That headline would have been as accurate as much of what appears in a NYT article on Republican proposals that they claim are designed to address poverty. The piece asserts “Republicans are offering a series of proposals to help more Americans rise out of poverty.”
Of course the NYT has no idea if the goal of these proposals is really to “help more Americans rise out of poverty.” There is good reason to believe that this is not the case since almost all of them have been tried before with little success. Furthermore, the most obvious beneficiaries of many of these proposals would be rich people who are able to game them successfully.
Usually reporters do not take politicians claims at face value. This is why they report on their statements and their actions, not their intentions. If progressive Democrats came up with a proposal for “defense reform,” which they asserted would make the country better able to confront foreign threats, it is unlikely that any major media outlet would simply describe the defense reform proposal as a plan to improve the country’s security.
Most of these proposals have obvious ways to game them. For example, Senator Rand’s proposal would provide for a 5 percent flat tax for any individual or business who lived in his designated “economic freedom zones.” It would be a relatively simple matter for Bill Gates or any other rich person to buy an apartment which they would claim as their residence in order to reduce their tax bill by 75-85 percent. Similarly, it would be easy for Apple to set up an office which would register most of its patents, so that it would be the location for most of its profits.
Of course the 6-figure and 7-figure tax accountants hired by the rich and large corporations would find many more sophisticated ways to game the Rand proposal. However, since it opens such obvious loopholes for the rich to drastically lower their tax bill it is as reasonable to believe that this Rand’s motive rather than recycling a failed approach in the hope that this time it will actually reduce poverty.
That headline would have been as accurate as much of what appears in a NYT article on Republican proposals that they claim are designed to address poverty. The piece asserts “Republicans are offering a series of proposals to help more Americans rise out of poverty.”
Of course the NYT has no idea if the goal of these proposals is really to “help more Americans rise out of poverty.” There is good reason to believe that this is not the case since almost all of them have been tried before with little success. Furthermore, the most obvious beneficiaries of many of these proposals would be rich people who are able to game them successfully.
Usually reporters do not take politicians claims at face value. This is why they report on their statements and their actions, not their intentions. If progressive Democrats came up with a proposal for “defense reform,” which they asserted would make the country better able to confront foreign threats, it is unlikely that any major media outlet would simply describe the defense reform proposal as a plan to improve the country’s security.
Most of these proposals have obvious ways to game them. For example, Senator Rand’s proposal would provide for a 5 percent flat tax for any individual or business who lived in his designated “economic freedom zones.” It would be a relatively simple matter for Bill Gates or any other rich person to buy an apartment which they would claim as their residence in order to reduce their tax bill by 75-85 percent. Similarly, it would be easy for Apple to set up an office which would register most of its patents, so that it would be the location for most of its profits.
Of course the 6-figure and 7-figure tax accountants hired by the rich and large corporations would find many more sophisticated ways to game the Rand proposal. However, since it opens such obvious loopholes for the rich to drastically lower their tax bill it is as reasonable to believe that this Rand’s motive rather than recycling a failed approach in the hope that this time it will actually reduce poverty.
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The NYT discussed the state of debate in the United Kingdom on the conservative government’s austerity policy. The piece notes that the economy is now growing again and implies that the austerity policies might be the basis for this renewed growth.
Actually, economies almost always grow, so there really should not be much debate about whether austerity policies deserve credit. This is like noticing that a child is taller at age six than she had been at age five and then boasting that her growth must have been attributable to six months of a near starvation diet. While that may be the nature of political debate in the United Kingdom, the billions of people around the world who know that children grow would recognize it as absurd.
Similarly, it is absurd to say that an economy has resumed growth after years of recession or near recession conditions, owes this growth to austerity. The NYT is not supposed to present delusions of political leaders to its readers as plausible explanations of reality.
The NYT discussed the state of debate in the United Kingdom on the conservative government’s austerity policy. The piece notes that the economy is now growing again and implies that the austerity policies might be the basis for this renewed growth.
Actually, economies almost always grow, so there really should not be much debate about whether austerity policies deserve credit. This is like noticing that a child is taller at age six than she had been at age five and then boasting that her growth must have been attributable to six months of a near starvation diet. While that may be the nature of political debate in the United Kingdom, the billions of people around the world who know that children grow would recognize it as absurd.
Similarly, it is absurd to say that an economy has resumed growth after years of recession or near recession conditions, owes this growth to austerity. The NYT is not supposed to present delusions of political leaders to its readers as plausible explanations of reality.
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Marketplace radio says that we should be happy for those big Wall Street bonuses because they lead to more spending and job creation. Of course spending by the Wall Street boys creates jobs, but the same is true of spending by drug dealers and bank robbers. It is a bit peculiar that a news show would try to use this fact as a justification for bonuses that arguably stem from rent-seeking activity that provides no benefit to the economy.
Marketplace radio says that we should be happy for those big Wall Street bonuses because they lead to more spending and job creation. Of course spending by the Wall Street boys creates jobs, but the same is true of spending by drug dealers and bank robbers. It is a bit peculiar that a news show would try to use this fact as a justification for bonuses that arguably stem from rent-seeking activity that provides no benefit to the economy.
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It’s good to see Larry Summers continue to press the case on secular stagnation. There are three points worth adding to his account.
First, dealing with bubbles really should not be that hard. The sort of bubbles that actually pose threats to the real economy (e.g. not the bubble in bitcoin prices) are easy to spot. Bubbles like the stock bubble in the 1990s and the housing bubble in the 2000s actually move the economy. It was easy to recognize this fact at the time and it would be easy to recognize the same about future bubbles. For this reason, we should watch for bubbles and be prepared to take steps to stop them before they grow dangerously large, but this is not the impossible task that Summers seems to believe.
Second, one obvious way to help generate demand is through a smaller trade deficit. The route to a lower deficit is a lower valued dollar. This can be done. It was done in the late 1980s with the Plaza Accord leading to a lower valued dollar and a lower trade deficit. The dollar actually has fallen sharply since 2002 leading to the trade deficit being cut almost in half as a share of GDP. We just need to do more of the same.
The third point is that one obvious way to reduce a gap between potential GDP and actual GDP is to reduce potential. If that sounds strange, it speaks to the narrowness of the debate in the United States. On average, workers in the United States put in 20 percent more hours a year than their counterparts in West Europe. The difference primarily takes the form of paid family leave, paid sick days, and paid vacation (six weeks a year is the norm in some countries).
There is no reason that the government can’t have policies to promote reductions in work time as a way to address excess potential output. Unemployment is a problem because it leaves many people unable to support themselves and their families. There is nothing obviously wrong with workers enjoying longer vacations or shorter workweeks.
In short, it’s great to see an economist with Larry Summers’ stature finally recognizing the problem of secular stagnation. It will be more helpful if he can think more broadly about the issue.
Note: typo corrected, thanks Joe.
It’s good to see Larry Summers continue to press the case on secular stagnation. There are three points worth adding to his account.
First, dealing with bubbles really should not be that hard. The sort of bubbles that actually pose threats to the real economy (e.g. not the bubble in bitcoin prices) are easy to spot. Bubbles like the stock bubble in the 1990s and the housing bubble in the 2000s actually move the economy. It was easy to recognize this fact at the time and it would be easy to recognize the same about future bubbles. For this reason, we should watch for bubbles and be prepared to take steps to stop them before they grow dangerously large, but this is not the impossible task that Summers seems to believe.
Second, one obvious way to help generate demand is through a smaller trade deficit. The route to a lower deficit is a lower valued dollar. This can be done. It was done in the late 1980s with the Plaza Accord leading to a lower valued dollar and a lower trade deficit. The dollar actually has fallen sharply since 2002 leading to the trade deficit being cut almost in half as a share of GDP. We just need to do more of the same.
The third point is that one obvious way to reduce a gap between potential GDP and actual GDP is to reduce potential. If that sounds strange, it speaks to the narrowness of the debate in the United States. On average, workers in the United States put in 20 percent more hours a year than their counterparts in West Europe. The difference primarily takes the form of paid family leave, paid sick days, and paid vacation (six weeks a year is the norm in some countries).
There is no reason that the government can’t have policies to promote reductions in work time as a way to address excess potential output. Unemployment is a problem because it leaves many people unable to support themselves and their families. There is nothing obviously wrong with workers enjoying longer vacations or shorter workweeks.
In short, it’s great to see an economist with Larry Summers’ stature finally recognizing the problem of secular stagnation. It will be more helpful if he can think more broadly about the issue.
Note: typo corrected, thanks Joe.
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Peter Wallison, who was White House Counsel under President Reagan and has long been a fellow at the American Enterprise Institute, told NYT readers today that the housing bubble is back. Wallison is right to be concerned about the return of a bubble, as I have pointed out elsewhere, but his account of the last bubble and the risks of a new one are strangely off the mark.
Wallison wants to blame the bubble on government policy of promoting homeownership. There certainly has been a problem of a housing policy that is far too tilted toward homeownership, but this does not explain the bubble. Fannie Mae and Freddie Mac were bad actors in the bubble years, buying up trillions of dollars of loans issued on houses purchased at bubble inflated prices, as I said at the time.
However the worst loans were securitized by folks like Citigroup, Merrill Lynch, and Goldman Sachs. They weren’t securitizing junk mortgages to meet government goals for low-income homeownership, they were doing it to make money. And they made lots of money in these years. In fact, the private securitizers were so successful in securitizing junk mortgages that they almost put the Federal Housing Authority (FHA) out of business. Since the FHA maintained its lending standards it couldn’t compete with the zero down payment loans being securitized on Wall Street. It saw its market share fall to 2 percent at the peak of the bubble. Some of us warned about the problem posed by the bubble in low-income communities at the time.
Anyhow, Wallison’s chronology of the last bubble is more than a bit off. He tells readers;
“In 1997, housing prices began to diverge substantially from rental costs. Between 1997 and 2002, the average compound rate of growth in housing prices was 6 percent, exceeding the average compound growth rate in rentals of 3.34 percent. This, incidentally, contradicts the widely held idea that the last housing bubble was caused by the Federal Reserve’s monetary policy. Between 1997 and 2000, the Fed raised interest rates, and they stayed relatively high until almost 2002 with no apparent effect on the bubble, which continued to maintain an average compound growth rate of 6 percent until 2007, when it collapsed.”
I also date the bubble as beginning in the mid-1990s, but there was a qualitative difference in the price rises of the late 1990s and the 2000s. If prices had stopped rising in 2000, house sale prices would have been somewhat higher relative to rents, but there would have been no serious risk of a recession and financial collapse if they fell back to their historic levels. However house price growth accelerated in the 2000s, with prices rising at a 10 percent annual rate from the 4th quarter of 2000 to their peak in the 2nd quarter of 2006 (not 2007). [Doesn’t the NYT do any fact checking? The interest rate story is wrong also, with the federal funds rate having been lowered to 3.0 percent by September of 2001.] And this more rapid price growth is from an already inflated level.
Levels are important also in assessing Wallison’s claim that we have a new bubble because:
“Today, after the financial crisis, the recession and the slow recovery, the bubble is beginning to grow again. Between 2011 and the third quarter of 2013, housing prices grew by 5.83 percent, again exceeding the increase in rental costs, which was 2 percent.”
This rate of growth is from a more normal level of house prices. As I have frequently noted, house prices were growing very rapidly in the first half of 2013 posing a real risk of a return to a bubble. However Bernanke’s taper talk in June and the resulting rise in mortgage rates appears to have curbed the irrational exuberance, although it will be important to watch future price appreciation closely. In any case, it appears that the main culprits today are private equity funds and hedge funds who have been buying up large blocks of homes as investment properties, not low income buyers.
Addendum:
Through the Twitterverse I received a link to this Wallison piece from 2002 in which he critcized the GSEs for not doing enough to provide mortgage credit to moderate income households. Here’s the key part:
“Any claim that they are discharging a public trust is an illusion. To the degree that they do anything less than maximizing profits it is to maintain their valuable franchise by reducing their political risk, not because they are voluntarily fulfilling some public trust. It can’t be otherwise; they are legally bound to a duty only to the corporation and its shareholders.
“This is very clearly seen in Fannie and Freddie’s activities in affordable and minority housing. Study after study has shown that they are doing less for those who are underserved in the housing market than banks and thrifts. Not only do they buy fewer mortgages than are originated in minority communities, the ones they buy tend to be seasoned and thus less risky. Despite Fannie’s claims about trillion dollar commitments, they are meeting their affordable and minority housing obligations by slipping through loopholes in the loosely written and enforced HUD regulations in this area.
“In other words, two companies that are immensely profitable and claim to have a government mission, are doing as little as they can get away with for those who most need assistance–while swamping the airwaves with advertising that they are putting people in homes. This should be no surprise, since their incentives push them in this direction. As shareholder-owned companies, they are maximizing their profits–as they must–while doing just enough to avoid the criticism that might result in the loss of the government support that enables them to earn these profits.”
Peter Wallison, who was White House Counsel under President Reagan and has long been a fellow at the American Enterprise Institute, told NYT readers today that the housing bubble is back. Wallison is right to be concerned about the return of a bubble, as I have pointed out elsewhere, but his account of the last bubble and the risks of a new one are strangely off the mark.
Wallison wants to blame the bubble on government policy of promoting homeownership. There certainly has been a problem of a housing policy that is far too tilted toward homeownership, but this does not explain the bubble. Fannie Mae and Freddie Mac were bad actors in the bubble years, buying up trillions of dollars of loans issued on houses purchased at bubble inflated prices, as I said at the time.
However the worst loans were securitized by folks like Citigroup, Merrill Lynch, and Goldman Sachs. They weren’t securitizing junk mortgages to meet government goals for low-income homeownership, they were doing it to make money. And they made lots of money in these years. In fact, the private securitizers were so successful in securitizing junk mortgages that they almost put the Federal Housing Authority (FHA) out of business. Since the FHA maintained its lending standards it couldn’t compete with the zero down payment loans being securitized on Wall Street. It saw its market share fall to 2 percent at the peak of the bubble. Some of us warned about the problem posed by the bubble in low-income communities at the time.
Anyhow, Wallison’s chronology of the last bubble is more than a bit off. He tells readers;
“In 1997, housing prices began to diverge substantially from rental costs. Between 1997 and 2002, the average compound rate of growth in housing prices was 6 percent, exceeding the average compound growth rate in rentals of 3.34 percent. This, incidentally, contradicts the widely held idea that the last housing bubble was caused by the Federal Reserve’s monetary policy. Between 1997 and 2000, the Fed raised interest rates, and they stayed relatively high until almost 2002 with no apparent effect on the bubble, which continued to maintain an average compound growth rate of 6 percent until 2007, when it collapsed.”
I also date the bubble as beginning in the mid-1990s, but there was a qualitative difference in the price rises of the late 1990s and the 2000s. If prices had stopped rising in 2000, house sale prices would have been somewhat higher relative to rents, but there would have been no serious risk of a recession and financial collapse if they fell back to their historic levels. However house price growth accelerated in the 2000s, with prices rising at a 10 percent annual rate from the 4th quarter of 2000 to their peak in the 2nd quarter of 2006 (not 2007). [Doesn’t the NYT do any fact checking? The interest rate story is wrong also, with the federal funds rate having been lowered to 3.0 percent by September of 2001.] And this more rapid price growth is from an already inflated level.
Levels are important also in assessing Wallison’s claim that we have a new bubble because:
“Today, after the financial crisis, the recession and the slow recovery, the bubble is beginning to grow again. Between 2011 and the third quarter of 2013, housing prices grew by 5.83 percent, again exceeding the increase in rental costs, which was 2 percent.”
This rate of growth is from a more normal level of house prices. As I have frequently noted, house prices were growing very rapidly in the first half of 2013 posing a real risk of a return to a bubble. However Bernanke’s taper talk in June and the resulting rise in mortgage rates appears to have curbed the irrational exuberance, although it will be important to watch future price appreciation closely. In any case, it appears that the main culprits today are private equity funds and hedge funds who have been buying up large blocks of homes as investment properties, not low income buyers.
Addendum:
Through the Twitterverse I received a link to this Wallison piece from 2002 in which he critcized the GSEs for not doing enough to provide mortgage credit to moderate income households. Here’s the key part:
“Any claim that they are discharging a public trust is an illusion. To the degree that they do anything less than maximizing profits it is to maintain their valuable franchise by reducing their political risk, not because they are voluntarily fulfilling some public trust. It can’t be otherwise; they are legally bound to a duty only to the corporation and its shareholders.
“This is very clearly seen in Fannie and Freddie’s activities in affordable and minority housing. Study after study has shown that they are doing less for those who are underserved in the housing market than banks and thrifts. Not only do they buy fewer mortgages than are originated in minority communities, the ones they buy tend to be seasoned and thus less risky. Despite Fannie’s claims about trillion dollar commitments, they are meeting their affordable and minority housing obligations by slipping through loopholes in the loosely written and enforced HUD regulations in this area.
“In other words, two companies that are immensely profitable and claim to have a government mission, are doing as little as they can get away with for those who most need assistance–while swamping the airwaves with advertising that they are putting people in homes. This should be no surprise, since their incentives push them in this direction. As shareholder-owned companies, they are maximizing their profits–as they must–while doing just enough to avoid the criticism that might result in the loss of the government support that enables them to earn these profits.”
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That’s because Larry Summers is right and John Taylor is just obscuring reality. The NYT did a disservice when it reported on Larry Summers’ concern for a period of secular stagnation that predated the downturn and then gave Taylor’s response:
“If Mr. Summers’s theory is accurate, said John B. Taylor, a Stanford economist who served in Republican presidential administrations, ‘You would have expected the economy to not have been working so well before the crisis. He says it wasn’t. I say it was.’
“Mr. Taylor said that such measures as inflation, housing investment and unemployment showed a strong economy leading up to the crisis.”
Actually the story of secular stagnation is totally consistent with one where growth can be temporarily spurred by a housing bubble. The growth created by the bubble can bring down unemployment and raise output to near capacity, but it is not sustainable. There is nothing that Taylor said that is in anyway inconsistent with a story of secular stagnation.
That’s because Larry Summers is right and John Taylor is just obscuring reality. The NYT did a disservice when it reported on Larry Summers’ concern for a period of secular stagnation that predated the downturn and then gave Taylor’s response:
“If Mr. Summers’s theory is accurate, said John B. Taylor, a Stanford economist who served in Republican presidential administrations, ‘You would have expected the economy to not have been working so well before the crisis. He says it wasn’t. I say it was.’
“Mr. Taylor said that such measures as inflation, housing investment and unemployment showed a strong economy leading up to the crisis.”
Actually the story of secular stagnation is totally consistent with one where growth can be temporarily spurred by a housing bubble. The growth created by the bubble can bring down unemployment and raise output to near capacity, but it is not sustainable. There is nothing that Taylor said that is in anyway inconsistent with a story of secular stagnation.
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Stanford Professor and former Bush administration economist John Taylor is taking strong exception to the secular stagnation argument being put forward by Larry Summers, Paul Krugman, and right-thinking economists everywhere. His alternative explanation for an unusually weak recovery and a decade of poor growth is excessively expansionary monetary policy and policy uncertainty due to items like the Affordable Care Act and Dodd-Frank. Both of these lines of argument are a bit hard to follow.
On the excessively expansionary monetary policy point, the usual evidence is accelerating inflation. We see the opposite over the last decade, low and falling inflation. The expansionary monetary policy has been a direct response to the weak economy over this period. Taylor seems to miss this, asserting in his paper:
“The federal funds rate was 1.0 percent in 2003 when the inflation rate was about 2.0 percent and the economy was operating pretty close to normal.”
Actually the economy was far from being close to normal. It was still shedding jobs until September of 2003, almost two years after the official recession was over. The employment to population ratio at the end of 2003 was still almost 2.5 percentage points below its pre-recession level, a larger falloff than at any point in the 1990-91 downturn. It seems more than a bit of a stretch to say the economy was operating close to normal. (My explanation is that we were having trouble recovering from the collapse of the stock bubble.)
Taylor then follows Peter Wallison in blaming Fannie Mae, Freddie Mac, and the Community Re-investment Act for the housing bubble even though the worst loans were securitized by private investment banks like Goldman Sachs and Bear Stearns. The GSEs lost massive market share in the bubble years to the subprime issuers.
Then we get that Affordable Care Act and Dodd-Frank are preventing firms from investing and hiring. There is no real explanation of how this is supposed to be occurring. First off, non-residential investment is almost back to its pre-recession share of GDP, so it seems like Taylor is trying to explain a gap that does not exist. The same applies to hiring. If there were a fear of hiring then we should be seeing the length of the average workweek rising far above historic levels, as employers substitute more hours for more workers. We don’t.
If the Affordable Care Act is actually discouraging hiring can we get some hint as to where to look for evidence. Presumably it would be at mid-size firms that didn’t previously provide insurance but might now be forced to by employer sanctions under the ACA. Is there any evidence this is happening? Taylor certainly doesn’t present any.
The same is true with Dodd-Frank. Do we see less hiring and growth in the financial sector than we would have in the absence of the new legislation? If so, Taylor does not make the case. Is it harder for non-financial firms to borrow as a result of Dodd-Frank? This is certainly not in any obvious way true.
In short, Taylor’s argument is primarily one of yelling “uncertainty, ACA, Dodd-Frank bad.” It may sell in some circles, but it is not a serious economic argument.
Stanford Professor and former Bush administration economist John Taylor is taking strong exception to the secular stagnation argument being put forward by Larry Summers, Paul Krugman, and right-thinking economists everywhere. His alternative explanation for an unusually weak recovery and a decade of poor growth is excessively expansionary monetary policy and policy uncertainty due to items like the Affordable Care Act and Dodd-Frank. Both of these lines of argument are a bit hard to follow.
On the excessively expansionary monetary policy point, the usual evidence is accelerating inflation. We see the opposite over the last decade, low and falling inflation. The expansionary monetary policy has been a direct response to the weak economy over this period. Taylor seems to miss this, asserting in his paper:
“The federal funds rate was 1.0 percent in 2003 when the inflation rate was about 2.0 percent and the economy was operating pretty close to normal.”
Actually the economy was far from being close to normal. It was still shedding jobs until September of 2003, almost two years after the official recession was over. The employment to population ratio at the end of 2003 was still almost 2.5 percentage points below its pre-recession level, a larger falloff than at any point in the 1990-91 downturn. It seems more than a bit of a stretch to say the economy was operating close to normal. (My explanation is that we were having trouble recovering from the collapse of the stock bubble.)
Taylor then follows Peter Wallison in blaming Fannie Mae, Freddie Mac, and the Community Re-investment Act for the housing bubble even though the worst loans were securitized by private investment banks like Goldman Sachs and Bear Stearns. The GSEs lost massive market share in the bubble years to the subprime issuers.
Then we get that Affordable Care Act and Dodd-Frank are preventing firms from investing and hiring. There is no real explanation of how this is supposed to be occurring. First off, non-residential investment is almost back to its pre-recession share of GDP, so it seems like Taylor is trying to explain a gap that does not exist. The same applies to hiring. If there were a fear of hiring then we should be seeing the length of the average workweek rising far above historic levels, as employers substitute more hours for more workers. We don’t.
If the Affordable Care Act is actually discouraging hiring can we get some hint as to where to look for evidence. Presumably it would be at mid-size firms that didn’t previously provide insurance but might now be forced to by employer sanctions under the ACA. Is there any evidence this is happening? Taylor certainly doesn’t present any.
The same is true with Dodd-Frank. Do we see less hiring and growth in the financial sector than we would have in the absence of the new legislation? If so, Taylor does not make the case. Is it harder for non-financial firms to borrow as a result of Dodd-Frank? This is certainly not in any obvious way true.
In short, Taylor’s argument is primarily one of yelling “uncertainty, ACA, Dodd-Frank bad.” It may sell in some circles, but it is not a serious economic argument.
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Greg Mankiw uses his column today to take on the minimum wage. He criticizes President Obama for citing studies showing that the minimum wage has little or no effect on employment and points to studies finding that a higher minimum wage will lead to modest declines in employment. (See John Schmitt’s excellent paper for a quick review of the state of the research.) Mankiw says that we should think of the minimum wage as a hidden tax that hits low wage employers.
Mankiw argues that if we want to help out the working poor then the best way to do it is to have an explicit tax and use it to fund a higher Earned Income Tax Credit (EITC). He argues that the EITC is a fairer and more efficient way to help low wage workers.
Let’s give this one a bit of thought. First of all, Jared Bernstein has already made the obvious point that the EITC and minimum wage should be seen as complementary policies. If we raise the minimum wage then the EITC costs us less. This should be important, especially to people like Greg Mankiw, who on other days argue for lower taxes because they create economic distortions and reduce output. Since the low tax Greg Mankiw and his allies are likely to reappear in public debates when the issue is not raising the minimum wage, we should be mindful of how much money the government spends on the EITC.
We can also think about the incidence of the burdens from a higher minimum wage versus a higher EITC. In the latter case we would presumably be looking at an increase in the income tax as the source of revenue. (Mankiw may want to cut Social Security and Medicare, but let’s not make this more complicated than necessary.) Since we will probably not be getting too much more out of the one percent in the current political environment, the funding for the EITC would have to come from more middle class types.
By contrast, the money to pay a higher minimum wage comes from several sources. As John Schmitt discusses in his paper, some of the higher wage will be passed on in higher prices. That will be like a tax in its incidence, as we all will pay a bit more for fast food and other items purchased from employers with a large share of low-wage workers.
However some of this will come out of the record corporate profits that we have seen in recent years. The Walton family may see their net worth fall by 10-20 percent, perhaps even slipping below $100 billion. (Handkerchiefs are on sale in aisle three). And part of the higher cost will be made up in higher productivity as turnover drops and employers learn how to use workers more efficiently.
So Mankiw’s EITC option has the middle class paying more through higher taxes, while the minimum wage route has much of the cost being met through lower corporate profits and greater efficiency. This distributional impact should be front and center on the table.
There is another part of the story that should feature in the discussion. Mankiw sees a higher minimum wage as a tax on low wage employers. However the reason that we have so many people who are willing to work for $7.25 an hour at places like Walmart and McDonalds is because they can’t get better paying jobs elsewhere. And the reason they can’t get better paying jobs is that we have a government policy to run budgets that are not consistent with full employment.
In other words, we could spend more and/or tax less and thereby increase demand in the economy. This would increase output and employment and give these low-paid workers more employment options. However as a matter of policy we decided to have federal budgets that led to higher rates of unemployment. Rather than seeing the minimum wage as a tax on low-wage employers, we can see the government’s high unemployment policy as a subsidy to low-wage employers. (Yes, this is a sales pitch for the free book I wrote with Jared.)
The point is that we have no virgin markets where the chips just fall where they may without the heavy hand of government. The question is who does that hand favor. Mankiw wants it to help the one percent, Jared and I would rather see it work to the benefit of the rest of the population.
Greg Mankiw uses his column today to take on the minimum wage. He criticizes President Obama for citing studies showing that the minimum wage has little or no effect on employment and points to studies finding that a higher minimum wage will lead to modest declines in employment. (See John Schmitt’s excellent paper for a quick review of the state of the research.) Mankiw says that we should think of the minimum wage as a hidden tax that hits low wage employers.
Mankiw argues that if we want to help out the working poor then the best way to do it is to have an explicit tax and use it to fund a higher Earned Income Tax Credit (EITC). He argues that the EITC is a fairer and more efficient way to help low wage workers.
Let’s give this one a bit of thought. First of all, Jared Bernstein has already made the obvious point that the EITC and minimum wage should be seen as complementary policies. If we raise the minimum wage then the EITC costs us less. This should be important, especially to people like Greg Mankiw, who on other days argue for lower taxes because they create economic distortions and reduce output. Since the low tax Greg Mankiw and his allies are likely to reappear in public debates when the issue is not raising the minimum wage, we should be mindful of how much money the government spends on the EITC.
We can also think about the incidence of the burdens from a higher minimum wage versus a higher EITC. In the latter case we would presumably be looking at an increase in the income tax as the source of revenue. (Mankiw may want to cut Social Security and Medicare, but let’s not make this more complicated than necessary.) Since we will probably not be getting too much more out of the one percent in the current political environment, the funding for the EITC would have to come from more middle class types.
By contrast, the money to pay a higher minimum wage comes from several sources. As John Schmitt discusses in his paper, some of the higher wage will be passed on in higher prices. That will be like a tax in its incidence, as we all will pay a bit more for fast food and other items purchased from employers with a large share of low-wage workers.
However some of this will come out of the record corporate profits that we have seen in recent years. The Walton family may see their net worth fall by 10-20 percent, perhaps even slipping below $100 billion. (Handkerchiefs are on sale in aisle three). And part of the higher cost will be made up in higher productivity as turnover drops and employers learn how to use workers more efficiently.
So Mankiw’s EITC option has the middle class paying more through higher taxes, while the minimum wage route has much of the cost being met through lower corporate profits and greater efficiency. This distributional impact should be front and center on the table.
There is another part of the story that should feature in the discussion. Mankiw sees a higher minimum wage as a tax on low wage employers. However the reason that we have so many people who are willing to work for $7.25 an hour at places like Walmart and McDonalds is because they can’t get better paying jobs elsewhere. And the reason they can’t get better paying jobs is that we have a government policy to run budgets that are not consistent with full employment.
In other words, we could spend more and/or tax less and thereby increase demand in the economy. This would increase output and employment and give these low-paid workers more employment options. However as a matter of policy we decided to have federal budgets that led to higher rates of unemployment. Rather than seeing the minimum wage as a tax on low-wage employers, we can see the government’s high unemployment policy as a subsidy to low-wage employers. (Yes, this is a sales pitch for the free book I wrote with Jared.)
The point is that we have no virgin markets where the chips just fall where they may without the heavy hand of government. The question is who does that hand favor. Mankiw wants it to help the one percent, Jared and I would rather see it work to the benefit of the rest of the population.
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The NYT had a retrospective on the 50th anniversary of the war on poverty. One item that is worth noting is that the poverty rate actually fell sharply through the sixties and into the early seventies. Then the economy was derailed by the oil price shocks and the recessions that followed in 1974-75 and then again at the end of the 1970s. Then President Reagan got elected and surrendered.
Since the poverty rate is ostensibly based on an absolute living standard, the failure to make any progress over the last fifty years really is striking. If we had seen the same growth rate over this period with no increase in inequality, poverty would have been almost completely eliminated. The rise in inequality over the last three decades explains the lack of progress on reducing poverty.
The NYT had a retrospective on the 50th anniversary of the war on poverty. One item that is worth noting is that the poverty rate actually fell sharply through the sixties and into the early seventies. Then the economy was derailed by the oil price shocks and the recessions that followed in 1974-75 and then again at the end of the 1970s. Then President Reagan got elected and surrendered.
Since the poverty rate is ostensibly based on an absolute living standard, the failure to make any progress over the last fifty years really is striking. If we had seen the same growth rate over this period with no increase in inequality, poverty would have been almost completely eliminated. The rise in inequality over the last three decades explains the lack of progress on reducing poverty.
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Thomas Friedman once again pronounces a pox on both their houses, demanding that Republicans and Democrats compromise and embrace his agenda for moving the country forward. The big problem is that because Thomas Friedman apparently doesn’t believe in doing homework, he doesn’t actually have an agenda that would move the country forward.
Taking his items in turn, he calls for an investment agenda, with the qualification:
“But this near-term investment should be paired with long-term entitlement reductions, defense cuts and tax reform that would be phased in gradually as the economy improves, so we do not add to the already heavy fiscal burden on our children, deprive them of future investment resources or leave our economy vulnerable to unforeseen shocks, future recessions or the stresses that are sure to come when all the baby boomers retire.”
Now the folks who have done their homework know that projections for Medicare and Medicaid spending have been sharply reduced in the last five years as the Congressional Budget Office and other forecasters have incorporated part of the slowdown in cost growth that we have seen over this period. This means that the deficit projections for 10-15 years out don’t look nearly as scary as they did in the recent past. The reduction in projected cost growth exceeds the savings from almost any remotely feasible cut that might have been proposed five years ago.
On the Social Security side of the entitlement ledger, most older workers have almost nothing saved for retirement because people with names like Greenspan, Rubin, and Summers are not very competent at running an economy (another example of the skills shortage). This means that it is not practical to talk about cuts to Social Security for anyone retiring in the near future since this is the bulk of what most retirees will be living on. In fact, those who did their homework know that many people in Congress and across the country are now talking about increasing benefits. We can cut our children and grandchildren’s Social Security, but this is a dubious way to propose to help them.
Then we have Thomas Friedman’s energy agenda:
“We should exploit our new natural gas bounty, but only by pairing it with the highest environmental extraction rules and a national, steadily rising, renewable energy portfolio standard that would ensure that natural gas replaces coal — not solar, wind or other renewables. That way shale gas becomes a bridge to a cleaner energy future, not just an addiction to a less dirty, climate-destabilizing fossil fuel.”
Friedman apparently has not done his homework here either. Andrew Revkin, who certainly is not a knee-jerk enviro-type, devoted a blogpost to a new study indicating that fracking results in much higher emissions of methane gas than had previously been believed. While this study is not conclusive, its findings certainly deserve to be taken seriously. Unless they can be shown to be mistaken, it is wrong to imagine shale gas to be the bridge fuel Friedman claims.
Then we are told:
“In some cities, teachers’ unions really are holding up education reform.”
Really, the problem is teachers’ unions? Well, large chunks of the country don’t have any teachers’ unions to block reform. Yet, we don’t hear of Texas and Alabama beating out Finland (which does have teachers’ unions) for top rankings on standardized tests or other measures of student performance. Teachers’ unions have often come into conflict with self-proclaimed reformers. While the unions may have obstructed their agenda (which often seems largely focused on weakening teachers’ unions), it is far from clear that this has had negative outcomes for students. In the Chicago teachers’ strike in 2012, the most noteworthy recent confrontation, the parents overwhelmingly sided with the teachers, so apparently they haven’t been clued in on the benefits of reform.
Next we get Thomas Friedman’s theory of wage inequality:
“Finally, the merger of globalization and the information-technology revolution has shrunk the basis of the old middle class — the high-wage, middle-skilled job. Increasingly, there are only high-wage, high-skilled jobs.”
That’s a nice try, but the data don’t fit Thoams Friedman’s little hyper-connected technology driven story. My friends Larry Mishel, John Schmitt, and Heidi Shierholz looked at this issue very carefully. In the last decade the jobs that have been growing most rapidly are actually low-skilled occupations. If we want to look for reasons for wage inequality we might try items like declining unionization rates and high unemployment.
So Friedman is surely right that we should not view compromise as a 4-letter word, but that doesn’t mean we should agree on a policy agenda that is not grounded in evidence.
Thomas Friedman once again pronounces a pox on both their houses, demanding that Republicans and Democrats compromise and embrace his agenda for moving the country forward. The big problem is that because Thomas Friedman apparently doesn’t believe in doing homework, he doesn’t actually have an agenda that would move the country forward.
Taking his items in turn, he calls for an investment agenda, with the qualification:
“But this near-term investment should be paired with long-term entitlement reductions, defense cuts and tax reform that would be phased in gradually as the economy improves, so we do not add to the already heavy fiscal burden on our children, deprive them of future investment resources or leave our economy vulnerable to unforeseen shocks, future recessions or the stresses that are sure to come when all the baby boomers retire.”
Now the folks who have done their homework know that projections for Medicare and Medicaid spending have been sharply reduced in the last five years as the Congressional Budget Office and other forecasters have incorporated part of the slowdown in cost growth that we have seen over this period. This means that the deficit projections for 10-15 years out don’t look nearly as scary as they did in the recent past. The reduction in projected cost growth exceeds the savings from almost any remotely feasible cut that might have been proposed five years ago.
On the Social Security side of the entitlement ledger, most older workers have almost nothing saved for retirement because people with names like Greenspan, Rubin, and Summers are not very competent at running an economy (another example of the skills shortage). This means that it is not practical to talk about cuts to Social Security for anyone retiring in the near future since this is the bulk of what most retirees will be living on. In fact, those who did their homework know that many people in Congress and across the country are now talking about increasing benefits. We can cut our children and grandchildren’s Social Security, but this is a dubious way to propose to help them.
Then we have Thomas Friedman’s energy agenda:
“We should exploit our new natural gas bounty, but only by pairing it with the highest environmental extraction rules and a national, steadily rising, renewable energy portfolio standard that would ensure that natural gas replaces coal — not solar, wind or other renewables. That way shale gas becomes a bridge to a cleaner energy future, not just an addiction to a less dirty, climate-destabilizing fossil fuel.”
Friedman apparently has not done his homework here either. Andrew Revkin, who certainly is not a knee-jerk enviro-type, devoted a blogpost to a new study indicating that fracking results in much higher emissions of methane gas than had previously been believed. While this study is not conclusive, its findings certainly deserve to be taken seriously. Unless they can be shown to be mistaken, it is wrong to imagine shale gas to be the bridge fuel Friedman claims.
Then we are told:
“In some cities, teachers’ unions really are holding up education reform.”
Really, the problem is teachers’ unions? Well, large chunks of the country don’t have any teachers’ unions to block reform. Yet, we don’t hear of Texas and Alabama beating out Finland (which does have teachers’ unions) for top rankings on standardized tests or other measures of student performance. Teachers’ unions have often come into conflict with self-proclaimed reformers. While the unions may have obstructed their agenda (which often seems largely focused on weakening teachers’ unions), it is far from clear that this has had negative outcomes for students. In the Chicago teachers’ strike in 2012, the most noteworthy recent confrontation, the parents overwhelmingly sided with the teachers, so apparently they haven’t been clued in on the benefits of reform.
Next we get Thomas Friedman’s theory of wage inequality:
“Finally, the merger of globalization and the information-technology revolution has shrunk the basis of the old middle class — the high-wage, middle-skilled job. Increasingly, there are only high-wage, high-skilled jobs.”
That’s a nice try, but the data don’t fit Thoams Friedman’s little hyper-connected technology driven story. My friends Larry Mishel, John Schmitt, and Heidi Shierholz looked at this issue very carefully. In the last decade the jobs that have been growing most rapidly are actually low-skilled occupations. If we want to look for reasons for wage inequality we might try items like declining unionization rates and high unemployment.
So Friedman is surely right that we should not view compromise as a 4-letter word, but that doesn’t mean we should agree on a policy agenda that is not grounded in evidence.
Read More Leer más Join the discussion Participa en la discusión
