Tag: alan krueger

Egypt’s Fall Down the Dark Hole

The ongoing events in Egypt are an unspeakable human tragedy. With yesterday’s death toll of 525 and rising violence in major Egyptian cities, the chances of a return towards anything resembling normalcy are very slim. The Muslim Brotherhood deserves a significant portion of the blame-–mostly for its complete failure in governing the country prior to the coup and also because their willful effort to be seen as martyrs in the aftermath of the military takeover. However, it is the military junta running the country that is now the single biggest factor driving the country towards a catastrophe.

The fact that the military has shut down the normal political process and proceeded with an extensive crackdown both against the leadership of the Brotherhood and its supporters, has created incentives for the rise in politically motivated violence and, potentially, terrorism. Princeton University economist Alan Krueger–author of What Makes A Terrorist, a book investigating the factors fostering political violence and terrorism–argued that

[t]errorists and their organisations seek to make a political statement; terrorists arise when there are severe political grievances with no alternatives for pursing those grievances.

This account describes perfectly the escalation of violence in Egypt after the military coup. Unfortunately, it is not clear that there is an easy way back. Ideally, one would hope that the Egyptian secular liberals engage with the Brotherhood, that the military relinquish its hold to power, lift the curfew, and renounce further repression, and that the Brotherhood and its various factions steer away from violence. Yet the probability of the simultaneous occurrence of all these events is rather small.

It is important to stress that the West has been complicit in the build-up of the current situation. Without a continual inflow of US military assistance (roughly $70 billion since the country’s independence), the Egyptian military would have hardly grown to be the unaccountable and opaque organization it is, controlling a large part of the Egyptian economy and effectively calling the shots in Egypt’s politics.

Alas, the behavior of Western policymakers in the aftermath of the coup has been equally embarrassing – notwithstanding the cancellation of joint military exercises with Egypt that President Obama announced today. Douglas Carswell, a member of the UK’s House of Commons, wrote an excellent blog post on the subject yesterday. He concludes by saying that

[b]y equivocating about the overthrow of Morsi (the US State Department won’t even call it a coup), Western governments seem to be doing all they can to validate the Brotherhood’s script. The more that we buddy up to the generals in Cairo, the further we legitimise the world view of people like Morsi.

Where is the principled opposition to military takeovers in London and Washington? Where is the condemnation of the treatment of Egypt’s democratically elected leader?  Where is the loud, and uncompromising condemnation of this morning’s killings?

Perhaps this is what happens when we leave it to career diplomats to determine foreign policy.  Equivocation and drift.  It does not do us – or Egypt – any favours.

Obama Supports VAT Sympathizer for Top Job at Council of Economic Advisers

The White House has announced that it is nominating Alan Krueger, a professor at Princeton, to be the new Chairman of the Council of Economic Advisers.

In a Freudian copy-editing slip, the Fox News story (at least as of 8:44 a.m.) says “Krueger’s job will be to provide policy prescriptions on ways to spur unemployment.”

That’s obviously tailor-made for a joke about the Obama Administration not needing any help when it comes to stimulating joblessness.

On a more serious note, though, I’m worried about Krueger’s sympathy for a value-added tax (VAT). Here’s what he wrote back in 2009.

…a 5 percent consumption tax would raise approximately $500 billion a year, and fill a considerable hole in the budget outlook. In addition, a consumption tax would encourage more saving in the long run. Many economists consider a consumption tax an efficient way of raising tax revenue, especially in a global economy. The prospect of greater revenue flowing into federal coffers would probably help lower long-term interest rates because the government would need to borrow less down the road, and further bolster the economy.

To be fair, Krueger was very careful to leave himself some wiggle room, even going so far as to write that, “I’m not sure it is the best way to go.”

But it seems rather obvious that Krueger, like other leftists, wants this giant new source of revenue. Heck, President Obama also has semi-endorsed a VAT, saying it is “something that has worked for other countries.”

The President’s assertion is especially foolish. After all, European nations imposed VATs about 40 years ago, which simply encouraged more spending and more debt – and now several nations are on the verge of bankruptcy.

If that’s “something that has worked,” I’d hate to see the President’s idea of failure.

The real lesson is that the United States should not copy Europe’s mistakes. This short video has the key arguments against this European-style national sales tax.

P.S. For a humorous perspective on the VAT, take a look at these clever cartoons (here, here, and here).

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