amount to $700 — which “isn’t enough to hire anyone.”
Those in the higher reaches aren’t investing in creating new jobs even now, when the full Bush tax cuts remain in effect, so why would extending them change that equation? American companies seem intent on sitting on trillions in cash until the economy reboots. Meanwhile, the nonpartisan Congressional Budget Office ranks the extension of any Bush tax cuts, let alone those to the wealthiest Americans, as the least effective of 11 possible policy options for increasing employment.
Nor are the superrich helping to further the traditional American business culture that inspires and encourages those with big ideas and drive to believe they can climb to the top. Robert Frank, the writer who chronicled the superrich in the book “Richistan,” recently analyzed the new Forbes list of the 400 richest Americans for The Wall Street Journal and found a “hardening of the plutocracy” and scant mobility. Only 16 of the 400 were newcomers — as opposed to an average of 40 to 50 in recent years — and they tended to be in industries like coal, natural gas, chemicals and casinos rather than forward-looking businesses involving the Green Economy, tech or biotechnology. This is “not exactly the formula for America’s vaunted entrepreneurial wealth machine,” Frank wrote.
As “Winner-Take-All Politics” documents, America has been busy “building a bridge to the 19th century” — that is, to a new Gilded Age. To dislodge the country from this stagnant rut will require all kinds of effort from Americans in and out of politics. That includes some patriotic selflessness from those at the very top who still might emulate Warren Buffett and the few others in the Forbes 400 who dare say publicly that it’s not in America’s best interests to stack the tax and regulatory decks in their favor.
Many of the countless tasks that need to be addressed to start rebuilding an equitable America are formidable, but surely few, if any, are easier than eliminating a tax break that was destined to expire anyway and that most Americans want to see expire. Two years ago, Obama campaigned on this issue far more strenuously than he did on, say, reforming health care. Now he and what remains of his Congressional caucus are poised to retreat from even this clear-cut battle. You know things are grim when you start wishing that the president might summon his inner Linda McMahon.
2010 m. lapkričio 11 d., ketvirtadienis
Argumentas prieš pensinio amžiaus didinimą
Income And Life Expectancy
Paul Krugman, November 10, 2010, http://krugman.blogs.nytimes.com
I’ve referenced this before, but here’s the Social Security Administration study. Look at Table 4: since 1977, the life expectancy of male workers retiring at age 65 has risen 6 years in the top half of the income distribution, but only 1.3 years in the bottom half.
Paul Krugman, November 10, 2010, http://krugman.blogs.nytimes.com
I’ve referenced this before, but here’s the Social Security Administration study. Look at Table 4: since 1977, the life expectancy of male workers retiring at age 65 has risen 6 years in the top half of the income distribution, but only 1.3 years in the bottom half.
2010 m. lapkričio 7 d., sekmadienis
Dar apie nelygybę JAV
Our Banana Republic
By NICHOLAS D. KRISTOF
November 6, 2010, www.nytimes.com
In my reporting, I regularly travel to banana republics notorious for their inequality. In some of these plutocracies, the richest 1 percent of the population gobbles up 20 percent of the national pie.
But guess what? You no longer need to travel to distant and dangerous countries to observe such rapacious inequality. We now have it right here at home — and in the aftermath of Tuesday’s election, it may get worse.
The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent series on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.
C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent.
That’s the backdrop for one of the first big postelection fights in Washington — how far to extend the Bush tax cuts to the most affluent 2 percent of Americans. Both parties agree on extending tax cuts on the first $250,000 of incomes, even for billionaires. Republicans would also cut taxes above that.
The richest 0.1 percent of taxpayers would get a tax cut of $61,000 from President Obama. They would get $370,000 from Republicans, according to the nonpartisan Tax Policy Center. And that provides only a modest economic stimulus, because the rich are less likely to spend their tax savings.
At a time of 9.6 percent unemployment, wouldn’t it make more sense to finance a jobs program? For example, the money could be used to avoid laying off teachers and undermining American schools.
Likewise, an obvious priority in the worst economic downturn in 70 years should be to extend unemployment insurance benefits, some of which will be curtailed soon unless Congress renews them. Or there’s the Trade Adjustment Assistance program, which helps train and support workers who have lost their jobs because of foreign trade. It will no longer apply to service workers after Jan. 1, unless Congress intervenes.
So we face a choice. Is our economic priority the jobless, or is it zillionaires?
And if Republicans are worried about long-term budget deficits, a reasonable concern, why are they insistent on two steps that nonpartisan economists say would worsen the deficits by more than $800 billion over a decade — cutting taxes for the most opulent, and repealing health care reform? What other programs would they cut to make up the lost $800 billion in revenue?
In weighing these issues, let’s remember that backdrop of America’s rising inequality.
In the past, many of us acquiesced in discomfiting levels of inequality because we perceived a tradeoff between equity and economic growth. But there’s evidence that the levels of inequality we’ve now reached may actually suppress growth. A drop of inequality lubricates economic growth, but too much may gum it up.
Robert H. Frank of Cornell University, Adam Seth Levine of Vanderbilt University, and Oege Dijk of the European University Institute recently wrote a fascinating paper suggesting that inequality leads to more financial distress. They looked at census data for the 50 states and the 100 most populous counties in America, and found that places where inequality increased the most also endured the greatest surges in bankruptcies.
Here’s their explanation: When inequality rises, the richest rake in their winnings and buy even bigger mansions and fancier cars. Those a notch below then try to catch up, and end up depleting their savings or taking on more debt, making a financial crisis more likely.
Another consequence the scholars found: Rising inequality also led to more divorces, presumably a byproduct of the strains of financial distress. Maybe I’m overly sentimental or romantic, but that pierces me. It’s a reminder that inequality isn’t just an economic issue but also a question of human dignity and happiness.
Mounting evidence suggests that losing a job or a home can rock our identity and savage our self-esteem. Forced moves wrench families from their schools and support networks.
In short, inequality leaves people on the lower rungs feeling like hamsters on a wheel spinning ever faster, without hope or escape.
Economic polarization also shatters our sense of national union and common purpose, fostering political polarization as well.
So in this postelection landscape, let’s not aggravate income gaps that already would make a Latin American caudillo proud. To me, we’ve reached a banana republic point where our inequality has become both economically unhealthy and morally repugnant.
By NICHOLAS D. KRISTOF
November 6, 2010, www.nytimes.com
In my reporting, I regularly travel to banana republics notorious for their inequality. In some of these plutocracies, the richest 1 percent of the population gobbles up 20 percent of the national pie.
But guess what? You no longer need to travel to distant and dangerous countries to observe such rapacious inequality. We now have it right here at home — and in the aftermath of Tuesday’s election, it may get worse.
The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent series on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.
C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent.
That’s the backdrop for one of the first big postelection fights in Washington — how far to extend the Bush tax cuts to the most affluent 2 percent of Americans. Both parties agree on extending tax cuts on the first $250,000 of incomes, even for billionaires. Republicans would also cut taxes above that.
The richest 0.1 percent of taxpayers would get a tax cut of $61,000 from President Obama. They would get $370,000 from Republicans, according to the nonpartisan Tax Policy Center. And that provides only a modest economic stimulus, because the rich are less likely to spend their tax savings.
At a time of 9.6 percent unemployment, wouldn’t it make more sense to finance a jobs program? For example, the money could be used to avoid laying off teachers and undermining American schools.
Likewise, an obvious priority in the worst economic downturn in 70 years should be to extend unemployment insurance benefits, some of which will be curtailed soon unless Congress renews them. Or there’s the Trade Adjustment Assistance program, which helps train and support workers who have lost their jobs because of foreign trade. It will no longer apply to service workers after Jan. 1, unless Congress intervenes.
So we face a choice. Is our economic priority the jobless, or is it zillionaires?
And if Republicans are worried about long-term budget deficits, a reasonable concern, why are they insistent on two steps that nonpartisan economists say would worsen the deficits by more than $800 billion over a decade — cutting taxes for the most opulent, and repealing health care reform? What other programs would they cut to make up the lost $800 billion in revenue?
In weighing these issues, let’s remember that backdrop of America’s rising inequality.
In the past, many of us acquiesced in discomfiting levels of inequality because we perceived a tradeoff between equity and economic growth. But there’s evidence that the levels of inequality we’ve now reached may actually suppress growth. A drop of inequality lubricates economic growth, but too much may gum it up.
Robert H. Frank of Cornell University, Adam Seth Levine of Vanderbilt University, and Oege Dijk of the European University Institute recently wrote a fascinating paper suggesting that inequality leads to more financial distress. They looked at census data for the 50 states and the 100 most populous counties in America, and found that places where inequality increased the most also endured the greatest surges in bankruptcies.
Here’s their explanation: When inequality rises, the richest rake in their winnings and buy even bigger mansions and fancier cars. Those a notch below then try to catch up, and end up depleting their savings or taking on more debt, making a financial crisis more likely.
Another consequence the scholars found: Rising inequality also led to more divorces, presumably a byproduct of the strains of financial distress. Maybe I’m overly sentimental or romantic, but that pierces me. It’s a reminder that inequality isn’t just an economic issue but also a question of human dignity and happiness.
Mounting evidence suggests that losing a job or a home can rock our identity and savage our self-esteem. Forced moves wrench families from their schools and support networks.
In short, inequality leaves people on the lower rungs feeling like hamsters on a wheel spinning ever faster, without hope or escape.
Economic polarization also shatters our sense of national union and common purpose, fostering political polarization as well.
So in this postelection landscape, let’s not aggravate income gaps that already would make a Latin American caudillo proud. To me, we’ve reached a banana republic point where our inequality has become both economically unhealthy and morally repugnant.
2010 m. spalio 14 d., ketvirtadienis
Glaeser apie šių metų ekonomikos Nobelį
October 11, 2010
The Work Behind the Nobel Prize
By EDWARD L. GLAESER
http://economix.blogs.nytimes.com
Edward L. Glaeser is an economics professor at Harvard.
This year’s Nobel Memorial Prize in Economic Science (formally the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) was awarded today to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides for their research on “markets with search frictions,” which means any setting where buyers and sellers don’t automatically find each other. Search models are relevant in many settings, including dating, used cars and housing, but above all, these models help us make sense of unemployment.
As the United States unemployment rate has remained above 9.4 percent since May 2009, the prize manages both to honor timeless research on core economic questions and to highlight the ways in which economics addresses a most timely global problem.
The most traditional economic model of the labor market assumes a labor supply schedule, which reflects the number of workers willing to work at a given wage, and a labor demand schedule, which describes the number of workers that companies are willing to hire at a given wage. At some wage, supply equals demand and that’s the market equilibrium, which is where traditional economics predicts the world will end up. In markets with undifferentiated products — like copper or winter wheat — that model works pretty well, but it has some pretty obvious failings when it comes to labor or housing markets.
In particular, the Economics 101 model does an awful job explaining an American civilian labor force where nearly one-tenth say they want a job and can’t find one. Die-hard supporters of the basic model sometimes argue that wage floors, like the minimum wage, keep wages too high for the market to clear. But American minimum wages are low, and only a small fraction of jobs are affected by that barrier. Another attempt to save the old model is to argue that unemployed workers just value their time too highly to take a job at current market rates. But the view that the unemployed are just having a swell time hanging out watching cable is wildly at odds with the real world. New paradigms emerge when reality crashes against theory, and that’s what brought us the search theory of Professors Diamond, Mortensen and Pissarides.
Search models don’t just assume that buyers and sellers face a market-clearing price — they try to actually describe the process that determines that price. The ur-search paper, “The Economics of Information,” was published in 1961 by George Stigler (who won his Nobel in 1982). Professor Stigler modeled a product market where consumers kept searching for lower prices until the point where “the cost of search is equated to its expected marginal return,” in the form of lower prices. Professor Stigler then applied search theory to the labor market in 1962, focusing on the dispersion of wages, which he argued should be higher when search was more difficult. He said little about unemployment and didn’t really address the pricing behavior of companies.
Dale Mortensen’s 1970 paper on “Job Search, the Duration of Unemployment and the Philips Curve,” formalized and extended Professor Stigler’s ideas. In Professor Mortensen’s paper, companies offer jobs, each of which requires a certain amount of skill. Jobs with the same skill requirements offer the same wage. Workers then interview for jobs, and if they are qualified, they can either take the job or move along. More skilled workers will be qualified for more jobs, which perhaps explains why the unemployment rate among college graduates is about one-third the unemployment rate for high school dropouts, but they will also be pickier. Pickiness among the more skilled also leads to unemployment, as workers hold out for a better job. In a sense, unemployment does reflect the fact that workers have something better to do than accept a low-paying job. That something is searching for a better-paying job.
But Professor Mortensen’s 1970 paper was still pretty modest in its treatment of the company side of the problem, which Peter Diamond remedied in his 1971 search model, “A Model of Price Adjustment,” published in The Journal of Economic Theory. Professor Diamond began writing about information a few years later, with an article about the “role of the stock market,” in the transmission of knowledge. The 1971 search paper produces a somewhat surprising result: if there are a number of otherwise identical stores, which fix their prices, then competition can lead to high monopoly prices, not low competitive pricing or Stiglerian price dispersion. If consumers think that companies are all charging the same price, then they won’t bother searching. If consumers don’t bother searching, then the only reasonable thing for companies to do is to charge the monopoly price. This result, which is known as the Diamond Paradox, can be weakened if price-cutting companies are able to advertise, but it suggests the enormous ability of search frictions to distort markets.
In the late 1970s, Professors Diamond, Mortensen and Pissarides all turned to the public policy implications of search models. In a 1977 article “Unemployment Insurance and Job Search Decisions,” Professor Mortensen examined the implication of unemployment benefits for unemployment rates. He concluded that the effects were more ambiguous than previously thought, because workers who aren’t currently receiving unemployment insurance benefits will be more likely to take on a low-wage, risky job if they know they can get unemployment insurance if the job doesn’t work out.
The core of Professor Diamond’s work on search models appeared in a three-year window between 1979 and 1982. His work was distinguished both by elegant modeling — building the theoretical tools needed to make sense of labor turnover—and important insights. Perhaps the key idea is the “search externality,” the idea that each “additional worker makes it easier for vacancies to find workers and harder for other workers to find jobs.” In a sense, a flood of unemployed workers can congest the labor market just as a flood of extra drivers can congest a highway. Whenever one worker passes up a job, that worker makes finding a job easier for other workers. This insight led to Professor Diamond’s conclusion that higher levels of unemployment insurance could improve the workings of the labor market by making some workers pass up marginal jobs.
Professor Pissarides had also begun working on job search models in the late 1970s, but he published his masterpiece “Job Creation and Job Destruction in the Theory of Unemployment,” together with Professor Mortensen, in The Review of Economic Studies in 1994. In this model, workers make decisions about searching for jobs. Companies make decisions about creating job openings. When they meet, a worker is hired if both parties benefit from the match. There is an implied negative relationship between the level of vacancies (the number of jobs needing to be filled) and the level of unemployment, which is called the Beveridge Curve. Most importantly, a cyclical downturn can cause the system to go seriously haywire, at least for a while, as the number of jobs destroyed soars and the number of jobs created drops.
The work of these economists does not tell us how to fix our current high unemployment levels, but it does help us to make some sense of our current distress. Their models tell us that common wisdom — like the belief that higher unemployment benefits always increase unemployment — may be wrong and that policies that improve matching may have great value. Rarely has the prize committee been better able to match the honored work with the moment.
The Work Behind the Nobel Prize
By EDWARD L. GLAESER
http://economix.blogs.nytimes.com
Edward L. Glaeser is an economics professor at Harvard.
This year’s Nobel Memorial Prize in Economic Science (formally the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) was awarded today to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides for their research on “markets with search frictions,” which means any setting where buyers and sellers don’t automatically find each other. Search models are relevant in many settings, including dating, used cars and housing, but above all, these models help us make sense of unemployment.
As the United States unemployment rate has remained above 9.4 percent since May 2009, the prize manages both to honor timeless research on core economic questions and to highlight the ways in which economics addresses a most timely global problem.
The most traditional economic model of the labor market assumes a labor supply schedule, which reflects the number of workers willing to work at a given wage, and a labor demand schedule, which describes the number of workers that companies are willing to hire at a given wage. At some wage, supply equals demand and that’s the market equilibrium, which is where traditional economics predicts the world will end up. In markets with undifferentiated products — like copper or winter wheat — that model works pretty well, but it has some pretty obvious failings when it comes to labor or housing markets.
In particular, the Economics 101 model does an awful job explaining an American civilian labor force where nearly one-tenth say they want a job and can’t find one. Die-hard supporters of the basic model sometimes argue that wage floors, like the minimum wage, keep wages too high for the market to clear. But American minimum wages are low, and only a small fraction of jobs are affected by that barrier. Another attempt to save the old model is to argue that unemployed workers just value their time too highly to take a job at current market rates. But the view that the unemployed are just having a swell time hanging out watching cable is wildly at odds with the real world. New paradigms emerge when reality crashes against theory, and that’s what brought us the search theory of Professors Diamond, Mortensen and Pissarides.
Search models don’t just assume that buyers and sellers face a market-clearing price — they try to actually describe the process that determines that price. The ur-search paper, “The Economics of Information,” was published in 1961 by George Stigler (who won his Nobel in 1982). Professor Stigler modeled a product market where consumers kept searching for lower prices until the point where “the cost of search is equated to its expected marginal return,” in the form of lower prices. Professor Stigler then applied search theory to the labor market in 1962, focusing on the dispersion of wages, which he argued should be higher when search was more difficult. He said little about unemployment and didn’t really address the pricing behavior of companies.
Dale Mortensen’s 1970 paper on “Job Search, the Duration of Unemployment and the Philips Curve,” formalized and extended Professor Stigler’s ideas. In Professor Mortensen’s paper, companies offer jobs, each of which requires a certain amount of skill. Jobs with the same skill requirements offer the same wage. Workers then interview for jobs, and if they are qualified, they can either take the job or move along. More skilled workers will be qualified for more jobs, which perhaps explains why the unemployment rate among college graduates is about one-third the unemployment rate for high school dropouts, but they will also be pickier. Pickiness among the more skilled also leads to unemployment, as workers hold out for a better job. In a sense, unemployment does reflect the fact that workers have something better to do than accept a low-paying job. That something is searching for a better-paying job.
But Professor Mortensen’s 1970 paper was still pretty modest in its treatment of the company side of the problem, which Peter Diamond remedied in his 1971 search model, “A Model of Price Adjustment,” published in The Journal of Economic Theory. Professor Diamond began writing about information a few years later, with an article about the “role of the stock market,” in the transmission of knowledge. The 1971 search paper produces a somewhat surprising result: if there are a number of otherwise identical stores, which fix their prices, then competition can lead to high monopoly prices, not low competitive pricing or Stiglerian price dispersion. If consumers think that companies are all charging the same price, then they won’t bother searching. If consumers don’t bother searching, then the only reasonable thing for companies to do is to charge the monopoly price. This result, which is known as the Diamond Paradox, can be weakened if price-cutting companies are able to advertise, but it suggests the enormous ability of search frictions to distort markets.
In the late 1970s, Professors Diamond, Mortensen and Pissarides all turned to the public policy implications of search models. In a 1977 article “Unemployment Insurance and Job Search Decisions,” Professor Mortensen examined the implication of unemployment benefits for unemployment rates. He concluded that the effects were more ambiguous than previously thought, because workers who aren’t currently receiving unemployment insurance benefits will be more likely to take on a low-wage, risky job if they know they can get unemployment insurance if the job doesn’t work out.
The core of Professor Diamond’s work on search models appeared in a three-year window between 1979 and 1982. His work was distinguished both by elegant modeling — building the theoretical tools needed to make sense of labor turnover—and important insights. Perhaps the key idea is the “search externality,” the idea that each “additional worker makes it easier for vacancies to find workers and harder for other workers to find jobs.” In a sense, a flood of unemployed workers can congest the labor market just as a flood of extra drivers can congest a highway. Whenever one worker passes up a job, that worker makes finding a job easier for other workers. This insight led to Professor Diamond’s conclusion that higher levels of unemployment insurance could improve the workings of the labor market by making some workers pass up marginal jobs.
Professor Pissarides had also begun working on job search models in the late 1970s, but he published his masterpiece “Job Creation and Job Destruction in the Theory of Unemployment,” together with Professor Mortensen, in The Review of Economic Studies in 1994. In this model, workers make decisions about searching for jobs. Companies make decisions about creating job openings. When they meet, a worker is hired if both parties benefit from the match. There is an implied negative relationship between the level of vacancies (the number of jobs needing to be filled) and the level of unemployment, which is called the Beveridge Curve. Most importantly, a cyclical downturn can cause the system to go seriously haywire, at least for a while, as the number of jobs destroyed soars and the number of jobs created drops.
The work of these economists does not tell us how to fix our current high unemployment levels, but it does help us to make some sense of our current distress. Their models tell us that common wisdom — like the belief that higher unemployment benefits always increase unemployment — may be wrong and that policies that improve matching may have great value. Rarely has the prize committee been better able to match the honored work with the moment.
2010 m. spalio 13 d., trečiadienis
Woodford siūlymas Bernankei
Bernanke needs inflation for QE2 to set sail
By Michael Woodford
www.ft.com
Published: October 11 2010 22:34 | Last updated: October 11 2010 22:34
Debate is raging within the Federal Reserve about whether to do more to stimulate the US economy. It seems many of its leading figures would like to, and the minutes of their last Federal Open Market Committee meeting, released Tuesday, will be read carefully for hints. Yet Ben Bernanke, Fed chairman, knows that a cut in rates, his usual tool, is currently infeasible. Therefore, speculation has turned to a return to quantitative easing (QE2), or large purchases of long-term Treasury bonds.
This would be a dramatic move. But we must not kid ourselves. It would have at best a modest effect in a large, liquid market such as Treasury bonds and, therefore, is unlikely to dig the US economy out of its current hole. There is, however, another option: for the Fed to clarify its “exit strategy” from its current, unconventional monetary stance. This would mean making clear that the Fed has no plans to tighten policy through increases in the federal funds rate, even if inflation temporarily exceeds the rate regarded as consistent with the Fed’s mandate. In short, the Fed should allow a one-time-only inflation increase, with a plan to control it once the target level of prices has been reached.
Such a move would be controversial within the Fed. But such a statement would merely be designed to help reduce expectations regarding both the path of short-term interest rates over the next few years and to increase the expected rate of inflation. Changes in these expectations would stimulate current spending: an expectation that low short-term rates will last for longer will lower long-term interest rates and an expectation of higher inflation should also reduce the perceived real rate of interest. Both of these steps would increase current expenditure by households and firms, giving the US economy a much-needed boost.
This proposal is different from that made in some quarters (and rejected by Fed officials) for an increase in the Fed’s inflation target. In order to obtain the benefits just cited, it is not necessary to make people expect a continuing high rate of inflation. Indeed, that would be counterproductive. To the extent that expectations of a permanently higher inflation rate would create uncertainty about the value of the dollar, for instance, they could easily make long-run real bond yields higher, rather than lower.
Instead, as suggested in a recent speech by William Dudley of the Federal Reserve Bank of New York, the Fed should commit to make up for current “inflation shortfalls” due to its inability to cut interest rates. If, for example, inflation was predicted to run half a percentage point below the Fed’s target for the next two years, the Fed could announce plans to offset this by allowing an additional one per cent rise in prices after that. Once the shortfall has been made up, the Fed would return to its previous, lower target.
Critics will say this will undermine the Fed’s credibility on price stability. They are wrong because the price increases allowed under this “catch-up” policy would be limited in advance. Catch-up inflation would simply put prices back on the path they would have followed had the Fed been able to cut interest rates earlier.
Others argue the opposite case: that a modest increase in prices would have too small an effect to boost the recovery. But the true value of such a commitment would be precluding a disinflationary spiral, in which expectations of disinflation without any possibility of offsetting interest-rate cuts lead to further economic contraction and hence to further declines in inflation. A commitment subsequently to offset any inflation deficit would allow higher future inflation to be anticipated in step with the size of the current inflation shortfall. This in turn would automatically limit the degree of disinflation that can occur.
The instinct of policymakers such as Mr Bernanke is to say less about future policy during a time of economic turmoil, on the grounds that the future seems especially difficult to predict at such times. Yet it is precisely when policymakers face unprecedented conditions that it is most difficult to assume that the public will be able to form correct expectations without explicit guidance. At times like the present, uncertainty about the future is one of the greatest impediments to faster recovery.
The writer is a professor at Columbia University and author of “Interest and Prices: Foundations of a Theory of Monetary Policy”
By Michael Woodford
www.ft.com
Published: October 11 2010 22:34 | Last updated: October 11 2010 22:34
Debate is raging within the Federal Reserve about whether to do more to stimulate the US economy. It seems many of its leading figures would like to, and the minutes of their last Federal Open Market Committee meeting, released Tuesday, will be read carefully for hints. Yet Ben Bernanke, Fed chairman, knows that a cut in rates, his usual tool, is currently infeasible. Therefore, speculation has turned to a return to quantitative easing (QE2), or large purchases of long-term Treasury bonds.
This would be a dramatic move. But we must not kid ourselves. It would have at best a modest effect in a large, liquid market such as Treasury bonds and, therefore, is unlikely to dig the US economy out of its current hole. There is, however, another option: for the Fed to clarify its “exit strategy” from its current, unconventional monetary stance. This would mean making clear that the Fed has no plans to tighten policy through increases in the federal funds rate, even if inflation temporarily exceeds the rate regarded as consistent with the Fed’s mandate. In short, the Fed should allow a one-time-only inflation increase, with a plan to control it once the target level of prices has been reached.
Such a move would be controversial within the Fed. But such a statement would merely be designed to help reduce expectations regarding both the path of short-term interest rates over the next few years and to increase the expected rate of inflation. Changes in these expectations would stimulate current spending: an expectation that low short-term rates will last for longer will lower long-term interest rates and an expectation of higher inflation should also reduce the perceived real rate of interest. Both of these steps would increase current expenditure by households and firms, giving the US economy a much-needed boost.
This proposal is different from that made in some quarters (and rejected by Fed officials) for an increase in the Fed’s inflation target. In order to obtain the benefits just cited, it is not necessary to make people expect a continuing high rate of inflation. Indeed, that would be counterproductive. To the extent that expectations of a permanently higher inflation rate would create uncertainty about the value of the dollar, for instance, they could easily make long-run real bond yields higher, rather than lower.
Instead, as suggested in a recent speech by William Dudley of the Federal Reserve Bank of New York, the Fed should commit to make up for current “inflation shortfalls” due to its inability to cut interest rates. If, for example, inflation was predicted to run half a percentage point below the Fed’s target for the next two years, the Fed could announce plans to offset this by allowing an additional one per cent rise in prices after that. Once the shortfall has been made up, the Fed would return to its previous, lower target.
Critics will say this will undermine the Fed’s credibility on price stability. They are wrong because the price increases allowed under this “catch-up” policy would be limited in advance. Catch-up inflation would simply put prices back on the path they would have followed had the Fed been able to cut interest rates earlier.
Others argue the opposite case: that a modest increase in prices would have too small an effect to boost the recovery. But the true value of such a commitment would be precluding a disinflationary spiral, in which expectations of disinflation without any possibility of offsetting interest-rate cuts lead to further economic contraction and hence to further declines in inflation. A commitment subsequently to offset any inflation deficit would allow higher future inflation to be anticipated in step with the size of the current inflation shortfall. This in turn would automatically limit the degree of disinflation that can occur.
The instinct of policymakers such as Mr Bernanke is to say less about future policy during a time of economic turmoil, on the grounds that the future seems especially difficult to predict at such times. Yet it is precisely when policymakers face unprecedented conditions that it is most difficult to assume that the public will be able to form correct expectations without explicit guidance. At times like the present, uncertainty about the future is one of the greatest impediments to faster recovery.
The writer is a professor at Columbia University and author of “Interest and Prices: Foundations of a Theory of Monetary Policy”
2010 m. spalio 11 d., pirmadienis
Paul Krugman apie fiskalinio stimulo iliuzijas JAV
Hey, Small Spender
By PAUL KRUGMAN
2010.10.10, www.nytimes.com
Here’s the narrative you hear everywhere: President Obama has presided over a huge expansion of government, but unemployment has remained high. And this proves that government spending can’t create jobs.
Here’s what you need to know: The whole story is a myth. There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need.
Ask yourself: What major new federal programs have started up since Mr. Obama took office? Health care reform, for the most part, hasn’t kicked in yet, so that can’t be it. So are there giant infrastructure projects under way? No. Are there huge new benefits for low-income workers or the poor? No. Where’s all that spending we keep hearing about? It never happened.
To be fair, spending on safety-net programs, mainly unemployment insurance and Medicaid, has risen — because, in case you haven’t noticed, there has been a surge in the number of Americans without jobs and badly in need of help. And there were also substantial outlays to rescue troubled financial institutions, although it appears that the government will get most of its money back. But when people denounce big government, they usually have in mind the creation of big bureaucracies and major new programs. And that just hasn’t taken place.
Consider, in particular, one fact that might surprise you: The total number of government workers in America has been falling, not rising, under Mr. Obama. A small increase in federal employment was swamped by sharp declines at the state and local level — most notably, by layoffs of schoolteachers. Total government payrolls have fallen by more than 350,000 since January 2009.
Now, direct employment isn’t a perfect measure of the government’s size, since the government also employs workers indirectly when it buys goods and services from the private sector. And government purchases of goods and services have gone up. But adjusted for inflation, they rose only 3 percent over the last two years — a pace slower than that of the previous two years, and slower than the economy’s normal rate of growth.
So as I said, the big government expansion everyone talks about never happened. This fact, however, raises two questions. First, we know that Congress enacted a stimulus bill in early 2009; why didn’t that translate into a big rise in government spending? Second, if the expansion never happened, why does everyone think it did?
Part of the answer to the first question is that the stimulus wasn’t actually all that big compared with the size of the economy. Furthermore, it wasn’t mainly focused on increasing government spending. Of the roughly $600 billion cost of the Recovery Act in 2009 and 2010, more than 40 percent came from tax cuts, while another large chunk consisted of aid to state and local governments. Only the remainder involved direct federal spending.
And federal aid to state and local governments wasn’t enough to make up for plunging tax receipts in the face of the economic slump. So states and cities, which can’t run large deficits, were forced into drastic spending cuts, more than offsetting the modest increase at the federal level.
The answer to the second question — why there’s a widespread perception that government spending has surged, when it hasn’t — is that there has been a disinformation campaign from the right, based on the usual combination of fact-free assertions and cooked numbers. And this campaign has been effective in part because the Obama administration hasn’t offered an effective reply.
Actually, the administration has had a messaging problem on economic policy ever since its first months in office, when it went for a stimulus plan that many of us warned from the beginning was inadequate given the size of the economy’s troubles. You can argue that Mr. Obama got all he could — that a larger plan wouldn’t have made it through Congress (which is questionable), and that an inadequate stimulus was much better than none at all (which it was). But that’s not an argument the administration ever made. Instead, it has insisted throughout that its original plan was just right, a position that has become increasingly awkward as the recovery stalls.
And a side consequence of this awkward positioning is that officials can’t easily offer the obvious rebuttal to claims that big spending failed to fix the economy — namely, that thanks to the inadequate scale of the Recovery Act, big spending never happened in the first place.
But if they won’t say it, I will: if job-creating government spending has failed to bring down unemployment in the Obama era, it’s not because it doesn’t work; it’s because it wasn’t tried.
By PAUL KRUGMAN
2010.10.10, www.nytimes.com
Here’s the narrative you hear everywhere: President Obama has presided over a huge expansion of government, but unemployment has remained high. And this proves that government spending can’t create jobs.
Here’s what you need to know: The whole story is a myth. There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need.
Ask yourself: What major new federal programs have started up since Mr. Obama took office? Health care reform, for the most part, hasn’t kicked in yet, so that can’t be it. So are there giant infrastructure projects under way? No. Are there huge new benefits for low-income workers or the poor? No. Where’s all that spending we keep hearing about? It never happened.
To be fair, spending on safety-net programs, mainly unemployment insurance and Medicaid, has risen — because, in case you haven’t noticed, there has been a surge in the number of Americans without jobs and badly in need of help. And there were also substantial outlays to rescue troubled financial institutions, although it appears that the government will get most of its money back. But when people denounce big government, they usually have in mind the creation of big bureaucracies and major new programs. And that just hasn’t taken place.
Consider, in particular, one fact that might surprise you: The total number of government workers in America has been falling, not rising, under Mr. Obama. A small increase in federal employment was swamped by sharp declines at the state and local level — most notably, by layoffs of schoolteachers. Total government payrolls have fallen by more than 350,000 since January 2009.
Now, direct employment isn’t a perfect measure of the government’s size, since the government also employs workers indirectly when it buys goods and services from the private sector. And government purchases of goods and services have gone up. But adjusted for inflation, they rose only 3 percent over the last two years — a pace slower than that of the previous two years, and slower than the economy’s normal rate of growth.
So as I said, the big government expansion everyone talks about never happened. This fact, however, raises two questions. First, we know that Congress enacted a stimulus bill in early 2009; why didn’t that translate into a big rise in government spending? Second, if the expansion never happened, why does everyone think it did?
Part of the answer to the first question is that the stimulus wasn’t actually all that big compared with the size of the economy. Furthermore, it wasn’t mainly focused on increasing government spending. Of the roughly $600 billion cost of the Recovery Act in 2009 and 2010, more than 40 percent came from tax cuts, while another large chunk consisted of aid to state and local governments. Only the remainder involved direct federal spending.
And federal aid to state and local governments wasn’t enough to make up for plunging tax receipts in the face of the economic slump. So states and cities, which can’t run large deficits, were forced into drastic spending cuts, more than offsetting the modest increase at the federal level.
The answer to the second question — why there’s a widespread perception that government spending has surged, when it hasn’t — is that there has been a disinformation campaign from the right, based on the usual combination of fact-free assertions and cooked numbers. And this campaign has been effective in part because the Obama administration hasn’t offered an effective reply.
Actually, the administration has had a messaging problem on economic policy ever since its first months in office, when it went for a stimulus plan that many of us warned from the beginning was inadequate given the size of the economy’s troubles. You can argue that Mr. Obama got all he could — that a larger plan wouldn’t have made it through Congress (which is questionable), and that an inadequate stimulus was much better than none at all (which it was). But that’s not an argument the administration ever made. Instead, it has insisted throughout that its original plan was just right, a position that has become increasingly awkward as the recovery stalls.
And a side consequence of this awkward positioning is that officials can’t easily offer the obvious rebuttal to claims that big spending failed to fix the economy — namely, that thanks to the inadequate scale of the Recovery Act, big spending never happened in the first place.
But if they won’t say it, I will: if job-creating government spending has failed to bring down unemployment in the Obama era, it’s not because it doesn’t work; it’s because it wasn’t tried.
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