Labor Markets Need More Help

Brad DeLong: 

Washington Post Crashed-and-Burned-and-Smoking Watch: …[The Washington Posts’s] Fred Hiatt this morning:

Re-Stimulating. Unemployment is bad. More fiscal debt might be worse: At 9.8 percent, the unemployment rate is higher than it has been since it hit 10.1 percent in June 1983. Since the recession began 21 months ago, the economy has shed nearly 7 million jobs. Whole industries — cars, housing, finance — have been devastated and may never recover fully. Nevertheless, White House economists reported in September that “employment is estimated to be between 600,000 and 1.1 million higher than it would otherwise have been” because of the Obama administration’s stimulus plan and other government policies, especially the Fed’s monetary expansion. While no one can prove or disprove that — much less apportion credit between fiscal and monetary policy — basic economics suggests that things might have been even worse if the government had done nothing…

It does not necessarily follow, however, that the economy needs more stimulus now. Government has managed to blunt the recession, but at a cost — a higher national debt burden, which future Americans must pay off by working harder and saving more than they otherwise would have…


So far the stimulus spendout has been some $160 billion. The midpoint estimate by Christy Romer and company is that GDP is now 1% higher than it would have been otherwise. That higher level of production and employment than we would have seen otherwise is going to lead to the collection of an extra $80 billion in tax revenues. That means that the net effect of the $160 billion we have pushed out the door has been to raise the national debt by $80 billion. The Treasury can now borrow through its TIPS program for 20 years at an interest rate of 2% plus inflation. That means that taxes in the future have to be higher by $1.6 billion per year–by $5 per person per year.

Thus the stimulus package so far:

  • Incur an extra forward-looking tax burden per person of 1.3 cents per day…
  • Get an extra 800,000 people productively at work–and get all the stuff they make and do–this year…

That looks like a very good deal: buying an extra productive job for an American today at a cost of $2000 per year in higher taxes looking forward–particularly when you think that some of those extra jobs build up our productive capacity to make us richer in the future as well.

The stimulus arithmetic suggests we should be doing more of it. The benefit-cost ratio at current stimulus spending levels is very good…

But nobody on Fred Hiatt’s staff realized this. For nobody on Fred Hiatt’s staff thinks that doing any arithmetic is part of their job description. Indeed, nobody on Fred Hiatt’s staff is capable of doing any arithmetic at all.

They blather on:

The real question is whether the benefits of pumping even more government fuel into America’s engine outweigh the risks. We see several reasons to doubt it. The first is the sheer immensity of stimulus policies already in place…. A second reason for skepticism is the intellectual poverty of some policy proposals…. [B]orrowing new money to move demand from the future to the present — whether it’s demand for houses, cars, or workers — is a dubious proposition.

Let’s set ourselves a national goal: close down the Washington Post down by July 2012.

Shaving peaks (e.g. tempering a housing boom so it doesn’t crash and burn) and filling troughs is demand shifting, and that’s exactly what you want to do to stabilize the economy across business cycles. It’s a bonus if the extra spending today gives you higher economic growth in the future, but that is not necessary for stabilization policy to be successful.

We are constrained in what we can do to stimulate the economy due to the artificial rule imposed by Republicans that any stimulus spending must increase economic growth in the future or it is not worth doing. That ties your hands in ways that makes it harder to implement anything but large scale public infrastructure projects (roads, bridges, etc.). Nothing wrong with those, they should be part of the mix, but those projects take time to put into place and may not be the best way to give an immediate boost to employment.

Under this definition of what type of stimulus is allowable, hiring someone to pick up trash in a public park is “wasteful” even though the community might place a high value on such activities, and it has an immediate impact on employment. I think Brad falls into the trap of being limited by this constraint in his calculations and discussions which emphasize future productivity. If you read between the lines he allows for other types of benefits (“some of those extra jobs build up our productive capacity to make us richer in the future as well”), but the discussion does seem to be framed within the “it must help with growth” terms that the right has set down (Republicans will, of course, accept growth enhancing tax cuts as an alternative).

We need to do something about the employment problem, and I don’t understand why the left has allowed its hands to be tied be the GOP’s framing of the stimulus issue. Of course it’s a political non-starter if you don’t fight back and present alternative arguments. There are benefits to stabilizing the economy by shifting demand from the good times to the bad times even if it doesn’t affect future economic growth (one could even argue that slightly lower growth is an acceptable trade off for enhanced stability, but that too is a political non-starter). People need jobs, and we need to put the policies in place – whatever those are – that can provide them.

On the “burden to future generations” point, please see “Bogus Arguments about the Burden of the Debt”.

Update: Dean Baker also weighs in and makes some of the arguments in the “Bogus Arguments” link above (where he is quoted), along with a few additional points:

More Bad Math/Bad Economics at the Post, by Dean Baker: Given the quality of the economics reporting, parents would be well-advised to prohibit their children from reading the Washington Post so that they don’t get confused on basic arithmetic concepts. The Post doesn’t want more stimulus and is willing to say anything to push its case.

The lead editorial tells readers that: “government has managed to blunt the recession, but at a cost — a higher national debt burden, which future Americans must pay off by working harder and saving more than they otherwise would have.” Actually, future Americans will own the debt that will be paid off. This is not a generational issue, it can be a distributional one.

There is a point that some of the debt is held by foreigners. This will be a burden on the country, but the issue here is the trade deficit, not the budget deficit. If we had no government debt, but foreigners bought up $4 trillion of private capital in the United States, it would pose the same burden on future generations as if foreigners bought up $4 trillion of government debt. Remarkably, the Post is not concerned about the trade deficit and the burden it poses on future generations and actually does not want the cause of the deficit — the over-valued dollar– to be fixed.

The Post also gives the bizarre argument that we should wait on further stimulus because “the government still hasn’t run through half of the $787 billion in tax cuts and spending increases enacted this year.” Of course, for those of us who passed our third grade arithmetic class this argument is just plain silly.

The stimulus is already being disbursed at its maximum rate and therefore having its full impact on the economy. The additional spending will provide no further boost.

To see this point, imagine my rich uncle promises to give me $2,400 over two years in installments of $100 a month. I may originally be slow to change my consumption, but after 3 or 4 months I will likely have fully adjusted my spending in accordance with this monthly gift of $100. Once I have reached the 8th month, I will almost certainly be at my maximum spending rate, even though two thirds of the gift is yet to come.

This is where we stand right now. We have spent close to 40 percent of the stimulus with more than 60 percent yet to come, however the rate of spending will not be increasing from this point forward. Therefore, it will provide no further net boost to the economy. People who write editorials for major newspapers should understand this fact.

It is worth noting that the Congressional Budget Office (CBO) projections showing a 10.2 percent unemployment rate for 2010 and a 9.1 percent rate for 2011 include the impact of the stimulus. Perhaps the Post’s editors know something that CBO doesn’t, in which case they should share this information with their readers.

Originally published at Economist’s View and reproduced here with the author’s permission. 
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