Archives: January, 2010

Can Unemployment Benefits Create Jobs?

At the Center on Budget and Policy Priorities, sociologist Michael Leachman claims “some of the most effective job-creation and job protection measures” in last year’s American Recovery and Reinvestment Act are excluded from the job figures to be released on recovery.gov on January 30.   He explains that, “Most of ARRA’s distributed dollars to date have gone directly to individuals (including greater jobless benefits and food stamps) and states (including greater federal support for Medicaid).  Although these dollars are likely protecting or creating hundreds of thousands of jobs, none of the aid for individuals or the Medicaid support are [sic] reflected in the January 30 jobs data release.”

In particular, Leachman claims Recovery Act funds to extend unemployment benefits from 26 to 79 weeks (and to 99 weeks since November) “produces and sustains jobs.”  For proof, he cites estimates from Mark Zandi of Economy.com “that every dollar spent on extending unemployment insurance benefits produces $1.61 in economic activity.”

This analysis runs into two big problems.  The first is that it assumes that the amount of time people spend on unemployment insurance is unrelated to how long the government offers to keep paying benefits.  The second is that it assumes that the assumptions about “fiscal multipliers” built into Economy.com econometric model are actually evidence rather than just assumptions.

On the first point, page 75 of the 2007 OECD Employment Outlook explains: “It is well established that generous unemployment benefits can increase the duration of unemployment spells and the overall level of unemployment… This could have a negative impact on productivity through inefficient use of resources and depreciation of human capital during long spells of unemployment. In addition, by reducing the opportunity cost of unemployment, generous unemployment benefits may lead existing employees to reduce their work effort, thereby lowering productivity (see e.g. Shapiro and Stiglitz, 1984; Albrecht and Vroman, 1996).”

As I recently noted, the overwhelming evidence that extended unemployment benefits raise the duration and rate of unemployment comes from economists in the Obama administration, Larry Summers and Treasury economist Alan Krueger, as well as many others such as Lawrence Katz of Harvard and Bruce Meyer of the University of Chicago.

Contrary to Leachman, bribing people to stay on the dole for an extra 53-73 weeks leaves them with less money to spend, not more.   It also looks bad on resumes, and may cause lasting damage to future job prospects.

Leachman’s second problem concerns fiscal multipliers, such as Zandi’s astonishing 1.6 multiplier for unemployment benefits.

In a similar effort to pretend that borrowed money is free, and therefore “creates jobs,” the Council of Economic Advisers claims to use “mainstream estimates of economic multipliers for the effects of fiscal stimulus.” Yet the cited sources are not from academic research at all, but from the mysterious innards of notoriously unreliable econometric forecasting models from Economy.com, Global Insight, J.P. Morgan Chase and Goldman Sachs.

At the Federal Reserve Bank of San Francisco, by contrast, economist Sylvain Leduc surveyed contemporary research by ten distinguished scholars, including current CEA chair Christina Romer and IMF chief economist Olivier Blanchard.

“An interesting aspect of this new literature,” wrote Leduc, is that, notwithstanding their vastly different methodologies, they reach surprisingly similar conclusions. Regarding the impact of tax cuts on the level of real GDP one year after the change in taxes, the three studies predict a multiplier of roughly 1.2…  Moreover …  in contrast to theoretical predictions from the simple Keynesian framework, the analyses found that government spending had less bang for the buck than tax cuts. For instance, one year after the increase in spending, the impact on the level of real GDP is less than one-for-one, partly reflecting a decline in investment.”

In this new academic research, the estimated multiplier for deficit spending ranged from 0.4 to 0.6 — meaning a dollar of added federal debt added far less than a dollar to GDP.   Moreover, an IMF paper on “Fiscal Multipliers” adds that negative multipliers are quite possible: “fiscal expansions can be contractionary if they decrease consumers’ and investors’ confidence, especially if the fiscal expansion raises, or reinforces, fiscal sustainability concerns.”

Whether the government pays people to work or to stay on the dole, it has to get the money by taxing, borrowing or printing money — all of which reduce real income and employment opportunities in the private sector.  To imagine that borrowing from Peter to pay Paul is a way to create or save Paul’s job is to forget that Peter expects his money back with interest.

If every dollar of unemployment benefits really added $1.61 to real GDP, then putting everyone on the dole would make us all much richer

Chinese Security Scholar Calls for Overseas Basing to Counter U.S.

Dr. Dingli Shen, a scholar of security studies and Chinese and U.S. foreign policies at Fudan University, had an interesting op-ed yesterday that merits attention.

Dr. Dingli Shen

According to Shen, China should consider developing “overseas military bases,” which he says people define in today’s context as “supply bases for the navy escorting the ships cruising in the Gulf of Aden and Somalia.”  Shen lists four main interests that justify overseas bases: “the protection of the people and fortunes overseas; the guarantee of smooth trading; the prevention of the overseas intervention which harms the unity of the country and the defense against foreign invasion.”

The lay reader should be clear that the United States does not look favorably on China’s developing the ability to guarantee its own smooth trading; we like having the leverage to determine, ultimately,whether we will allow foreign countries to trade.  The reader should also be aware that the third interest Shen lists is a diplomatic phrasing of “being able to prevent U.S. intervention in Taiwan,” perhaps in addition to some much smaller concerns about Tibet.  The Chinese do not need to do anything to pursue the fourth listed interest, preventing foreign invasion of China.  So what’s left is protecting Chinese people and money overseas; wresting control of China’s sea lines of communication from the United States; and preventing U.S. intervention in ways that would “harm the unity of the country.”

The piece really goes out of its way to make clear that this is all about countering American military power.

For instance, his first example justifying a greater role for China abroad is the Korean War.  According to Shen, “China had no option but to call up volunteer soldiers to fight against the overseas intervention in its northern neighbor.”  Later in the piece he makes clear that although he believes in each of the four interests above,

[t]he real threat to us is not posed by the pirates but by the countries which block our trade route.

The threats also include secessionism outside the Chinese mainland. The situation requires us be able to hit the vulnerable points of our potential opponents by restricting their international waterway.

In closing, he acknowledges three potential obstacles to successfully developing these overseas bases: “relations between base troops and the host countries,” “the relationship between the base troops and the countries neighboring to the host country,” and “the relationship between the big countries in the world.”  With respect to the latter, Shen notes,

It is inevitable for some countries to suspect our good intention in maintaining the world peace, but their suspicion shall not become an obstacle to our military base strategies. Currently, America, France and Britain own a majority of troop bases in the world. Yet China seldom felt being threatened by the military bases set up by Britain and France. Therefore, we have no reasons to feel that the military bases we set up will agitate other countries. (emphasis mine)

Note the shift from the three countries who have the majority of overseas bases at present to the two countries whose bases don’t concern China.

A few thoughts:

1) How did this debate start?  Shen refers to debates “online,” but presumably this issue has been taken up in greater detail recently in Chinese strategic studies journals.  I’d be interested to see the trajectory of this discussion both there and in public.

2) Why such an expressly anti-U.S.-hegemony tone?  This sort of thing is not exactly conducive to cloaking China’s growing military power in mystery.  The rhetoric about “peaceful rise,” remember, was viewed as too provocative because it included the word “rise,” so it got switched to “peaceful development,” which was viewed as sufficiently diplomatic.  But just coming out and saying “we need overseas bases to counter the U.S. military” like this is running, not walking, in the opposite direction.  This analysis sounds positively Mearsheimerian.  Why is this debate being carried out in this manner, in public and now in English?

3) How does this (or doesn’t it) tie in to prospective Chinese aircraft carrier capabilities?  As one recent article noted,

A PLAN carrier would have the effect of extending Chinese air capabilities without requiring overseas air bases. Nonetheless, while a nuclear carrier may be homeported in China, supplying it with jet fuel, food, ammunition, and other consumables becomes harder with distance. The U.S. Navy solves this problem with an extensive series of overseas logistics bases and large, fast replenishment ships that support the operations of carriers, themselves operating largely from the continental United States. Lacking such support mechanisms, a Chinese carrier is likely to stay closer to home, but it may still require a Chinese support presence overseas.

So then should we interpret such a call for overseas basing as reflecting a continuation of the “string of pearls” orientation of the PLAN, or as laying the groundwork for allowing carriers to operate farther away from Chinese ports?

More Data on “Fiscally Conservative, Socially Liberal” Voters

A study by the Tarrance Group for the Republican organization GOPAC provides further evidence on the existence of voters who don’t fall into the “conservative” or “liberal” box.  Tarrance asked people who voted in the 2008 election not just to label themselves conservative or liberal, but to describe their views on both fiscal and social issues. The questions were:

When thinking about fiscal issues, like taxes and government spending, do you consider yourself to be:
Very conservative, Somewhat conservative, Somewhat liberal, or Very liberal?

When thinking about social issues, like abortion and gay marriage, do you consider yourself to be:
Very conservative, Somewhat conservative, Somewhat liberal, or Very liberal?

Tarrance leaves out the “moderate” option, but a few respondents volunteer it.

The results were interesting. While 69 percent of respondents described themselves as conservatives on fiscal issues, only 53 percent said they were conservative on social issues. When you combine the responses, you find that 23 percent of respondents described themselves as fiscally conservative but liberal or moderate on social issues. That’s pretty close to the estimates of the libertarian vote that David Kirby and I presented in “The Libertarian Vote in the Age of Obama.” See pages 4-7, especially Figure 3, in the full study. Using fairly strict criteria, we declared 14 percent of the electorate to fall into the libertarian category. But three other studies yielded 23 to 26 percent who gave libertarian answers to questions about both fiscal and social issues.

Tarrance presented the results to GOPAC this way (the “moderate” category includes both those who volunteered the word moderate and those who declined to pick either liberal or conservative as a label):

Interestingly, these “fiscally conservative, socially moderate or liberal” respondents made up 17 percent of Republicans but 24 percent of Democrats – and 41 percent of ticket-splitters:

So a couple of interesting points to take away from this study (which was actually done right after the 2008 election but I only just learned about): First, conservative pundits have talked a lot over the past year about Gallup’s findings throughout 2009 that conservatives outnumbered both moderates and liberals, suggesting a slight shift to the right among Americans. The GOPAC study shows us that lots more Americans think of themselves as fiscal conservatives than as social conservatives. That’s a result that Ramesh Ponnuru, who regularly argues that Republicans win more votes on social conservatism than on economic conservatism, might ponder.

Second, as Kirby and I keep saying, there actually are libertarian-ish voters, who generally prefer less government in both economic and personal matters, and politicians, consultants, and pundits ought to pay attention to them.

Third, Tarrance found that 23 percent of likely voters declare themselves conservative on fiscal issues but not on social issues (and only 7 percent say they’re socially but not fiscally conservative, and they’re almost all Democrats), and that number is very close to numbers found by other pollsters. But when Zogby asked people, “Would you describe yourself as fiscally conservative and socially liberal?” 59 percent said yes. That’s a much larger number. Maybe the combination is particularly attractive – “best of both worlds.”

Teachers Union Channels Teen Talk Barbie

“Math class is tough!”  –Teen Talk Barbie

Political scientist Jay Greene bravely decided to read the new NEA paper that is billed as showing that “Teachers Take ‘Pay Cut’ as Inflation Outpaces Salaries.  Average teachers’ salaries declined over the past decade.”

But a funny thing happened when he reviewed the study: it didn’t support the NEA’s own claim. Here’s Jay:

The only problem is that this is not what the data in the NEA report actually show.  In Table C-14 “Percentage Change in Average Salaries of Public School Teachers 1998-99 to 2008-09 (Constant $)” we see that salaries increased by 3.4% nationwide over the last decade after adjusting for inflation…. I can’t find a single table or figure in the report that would justify the headline and claims in the press release.  But when the Ministry of Truth speaks, who are you supposed to believe — them or your lying eyes?

Of course the real reason that public school labor costs have risen so much in the past 40 years is not that salaries have skyrocketed, but that employment has. We now have 70% more staff per student than we did in 1970, and students’ scores are not a whit better for it at the end of high school.

Would the NEA be happy if we gave every teacher a raise but returned to the staff/student ratio of 1970? I doubt it. It would drastically cut the union’s dues revenues.

In any event, the union’s impact through collective bargaining, as I wrote in the Cato Journal recently, appears to be negligible. Where they make a difference is in effective lobbying to preserve the existing government education monopoly. The monopoly is great for public school employee unions, but lousy for kids, parents, and taxpayers.

George Will on Obama

In the Washington Post and many other papers today, in re the State of the Union:

Obama’s leitmotif is: Washington is disappointing, Washington is annoying, Washington is dysfunctional, Washington is corrupt, verily Washington is toxic – yet Washington should conscript a substantially larger share of GDP, and Washington should exercise vast new controls over health care, energy, K-12 education, etc.

Mark your calendar for May 13, when George Will keynotes the biennial Milton Friedman Prize for Advancing Liberty Dinner here in Washington. I anticipate similarly acerbic analysis.

State and Local Subsidies

Earlier this week I criticized the U.S. Conference of Mayors for going to Washington and groveling for more federal handouts. Let me provide some more background for my criticisms with a look at federal budget data. The first chart shows that since 1960, total federal subsidies to state and local government have increased an astounding 1,173%.

Several readers have asked me what particular programs account for this large increase in state aid. The federal budget breaks down the total figures into categories. Not surprisingly, health subsidies — mainly Medicaid — account for almost half of the current total and are the driving force behind the massive overall increase:

However, there have been large increases in other activities as well. Here are the changes by federal budget function in state aid since 1960, in billions of 2010 dollars:

  • Health: $1.5 to $310.7 (+21,128%)
  • Education, Training, Employment & Social Services: $3.7 to $103.3 (+2,723%)
  • Community & Regional Development: $0.7 to $20.3 (+2,674%)
  • Other*: $0.7 to $12.0 (+1,707%)
  • Natural Resources & Environment: $0.7 to $7.8 (+966%)
  • Income Security: $19.0 to $113.8 (+498%)
  • Transportation: $22.0 to $73.5 (+235%)
  • General Government: $1.5 to $4.7 (+221%)
  • Administration of Justice*: $2.6 to $5.3 (+100%)
  • Agriculture: $1.5 to $1.0 (-32%)

*Administration of Justice begins in 1975. “Other” begins in 1965 and consists of grants for national defense, energy, social security, and veterans’ benefits and services.

All of these categories are at or near their high water mark in constant dollars with the exception of Natural Resources & Environment ($13.8 in 1980), Agriculture ($4.5 in 1985), and General Government ($26.9 in 1975).

Rather than being deprived, state and local governments have developed an unhealthy dependency on federal money. In a way, the states have become an extension of the federal government. This is at odds with the Constitution, which clearly intended for the federal government to have specific limited powers. As the 10th amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” There seems to be very little reserved to the states anymore, and even less to the people.

See these essays for more on constitutional basics and the desirability of fiscal federalism.

How Will the Independents Vote?

In a recent Cato study, “The Libertarian Vote in the Age of Obama,”  authors David Boaz and David Kirby found that libertarian voters, who make up about 14 percent of the electorate, are a leading indicator of how independents will cast their ballots.

Appearing on Freedom Watch earlier this week, Boaz explained the results of the study, and what it means for the next election. Watch: