Arnold Kling  

The Employment Situation

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Phelps on the Great Displaceme... Getting Ricardo Wrong...

We will get more news this Friday, but meanwhile Paul Krugman has stirred up a lot of invective, pro and con, with his comment that


Such measures as the length of time it takes laid-off workers to get new jobs continue to indicate the worst job market in 20 years

See, for example, Brad DeLong, speaking for the defense (he in turn links to one of the prosecutors).

I continue to follow the labor market using the capacity utilization measure that I recommended here. This has turned up slightly since July, but it continues to show a significant drop from the peak four years ago. However, it was never so low as to justify a "worst in twenty years" characterization.

To me, the labor market utilization measure indicates that the economy is operating well below capacity. The low rate of inflation corroborates that view.

If there is little improvement in labor demand over the next several months, then I think that Krugman and others have a legitimate (although perhaps overstated) case that the economy is more sluggish than the unemployment rate would suggest. However, if labor market indicators turn up, as I expect will happen, then by summer the issue will be essentially moot.

For Discussion. If the labor market stays soft, what policy recommendations would you make?


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CATEGORIES: Labor Market



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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/41
The author at Daniel W. Drezner in a related article titled Hiss. Hiss, I say. writes:
    Brad DeLong is pissed off: Daniel Drezner screams and leaps, fangs bared, for Paul Krugman's jugular. However, he trips over a tree root and falls off a cliff.... Misrepresent somebody [Krugman] as saying something they did not say. Attack them... [Tracked on January 6, 2004 6:59 PM]
COMMENTS (60 to date)
Adrian Nicolici writes:

This question has been of great interest to me although my knowledge of economics is very limited. Does the President of this country have any really productive choices given political reality? Repubilcans tend to offer tax cuts and also don't control spending accordingly (Regan, Bush II) and the economy certainly responds to all that stimulus. But of course the cost is debt through deficit spending. Democrats will choose to increase spending and keep taxes where they are or even raise them. Both methods produce some form of stimulus but it's always through deficit spending which hurts the economy in the long run. My question is: do leaders have any other choice? Can they go before the public and say things like "We can wait this out, jobs will return when the economy revives naturally" or are they forced to do something because if they don't, they will seem to not care about the unemployed?

Steve writes:

--> For Discussion. If the labor market stays soft, what policy recommendations would you make?

Steve writes:

Anyone think that Bush's new open borders policy is going to help native born employment?

If you do, I've got a bridge to sell you.

Eric Krieg writes:

There is no way that we could be doing any better employment wise than we are now. Any other course of action would have resulted in more unemployment.

Dubya is the biggest Keynsian to ever sit in the oval orafice.

Steve writes:

I seem to remember 8 years averaging 250,000 new jobs/month. Call it what you want, but I call that "better than what we've got".

I'd really like it if Arnold would post something about this new immigration policy. It has the potential to flood our already-flooded labor market with millions of people who are willing to work for peanuts and drag our fragile wage recovery back into a wage recession.

John Thacker writes:

Steve, you're comparing apples and oranges. Unemployment is going to drop and jobs will be created. Textile jobs, and other manufacturing jobs, however, will continue to be lost. They were being lost under Clinton as well. That's because they're more efficient to do elsewhere. However, those jobs were replaced by other jobs, just as they'll continue to be.

Furthermore Steve, if immigrants don't come to this country, the jobs will move to them. If you close the borders, as you apparently wish, you'll only hasten the trend of outsourcing those jobs.

In addition, if immigration brings talented people to this country who work and get ahead, and continue to help the economy grow, as it has always done, then yes, it will help native born employment. Or perhaps you would wish that they start companies and produce inventions in other countries than the US?

Steve writes:

I'm all for Bush's plan to throw open the borders, just get rid of H1B while doing it. What they are going to do is start allowing a flood of immigrants WITHOUT ridding the country of a would-be-illegal business subsidy called H1B where workers are not allowed to quit and find higher wages.

Get rid of H1B and I'll be happy with the proposal.

Eric Krieg writes:

I don't know how to feel about immigration.

The first statistic that you have to process is that we need to generate 80,000 jobs per month just to absorb the immigrants, legal and illegal, that come to this country every year. That's a lot of jobs, and as everyone knows, the economy has been barely producing that amount of jobs until very recently.

I don't know if Dubya's proposal is a good idea or not. Certainly, something has to be done about illegals, whether to make them legal or to find some way to close the border and let their numbers drop by attrition.

Steve writes:

Eric--

Here's how the new proposal works:

Employers post jobs on a website
If the employers are unable to "Fill" the position with a legal resident within x days, they can import somebody from offshore/nearshore
The new "legal" immigrant gets to work for 3 year, renuable terms

What happens if they quit or get fired? Deportation? Probably not. Free health care and welfare payments? Likely
What happens when employers start putting $5.75/hour jobs out there for, say, construction worker positions and are unable to "fill" them with residents?
At the very least, this proposal might cause more minimum wage positions to be created at the expense of possibly high-end jobs, and certanly might raise wages for low-wage day laborers who make far less than min wage.

This thing will NEVER pass congress.

Eric Krieg writes:

>>This thing will NEVER pass congress.

Yeah, I think you're right. But who knows, there are a lot of Congressmen from pro-immigrant states like California and New York (states that have laws on the books giving illegals drivers licenses). We might be surprised.

Eric Krieg writes:

This is from National Review, Steve. See, not all Republicans are lapdogs for business interests.

...As well-meaning as such efforts may be, the basic assumption is false — there is simply no economic reason to import foreign workers.

If the supply of foreign workers were to dry up (say, through actually enforcing the immigration law, for starters), employers would respond to this new, tighter, labor market in two ways. One, they would offer higher wages, increased benefits, and improved working conditions, so as to recruit and retain people from the remaining pool of workers. At the same time, the same employers would look for ways to eliminate some of the jobs they now are having trouble filling. The result would be a new equilibrium, with blue-collar workers making somewhat better money, but each one of those workers being more productive.

Many people fear the first part of such a response, claiming that prices for fruits and vegetables would skyrocket, fueling inflation. But since all unskilled labor — from Americans and foreigners, in all industries — accounts for such a small part of our economy, perhaps four percent of GDP, we can tighten the labor market without any fear of sparking meaningful inflation. Agricultural economist Philip Martin has pointed out that labor accounts for only about ten percent of the retail price of a head of lettuce, for instance, so even doubling the wages of pickers would have little noticeable effect on consumers.

But it's the second part of the response to a tighter labor market that people just don't get. By holding down natural wage growth in labor-intensive industries, immigration serves as a subsidy for low-wage, low-productivity ways of doing business, retarding technological progress and productivity growth.

That this is so should not be a surprise. Julian Simon, in his 1981 classic, The Ultimate Resource, wrote about how scarcity leads to innovation:

It is important to recognize that discoveries of improved methods and of substitute products are not just luck. They happen in response to "scarcity" — an increase in cost. Even after a discovery is made, there is a good chance that it will not be put into operation until there is need for it due to rising cost. This point is important: Scarcity and technological advance are not two unrelated competitors in a race; rather, each influences the other.
As it is for copper or oil, this fact is true also for labor; as wages have risen over time, innovators have devised ways of substituting capital for labor, increasing productivity to the benefit of all. The converse, of course, is also true; the artificial superabundance of a resource will tend to remove much of the incentive for innovation.

Stagnating innovation caused by excessive immigration is perhaps most apparent in the most immigrant-dependent activity — the harvest of fresh fruit and vegetables. The period from 1960 to 1975 (roughly from the end of the "Bracero" program, which imported Mexican farmworkers, to the beginning of the mass illegal immigration we are still experiencing today) was a period of considerable agricultural mechanization. But a continuing increase in the acreage and number of crops harvested mechanically did not materialize as expected, in large part because the supply of workers remained artificially large due to the growing illegal immigration we were politically unwilling to stop.

An example of a productivity improvement that "will not be put into operation until there is need for it due to rising cost," as Simon said, is in raisin grapes]. The production of raisins in California's Central Valley is one of the most labor-intensive activities in North America. Conventional methods require bunches of grapes to be cut by hand, manually placed in a tray for drying, manually turned, manually collected.

But starting in the 1950s in Australia (where there was no large supply of foreign farm labor), farmers were compelled by circumstances to develop a laborsaving method called "dried-on-the-vine" (DOV) production. This involves growing the grapevines on trellises, then, when the grapes are ready, cutting the base of the vine instead of cutting each bunch of grapes individually. This new method radically reduces labor demand at harvest time and increases yield per acre by up to 200 percent. But this high-productivity, innovative method of production has spread very slowly in the United States because the mass availability of foreign workers has served as a disincentive to farmers to make the necessary capital investment.

But perhaps immigration's role in retarding economic modernization is confined to agriculture, which, after all, is very different from the rest of the economy. Nope. Manufacturing sees the same phenomenon of a scarcity of low-skilled labor yielding innovation while a surfeit yields stagnation. An example of the latter: A 1995 report on southern California's apparel industry, prepared by Southern California Edison, warned of the danger to the industry of reliance on low-cost foreign labor:

In southern California, apparel productivity gains have been made through slow-growth in wages. While a large, low-cost labor pool has been a boon to apparel production in the past, overreliance on relatively low-cost sources of labor may now cost the industry dearly. The fact is, southern California has fallen behind both domestic and international competitors, even some of its lowest-labor-cost competitors, in applying the array of production and communications technologies available to the industry (such as computer aided design and electronic data interchange)." (Emphasis in original)
Conversely, home builders, who are still less reliant on foreign workers than some other industries, have begun to modernize construction techniques. The higher cost of labor means that "In the long run, we'll see a move toward homes built in factories," as Gopal Ahluwalia, director of research at the National Association of Home Builders, told the Washington Post several years ago. But as immigrants increasingly move into this industry, we can expect such innovation to spread much more slowly than it would otherwise.

But surely immigration is needed fill jobs in the service industry? After all, without immigrants, who will pump our gas? Oh, wait — we never imported immigrants for that and so now we pump our own gas, aided by technology that lets us pay at the pump — thus we have fewer attendants but more gas stations and get in and out faster than we used to when we trusted our car to the man who wore the Texaco star.

Other innovations suggest how, despite the protestations of employers, a tight low-skilled labor market can spur modernization even in the service sector: Automated switches have replaced most telephone operators, continuous-batch washing machines reduce labor demand for hotels, buffet-style restaurants need much less staff that full-service ones. As unlikely as it might seem, many VA hospitals are now using mobile robots to ferry medicines from their pharmacies to various nurse's stations, eliminating the need for a worker to perform that task. And devices like automatic vacuum cleaners, lawn mowers, and pool cleaners are increasingly available to consumers. Keeping down low-skilled labor costs through the president's vast new guestworker plan would stifle this ongoing modernization process.

The idea that a modern society like ours requires the ministrations of foreign workers, because there is no other way to do get these jobs done, smacks of the apocryphal quote from a 19th-century patent commissioner: "Everything that can be invented has been invented."

Steve writes:

Excellent article, Eric.

Again, never going to pass congress in an election year.

I like that a republican finally admitted that there is no such animal as a "labor shortage" only a "labor shortage for the wages employers are willing to pay".

Eric Krieg writes:

Steve, the productivity argument against immigration is one that I've thought about before. I wonder why more economists don't make it.

People bitch and bitch about inequality in this country. But if you don't count immigrants, there is very little inequality. And if you could somehow limit the number of immigrants, there would be NO inequality (immigrants, especially Mexicans, are largely competing with African Americans for low wage jobs).

And the same people who decry inequality are the ones who are pro-immigration. Go figure.

From a fiscal policy standpoint, Dubya has done everything he could possibly do to jack up employment. But his inability or unwillingness to address illegal immigration has really hurt him when it comes to unemployment. 57,000 jobs created in the month of November would be plenty if those 80,000 immigrants per month weren't here looking for work.

I change my opinion on immigration from minute to minute, it seems. Here I am arguing against immgration, but at the same time I'm having a garage built with Mexican labor.

I just don't know what to think. Part of the problem is that all arguments are based on anecdotal information. The real cost and benefits of immigration don't seem to be well known.

Steve writes:

-> Steve, the productivity argument against immigration is one that I've thought about before. I wonder why more economists don't make it. I change my opinion on immigration from minute to minute, it seems. Here I am arguing against immgration, but at the same time I'm having a garage built with Mexican labor.

John Thacker writes:

Well Steve, certainly you sound a bit selfish with your apparent desire to keep foreigners poor.

"57,000 jobs created in the month of November would be plenty if those 80,000 immigrants per month weren't here looking for work."

Except that first of all it's hardly the case that the same number of jobs would have been created without immigration. Without immigration, outsourcing would have occurred more quickly, and the economy would be in general less efficient, as well as having less demand. You can't fairly make the claim you're making. Would you rather all the immigrants have the same jobs they have now, but in their home countries?

The economic cycle would operate with or without immigration. It only takes a brief look at Japan or many European countries to illustrate this. It's incorrect to ascribe the low points in the economic cycle to immigration.

The world is not a utopia. There's not a fixed number of jobs and work that can be done, and it's not a zero sum game. The reason economists ignore your opinions is that they're based on the same ancient economic fallacies that have been refuted time and again. Every time the business cycle turns, the same fallacies, just like socialism, rear their ugly head.

Without immigration, the average native born citizen in the US would be poorer.

Boonton writes:

Take the productivity argument to its logical conclusion, just outlaw low skilled labor! Hike the min. wage to $10 per hour. Think of the great innovation that will take place as businesses invent machines that are able to automatically serve fast food or do other work that was done by low wage workers.

This is the flaw in the reasoning of the otherwise excellent article. Cutting the supply of any production input, whether it is oil, illegal immigrant labor, or whatnot is a negative supply shock. It results in less production at higher prices assuming all else remains equal. Yes the market will respond with innovation to try to address the supply shock but this will be done with resources that could have been used elsewhere.

What this article is really communicating is that cutting off illegal immigration is less costly than some businesses will have us believe. This same argument can be applied to the min. wage or its worse nephew the 'living wage'. I'm sure the National Review doesn't care for that implication :)

Just because something costs less doesn't mean its free.

Boonton writes:

Another point:

Just because something is an innovation doesn't mean its more efficient. Take those robots that ferry drugs to nurses' stations in hospitals. How much do those things cost? I'd be surprised if they cost less than $150K. Think about it, the hospital has to buy the hardware, have its layout programmed into the system, the robots have to be maintained and so on. There's probably a hefty license fee each year even after all this is paid for.

Is this really more efficient for the economy? Suppose the hospital was able to hire two or three low wage runners to do this job for a total payroll of $75K per year.

1. At least $75K ($150K-$75K) would be freed up for other uses...such as buying diagnostic equipment, R&D etc.

2. Considering that many hospitals are located near inner cities, the low skilled employment could open up a career path for someone with a disadvantaged background....possibly even giving them the direction to go onto a higher skilled job in healthcare.

Is it really so obvious now that the hospital and economy is better off having 'innovated' away the low skilled job with a system of robots?

Steve writes:

John--That quote you ascribe to me was actually written by Eric.

I don't desire that they stay poor, I just desire that they stay in their country and let us compete with eachother instead of constantly competing with new people willing to work for less than us.

Japan is doing just fine. Look at Prada's sales in Japan, first of all. Japanese women (according to NPR) are buying $500 handbags like hotcakes. They also have a 5.5% unemployment rate. You're lulled into this belief that their economy is bad. If it is so bad and ours is so good, why aren't they trying to immigrate here?

...There's not a fixed number of jobs and work that can be done, and it's not a zero sum game....

BULL. There is not an infinite amount of work to do, therefore there IS maximum amount of jobs available. If there was an infinte amount of work to go around, we'd have no unemployment problems.

.... Without immigration, the average native born citizen in the US would be poorer....

You'd have a hard time proving that. All jobs targetted by immigrants have seriously depressed wages in the short AND long term. Yes, right, I know, they'll find better jobs. WHERE ARE THE BETTER JOBS?

Boonton writes:

"BULL. There is not an infinite amount of work to do, therefore there IS maximum amount of jobs available. If there was an infinte amount of work to go around, we'd have no unemployment problems."

This is sometimes called the 'lump of work' fallacy. The idea is that there is some finite amount of work the economy needs and if its only enough to divide between 90% of the population the unemployment rate will be 10%.

The way to think of it is in terms of output. Suppose you were making cakes. YOu need bakers, flour, eggs, icing, ovens, etc. If you have a certain amount of flour, eggs, icing etc. but you had a huge number of bakers you may discover some of your bakers will have nothing to do (unemployment). But in an economy the game is output (cakes). If the price of one input falls (say flour) then that allows you to bake more cakes. If the price of an input increases then you can bake fewer cakes. There's nothing stopping you from having an infinite amount of cakes provided you can secure an infinite amount of inputs.

Steve writes:

Boonton--

Yes, there is something keeping you from pumping out millions of cakes: there isn't DEMAND for millions of cakes.

That's what I mean by finite. There isn't an infinite demand for laboreres, therefore, when you jack up the supply of laborers, price (wages) will fall.

I guess this is the difference between people who consider themselves supply-siders and those who do not. We demand-siders realize that you have to have demand, without demand supply does not matter. That's one of the shoking things about Bush's tax cuts for businesses. It encourages oversupply in productive capacity without any care about demand.

Eric Krieg writes:

>>Without immigration, the average native born citizen in the US would be poorer.

Prove it. With all due respect, I don't think that you can. Not that I can prove the contrary, but that's my point: no one has added up the costs and benefits to determine if immigration is a net benefit. Some days I think that it is, some days I don't.

I think that the argument that, if immigrants didn't do the job here it would be done somewhere else, is simply not true for the majority of the jobs that immigrants do. Immigrants can't cut my lawn if they're not in this country. They can't cook my food, or wait my table. They can't watch my kids, or perform day labor.

And even for those jobs that do move offshore, perhaps it is better that they do so. It is expensive to live in the US. It is much cheaper to live in India or Mexico or whatever, so low wages are more compatible with those countries' lifestyle.

This is no joke. I raise money for a local health clinic whose clientel is entirely Mexicans. We put together "hygene kits" consisting of soap, toothpase, etc. that are given out at the clinic and that go like hotcakes. How can immigration be a net good if the immigrants can't even afford toothpaste?

Eric Krieg writes:

>>The economic cycle would operate with or without immigration. It only takes a brief look at Japan or many European countries to illustrate this. It's incorrect to ascribe the low points in the economic cycle to immigration.

I know, and I agree with that. I'm not Steve, attributing job losses from the recession to India "stealing jobs".

But you still have that number floating out there: 80,000 jobs per month needed just to absorb all the immigrants that come here. It isn't easy to overcome that number in a recession.

Steve writes:

Not just India. China, India, Brazil, Russia, and all other countries that are mercantille states. Get it straight.

Eric Krieg writes:

>>That's what I mean by finite. There isn't an infinite demand for laboreres, therefore, when you jack up the supply of laborers, price (wages) will fall.

Steve, it doesn't end there. Lower wages in turn stimulate more demand. I wouldn't be building my garage if it weren't so cheap to do so, and it wouldn't be cheap if the labor wasn't Mexican. And my life will be a lot better when I have a 2 car garage with lots of storage and room for my truck and minivan instead of an obsolete 1 car that couldn't fit anything larger than a VW Bug.

Okay, I'm back to pro-immigration.

Boonton writes:

Steve,

I don't discount demand, but demand can be created whenever it is needed. If your a Keynesian you believe it can be done thru fiscal policy, monatarists believe it can be done thru printing money and classicalists believe it takes care of itself. Not matter what your flavor of economic theory, increasing supply can be meet with an increase in demand. The argument is simply over whether this increase is more or less automatic or if it has to be managed by pro-demand gov't policies.

Given the choice between a lower supply versus a higher one, the higher one is better. It provides for a higher standard of living which is what this is all about. Therefore policies that increase supply should be welcomed even if you are a 100000% Keynesian demand sider.

Steve writes:

That is completely bunk. If there are millions of extra people clamoring to get jobs, EVERYONEs wages will fall.

Wages falling hurts demand. Who cares if there is a lot of supply when demand is falling? Sure, more supply is good, but without demand, does supply really matter?

During the G.D. we had pleanty of supply, but since fewer and fewer had the means to attain the "stuff" (ie:JOBS) demand fell, taking the economy with it. When people started getting the means to purchase "stuff" (through CCC, TVA, etc), the economy came back. Demand is all that matters, supply will rise to meet demand when demand increases, NOT the other way around.

Boonton writes:

Eric:

Here's how to prove immigrants have raised all American's income:

"But you still have that number floating out there: 80,000 jobs per month needed just to absorb all the immigrants that come here. It isn't easy to overcome that number in a recession."

Think of the analogy with baking cakes. Suppose the flour company tells you they are giving you an extra 80 pounds per week because you won a contest. Does this help or hurt your ability to bake more cakes? Would any cake company in their right mind turn down this gift because they are worried about how to find a use for all 80 pounds of flour?

Steve writes:

The difference is that 99.999% of people are not entreprenuers who own bakeries. In your example, WE ARE THE CAKES. My goal is to get purchased by either a cake-eater or another bakery for show. When there is 80 lbs of more cakes (ie: people like me wanting to get sold) I have less of a chance of getting bought or my baker has to lower my price.

Research price elasticity of your cakes. You'll see that REAL prices (wages) fall by more of a percentage than population increases (%), I would guess.

Boonton writes:

No Steve, you would be the baker in this analogy. You aren't 'purchased to be eaten', you want to eat as much as you can and that means we need lots of cake (or we want to enjoy goods & services which means we must produce as many as possible).

Your argument is that demand may not be able to meet supply. This is valid but has nothing to do with the goal of achieving the best supply possible. If demand is slack then it should be increased by the proper policies. Limiting your supply (which is what labor restricting policies do) would not resolve such a problem.

Eric Krieg writes:

>>If demand is slack then it should be increased by the proper policies. Limiting your supply (which is what labor restricting policies do) would not resolve such a problem.

Which brings us back to Arnold's question. What ADDITIONAL policies will create jobs?

I really don't see what more Dubya can do. He cut taxes and raised spending. Greenspan is doing his part, rates are very low. What more can be done?

Steve writes:

How on Earth is restricting immigration going to limit supply of anything other than labor?

Eric Krieg writes:

Does anyone agree with Paul Krugman, by the way? Is it "the worst job market in 20 years"?

I don't see how the current market could be considered worse than 1983. Well, except that the '83 recession was short, and this one is unusually long. But Dubya can't be blamed for that. His policies have made things a lot better than they would be if Paul Krugman was in charge.

Eric Krieg writes:

>>How on Earth is restricting immigration going to limit supply of anything other than labor?

Well, you're going to have to mow your own lawn. Which, Americans being as fat as we are, we probably should be doing anyway!

Steve writes:

We should study what has worked in other countries.

Perhaps we should study what works with markets OTHER than labor. Clearly supply of "widgetA" is too high, so prices are falling and product is rotting on the shelves. We should pull back on production of "widgetA". Maybe we should upgrade all our stock of "widgetAs" to "widgetBs"? Then apply the same theories back to the labor market: Increase funding for colleges, get people to stop reproducing so much, tax incentives for citizens who work overseas and leave the labor market, etc...

Steve writes:

I don't know whether to agree with PK or not. Can't remember 20 years ago my parents being scared night and day about whether their job was going to be exported this year or not. Surely they didn't worry about it for 3 straight years. Surely they haven't been forced into job-hopping to avoid the flood of offshoring.

Perhaps it's the worst job market in 20 years because even us snooty white-collar folks are getting shown the door in record numbers?

Boonton writes:

"Which brings us back to Arnold's question. What ADDITIONAL policies will create jobs?

I really don't see what more Dubya can do. He cut taxes and raised spending. Greenspan is doing his part, rates are very low. What more can be done"

If the problem is over-supply then the real problem is lack of demand. If demand is very low then the Fed can continue taking an aggressive policy. It's possible to even drop rates to 0%. Beyond that the Fed has the ability to be even more aggressive by purchasing something other than 3 month T-bills (for example, 30 year bonds). Krugman argued this for the Japanese central bank even though they had lowered rates already to 0%.

No economy should ever be in distress because of lack of demand. If that is the case then policy makers are being negligant. Demand can be expanded to any level necessary to soak up supply.

Boonton writes:

On the fiscal side, Bush's tax cuts were highly inefficient as demand boosters. Most of the tax savings would be realized years later (thereby dulling the incentive to increase demand immediately) with only minor tax savings to be achieved recently. Worse, the tax cuts basically reset expected future budgets to be endless deficits as far as the eye can see. This probably hurt demand for investment goods since it raised long term rates higher than what they otherwise would have been.

If Bush had been interested in boosting demand, there were plenty of real policies that could have been proposed such as a 6 month payroll tax holiday.

Eric Krieg writes:

>>If Bush had been interested in boosting demand, there were plenty of real policies that could have been proposed such as a 6 month payroll tax holiday.

Have you been to my link in the previous post? I doubt that the nature of the tax cuts vs. the size of the tax cuts has much effect, and we all know that temporary tax cuts get saved rather than spent.

The legality of a payroll tax holiday is open to question as well. Social Security is tied pretty closely to payroll tax revenue.

Eric Krieg writes:

>>Perhaps it's the worst job market in 20 years because even us snooty white-collar folks are getting shown the door in record numbers?

Nah. There is always panic of this sort at the end of a recession. I remeber back in '93, people were saying that Gen X would be the first generation in US history to be poorer than its parents.

Eric Krieg writes:

>>Worse, the tax cuts basically reset expected future budgets to be endless deficits as far as the eye can see.

WRONG!

Boonton, you obviously have not gone to my link. I am very disappointed in you.

The deficit is mostly a result of the recession and the fact that we are no longer in a stock market bubble. The tax cuts are only responsible for a portion of the deficit, and not even a majority of it.

Even if Bush had held the line on spending, there would be a deficit. If Bush raised taxes to eliminate the deficit, we would have had an out and out depression.

Go to the link! I realize that it is just a computer model, but it is more precise than the BS that comes out of PKs mouth.

Eric Krieg writes:

Economics of an alternate universe

http://www.econopundit.com/archive/2003_12_01_econopundit_archive.html#107062941223362794

Read it, B!

Boonton writes:

I'm not really convinced by EconoPundit's model. Regardless I'm talking about the long run expected budget...not where it currently is. Being in the red $300B this yr but with projections of black for the next 15 years (or less in the red) is one thing. Being in the red $300B this year with projections if being $300B+ every year after that forever is quite different.

As you said, Bush's tax cuts had little impact on the current deficits because their costs are highly backloaded. This means the deficits they cause (or portion of deficits they cause) will be dramatically larger in the future.

Eric Krieg writes:

So in 1995, the CBO was projecting deficits as far as the eye could see. In 1999 it was projecting surpluses as far as the eye could see. And in 2003, it's back to deficits.

Maybe the should switch to the FAIR model! Their forcasting STINKS!!!

Eric Krieg writes:

>>I'm not really convinced by EconoPundit's model.

Why not?

Are you going to take the Econopundit challenge? The nice thing about the FAIR model is that anybody can use it. Even Paul Krugman.

Boonton writes:

The burden is on the model to prove itself accurate, not on me to show why it has yet to earn my trust. Even with a good model that is no substitute for thinking about the situation.

Eric Krieg writes:

>>The burden is on the model to prove itself accurate, not on me to show why it has yet to earn my trust. Even with a good model that is no substitute for thinking about the situation.

And your proof that it isn't accurate is... what exactly?

Do you feel the same way about global warming?

Boonton writes:

Yes I do.

Boonton writes:

Also the model is only looking at the short term for the following sceneros:

1. Bush kept the deficit exactly at $0 using tax increases as needed.

2. Bush kept the deficit exactly at $0 using spending cuts as needed.

Neither of these are comparable to the better policies I mentioned. Some of these better policies might have been:

1. Leave taxes unchanged.
2. A demand side tax cut that increased the short term deficit but had no long term impact.
3. A policy that accepted deficits in the short term due to the recession & war but kept the budget deficit balanced or at least under control for the long term expected future.

The problem that Krugman and others have correctly seen is that Bush's policies push the budget into ever increasing deficits forever both in terms of absolute numbers and as a % of GDP. Unless you want to assert that a free lunch exists (in which case the burden should be on you to prove it), the cost of this policy must hit sooner or later.

Steve writes:

Ah...Demand side stimulus...music to my ears....

Why did I vote for Bush? What was I thinking?

Eric Krieg writes:

>>The problem that Krugman and others have correctly seen is that Bush's policies push the budget into ever increasing deficits forever both in terms of absolute numbers and as a % of GDP. Unless you want to assert that a free lunch exists (in which case the burden should be on you to prove it), the cost of this policy must hit sooner or later.

Once again, Boonton, what evidence do you have to show that deficits are a concern? We had deficits from 1969 to 1997. Can you find any evidence that they had any negative impact whatsoever? Even during the '80s, when the deficit was huge as a % of GDP (much higher than any future predictions I have seen), there was no measurable impact.

Not only that, but you are being very selective in your modeling. You dismiss the FAIR model, which has a good track record of predictions (read more on the Econopundit site), but spout numbers from a CBO that has a track record of futility.

I'm going to e-mail the Econopundit and see if he'll run your alternate scenarios. My instinct is that short term stimulus is not very stimulating!

Boonton writes:

1. Eric, I spouted no numbers regarding CBO estimates of future deficits. The fact is that the trend is now towards ever increasing deficits in the future. I know it, you know it and the bond market certainly knows it. Is this guaranteed? No, tomorrow a metorite of solid gold may land in Washington DC and allow the gov't to pay off its entire debt.

2. As I stated before, if deficits are not a problem then you have discovered a free lunch. You should explain to us what mechanism allows this to exist.

3. Like I said, the obligation is on the model to prove itself...not for me to justify my skepticism. Do you have any evidence that FAIR works well beyond 3-5 years?

Eric Krieg writes:

E-mail reply from the Econopundit:


Let me comment point by point.

"Also the model is only looking at the short term for the following
scenarios:
1. Bush kept the deficit exactly at $0 using tax increases as needed.
2. Bush kept the deficit exactly at $0 using spending cuts as needed. "

Short-term is as good as it gets here. The statistical reliability of the forecast beyond 2007 is about the same as guessing.

"Neither of these are comparable to the better policies I mentioned. Some of these better policies might have been:
1. Leave taxes unchanged."

I think I simulated taxes unchanged at their 2001 level. It's back there somewhere.

"2. A demand side tax cut that increased the short term deficit but had no long term impact."

Anyone on the web can go to Fairmodel and try that. Change the COG variable for any quarter/quarters you wish. But here's the trick -- you can't specify both the policy ("a demand side tax cut") and the result ("that increased the short term deficit but had no long term impact"). If we were able to do that economic policy formulation would be no problem whatsoever!

"3. A policy that accepted deficits in the short term due to the recession & war but kept the budget deficit balanced or at least under control for the long term expected future."

This amounts to saying something like "a policy that gives everyone free health care at no cost to anyone anywhere in the economy." It would be nice, yes. But it ain't possible.

Steve Antler
EconoPundit

Eric Krieg writes:

>>The fact is that the trend is now towards ever increasing deficits in the future. I know it, you know it and the bond market certainly knows it.

Which was the same trend as in 1995. But then the economy hit overdrive and blew those predictions out of the water.

I think that it is 1995 all over again. We are at the precipice of a huge expansion (I say this because it appears that the entire world economy is going into economic growth mode. Remember, the late 1990s were not a good time for the Asian or Latin American economies).

Anyway, the point is that long term budget forcasts are not worth the paper they are printed on. We are NOT going to see deficits as far as the eye can see, because the economy is improving and at some point there will be political will to get spending under control (you don't cut spending in a recession, but you also don't run 600 billion dollar deficits in a boom).

Eric Krieg writes:

>>2. As I stated before, if deficits are not a problem then you have discovered a free lunch. You should explain to us what mechanism allows this to exist.

I didn't "discover" anything. I am just regurgitating a historical fact. Very large deficits in the 1980s had very little negative impact to the US economy. The deficits were not the end of the world, as PK would have you believe.

And just because we have no good theory to explain a phenomenon does NOT mean that the phenomenon isn't real, or that you cannot exploit that phenomenon.

In engineering, you would be surprised how many phenomenons we exploit without understanding them completely. For instance, we use steel alloys routinely where metallurgists can't explain how the alloys have the properties that they have. We don't understand the alloys at the nanoscale level, but that doesn't change the fact that we can exploit an alloy for engineering purposes.

I would say the same thing about deficit spending. We don't know why it doesn't cause the problems that economists like PK say it should. But it hasn't in the past, and the probability is that it won't in the future.

Boonton writes:

"Which was the same trend as in 1995. But then the economy hit overdrive and blew those predictions out of the water."

Actually the trend in '95 was for the deficit to either shrink or remain stable as far as the eye can see. Especially in terms of % of GDP which is a more meaningful measure of gov't borrowing.

"This amounts to saying something like "a policy that gives everyone free health care at no cost to anyone anywhere in the economy." It would be nice, yes. But it ain't possible."

Steve's just wrong about this. Take a policy of no tax cuts and no major spending increases except for 9/11 & the war (which are one time expenditures). This would be equal to accepting short term deficits due to recession & war but keeping the long term prospects for a stable deficit or surplus.

The model is clearly useless for long run predictions as Steve admitted. If anything after 2007 is as good as guessing then what do you make of the fact that budgets are often presented for 5 years? That alone means that FAIR is good only as a very short term model. Fine if your only concerned about making it to the next election.

"I didn't "discover" anything. I am just regurgitating a historical fact. Very large deficits in the 1980s had very little negative impact to the US economy. The deficits were not the end of the world, as PK would have you believe."

Unless you want to assert that the US was suffering from a persistant demand deficiency (hard to believe considering the amount of consumer spending we do and how low our savings rate supposedly is) then the deficits of the 80's did cost us in the 90's (as well as today). Likewise the reduction of the deficit in the 90's boosted investment that would have otherwise been crowded out.

The fact that you didn't see the US fall off the Earth into a vat of boiling oil in 1989 doesn't mean you've discovered a 'free lunch' whose mechanism is simply unknown. Engineers, I'm sure, know that perpetural motion machines do not exist...

Steve writes:

My "policy" is for major short-run tax holiday for those who will SPEND it (middle class) and massive dose of demand-side stimulus in the form of government works projects, not to mention tariffs to cover some of the difference. A short term 7% of GDP budget deficit gradually going to a Clintonesque 2-3% surplus with Richard Gehphart at the helm.

Ah...The future...

Eric Krieg writes:

>>The fact that you didn't see the US fall off the Earth into a vat of boiling oil in 1989 doesn't mean you've discovered a 'free lunch' whose mechanism is simply unknown. Engineers, I'm sure, know that perpetural motion machines do not exist...

Maybe if the deficit got to Italian or Japanese proportions of GDP I would be concerned. At the levels they are now, and that they are projected to be, they simply can not do what you and PK say that they will do.

Boonton writes:

Another question, how accurate is the model for *extreme* policies? I can easily see how a model that is accurate for estimating the consquences of modest changes in taxing an spending could be inaccurate for modeling drastic changes.

Just another Econopundista writes:

From www.econopundit.com

Nothing but the presidential election will really answer this question. In the meantime, Bartlett subjects the question to reasoned logic:

Leaving aside the details of the Bush tax cuts, which did in fact benefit the middle class substantially, there are still two good reasons why a voter might support tax cuts (and oppose tax increases) even if they would have no change in their tax liability either way. First, one can believe that tax cuts (increases) will increase (reduce) economic growth and job creation. This will benefit even those who pay no taxes at all.

Second, one can view tax cuts as a restraint on the growth of government. In other words, tax policy is a very accurate measure of a party's political and economic philosophy. Grover Norquist calls this a party's brand identity and must be protected for the same reason corporations protect their brands. That is why it often makes sense to propose tax cuts even when it may not necessarily make economic sense to do so, just as companies sometimes put their best-sellers on sale. It reminds voters and consumers about the brand and helps protect against competitors.

I have found indirect but overwhelming evidence of public support for the tax cuts. The evidence is right before us and we have missed it because it is disguised as a negative economic statistic. Evidence of voter support for the Bush tax cuts can be found in the unemployment rate.

We'll explain, but first a bit of background.

From its murky beginnings last June, the weblog has been obsessed with employment and the unemployment rate. One of our first posts described the sinking sense of nausea one can experience when trying to explain how changes in the size of the labor force can influence the unemployment rate. Some loyal Econopunditistas have taken up the challenge of this issue, attempting to address the issue in their own terms.

More recently, in a bored sort of way we've briefly mentioned the ten-thousandth rediscovery of the discouraged worker effect, without tracking the many and even many more discussions of Paul Krugman's rediscovery of same.

Every day there's a negative story on the "jobless recovery." Postive ones like this -- ones which look below the simplest numbers -- are few and far between

Now ask yourself as you look over these stories: what's at stake here? How many jobs make the difference between a negative story and a positive one? Between a story and no story at all? The numerical answer is from about 50,000 up-or-down on a monthly basis, or, alternately, about 3 million when viewed annually -- the number of jobs supposedly "lost" by the Bush administration.

We have persuasive quantitative evidence from 500,000 to one million US residents have been sufficiently affected by the Bush tax cuts to significantly change their behavior -- in a positive direction and in a manner strongly suggesting support for the tax cuts.

These people are either employed or looking for work whereas, in the absence of the tax cut, they would not be part of the labor force.

The evidence was obtained very simply: by running Yale University's FAIRMODEL under the counterfactual assumption of no tax cut, and comparing the results with the same model's conclusions given the presence of the tax cut. The model shows a growing "extra" component of the labor force -- by now a number approaching one million -- responding to all the supply-side incentives offered by higher take home pay.

Some may object or even sneer, claiming the tax cut impact on take home pay must be too small to make a difference.

We can think of three responses. (1) The reliability of FAIRMODEL is a matter of public record. (2) One's own intuitive response to a change in incentives is a poor indicator of how other people may respond. (3) Finally, the numbers say exactly what the numbers say.

Soon EconoPundit will post a tutorial on how to run FAIRMODEL so you can verify these results for yourself.

Meanwhile, keep thinking positively. An "extra" one million employed or seeking work is only a negative if you think the economy's in the business of producing not goods, but "bads."
Link posted by Steve Antler : 10:54 AM

Sam Jew writes:

I read the alternate unvierse link and it is highly partisan and therefore suspect.

Similarly, the motives of those who input the data into the world's most elaborate computerized economic models are also apparently partisan it seems.

We don't need elaborate computer models to know that Keynesian economics works.

It is not a question of tax cuts for the rich or no tax cuts at all as the spin-doctors at Fox News would have us believe. It is a question of tax cuts for the rich or aid to states or additional government R&D spending or a reduction in payroll taxes or any other number of other stimulative policies.

We don't need easier access to capital or more capital formation. That's not the bottleneck to economic growth. The bottleneck to economic growth is entrepreneurship and the fact that new industries aren't being created as they were during the 90's. And if they aren't being created, they aren't being funded because capital is extremely risk-adverse these days.

Moreover, I don't believe an additional 1,000,000 people looking for work is an economic good. Rather I see 1,000,000 people looking for work in the absence of attractive opportunity as an economic bad as this introduces the inefficiency of huge numbers of people expending huge amounts of effort on a quixotic quest that yields no economic benefit for anyone.

Or as Russell Crowe would put it, pigeons fighting over bread crumbs....


However, I have my reservations about the

Either employed or looking for work? So 500,000 to 1,000,000 people could all be unemployed but looking for work and this would be an economic "good?" Does Yale

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