Tag: unemployment

Fed Can’t Serve Two Masters

Last week Congressman Pence and Senator Corker announced a bill to end the Federal Reserve’s dual mandate of price stability and maximum employment.  Before getting into why this is a good start, what exactly is the dual mandate?  Section 2a of the Federal Reserve Act, which sets the Fed’s monetary policy objectives, directs the Fed to:

maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Building upon the notion of the Phillips curve, which suggests an historical relation between inflation and unemployment, some have read 2a as implying that the Fed should pick an inflation-unemployment trade-off that improves social welfare.  It is this perceived “trade-off” that dominates the current actions of the Federal Reserve. Quite simply, Fed leaders, such as Bernanke, believe with a little extra inflation we can get more employment.

The problem is that this isn’t so.  As soon as policymakers tried to exploit this trade-off, in the 1960s and 1970s, it disappeared.  From about 1961 to 1966, it did indeed appear that one could choose a mix of inflation and unemployment.  But from 1966 until 1980, when Volcker moved to bring down inflation, inflation and unemployment were positively correlated.  It appeared that all we got was more inflation and more unemployment.

Despite the painful experiences of the 1970s, Bernanke seems intent on repeating those mistakes.  Which gets to me to the point of removing the dual mandate.  It forces the Fed to focus on the only thing it really has any influence over: inflation.  It also removes the temptation to exploit an inflation-unemployment trade-off that never existed in the first place. 

Now given Bernanke’s views on price stability, eliminating the dual mandate can only be a first step.  We ultimately need to remove the discretion of the government to indulge in the Phillips curve fantasy.

The GM ‘Turnaround’ in Bastiat’s View

GM’s long-rumored initial public stock offering will take place Thursday and self-anointed savior of the U.S. auto industry, Steven Rattner, is pretty bullish about the prospect of investors turning out in droves. 

I’ve been saying for a while that I thought the government’s exposure [euphemism for taxpayer losses] in the auto bailout was in the $10-billion to $20-billion range.

But since investor interest has pushed the initial price up from the $26-to-$29 per share range to the $32-$33 range, Rattner now believes:

[T]his exposure is in the single-digit billion range, and arguably potentially better.

I won’t argue with Rattner’s numbers.  After all, they affirm one of my many criticisms of the bailout: that taxpayers would never recoup the value of their “investment.”  My bigger problem is with Rattner’s cavalier disregard for the other enduring—and arguably more significant—costs of the auto bailouts.

Rattner is like the foil in Frederic Bastiat’s excellent, but not-famous-enough, 1850 parable, That Which is Seen and That Which is Unseen.    Rattner touts what is seen, namely that GM and Chrysler still exist.  And they exist because of his and his colleagues’ commitment to a plan to ensure their survival, along with the hundreds of thousands (if not millions, as some “estimates” had it) of jobs that were imperiled had those companies vanished.  (For starters, I very much question even what is seen here. I am skeptical of the counterfactual that GM and Chrysler would have disappeared and that there would have been significantly more job loss in the industry than there actually was during the recession and restructuring.  But I’ll grant his view of what is seen because, frankly, the specifics are irrelevant in the final analysis).

For what is seen, Rattner admirably admits of a cost.  And that cost is not insignificant.  It is anywhere from $65 billion to $82 billion (the range of the cost of the bailout) minus what is being paid back and what investors are willing to pay for GM shares—in the “single-digit billion range,” as Rattner says.  But Rattner is willing to stand by that trade-off, claiming his efforts and the billions in “government exposure” were a small price to pay for saving the U.S. auto industry, as it were.  It’s merely a difference in philosophy or compassion that animates bailout critics, according to this position.

No.  Not so fast.  All along (quite contemptuously in this op-ed, which I criticized here) Rattner has been unwilling to acknowledge the costs that are unseen.  Those unseen costs include:

  • the added uncertainty that pervades the private sector and assigns higher risks and thus higher costs to investing and hiring (whom might government favor or punish next?);
  • the diversion of resources from productive to political purposes in the business community (instead of buying that machinery to churn out better or more lawn mower engines, better to hire lobbyists to keep Washington apprised of how important we are or how this or that policy might be beneficial to the national employment picture!);
  • excessive risk-taking and other uneconomic behavior that falls under the rubric of moral hazard from entities that might consider themselves too-big-to-fail (perhaps, even, the New GM!);
  • growing aversion to—and rising cost of—corporate debt (don’t forget what happened to Chrysler’s “preferred” bondholders in the bankruptcy process!);
  • the sales and market share that should have gone to Ford or Honda or VW as part of the evolutionary market process;
  • the fruitful R&D expenditures of those more disciplined companies;
  • the expansion of job opportunities at those companies and their suppliers;
  • productivity gains passed on to workers in the form of higher wages or to consumers as lower prices;
  • the diminution of the credibility needed to discourage foreign governments from meddling in markets, often to the detriment of U.S. enterprises.

 The list goes on.

 Yet, Rattner, seemingly oblivious to the fact that the economy remains stuck in the mire, speaks triumphantly of the successful auto bailout.  But nobody ever doubted that taxpayer resources in the hands of policymakers willing to push the bounds of legality could “rescue” GM from a fate it deserved.  The concern was that policymakers would do just that, leaving behind wreckage to our institutions not immediately discernible.  But anemic economic activity, 9.6 percent unemployment, and a private sector unwilling to invest is pretty darn discernible at this point.

Rattner should take off the tails, put down the champagne flute, and acknowledge what was originally unseen.

Obama’s Job-Killing Policies: A Picture Says a Thousand Words

The new unemployment data have been released and they don’t paint a pretty picture – literally and figuratively.

The figure below is all we need to know about the success of President Obama’s big-government policies. The lower, solid line is from a White House report in early 2009 and it shows the level of unemployment the Administration said we would experience if the so-called stimulus was adopted. The darker dots show the actual monthly unemployment rate. At what point will the beltway politicians concede that making government bigger is not a recipe for prosperity?

They say the definition of insanity is doing the same thing over and over again while expecting a different result. The Obama White House imposed an $800-billion plus faux stimulus on the economy (actually more than $1 trillion if additional interest costs are included). They’ve also passed all sorts of additional legislation, most of which have been referred to as jobs bills. Yet the unemployment situation is stagnant and the economy is far weaker than is normally the case when pulling out of a downturn.

But don’t worry, Nancy Pelosi said that unemployment benefits are stimulative!

Pro-War, Anti-Immigration Folks Are Confused

USA Today runs an interesting article about the DREAM Act, which Senate Republicans torpedoed this week, and which would have paved the way for many illegal immigrants to become legal.

As journalist Alan Gomez notes, the “less publicized part of the [DREAM Act] is that the Pentagon is pushing for it as a means to staff the armed forces.”

When the Department of Defense published its three-year strategic plan, it listed the DREAM Act as a way it could replenish its ranks.

“If we needed to expand the pool of eligible youth, the (DREAM) initiative would be one of several ways to do it,” spokeswoman Eileen Lainez said in an e-mail.

Retired Army lieutenant colonel Margaret Stock says a “crisis in military manpower” is looming as the population ages and the economy improves. She says the military struggled to recruit enough people when the economy was booming just a few years ago because people had more employment options.

“DREAM would give us the ability to tap into a huge number of people who grew up in the United States, were educated here, they talk like Americans, they look like Americans and their loyalty lies with America,” says Stock, a former West Point professor who teaches political science at the University of Alaska-Anchorage.


The military part of the act worries Jorge Mariscal, director of Latino studies at the University of California-San Diego.

He says many illegal immigrant families are too poor to pay for college.

“Our concern is that people are just going to get trapped for economic reasons into the military,” says Mariscal, who otherwise supports the DREAM Act.

A few thoughts on this: First, we might be experiencing a “crisis in military manpower” because we’re fighting too many wars and trying to do too much abroad, rather than as a necessary consequence of our aging population.

Second, Mariscal’s concern about illegal immigrants joining the military out of financial considerations rather than support for the nation’s wars makes them…a lot like the people who are in the military already.  In a poll of active-duty military personnel published in the April 12, 2010 Defense News, responses to the question “What are the three most important reasons you would stay in the military?” were as follows:

  • Job security (50%)
  • Pension (49%)
  • Patriotism (48%)
  • Health care for my family and me (42%)
  • Career satisfaction (32%)
  • Pay (31%)
  • Educational opportunities (21%)
  • Travel, adventure (16%)
  • Wars in Afghanistan and Iraq (11%)
Credit: Jamie Rose for The New York Times

Finally, those in Congress who support American militarism but oppose immigration have a few contradictions to reconcile.  The late Samuel Huntington, whose last book was searingly unpersuasive and draped a veneer of scholarly credibility over rank nativism, nonetheless got it right when he wrote that

[W]ars have furthered assimilation of immigrants not only by reducing their numbers but also by giving them the opportunity and the impetus to demonstrate their loyalty to America.  Readiness to fight and if necessary die in war cemented their attachment to their new home and made it difficult if not impossible for nativist, anti-immigrant groups to oppose their full membership in American society.

So if you’re in any way interested in “assimilation,” getting people into the military is one of the best ways to do it.

Further, when you have DOD pushing for a bill on the grounds that it provides for a future where the nation’s armed forces can be fully staffed, and congressional war hawks spiking it because–well, for whatever variety of reasons they might have–it raises the question what the pro-war, anti-immgration folks’ plan is for perpetuating American hegemony while keeping immigrants out of the armed forces.  Keeping unemployment at 10%?  Cranking up pay and benefits even faster, making the military budget even less sustainable?

Actually, one additional point: Mark Haas wrote an interesting article a few years back positing a “geriatric peace” on the grounds that large and powerful countries may age so fast that they may not have concentrations of young men (or women) needed to fight and die in war.  In that article, Haas wrote that

The United States is currently the youngest of all the Group of Eight nations.  Because it has the highest fertility and immigration rates of all these countries, it will maintain, even strengthen, this position in coming decades.


Both the opportunities and challenges for U.S. security in an aging world are substantial. The United States’ aging crisis is less acute than in the other great powers, and its ability to pay the costs associated with this phenomenon is significantly better than most of these states. These facts, however, should not disguise the magnitude of these costs for the United States nor lull U.S. leaders into inaction on this critical issue. The more the United States maintains its enviable demographic position (compared with the other great powers) and relatively superior ability to pay for  the costs of its elderly population, the more it will be able both to preserve its own position of international power dominance and to help other states address their aging (and other) problems when it is in U.S. interests to do so. A critical implication of these facts is that such domestic policies as means-testing Social Security and Medicare payments, raising the retirement age to reflect increases in life expectancies, maintaining  largely open immigration policies to help keep the United States’ median age relatively low, encouraging individual behaviors that result in better personal health, and perhaps above all restraining the rising costs of its health-care system are critical international security concerns.  A defining political question of the twenty-first century for U.S. international interests is whether U.S. leaders have sufficient political  will and wisdom to implement these and related policies. The more proactive U.S. leaders are in minimizing the scope of its aging population and the costs associated with it, the more protected U.S. international interests will be. To ignore these costs, or even to delay implementing various reforms designed to limit their size, will jeopardize the level of global influence and security that the United States enjoys today.

Food for thought.

Is National Journal Giving ObamaCare a Big, Wet Smooch?

Come September, National Journal will host a policy summit titled “Prescription For Growth,” funded by Eli Lilly, that will probe “the potential impact of recently passed health care reform as an economic engine” and ask whether “health care reform [will] serve as a jobs creator and accelerate growth in health-related industries?”

Oy, where to begin?

I suppose I could start with how a news organization that bills itself as “the leading source of nonpartisan reporting” could lend ObamaCare a positive gloss by calling it “reform” – a term that even NPR declines to ascribe to actual legislation (for that reason).

Next, there’s this inane question of whether ObamaCare will spur job growth in the health care sector.  With two new health care entitlements and maybe a trillion dollars of new health spending…gosh, d’ya think?

But then there’s the presumption that creating new health care jobs is a good thing.  You’d think it would be.  After all, unemployment is near 10 percent.  But one of our biggest health care problems is that there are too many health care jobs.  The Dartmouth Institute’s Elliot Fisher has quipped, “In theory, we could send a third of the U.S. health care workforce to Africa and improve the health of both continents.”  ObamaCare will just make this country’s health care sector even more bloated and inefficient.

Wrap your head around all that this summit aims to accomplish.  It could give a boost to an unpopular and embattled law by taking one of the law’s biggest liabilities and dressing it up as an asset.  It could create a meme that helps turn around President Obama’s low approval rating on the economy – never mind that ObamaCare is stifling the right kind of job creation.

Of course, I may have this summit all wrong.  It may give all these issues a fair hearing.

Did I mention the summit’s sponsor is one of the biggest special-interest beneficiaries of ObamaCare?  (Tim Carney, call your office.)

Or a Program That Was Actually Going to Work

John Judis writes in the New Republic that Obama hasn’t been as successful at selling his economic program as Reagan was:

On the eve of the [1982] election, with the unemployment rate at a postwar high, a New York Times/CBS News poll found that 60 percent of likely voters thought Reagan’s economic program would eventually help the country. That’s a sign of a successful political operation.

When Keynesians Attack

If I was organized enough to send Christmas cards, I would take Richard Rahn off my list. I do one blog post to call attention to his Washington Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable criticism. Now it’s time to address Derek Thompson’s critique on the Atlantic’s site.

At the risk of re-stating someone else’s argument, Thompson’s central theme seems to be that there are many factors that determine economic performance and that it is unwise to make bold pronouncements about Policy A causing Result B. If that’s what Thompson is saying, I very much agree (and if it’s not what he’s trying to say, then I apologize, though I still agree with the sentiment). That’s why I referred to Reagan decreasing the burden of government and Obama increasing the burden of government — I wanted to capture all the policy changes that were taking place, including taxation, spending, monetary policy, regulation, etc. Yes, the flagship policies (tax reduction for Reagan and so-called stimulus for Obama) were important, but other factors obviously are part of the equation.

The biggest caveat, however, is that one should always be reluctant to make sweeping claims about what caused the economy to do X or Y in a given year. Economists are terrible forecasters, and we’re not even very proficient when it comes to hindsight analysis about short-run economic fluctuations. Indeed, the one part of my original post that causes me a bit of regret is that I took the lazy route and inserted an image of the chart from Richard’s column. Excerpting some of his analysis would have been a better approach, particularly since I much prefer to focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week  and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in 2011).

But a blog post is no fun if you just indicate where you and a critic have common ground, so let me identify four disagreements that I have with Thompson’s post:

(1) To reinforce his warning about making excessive claims about different recessions/recoveries, Thompson pointed out that someone could claim that Reagan’s recovery was associated with the 1982 TEFRA tax hike. I’ve actually run across people who think this is a legitimate argument, so it’s worth taking a moment to explain why it isn’t true.

When analyzing the impact of tax policy changes, it’s important to look at when tax changes were implemented, not when they were enacted (data on annual tax rates available here). Reagan’s Economic Recovery Tax Act was enacted in 1981, but the lower tax rates weren’t fully implemented until 1984. This makes it a bit of a challenge to pinpoint when the economy actually received a net tax cut. The tax burden may have actually increased in 1981, since the parts of the Reagan tax cuts that took effect that year were offset by the impact of bracket creep (the tax code was not indexed to protect against inflation until the mid-1980s). There was a bigger tax rate reduction in 1982, but there was still bracket creep, as well as previously-legislated payroll tax increases (enacted during the Carter years). TEFRA also was enacted in 1982, which largely focused on undoing some of the business tax relief in Reagan’s 1981 plan. People have argued whether the repeal of promised tax relief is the same as a tax increase, but that’s not terribly important for this analysis. What does matter is that the tax burden did not fall much (if at all) in Reagan’s first year and might not have changed too much in 1982.

In 1983, by contrast, it’s fairly safe to say the next stage of tax rate reductions was substantially larger than any concomitant tax increases. That doesn’t mean, of course, that one should attribute all changes in growth to what’s happening to the tax code. But it does suggest that it is a bit misleading to talk about tax cuts in 1981 and tax increases in 1983.

One final point: The main insight of supply-side economics is that changes in the overall tax burden are not as important as changes in the tax structure. As such, it’s also important to look at which taxes were going up and which ones were decreasing. This is why Reagan’s 1981 tax plan compares so favorably with Bush’s 2001 tax plan (which was filled with tax credits and other policies that had little or no impact on incentives for productive behavior).

(2) In addition to wondering whether one could argue that higher taxes triggered the Reagan boom, Thompson also speculates whether it might be possible to blame the tax cuts in Obama’s stimulus for the economy’s subsequent sub-par performance. There are two problems with that hypothesis. First, a substantial share of the tax cuts in the so-called stimulus were actually new spending being laundered through the tax code (see footnote 3 of this Joint Committee on Taxation publication). To the extent that the provisions represented real tax relief, they were much more akin to Bush’s non–supply side 2001 tax cuts and a far cry from the marginal tax-rate reductions enacted in 1981 and 2003. And since even big tax cuts have little or no impact on the economy if incentives to engage in productive behavior are unaffected, there is no reason to blame (or credit) Obama’s tax provisions for anything.

(3) Why doesn’t anyone care that the Federal Reserve almost always is responsible for serious recessions? This isn’t a critique of Thompson’s post since he doesn’t address monetary policy from this angle, but if we go down the list of serious economic hiccups in recent history (1974-75, 1980-82, and 2008-09), bad monetary policy inevitably is a major cause. In short, the Fed periodically engages in easy-money policy. This causes malinvestment and/or inflation, and a recession seems to be an unavoidable consequence. Yet the Fed seems to dodge any serious blame. At some point, one hopes that policy makers (especially Fed governors) will learn that easy-money policies such as artificially low interest rates are not a smart approach.

(4) Thompson writes, “Is Mitchell really saying that $140 billion on Medicaid, firefighters, teachers, and infrastructure projects are costing the economy five percentage points of economic growth?” No, I’m not saying that and didn’t say that, but I have been saying for quite some time that taking money out of the economy’s left pocket and putting it in the economy’s right pockets doesn’t magically increase prosperity. And to the extent money is borrowed from private capital markets and diverted to inefficient and counter-productive programs, the net impact on the economy is negative. Thompson also writes that, “Our unemployment picture is a little more complicated than ‘Oh my god, Obama is killing jobs by taking over the states’ Medicaid burden!’” Since I’m not aware of anybody who’s made that argument, I’m not sure how to respond. That being said, jobs will be killed by having Washington take over state Medicaid budgets. Such a move would lead to a net increase in the burden of government spending, and that additional spending would divert resources from the productive sector of the economy.

The moral of the story, though, is to let Richard Rahn publicize his own work.