Genre: Opinion/Argumentation

New CEA head falls well short of the (macro) mark The news today is not good and you might want to go to the end and get the music segment rolling before coming back to the start to read the rest. The newly appointment of Alan Krueger to the Chair of the US President's Council of Economic Advisors (CEA) has been widely applauded. Somehow the press think that he might actually change the course of policy and provide for a resurgence of employment. If you examine his early academic work you realise he has a concern for low-pay workers that many mainstream economists eschew. But he hasn't published anything substantial in macroeconomics or banking. His recent macroeconomics commentary is not encouraging. My conclusion is that the new ew CEA head falls well short of the (macro) mark. Alan Krueger takes on a leading economic role in the US Administration after a long-list of failures over the last few years including Lawrence Summers, Christina Romer, and Austan Goolsbee. The press are calling him a labour economist which just means his major work has been studying labour markets. I don't expect much will change. His 1995 book with David Card really set the cat among the conservative pigeons by demonstrating that imposition of minimum wages does not damage employment. The neo-liberals went wild. I attended many presentations by second-raters all taking aim at the book. Typical stuff -- starting with "lets assume we live on the planet X which is not Earth" -- "lets assume we collect coconuts and swap them with each other" -- "lets assume there is no money in this economy for simplifying the argument" -- "lets assume the government doesn't exist but a minimum wage policy is introduced nonetheless" -- then after a page or more of second-rate mathematics -- we get the conclusion -- "Card and Krueger are wrong -- minimum wages stop workers collecting coconuts". Many times I have heard that sort of rubbish at conferences, workshops, etc. The most significant response to their work came in 2000 (Neumark and Wascher) which was touted by the conservatives as the definitive repudiation of Krueger and Card. Like most of the mainstream responses to anomaly (that is, when their predictions fail dramatically) this work was poor and failed the most basic tests of controlling for multiple influences on the item of interest. As a critique it failed badly. Such has been the robustness of Card and Krueger's minimum wage work that even the OECD has started to back off its extreme neo-liberal position. The 2006 OECD Employment Outlook entitled Boosting Jobs and Incomes , is based on a comprehensive econometric analysis of employment outcomes across 20 OECD countries between 1983 and 2003. The sample includes those who have adopted the 1994 OECD Jobs Study as a policy template (that is, pushed for lower minimum wages and other labour market deregulation) and those who have resisted labour market deregulation. The report provides an assessment of the Jobs Study strategy to that date and reveals significant shifts in the OECD position. OECD (2006) finds that: There is no significant correlation between unemployment and employment protection legislation; The level of the minimum wage has no significant direct impact on unemployment; and No mainstream research has convincingly showed the opposite despite students being taught every day that wage increases damage employment particularly at the low-pay end of the labour market. This is one of those areas that the mainstream will never concede that their competitive labour market model is deeply flawed and is totally inadequate when it comes to understanding the dynamics of low-paid jobs. There was also the 2004 book he co-authored with James J. Heckman -- Inequality in America" -- which focused on the role of human capital investments in generating unequal income and wealth outcomes. They argued that low-income workers would benefit from more investment in human capital. A major finding was that more resources should be devoted to public schooling which they demonstrated provided a high return per public dollar. The book was fairly orthodox but it is fair to say that it was on the liberal end of the mainstream -- that is, a concern for equity, a signal that inequality was a market failure that could be reduced by public spending intervention targetted at the poor. What about now though? Krueger has had a recent chance to influence job creation given he was the assistant Treasury secretary for economic policy in the first two years of the Obama administration. His input promoted the "cash for clunkers" policy which seemed a far-fetched way to create work. Krueger was somewhat non-committal which at the time (when I read the article) I noted captured a sense of desperation and an unwillingness to cut to the chase -- which would be -- wide-scale public sector job creation. In that article, he is clearly aiming to comment on macroeconomic policy -- and it is one of rare public commentaries available from him in that context. He claimed that "(a)ny casual observer knows the United States faces enormous economic challenges in both the short and long run" which he characterises as: On the one hand, the economy is contracting, people are cutting back on their spending and the economy faces a possible downward spiral with fear of job loss, causing consumers to spend even less, which in turn would cause more job loss -- the so-called paradox of thrift. On the other hand, Americans save very little, critical infrastructure has been neglected, and the president-elect warned of government deficits in the trillion-dollar range for years to come. Efforts to spur short-run consumption can worsen the long-run problems by increasing the government budget deficit and depleting personal savings. In that statement, I learned that he would not bring any new macroeconomic thinking to the US Administration. I learned that his macroeconomics is probably in the deficit-dove category and while he has clearly been concerned with under-privilege and the plight of low income workers and has rejected some of the extremes of mainstream microeconomics, he still is in the mainstream macroeconomic cast. Stifling as it is. There is no long-run budget problem in the US. There might be a real problem in the distant future -- that is, the economy might not be able to sustain real standards of living given the available real resources, possibly environmental constraints, and a growing population wanting access to those resources (which includes the rising middle class in China and India). But what will be available for sale in US dollars in 2050 will always be able to be purchased by the US Government if it so chooses. The US government will still have the same capacity then to purchase it as it has now -- infinite minus 1 cent. If there are idle resources then the government will be able to put them to productive use just as it could right now if it chose. What the American people have to eventually learn is that the massive waste of labour embodied in the 9 per cent official unemployment is the result of a definite choice by the US Federal Government to leave the workers idle. The US Government can always purchase that labour power and put it to productive work if it chooses. Given there is a zero private bid in the market for the labour such a purchase (at minimum wages) would not even alter the wage structure (via competition). Anyway, in 2009 Krueger claimed that he had a solution to "both the short-run and long-run problems": Why not pass a 5 percent consumption tax to take effect two years from now? There are many different ways to implement a consumption tax, but for simplicity think about a national sales tax. In the short run, the anticipation of a consumption tax would encourage households to spend money now, rather than after the tax is in place. Along with the rest of the economic recovery package, this would help jump-start spending in the economy and thereby increase production and employment. In the long run, 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. As a reflection of his macroeconomic judgement this would have been a disastrous policy innovation. It would have started in January of this year just as things have started to go backwards again as the fiscal stimuli around the world have been withdrawn. It is highly unlikely that consumers would have been tempted to spend up big in 2009-10 in anticipation of a 5 per cent price hike in 2011 because the scale of the unemployment problem, the collapsed housing market and the hang-over of private debt were powerful deflationary forces and dwarfed the threat of a 5 per cent price rise. Krueger acknowledges that the "main downside" would be to "reduce economic activity" and justifies the policy given that knowledge with this neo-liberal gem (aka as a myth): But the government must make critical trade-offs, and a consumption tax could be the most efficient means to raise revenue to finance essential government functions. Over time, if the budget picture improved, income taxes or corporate taxes could be reduced and the revenue replaced by the consumption tax. What critical trade-offs must be made at present in the US (or in most nations)? He is referring to a trade-off -- budget reduction versus growth -- which is not an applicable trade-off in a fiat monetary economy with 9 per cent unemployment and massive unused productive capital capacity. This is the conservative myth that the Democrats have fallen into -- that public finances have reached a critical juncture and some austerity is required to save the government from going broke. It is such a ridiculous construction. The opportunity cost of a massive public sector job creation program right now is next to zero given how much idle capacity is available. The "costs" of the program would be the extra food and real resources that would be consumed/used as a result of the program. The budget outlays cannot be considered a meaningful "cost" given that the US government creates the funding from no-where courtesy of its capacity as issuer of the currency. So in 2009, Krueger wasn't impressing me as a likely contender for the top CEA job in Washington. I favor the idea of having a new jobs tax credit ... If companies increase their payroll by an employee, they could get a $5,000 tax cut to offset their additional hiring costs ... Eventually, companies reach a point where they are so lean they do need to hire more ... But they also need to be more confident that demand will be there for their goods and services. Tax credits amount to wage subsidies which are designed to increase labour demand. Mainstream economists have generally increased the emphasis on wage subsidies to private sector employers relative to public sector job creation in the belief that provision of jobs that closely resemble mainstream employment produce superior employment outcomes. The presumption is that firms are not hiring because labour is too expensive. The reality is that they are not hiring because there is insufficient demand for the output. Making labour cheaper to produce goods and services that will not sell will not increase employment. Another major issue with wage subsidies in the private sector is whether additionality can be ensured. Consequently many countries attempt to design programmes that minimise displacement and substitution. They typically fail. Firms might convert jobs into wage subsidy jobs and then churn workers through them to capture maximum subsidies. In a note (August 29, 2011) signifying his approval of the appointment, his Princeton colleague Paul Krugman said: His advocacy of job tax credits comes from an attempt to work within political constraints, not lack of interest in more decisive solutions. Which just about says it all really. Conclusion The US has been enduring an official unemployment rate of over 9 per cent for some two years now with broader measures of labour underutilisation over 16 per cent. That is a catastrophe by any measure but it is only recently that we have heard some noises from the Government about the need for urgent job creation. The most simple way to achieve that is to introduce direct public sector job creation -- in public works, community development and environmental care services. There are millions of productive jobs that could be created which would fill urgent need in the US at present. There is no shortage of productive jobs -- just an absence of someone who will pay the wages. I don't predict that the new appointment is going to change the policy direction. His macroeconomic statements are not encouraging and he jobs proposal falls seriously short of the mark. And while on pay ... It is always good to know when pay levels are linked to the performance levels of a major company. Yesterday, Australia's largest telco, Telstra released it 2011 Annual Report . The company used to be 100 per cent public owned before the neo-liberal privatisation push began. The privatisation has been a disaster for the shareholders who were persuaded to support the sell-off. As background you might like to read the following blog -- The Futures Fund scandal . How did the Government ever get away with persuading us to buy shares in something we all already owned? And then to look us in the eyes as that wealth plunged in value! Here is the latest share price chart for the company (since 1999) -- the privatisation occurred during the 1990s. Anyway, time moves on and if you read the 2011 Annual Report you would conclude that the company is in great shape -- at least if you read the executive pay details before getting any further. The total pay of Telstra's top executives has jumped by more than 70 per cent, despite an 18 per cent fall in the company's profits. The best one was that: The fourth highest-paid executive was Bruce Akhurst of phonebook company Sensis (which is a division of Telstra). He predicted Sensis would make a loss for the next three years, but he still pockets $2.9 million -- an increase of 53 per cent. A commentator said that "it has been a difficult year for Telstra and executives have had to work hard". That has to be a joke. But it is September not April! Friday music After that piece of news I need some music. This is a classic track from Linton Kwesi Johnson -- Reggae fi Radni. It is about Dr Walter Rodney , a Guyanese academic historian who was assassinated in Guyana in 1980 after he formed the Working People's Alliance against the oppressive PNC government. 14 Responses to New CEA head falls well short of the (macro) mark Dear Bill i would be very interested to hear your ideas on the minimum wage legislation in the Euro Area. Since it is a monetary union (with no opportunity for exchange rate flexibility) would a minimum wage reduction specifically on the export oriented part of the Greek (for example) manufacturing sector alter it's competitive advantage and increase employment in that sector? Obviously if the rest of the periphery embarked on the same route the end result would be zero. But in any case, can such a 'micro' measure have any measurable results? I normally am opposed to privatisation as a rip-off of the taxpayer. However, this one seems to have worked out well. The greedy who bought the shares have lost a lot of money. Australian taxpayers got rid of the company for much more than it was worth and could now buy it back cheaply. That seems like a good deal to me. And if the shareholders are lazy enough to allow the executives to line their pockets while not performing, that's their look out. Kostas reducing wages would reduce aggregate demand so it digs the economy deeper into the slump, it would also reduce income taxes and expenditure taxes as a byproduct of the fiscal automatic stabilisers. Dear Bill I see no reason for disputing Kruger's findings on the minimum wage. However, it should be kept clear that everywhere the minimum wage is rather low. If it were doubled, then it surely would have disemployment effects. My second point is that, even if the minimum wage had some disemployment effects, it could still be beneficial for low-skilled people. Let's suppose that in Ruritania there is no minimum wage and that 1 million people earn less that 10 ruris per hour, with an average of 7.5 ruris per hour. Now the government introduces a minimum wage of 10 ruris per hour. Employment drops from 1 million to 900,000. That group of people is collectively still better-off because now they make 900,000 x 10, which is more than 1 million x 7.5 by 20%. It could be argued that the minimum wage is beneficial to 900,000 people but harmful to 100,000. However, that argument s only valid if the same 100,000 will stay unemployed all the time. That is not necessarily the case. It could be that that everyone of the 1 million now works 90% as much as before. That is of course a limiting case. Be that as it may, as a group, those 1 million are better-off with the minimum wage than without it. I also think that countries with a minimum wage should should have a welfare program for those who could only be employed at a wage below the minimum one. Finally, it seems to me that the minimum should be age-related. One for people below 18, one for people of 19 to 21, and one for people over 21. We might also exclude seniors from the minimum wage. One way to engineer "internal devaluation" would be to levy flat tax on labor, say 20%, and then reimburse employers with it. Presumably competitive forces of market economy would drive prices down to the new cost of employing workers. This has the advantage that since most greek purchases are made of greek produced goods and services, purchasing power of those shoppings would not go down, only foreign purchases and input prices. But since this would not solve eurozones internal problems I can't really recommend it. Instead what I think Greek, Italian, Spanish, Portuguese and Irish governments should do is to introduce another currency alongside euro. Part or maybe all taxation could be shifted to this new currency to create demand for it and they could run full-employment policies. Euro debts, both private and public could be dealt with over time, and euro would be effectively just an another foreign currency where large proportion of debt happens to be nominated. New local currency would slowly replace euro and smooth transition out of the currency union would be possible in the future. As an interesting example, you could use Russia which used $ as currency along with Russian rubles in 90s. It took almost 10 years (2000-2010) to force taxation in national currency. The result is more than evident -- no volatility on exchange $ to RUR as we used to have all the time in 90s. I think Argentina went through the same decoupling process. Coincidentally, yesterday I was wondering how MMT would adress the economics of privatisation. If a public company is sold to the public for $1bn. Say the public used $500m cash and took loans for the other $500m. Private debt increases by $500m Private saving decreases by $500m Government gets $1bn in tax The countries net wealth remains the same but now part of the wealth is controlled by a minority. If the company was running a profit of 10%. The Government also loses a tax stream of $100 per anum. Depending how the venture was run. Investment in plant and equipment is switched from public investment (vertical money?) to private investment (horizontal). Following privatisation the new management will try to make the company more efficient. Generating greater profits. Lay workers off, increase executive pay, erode the pay and conditions of the rest of the workforce. They will likely invest more in new equipment to improve labour productivity. Maybe I'm missing something. I am trying, but I just don't see any advantage for the average person. The share owners and financiers get revenue streams. Concentrated at the top end of town of course. Execs are big winners, workers losers. Customers may gain improved services in the short term but most likely lose in the long run as profit margins creep up. Someone must have done the dirty maths to make it look good, what was their argument? Is it just the old deficit reduction canard? The basic problem is that great bulk of the population do not understand any of the key issues facing modern global civilization. They do not understand economics, they do not understand limits to growth, they do not understand climate change, they do not understand energy limits to growth etc. etc. etc. I was at a large dinner party recently where the table was ringed by professionals (excluding me as I am not a professional). There were a couple of medical professional or (doctors and allied profession), an engineer or two, an accountant and a financial adviser. Without giving away my views on economics, limits to growth, energy security, climate change, environmental damage and species extinction rates, I quietly dropped various non-committal comments and half-questions into the conversation to get the ball rolling on these topics. Then I sat back and listened to their views. It was clear from the general conversation (in which all essentially agreed except me and I kept silent on my views), that none of the others present had any idea that limits to growth was an issue, that energy or resource shortages might be an issue or that climate change was a real threat. In addition, none had any idea how fiat currency economics really worked and could work for us (in the Kenesian-MMT sense). Many of the prejudicial notions and views they trotted out about energy and economic issues could have come straight from the rantings of Andrew Bolt. I looked around myself and thought "Strike me pink, these are relatively educated people... what hope have we got?" Maybe 5% of the population has any idea of how serious our situation is. The other 95% have no idea, are preceding on very prejudical views and believe their privileged (in the West) lifestyles can go on for ever. It is frightening to witness such unconsciousness of clear and present danger even among the intelligent and educated classes. Would anyone be so kind as to explain how this: "But what will be available for sale in US dollars in 2050 will always be able to be purchased by the US Government if it so chooses." and this: "The budget outlays cannot be considered a meaningful "cost" given that the US government creates the funding from no-where courtesy of its capacity as issuer of the currency." won't lead to, at some point, such debasement of the $US that foreign markets will no longer sell things in exchange for $US? I am only asking because I hear that argument all the time when I discuss MMT with people, that is, that if we keep getting more and more in debt, the $US will become practically worthless outside the US (as foreigners don't need to pay taxes in $US, it seems to my limited mind to be a valid point). This is a question I cannot answer, and am not smart enough to find an answer here among Professor Mitchell's vast output of work. I sincerely appreciate any help.