“Your chances of achieving the American Dream are almost two times higher … if you are growing up in Canada than in the United States,” said Harvard’s Raj Chetty at a Center on Children and Families (CCF) event held on Monday. Chetty, the Bloomberg Professor of Economics and a leading scholar on opportunity and intergenerational mobility, presented his latest research on how where one grows up has a huge impact on success later in life.
Chetty and colleagues calculated upward mobility for every metro and rural area in the United States.
The heat map below shows the chances that a child born in the bottom fifth of the income distribution in that particular place will reach the top fifth later in life.
My more perceptive readers may be thinking, “Ben, you usually advocate for equality of opportunity, not outcomes, what gives?”
This is a fair observation. Generally speaking, I do believe more in equality of opportunity than equality in outcomes. But these two concepts cannot be fully separated. In fact, they intersect at what has become an important issue for politicians, academics, and social scientists alike–social mobility.
Observing social mobility outcomes at the macro level provides insight into opportunity (or lack thereof) at the micro level. At more macro levels (neighborhood, city, county, etc), the differences in individuals’ development experiences (wealth, culture, parental values, personal ability, luck, etc.) are naturally smoothed out. Taking into consideration every possible permutation of personal development, these forces offset one another. What we are left with is the “average” (for lack of a better word) personal development experience.
This “average” experience leaves a common factor–public goods and services–as the variable explaining why certain areas recognize greater social mobility than others (as shown on Mr. Chetty’s map). The fact that the administration of many important public services is carried out at these same levels reinforces the idea that social mobility outcomes are the result of policy choice(s).
Once we get past the question of “if” government programs can impact people’s opportunities, we can focus on which programs are most effective in promoting social mobility. Data mapping serves an important role here, highlighting areas that may have a working policy mix (although since economic development is context sensitive, even the seemingly best policy mix must be adapted to local realities to be effective).
The question then becomes how to pay for the programs which enable equality of opportunity. Fiscal debates are always implicitly an often explicitly shaped by underlying budgetary positions. The unwillingness of governments around the world to engage in stimulus spending despite low interest rates and high un(der)employment (a liquidity trap) is case-in-point.
In order to pay for the services needed to enhance social mobility in poorer neighborhoods, significant investments are needed. This necessitates higher effective tax rates on the ultra-wealthy (which in turn requires a multi-faceted approach, closing loopholes in capital gains, income, and inheritance/gift taxes to name a few); people whose wealth is often unrelated to productivity.
The economic outcomes of the wealthiest ultimately must be impacted in order to finance programs that promote equality of opportunity. This fact, however, does not necessitate class warfare between the lower, middle, and upper-middle classes–the vast majority of the America’s citizenry.
The American economy must work for everybody who is willing to work hard to succeed, regardless of their socioeconomic background. Once this condition is met, inequality is not only defensible, it actually spurs hard work and innovation. Unfortunately, contemporary America is nowhere near this “good inequality”; our inequality is not the result of meritocracy, but primarily the result a political process / tax code beholden to wealthy interests and an outdated criminal justice system.
Everybody wants good jobs (both public and private) and good public services–both have positive and immediate benefits for the municipalities securing them. However, there are also costs associated with bringing in jobs and providing public services. If these costs (even if they seem far off) outweigh the benefits, in the end everyone suffers.
It has become abundantly clear that local and state officials are (generally) either unable and/or unwilling to conduct meaningful C-B analyses when making deals with taxpayer money. They are unable to strike sustainable deals because of power asymmetries; large corporations and powerful unions have more legal clout and can out-negotiate municipalities. Furthermore, in the case of private sector jobs, a company can threaten to move to a different municipality, leading local / state officials to bid against each other in a “race to the bottom“. They are unwilling to strike sustainable deals because while benefits are realized immediately (look at the jobs / roads / services I brought!), the costs are paid gradually over time, usually long after said decision maker is out of politics.
Two examples highlight the bad deals taxpayers are getting due to a lack of political will–subsidies for corporations and municipal budget deficits.
A few months back, when NN was in it’s infancy, I picked up on a NYT article highlighting how out of control subsidies for private corporations had become in America. Here are some highlights from that post:
One form of government subsidy, which was brought to light by a recent NYT article/study, highlighted how state and local governments often engaged in bidding wars to lure private corporations to their markets. Billions in taxpayer dollars go toward subsidizing these companies operations, with NO INTENTION of ever paying the money back.
It is hard to believe such an archaic system exists in today’s modern world. Small municipalities come to the negotiating table with huge multinational corporations. A power asymmetry exists; companies often outright lie about other municipalities bidding for their business to drive up prices. A “fight to the bottom” ensues, where each party is trying to give the best deal for the business, which on the flip side is going to be the worst deal for the taxpayer as they will be financing the subsidy. No real cost-benefit analysis goes into the decision. Politicians dedicate funding because they want the short term benefits of added employment on their record, without any long term accountability on the part of the company that receives the benefit or the politician securing the financing.
At a time when fiscal responsibility is on the agenda, how can we justify taking money from schools and public goods and giving them blindly to corporations with the hope that it ends up working out in the taxpayers benefit? How can we justify paying companies, not on a needs-based basis, and not hold them at all accountable for anything?
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Municipal Deficits:
The ongoing bankruptcy of Detroit–the largest municipality to ever attempt such a bankruptcy–brought the concept of municipal waste to the forefront. However, Detroit’s problems could be seen coming from a mile away; once a symbol the strength of American manufacturing, economic decline and associated emigration have left Detroit unable to pay it’s bills. Nobel Prize winning economist Joseph Stiglitz wrote an excellent Op-Ed on the subject, entitled “The Wrong Lesson From Detroit’s Bankruptcy“.
Detroit’s bankruptcy makes sense, it is the combination of government excess and economic decline. Much less understandable is the story of San Jose’s municipal budget deficit:
This metropolis of nearly a million residents is the third-largest city in California, home to tens of thousands of technology industry workers, as well as many thousands more struggling to get by. Yet even here, in the city that bills itself as the capital of Silicon Valley, the economic tidal wave that has swamped Detroit and other cities is lapping at the sea walls.
San Jose now spends one-fifth of its $1.1 billion general fund on pensions and retiree health care, and the amount keeps rising. To free up the money, services have been cut, libraries and community centers closed, the number of city workers trimmed, salaries reduced, and new facilities left unused for lack of staff. From potholes to home burglaries, the city’s problems are growing.
“We’re Silicon Valley, we’re not Detroit,” said Xavier Campos, a Democratic city councilman representing San Jose’s poor East Side. “It shouldn’t be happening here. We’re not the Rust Belt.”
The situation in San Jose is not anywhere near as dire as it is in Detroit or two other California cities, Stockton and San Bernardino, already in bankruptcy. But government officials and municipal bankruptcy experts across the country are watching San Jose closely because of a plan to reduce benefits — drafted by Mayor Chuck Reed, a Democrat, and passed by 70 percent of voters in areferendum last year.
The plan is being opposed in court by unions that represent city workers and say it is illegal under state law. It would introduce a second tier for new city employees involving much lower pension and health benefits. It would also alter pension benefits for existing workers, allowing them to choose either a similar, second-tier benefits plan or to pay significantly more out of their own pockets for the benefits they had come to expect.
The outcome of the case is expected to have a major impact on municipal budgets around the state and, perhaps, the country. If a state court rules later this year or early next year that the referendum allows San Jose to alter pension plans for existing workers, and it survives appeals, similar measures are expected to pop up elsewhere.
“These employees did nothing wrong, and their unions did nothing wrong for pushing for these benefits,” said David Crane, a lecturer at Stanford University and special adviser to former Gov. Arnold Schwarzenegger on pensions and other issues. “Nobody forced government officials to make these promises and not fund them. And now you have some really brutal things happening to people who had counted on a certain level of retirement.”
Cities in California are under particular pressure because it is so difficult to raise property taxes in the state, and because in 1999, at the height of the tech bubble, the Legislature voted for a huge benefit increase allowing, for instance, police officers to retire at age 50 with 90 percent of their salaries.
“We have this all over the state of California,” said Karol K. Denniston, a bankruptcy lawyer with the firm of Schiff Hardin in San Francisco, who is advising a number of local taxpayer groups. “There is growing recognition that there is not enough money to keep doing what they’re doing, and something’s got to change.”
As in San Jose, public employees’ unions sued. In March, a state administrative labor-law judge found that the city had failed to bargain as required with its workers. The city went ahead with the ballot-measure change, but the administrative finding portends further litigation.
Mr. Crane blames the political leadership in Sacramento, San Jose and all similarly struggling cities for failing to deal with the pension problem while it was still manageable. Mr. Reed agreed. “I have to accept my share of the responsibility,” he said. “There’s plenty of blame to go around.”
Now, he said, city workers must understand that the 10 percent pay cut they accepted a few years ago, in a previous attempt to right the city’s imbalance, was not sufficient to solve the problem and that deep, painful pension and retiree health care changes were needed.
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State and local officials have failed their constituencies with unsustainable spending. Instead of pursuing “counter-cyclical fiscal policy”, saving when times are good to have a cushion when times are bad, these officials have used taxpayer money to show all the “benefits” that have accrued during their time in office. The end result of ignoring the costs is that during times of economic downturn–when public services and jobs are most needed–there is no money to fund these essential services.
The Federal government must step up to fill this void in the name of the interests of American taxpayers.
In terms of private corporate subsidies, the federal government has the resources to negotiate with large corporations. It also has the resources to conduct strong cost-benefit analysis and determine needs based subsidies, as opposed to a money grab under the guise of maximizing shareholder value.And perhaps most importantly, the federal government will not have to bid against any other parties, as it represents every municipality within the United States. It will be able to secure the best deal for the municipality, not the worst deal.
When it comes to public services, the federal government has the benefit of being insulated from the short-sighted demands of taxpayers. While local and state officials rely on being re-elected, an appointed federal committee should in theory be able to consider the costs and benefits of any potential deal with greater prudence.
State and local governments have failed to secure good deals for their taxpayers when negotiating with both the private and public sectors. These bad deals are systematic; they are the manifestation of short-sighted political aspirations and power imbalances. It is time the Federal government got into the business of making sure that American tax-payers are getting their moneys worth.
Federal oversight would be in public workers best interests as well; while they may get slightly less generous benefits, they will have the comfort of knowing that the deals they have struck will not be reneged. It would also help avoid ugly litigation which pits civil society against the civil servants who serve them, and want only to receive what they were promised in the first place.
THERE is an indisputable elegance to the idea of transforming garbage into fuel, of turning icky, smelly detritus into something valuable.
But big drawbacks have prevented the wholesale adoption of trash-to-gas technology in the United States: incineration is polluting, and the capital costs of new plants are enormous. Gasification systems can expend a tremendous amount of energy to produce a tiny amount of electricity. Up to this point, it hasn’t seemed worth the trouble.
Mike Hart thinks that he has solved those problems. In a former Air Force hangar outside Sacramento, his company, Sierra Energy, has spent the last several years testing a waste-to-energy system called the FastOx Pathfinder. The centerpiece, a waste gasifier that’s about the size of a shower stall, is essentially a modified blast furnace. A chemical reaction inside the gasifier heats any kind of trash — whether banana peels, used syringes, old iPods, even raw sewage — to extreme temperatures without combustion. The output includes hydrogen and synthetic natural gas that can be burned to generate electricity or made into ethanol or diesel fuel. The FastOx is now being prepared for delivery to Sierra Energy’s first customer: the United States Army.
Ethanol has long been promoted as an alternative fuel that increases energy independence, and federal law requires the use of greater amounts of it. But most ethanol in this country is produced from corn or soybeans, and many people worry that the mandate is pushing up food prices. Ethanol produced from trash — or agricultural waste, as others are trying — would allay such concerns.
The military is looking for ways to reduce its oil consumption, and to make it easier to supply the front lines with the fuel it uses in all its vehicles and generators. “These days, the supply lines are in the battlefield,” said Sharon E. Burke, the assistant secretary of defense for operational efficiency plans and programs. “And we consume a lot of fuel, which makes us a big target.
The FastOx gasifier is the brainchild of two former engineers at Kaiser Steel, patented by the grandson of one of them and commercialized by Mr. Hart. “It’s a modular system that can be dropped into any area,” Mr. Hart said, “using waste where it’s produced to make electricity where it’s used.” Once it’s off the ground, he said, “garbage will be a commodity.”
Gasification is more efficient than incineration and eliminates toxic byproducts that come from burning trash. But it was especially appealing from a business point of view because it relied on a proven technology and used materials in wide abundance: blast furnaces being abandoned as the American steel industry was collapsing.
“What was compelling from the start,” Mr. Soderquist said, “was repurposing existing infrastructure into a generator of clean energy, with a second revenue stream from people paying you to take their waste.”
Results at the Defense Department’s testing facility near Sacramento have been promising; after about four hours, one ton of waste creates enough gas to produce 1,580 kilowatt-hours of electricity, which would power an average home in the United States for about a month and a half — at one-third the emissions of coal — and 42 gallons of renewably sourced fuel. And that’s with a 12-ton-a-day gasifier; existing blast furnaces can handle as much as 2,000 tons a day.
“California produces 30 million tons of garbage a year,” Mr. Hart said. “If it decided to turn its waste into clean fuels, at that rate it could meet all its oil consumption needs and still export more fuel than some OPEC members.” That is, if the FastOx can do what no other waste-to-energy gasification technology has done before: take any kind of trash, in any succession, without additional separation or preparation.
Any waste-to-energy plan, however, must overcome a major hurdle: the wild inconsistency of the waste stream. “Until you’ve demonstrated that you can handle it all, nobody’s interested,” Mr. Hart said. “I can understand it; they’ve heard similar promises before. We’ve got 150 cities, communities and businesses lined up to be Serial No. 2. Nobody wants to be No. 1.”
NOBODY, that is, except the Pentagon. The Defense Department is the country’s largest single consumer of energy, spending $15 billion a year just on fuel.
The appeal of Mr. Hart’s Pathfinder system is that it would produce fuel on site, eliminating the need to truck in fuel to dangerous military outposts. It would also reduce the need for trash-burning on bases, which creates pollution and noxious odors that have contributed to locals’ distaste for the American presence in Iraq and Afghanistan. As a result, United States forces in Afghanistan are working to close burn pits.
Ms. Burke added, “Something for military operations has to be really rugged, deployable, simple to use — all of those things.” Consultants and municipal sanitation officials who’ve looked at the FastOx say it meets those criteria.
“Waste is a problem,” Ms. Burke said. “So if we could dispose of waste and create energy at the same time, that would be a silver bullet.”
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Whats not to love about this story? An idea for turning trash-to-fuel, a seemingly futuristic and complex concept, with its origins in a 1980s steel plant. The process does not require complex new technology, but instead relies on modified blast furnaces, which are abundant due to the decline of the U.S. steel industry. Utilizing recycled capital and infrastructure only makes waste-to-fuel more appealing from a sustainability and affordability point of view.
The idea was scoffed at, evolved through trial and error and by chance, and today has become the first trash-to-fuel concept to be adopted by the U.S. D.o.D. With minimal government aid (the article cites $8 million dollars from the federal and state government), and a little bit of American ingenuity and determination, garbage may someday be worth its weight in gold (not literally, but as the article says it will be a commodity, not a liability).
A little more research into the D.o.D energy consumption further emphasized the importance of “greening-up” D.o.D operations:
DoD analyses over the last decade have cited the military’s fossil fuel dependence as a strategic risk and identified renewable energy and energy efficiency investments as key mitigation measures.
As the largest energy consumer in the United States, the federal government plays an important role in the country’s energy system. In recent years, a number of factors have led it to reduce fossil fuel dependence through investment in renewable energy and energy efficiency, including supply risks, high and volatile prices, and environmental impacts. In fiscal year 2010, DoD spent $4 billion on installation energy and $11 billion on operational energy. The full cost of fuel can be as high as $400 per gallon by the time it is delivered to a remote Forward Operating Base.
Recent U.S. Military operations in the Middle East have been too closely associated with U.S. energy interests. It is hypocritical to cite foreign energy dependence as a national security threat and not do everything in your power to reduce your own organization’s reliance on those very same energy sources.
I often write about the sustainability of U.S. military endeavors from an opportunity cost (programs we can’t afford as a nation because of high military spending) and human loss perspective. This form sustainability is about knowing when to use military intervention and when to pursue other means of foreign policy, within the D.I.M.E. paradigm. However, sometimes military intervention is necessary; another manifestation of military sustainability is ensuring that day-to-day operations and necessary military interventions are carried out in the most environmentally sustainable way as possible.
Furthermore, according to the NYT article, less reliance on fossil fuels would reduce the number of military deaths; “about half of United States casualties in Iraq and Afghanistan between 2003 and 2007 were of servicemen and servicewomen moving and protecting fuel convoys, according to an Army report.”
As a nation we spend a lot on military programs–far more than any other country. We also consume a lot of energy; these two characteristics of America are not completely independent of one another. Both of these forms of sustainability are about making sure every dollar that goes to the D.o.D. is truly needed an fully utilized, as it is one dollar that cannot go to a school, hospital, infrastructure project, or any other public good / program (not to mention both reforms would directly save lives). There are arguments for and against reducing military spending, which I will not get into here. It is, however, indisputable that the D.o.D. and the D.o.S. should work together in order to operate in the most strategic and environmentally sustainable way possible.
Waste-to-energy is a promising concept that could eventually transform how the military and municipalities deal with waste–I’ll be sure to keep my readers up-to-date about this exciting experiment.
Japanese economic policy, named “Abeconomics” after Japan’s Prime Minister Shinzo Abe, offers a natural experiment from which the U.S. can draw lessons. There is a much more obvious natural experiment for the U.S., which is U.S. economic policy, but those against “Quantitative Easing” are never short on reasons for why QE hasn’t debased the dollar / led to soaring interest rates on U.S. bonds (but soon will ahhtheskyisfallingmoralhazard!!!!!). Perhaps Japan’s experience, which is further removed from the U.S., can allow us to be more objective in our analysis.
The basis for expansionary monetary policy is due to “liquidity trap” macroeconomics. When the Fed cut’s interest rates near zero, non-traditional means of using monetary policy are the only policy choice left to stimulate aggregate demand and reduce unemployment (as far as monetary policy goes, fiscal policy is another story to be addressed shortly).
Both the U.S. and Japan have greatly increased the supply of money in attempt to revive the economy. QE in the U.S. has basically quadrupled the Feds holdings since 2008, while Abeconomics has doubled Bank of Japan’s (BoJs) holdings. In the U.S., the dollar has remained strong despite QE. In Japan, the Yen has slid in value (and this is a desired result, to increase export competitiveness):
“Normally a weakening exchange rate might be taken as a sign of decline. The yen has fallen nearly 14 percent against the dollar this year, and no currency has fallen more except the Venezuelan bolívar.
In Japan’s case, it is a sign that the policies put in place by Mr. Abe and Haruhiko Kuroda, chairman of the Bank of Japan, are starting to work. A weaker yen makes Japanese exports more competitive around the world.”
The U.S. probably benefit from a slightly weaker dollar, making exports more competitive which could help revive U.S. manufacturing and renewable energy industries (among others). I believe the USD role as primary international reserve currency (60% of international holdings) are keeping the dollar strong despite QE. Foreign holders do not want to see the value of their reserves go down, so the dollar continues to be the safe-haven for investments despite unprecedented monetary stimulus.
How effective have these policies been? U.S. unemployment has dropped to 7.5%, although underemployment and people dropping out of the labor market may be producing a rate that doesn’t capture the stagnation in the job market in the U.S. Japanese unemployment sits at 4.1%, a rate that for the U.S. would currently constitute an economic pipe-dream.
Japan certainly has its issues, but it is not letting doomsayers dictate its economic policy. Despite much higher gross government debt to GDP (Japan has roughly 235% debt to GDP ratio, while the U.S. is at about 107%) Japan is pursuing fiscal stimulus. Abeconomics includes a 2-2.5% of GDP stimulus plan for Japan. Compare that with the fiscal contraction in the U.S.
So the U.S. and Japanese economic policies give us a natural experiment. Both are advanced countries with highly skilled labor forces and strong financial markets. Both are pursuing monetary expansion. One of the countries, despite a much higher debt-to-GDP ratio, is also pursuing fiscal stimulus, while the other is pursuing fiscal contraction. Granted Japan went through years if not decades of stagnant growth before flipping the script to “Abeconomics”. The U.S. is “only” 5 years removed from the Great Recession. Do we really need to wait decades before we pursue policy that we know will stimulate the economy and reduce unemployment / the output gap?
As Keynes said, “In the long run, we’re all dead”. It is not enough to say give it time and things will get better. Peoples skills and confidence in their abilities are deteriorating in the U.S.. The output gap is large and growing, and spending on safety-net policies will not decrease until unemployment goes down (hence “automatic stabilizers”). Hopefully Japan’s successes will inspire confidence in fiscal stimulus; if a country with twice as high of a debt-to-GDP ratio (and an unemployment rate almost half as low) can benefit from fiscal stimulus, surely the U.S. can as well.
Paul Krugman does a nice job of explaining why unprecedented monetary expansion (“quantitative easing”) has not really moved the needle in terms of reducing unemployment and increasing aggregate demand.
It would be prudent to remind the reader that there has been very little counterfactual analysis of the Feds policies since the Great Recession began (that I am aware of). The situation would almost certainly be worse, higher unemployment and deflation, had the Fed failed to act in the way it is. If you would like to read further on the downward spiral of debt, austerity and deflation in a depressed economy, Irving Fischer wrote on the subject following the Great Depression in a way that is both easy to understand and still as relevant today (perhaps even more-so given how much less politically charged expansionary monetary policy is post-gold standard).
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A liquidity trap is a situation when slashing interest rates on government bonds to near zero percent is insufficient to provide enough credit to allow the economy to produce at full productive capacity. Investors would rather invest in safe government assets with almost no yield then invest in private markets.
I believe a liquidity trap is in itself justification for expansionary fiscal policy. It is basically investors saying to the government, “here, we don’t want to invest our money, so do it for us and just promise to pay us back in the future, don’t even worry about the interest”. But fiscal policy, which originates in the House of Representatives, is politically charged (especially when a government is already highly indebted, then every spending program comes under close scrutiny).
Monetary policy, on the other hand, is much more politically isolated. It originates within the Federal Reserve, which is staffed with economists who understand economics better than politicians. The Fed began by cutting rates, hoping to stimulate aggregate demand.
Once this conventional monetary policy failed, unconventional means were taken; the Fed is buying assets on a large scale, expanding the monetary base. The Fed has pledged to continue to pursue expansionary monetary policy by buying assets on a monthly basis until either the unemployment rate falls below a certain level (I believe 6.5%) or inflation rises above a certain level (I believe 2%).
The Fed made this announcement to try to change people’s expectations. Since you cannot cut nominal interest rates below zero percent (the “Zero Lower Bound”), the Fed hopes to stimulate demand by making people think that in the future inflation will be higher than it is now. If money is worth less in the future, then people will want to spend it now while it is worth more. More spending stimulates the economy and reduces unemployment.
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So why has this policy been ineffective? Well, as I said before, I am not so sure it has been—certainly the situation would be worse right now, not only for America but for the rest of the world which overwhelmingly relies on dollars for international transactions.
“I’m not claiming that there is nothing the central bank can do; but as I’ve tried to explain before, monetary policy can, for the most part, gain traction under current circumstances only by changing expectations about future actions (and changing them a lot). Meanwhile, fiscal policy has a direct, current effect on the economy, which easily trumps attempts to move the economy by changing the Fed’s messaging.
Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.”
Think of beginners national income accounting, where aggregate demand (Y) = C (consumption) + I (investment) + G (government spending).
Fiscal policy can stimulate AD directly by increasing either G, C, or I depending on how the program is designed. Monetary Policy, on the other hand, has a much less direct effect. It tries to incentivize people to act a certain way (increase C or I), but people do not always act “rationally” in the economic sense. Sometimes people are so risk averse that even reducing the yield on an investment does not reduce the demand for this investment (particularly in times of economic uncertainty, when I would argue investors tend to become more risk averse).
Also, there is inherently less scrutiny in exactly how monetary policy works. While it is true that some portion of fiscal expansion may be used inefficiently, it is much more tractable than monetary policy.
Monetary policy stimulates AD, but it can also feed into financial bubbles. By providing low interest loans to banks, the Fed is making a leap of faith that the money will be spent wisely. The money should be going to helping people restructure underwater mortgages, or generally providing low cost financing, freeing money for people to spend and stimulate demand. And to a certain extent it is does, but it can just as easily be spent in other less egalitarian ways. If this money goes to Wall St. investments, the gains will be realized almost entirely by the wealthy.
Evidence exists that this is happening—unemployment remains stuck while financial markets have reached record highs. Securitization, which became taboo after the financial crisis hit, has began to become common practice again. Without meaningful financial reform, the Feds policies could be fueling the next asset bubble.
The Fed has maintained it is keeping a close watch on how its money is being spent, and given the suffering caused by the Great Recession I’m sure it is, but there is only so much it can do.The Fed cannot possibly micromanage how all of its “cheap money” is being spent. The Fed could try to only lend to more people-friendly institutions, such as “credit unions”, or establish mechanisms to lend directly to people and small businesses, but up until this point has either has not or cannot do so (either due to its mandate or due to insufficient manpower for such oversight).
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So expansionary monetary policy has kept the recovery from not being worse than it is (or not being a recovery at all), but it has predictably fallen short of its intended goal. It needs to be complimented by expansionary fiscal policy. That’s not to say that there are no inefficient programs that can be made to more efficient–there almost assuredly are. The stimulus-advocate policymaker should have concrete examples of how resources can be used more effectively, if he has any hopes of convincing his austerity minded counterpart of coming to an agreement. Policy, like markets, requires both competition and coordination to be made as efficient as possible.
The Fed should not reverse course now, but should ensure proper oversight for its policies. The Federal government, on the other hand, seems to be slowly moving from austerity to stimulus. Will common sense and text-book macroeconomics prevail, or will business as usual continue? Only time will tell.
Yesterday a friend of mine, Adam Blejer, pointed me towards an HBO documentary, “American Winter”. He thought, rightfully so, that the message conveyed in the documentary was one that I may be interested in and have some insight on. Always eager to learn from my followers and get them involved, I looked into the documentary.
I should say now that I was unable to actually watch the documentary, as I do not have HBO on demand. What I was able to do was read the summary of the documentary by the producer, which can be found here. This actually helped me analyze the documentary more clearly for two reasons. One, I have the meat and potatoes of the documentary spelled out in front of me, I did not have to watch and take notes or worry about missing anything, it is all there for me to go back and check on. Second, I was able to see the underlying argument without getting emotionally wrapped up in the struggles of the people in the documentary. This would have made an unbiased critique difficult if not impossible.
Without further ado, an analysis of the documentarian’s message:
The first thing I analyzed was any message conveyed based on economic indicators. In the first paragraph, I saw something that could not look right. “Yet 46% of this country is living in poverty, or near poverty, and today we have the highest number of poor since we began keeping records.” This is a slight of word, as the official U.S. poverty rate as of 2011 was 15%–31% of that 46% may be living “near poverty”, but are not actually living in poverty.
One has to be careful, as poverty rates are based on a benchmark rate; set that rate too high and everyone is in poverty, set that rate too low and some people who are truly struggling to survive will not be counted. The census bureau is very transparent about how they find their numbers; an explanation can be found here. I will leave it up to you to determine whether the numbers are too high or too low, but that 46% was an obvious shock value number—many of those 31% living “near poverty” have much much more than even the “wealthy” in less developed countries.
Which brings me to my next point, about inequality in the U.S.: “The Gini coefficient is commonly used as a measure of inequality of income or wealth and is accepted as a fair method to compare income inequality in different countries. According to America’s Gini coefficient of 0.450, the U.S. ranks near the extreme end of the inequality scale, comparable with Cameroon, Madagascar, Rwanda, Uganda and Ecuador. China is significantly more equal than the U.S. with a Gini coefficient of 0.415, and India is leagues ahead of the U.S. on income inequality, with a Gini coefficient 0.368. Even Russia is less unequal than the U.S., at 0.422 Gini.”
The Gini coefficient ranges from 0-1; the closer to 0 the more equally a countries income is distributed.The .45 number checks out, although it is significant lower once you account for taxes and transfers. There are structural issues that have lead to this inequality; low investment in social programs, preferential tax rates on capital gains and other subsidies which disproportionately go to the wealthy, and the decline of union power are all common examples.
However, there are notorious shortcomings for comparing Gini coefficients between countries. For one thing, the same Gini coefficient for two countries can mean different things. Whenever you aggregate numbers, information gets lost in that aggregation. Also, in some countries such as China and India, the most impoverished experience “extreme poverty”. While relative poverty of course exists everywhere, extreme poverty exists only in the developing world. For these reasons, it is irresponsible to say “The Gini coefficient…is accepted as a fair method to compare income inequality in different countries.” This is far from a consensus amongst academics and policy makers.
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Next I examined the ethical argument over the welfare state, the “makers vs. takers” argument if you will. Paul Krugman has done a great job of highlighting how transfer programs tend to amount to inter-generational consumption smoothing; you borrow when you’re young, work and contribute when you’re in the prime of your life, and then retire and take from the system again. This formula has underpinned political economy and tax philosophy for decades if not centuries, and it works. In fact, there is really no alternative that works remotely as well in creating the opportunity for social mobility.
Here’s the filmmakers take on the subject:
“How can nearly half of our country be in such dire circumstances and yet our politicians chose this time of the most need in 80 years to cut budgets and social services all across the country? It’s because there are such pervasive myths and stereotypes about those families who need help—they are lazy, they are takers, they are incapable, they made bad decisions—so we don’t need to care about them. But as we made American Winter we found a very different story. The families who we followed for this film are struggling, yet they are just like our friends, neighbors and members of our own family. They are hardworking, loving folks who have had a bit of bad luck, a job loss, a health issue, a death of a parent, a handicapped child. These events have set them back and then life becomes an uphill battle to get back on their feet again.”
This is a problem I tend to have with documentaries, is that they cherry pick information. Certainly some people who need help actually need it temporarily to help them get back on their feet. But you can be equally certain that there are some lazy people who rely on handouts their whole lives, people who “game the system”. It is because people see the world as black and white that it is so hard to work on reforms that can strengthen the welfare state and make it work more effectively. This is why politicians talk past each other, instead of deliberating and debating in order to come to reasonable compromises that work for the American people.
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Another issue the summary touches on is the inter-generational nature of poverty; what economists refer to as poverty traps:
“In making American Winter we saw firsthand how stressed and scared these parents are everyday by the prospect of losing their homes, and by the daily struggle to pay their bills. However, the most overwhelming part was seeing the kids who have lost hope for their future. These kids see their parents work extremely hard, and the kids say to themselves, “we’re barely getting by everyday, how am I going to make it when I grow up?” And losing that sense of optimism and hope does not bode well for a child’s future.”
“Studies show that it is cheaper to help families before they become homeless. And it is cheaper to help families before the kids are traumatized by living with food and housing insecurity, because those kids don’t do as well in school and they are more likely to wind up on drugs or in the prison system. Those costs to society will affect all of us for ten, twenty, thirty years to come. Yet even though it is cheaper to help families, to get them to a place where they are stable and productive, we seem to turn a blind eye and tell these families that they are on their own.
Every one of us needs help at some time in our lives. But the idea that families who need social services are “takers” is one of the most destructive myths of all. The perception is that our tax system and our government disproportionally helps the less affluent at the expense of the wealthy. In fact, the U.S. government spends $400 billion a year on tax policies intended to help families save and invest. In 2010, the wealthiest 5% of taxpayers averaged a net benefit of $95,000 each, while the bottom 60% received an average benefit of $5 each.”
I have written about poverty traps many times here at NN, just search poverty traps in the search bar and you will see in how many different contexts poverty traps exist. I fully agree that it is cheaper and more effective to attack the root causes of poverty before they become a problem. I do not know the methodology the filmmakers use to come to their conclusion, but it fits into a general philosophy I have on the subject; that any money saved in the short run by cutting social programs will be dwarfed by increased future spending in the welfare and penal systems.
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So while some of the figures and concepts the documentary pronounces may be a bit stretched (as is common with documentaries, as they are meant to have shock value), the overall message is one that I cannot (and do not wish to( refute. Income inequality is too high in America, and it is this way due to structural flaws in our fiscal and tax policies. Sequestration and other short term budget cuts are like putting a Band-Aid on a gunshot wound, it may stop the bleeding for a little but in the long run the problem will be worse.
Capital gains taxes remain too low, even as they have risen from 15 to 20% following the “fiscal cliff” deal. Joseph Stiglitz explains quite eloquently how this perpetuates financial bubbles and takes talent away from more sustainable fields (such as medicine, teaching, manufacturing; basically anything not associated with capital gains).
Meanwhile, no meaningful financial reform has taken place since the financial crisis. The same concept of “securitization” is beginning to rear its ugly head again. We must learn as a country from our past failures, and demand our elected officials enact policies that our in our best interests as a nation (I have often said that the only special interest group Congress should be worried about is the American people).
It is the job of the American people to hold their elected officials accountable, and vote for the politicians that support the policies that we as a nation know are right (or at least vote against politicians who support policies that have been tried and failed).
There has been lots of media coverage over the past two years of the civil unrest in Egypt following the ouster of Honsi Mubarak 2 years ago. While political jockeying continues amongst members of the Muslim Brotherhood (Mr. Morsi’s Sunni dominated party) and the small Christian / Shi’ite minority who see his rule as a challenge to their vested interests secured through decades of supporting the military dictator Honsi Mubarak, the majority of Egyptians are presumably pleased with the new freedoms that have come with democracy and wish simply for the political coherence needed to move the country forward.
But those who stand to lose their privileged positions will not give up so easily (there is also the argument that Egypt’s new constitution does not protect minority rights, but I believe this is a scare tactic being used against Morsi’s regime). It is essentially a collective action problem, those who stand to lose from Morsi’s rule stand to lose a lot, while those who stand to benefit stand to gain only incremental benefits (at least in the short run). Morsi’s opponents are also bolstered by the idea that if they can simply continue to apply pressure a little longer, they can break Morsi’s hold on power.
And they may be correct. I for one am a fan of Morsi and the democracy experiment in Egypt.But no matter who is right or wrong, or who really wants what is best for the people of Egypt, if the Morsi government is unable to provide essential services to the people, his opponents will leverage this ineffectiveness as a means to incite further political instability in Egypt.
“The root of the crisis, economists say, is that Egypt is running out of the hard currency it needs for fuel imports. The shortage is raising questions about Egypt’s ability to keep importing wheat that is essential to subsidized bread supplies, stirring fears of an economic catastrophe at a time when the government is already struggling to quell violent protests by its political rivals. “
“United States officials warn of disaster unless Egypt soon carries out a package of tax increases and subsidy cuts tied to a $4.8 billion loan from the International Monetary Fund. That would persuade other lenders that Egypt was creditworthy enough to obtain billions more in additional loans needed to meet its yawning deficit. “
“Egypt has held two years of unsuccessful talks with the I.M.F., and the current government is still balking at the politically painful package of overhauls — even as rising prices and unemployment make those measures more difficult with each passing day.
‘They are operating on the notion that Egypt is too big to be allowed to fail, that the U.S. and the West will step in,’ Mr. Shimy said. ‘They think Egypt has a right to get the loan, and I think they will probably keep pushing all the way.’”
“Energy subsidies make up as much as 30 percent of Egypt’s government spending, said Ragui Assaad, of the Economic Research Forum here. The country imports much of its fuel, and for the first time last year it was forced to import some of the natural gas used to generate electricity — the reason for the recent blackouts. Egypt also imports about 75 percent of its wheat, mixing the superior foreign wheat with lower-quality domestic supplies to improve its subsidized bread. “
“But the two years of mayhem in the streets since the ouster of Mr. Mubarak have decimated tourism and foreign investment, crippling the economy. The government’s reserve of hard currency has fallen to about $13 billion from $36 billion two years ago.”
Part of the problem appears to be people’s expectations. According to Mr. Farash of the Supply Ministry, people are hoarding goods and gaming the system because they fear future uncertainty. Fuel truck drivers are diverting fuel to black markets, and bakeries are reselling their subsidized wheat at higher prices to people who fear future shortages. The thinking being, once shortages do hit, those who have supplies horded will have the goods they need to survive and will be able to sell their excess at a steep profit.
Morsi’s government is planning on installing “smart cards” to increase accountability of fuel truck drivers and bakers, which should make gaming the system more difficult. But people will still find ways to take advantage if they believe it is essential for their future well being. In order to change people’s expectations and their actions, the Morsi government will need to secure international financing to allow the Egyptian economy to run as usual.
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This is where the story ties into yesterdays Normative Narratives post. One section of yesterdays post highlighted a recent IMF report stating that countries should stop fuel subsidies as a means of injecting money into the economy. With 30% of Egyptian spending tied up in fuel subsidies, clearly the IMF will not extend financing until Egypt does something to temper its unsustainable fuel subsidies.
But these subsidies are popular amongst the people, something Morsi understandably does not want to undermine early into Egypt’s first attempt at democracy in decades. There are especially important now as the value of the Egyptian pound has plummeted in conjunction with the instability caused by removing Mubarak from power and unemployment remains high.Reducing fuel subsidies will be important for Egypt’s long term fiscal stability, but doing so prematurely—as the IMF is insisting on—would undermine the popular support needed for a democratic regime to govern.
Which brings us to the second point of yesterdays post; the BRICS proposed development bank. The Bank’s purpose is to provide an alternative to IMF and WB financing, and is specifically focused on energy and infrastructure projects. This Bank could be essential to providing the financing that the IMF is currently unwilling to lend without imposing the politically impossible conditions the IMF is insisting on. But this bank was just proposed, is it really possible for it to provide funding that is needed more or less immediately?
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Up till this point, unrest in Egypt has been mostly politically motivated. But if a food and fuel shortage based humanitarian crisis unfolds, the Morsi regime will be under real threat of a full blown revolution. It is essential for Egypt’s attempt at democracy to succeed, as it is a natural experiment whose results will dictate whether future attempts at democracy are attempted in the region. In order for Morsi to remain in power, international financing has to come from somewhere. Will the IMF budge on it’s conditionality? Will the BRICS development bank be running soon enough to help stabilize the Egyptian economy? Will Morsi ultimately have to cave in to IMF demands in order to receive emergency financing? Or will the democracy project in Egypt fail? None of the answers to these important questions are yet written in stone—we will have to keep a close eye on the situation as it continues to unfold.
I took particular interest in a recent Politifact article highlighting House Speaker John Boehner’s assessment that “There’s no plan from Senate Democrats or the White House to replace the sequester.” This statement should not seem right to anybody who follows politics, the news, or simply has not been living under a rock for the past few months (years?). Have the democrats really dropped the ball, or is this more political jockeying by the Do-Nothing GOP? Unsurprisingly, it is the latter. The President and Senate democrats have proposed plans, just not the plans their opponents agree on. Politifact gave Boehner’s comment its worst possible rating “Pants on Fire”.
Democrats, both in the White House and Capitol Hill, have proposed alternatives to the sequester that involve cutting bloated programs and closing tax loopholes to raise revenue. The “Sequester”, as most know by now, cuts programs indiscriminately of their importance to overall economic and social security and without taking into consideration whether the program runs efficiently or not. This undesirable result was meant to be undesirable in the hopes of forcing congress into passing a more acceptable deal. Unfortunately, Congress was unable to envision its own incompetence, and the sequester became fiscal policy starting last Friday.
But how could Boehner openly deny Democrats having offered alternative plans, when they clearly have (you can go on the White House website and “click a prominent button that says “SEE THE PLAN.” It leads to a page titled “A Balanced Plan to Avert the Sequester and Reduce the Deficit.”?”)
The answer given by Boehner’s representative would be comical, if it did not represent such a high ranking U.S. government official:
“A plan must demonstrate it has the ability to pass a chamber of Congress to be worth anything. We’ve twice passed a plan. We’re still waiting for the Senate to pass something, anything,” Buck told PolitiFact in an email.”
So the Do-Nothing-GOP has decided the democrats have not offered an alternative plan because they have made it their party’s goal to strike down any plan the Democrats offer. This sounds more like self-fulfilling economic suicide than two sides working towards an agreement that will work for the American people.
“’Republicans want tax reform. We want to bring rates down for all Americans so that we’ve got a fairer tax code,’ Mr. Boehner said. ‘But to arbitrarily pull out a couple of tax expenditures and to say, ‘Well, we ought to use that to get rid of the sequester.’ Listen, every American knows Washington has a spending problem.’”
Does the U.S. really have a spending problem, or do we have a revenue problem? Let’s take a look at the numbers:
The blue line represents Federal government receipts (revenue), the red line represents Federal government outlays (spending). A number of interesting takeaways from this graph:
1) The U.S. was running a budget surplus until Bush gave that surplus away in the form of tax breaks (notice the blue line sharply going down around 2000) and spending on the “war on terror” (notice how the red line goes up when around the same time period).
2) Federal government receipts are at their lowest point since the 1960s. This is partially due to Bush Era tax cuts (which have expired for the wealthiest Americans thanks to “Fiscal Cliff” negotiations, which is probably what the current small uptick represents) and partially due to exploitation of tax loopholes (and other forms of tax evasion, such as moving profits abroad).
Government spending is supposed to rise during a recession, the only reason this is a problem is because the surplus secured under President Clinton was squandered during a period of economic prosperity by President Bush. Instead of pursuing counter-cyclical fiscal policy, (save up during the good times to spend during the bad times) Bush did the opposite.Therefore, we have had to rely on deficit spending instead of spending out of a “rainy day fund”. While not exact science, if government receipts had stayed at Clinton-era levels, it appears our deficit would be about half of what it currently is (around 40% of GDP instead of 80%).
In an ideal world, we would be able to pass another stimulus program to jump-start the economy and reduce unemployment. As interest rates remain low, the government could worry about paying back this deficit once the economy is producing at its full potential. The deficit is a manufactured problem, a legacy of “starve-the-beast” fiscal policy championed by the GOP. The problem is that starve-the-beast does not work, you can reduce the amount of resources the government has, but you cannot reduce the programs people rely on to survive (especially not during times of high unemployment). What you get instead is a large government deficit.
A balanced approach to deficit reduction would be reasonable during healthy economic times. In the current economic climate, however, the red line will continue to come down on its own as the economy recovers and less people rely on entitlement programs. The blue line is the one that requires government action.
“He had written a piece suggesting that if only Republicans knew how much Obama has been willing to offer, they might be willing to make a deal. Jonathan Chait set him straight, informing him that no matter what Obama put on the table, Republicans would find a way to say that it’s not enough. And sure enough, a Twitter exchange lets Klein watch that process in real time, as a top Republican consultant, confronted with evidence that Obama has already conceded what he said was all that was needed, keeps adding more demands.
So Klein admits that Republicans just don’t want to make a deal. Their objections to the deals on the table aren’t sincere; if convinced that Obama has met their demands, they just make more demands.”
The GOP has no interest in getting a deal done if that deal involves raising revenues. This is an absurd position, as government revenue is at its lowest point in decades. A balanced approach to avoiding the “Sequester” is not what the doctor ordered; fiscal stimulus and greater government revenue is the optimal fiscal policy for the American public. But the idea that we have a spending problem, and not a revenue problem, is wrong. A balanced approach is still better than the alternative, but the GOP is refusing to consider even a balanced plan to end the Sequester.
By refusing to consider any deal increasing revenue, the GOP has doubled down on its “Do-Nothing” approach to governance, to the detriment of the American people and American economy. The GOP manufactured this deficit with “starve-the-beast” fiscal policy, now it is manufacturing a need to reform entitlement programs NOW (these are long term issues, while the Sequester and stubbornly high unemployment are immediate problems that are not being addressed).
The GOP is the party of the 1%. and the 1% are not being hurt as badly as the rest of us by the Sequester, so why should the GOP budge if it’s constituents are happy? Hopefully in 2014 the GOP receives 1% of the seats in Congress; representation based on those it truly serves. It has become clear that the Democrats need a complete majority in the Federal government if there is any hope of reversing the high unemployment and inequality and low levels of social mobility that have come to define contemporary America.
True important tax reforms we’re secured during the Fiscal Cliff debate (raising the top rate on incomes over $400,000 and raising the capital gains tax, as well as keeping Bush era tax cuts in place for everyone else). Not to take anything away from the significance of averting the “fiscal cliff”, but it was at best an incomplete victory. But on the spending side, nothing permanent was decided. Congress was able to agree that the economy would be unable to absorb the shock of spending cuts without causing a double-dip recession / increasing unemployment, and succeeded in kicking the can down the road for a few months. If congress couldn’t figure it out in the year and a half time period between the original debt-ceiling debate and the “fiscal cliff”, was it realistic to think they would be able to reach an agreement on mostly the same issues over the course of two months?
Whether it was reasonable or not, we are currently face-to-face with another austerity program that could indeed send the U.S. economy back into a recession / greatly increase unemployment:
“In less than two weeks, a cleaver known as the sequester will fall on some of the most important functions of the United States government. About $85 billion will be cut from discretionary spending over the next seven months…The sequester will not stop to contemplate whether these are the right programs to cut; it is entirely indiscriminate, slashing programs whether they are bloated or essential…These cuts, which will cost the economy more than one million jobs over the next two years are the direct result of the Republican demand in 2011 to shrink the government at any cost, under threat of a default on the nation’s debt.”
This New York Times article does a great job of highlighting exactly how and where the cuts would take place.
Initially I was going to go through the article piece by piece and explain how each cut could hurt a specific group of Americans. But this is pretty obvious from reading the article, so I will leave it up to the reader to read about specific cuts and make their own judgements. Much less obvious is why these cuts will hurt the U.S. economy overall (and not just specific groups withing the economy). There are two main reasons for this:
1) The Government provides “public goods” that cannot be adequately provided by the private sector
2) We are still in what economists call a “liquidity trap”
First #1. The government provides public goods, such as schooling, infrastructure, and security (military / policing). Public goods are public because they inherently suffer from the “free-rider” problem. Everyone benefits from public goods, there’s no way of excluding someone from benefiting from a better school system, or better roads, or more police officers. These positive externalities mean that, left up to the private sector, investment in these goods will be insufficient. People will expect someone else to pay for the program and try to reap the benefits for free (hence the “free-rider” problem). Insufficient spending on public goods leads to higher crime (less law enforcement available combined with higher poverty rates due to cuts in social programs), and depresses both current (think poor infrastructure) and future (think inadequate schooling) economic prospects.
The private sector cannot decide to buy public goods just for certain people, as it cannot take advantage of “economies of scale” necessary for public goods to be affordable. Think how expensive it would be for a rich community to decide to pave it’s own roads, or build it’s own schools, and the security bill needed to ensure other people do not use these services. These bills would be much greater than the taxes otherwise needed to pay for such goods.
But lets suppose that the private sector could make up for this government spending. This is where #2 comes in–the liquidity trap:
A liquidity trap is a situation in which despite very low interest rates (up against the “zero-bound”), private sector funds are not being adequately invested into the economy, but instead dumped into government T-bills (or other low yield but safe asset). A common argument against fiscal stimulus is that it will “crowd-out” private sector spending, and therefore cannot lead to growth. In times of economic growth, this is somewhat true (although not true for “public goods”, as explained above). But in a liquidity crisis, this argument does not hold. Even given incredibly low rates of return, the private sector is unwilling to invest the money needed to create the aggregate demand needed for economic growth / job creation.
If the private sector instead decides it is better to give this money to the government, it should be a strong signal that the government should be spending the money in productive ways (instead of letting it sit in the Federal Reserve, and for it’s part the Fed led by Ben Bernanke has done a marvelous job making sure the economic recovery has not been even more stagnant / non-existent by pursuing unprecedented expansionary monetary policy, known as “quantitative easing”. But this alone is not enough, expansionary fiscal policy is also needed. If stimulus is not politically realistic, contractionary fiscal austerity must be avoided at least.
There is no additional cost to the government spending money, as it essentially pays zero interest on borrowed funds. Given high unemployment, why not put that money to work, and worry about paying it back later? Economically speaking, with an interest rate near zero, and a fiscal multiplier > 1, stimulus spending can be a magic bullet of sorts. Government spending costs the government less now than it otherwise would, and the expansionary effects of fiscal spending are greater now then they otherwise would be. Currently, stimulus is both fiscally responsible and economically necessary to boost aggregate demand (and stimulate economic growth / reduce unemployment / increase tax receipts by growing the economy).
So again here we are; the G.O.P. is playing a game of chicken with “the full faith and credit of the United States of America” (which is one of the reasons we are able to borrow at such low rates despite a relatively high debt / GDP ratio, the fact that American debt is considered “safe”). The effects of a default on our debt would cripple America’s ability to pursue meaningful monetary policy in the future. The effects of contractionary fiscal policy would depress an already weak U.S. economy (which would send out a ripple effect, depressing global economic growth) and raise unemployment. Yet the G.O.P. is willing to consider these unthinkable scenarios in order to push it’s tried and failed Austerian ideology.
America will have to reign in it’s deficit one day, especially with rising healthcare / social security costs, but that day is not today. Artificially forcing that day to be today, due to the sequester / debt-ceiling, will do nothing but hurt America’s credibility as an economic power both at home (by forcing the government to cut essential programs) and abroad (by making people reconsider whether U.S. debt is a “safe” investment or not).
Normative Narratives 