Thursday, March 26, 2009

Keynes on "Wasteful" Spending

With a bit of a lag, I have been following along with Marginal Revolution's intermittent "book club" discussion of Keynes' General Theory. Tyler Cowen does not like chapter 10; but I do, partly because it reminds us how funny - and prescient - Keynes could be. The last section contains the famous example about burying money. Keynes, who refers to deficit-financed government spending as "loan expenditure," makes a point that is quite relevant amid the current obsession with finding examples of "wasteful" spending in the administration's proposals:
When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted, the above reasoning shows how "wasteful" loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly "wasteful" forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict "business" principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

The analogy between this expedient and the goldmines of the real world is complete. At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available our wealth suffers stagnation or decline. Thus gold-mines are of the greatest value and importance to civilisation. Just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance.
Another more sensible loan expenditure would be volcano monitoring, as we were recently reminded.

Dis-Endowed Chairs

There's no Herman Miller Aeron chair in my future, and, apparently, that's front-page news:According to the story:
In what usually is a routine request, Miami wanted to spend $166,648 for office chairs in the new Farmer School of Business building, which opens next fall. But because some of the chairs cost $522 each, the board charged with considering state spending requests rejected the request 6-1.

Miami asked the board to approve 333 chairs for the new business building - 245 office chairs at $522 each, 78 conference room chairs for $446 each and 10 other chairs for $397 each. They were to come from APG Office Furnishings of Cincinnati.

Controlling board members objected to the highest-priced chairs and noted that the same company offers office chairs for $400 or less.

Before any torch-bearing, pitchfork-wielding mob comes for me, I do want to say, that had I been given such a chair, I would have been willing to return it voluntarily.

(As a factual matter, it is worth noting that a large portion of the money being spent on the new building was raised from donors).

Hmm... perhaps metal folding chairs would make faculty meetings more entertaining, and quicker.

Update (3/29): From University VP David Creamer's response:

In the case of these chairs, we used our four standard criteria for purchasing furnishings and equipment: ergonomics, life of the product, price, and appearance, in that order. When all factors were considered, the chair that was selected – the Aeron – with an estimated life of 15 years and a 12-year full warranty, offered the lowest long-term cost and best value. It is a widely used chair in every public four year university in Ohio.

This chair is on the state’s list of eligible items for $693. Miami could have purchased from that list without the approval of the controlling board. Instead, we solicited bids in order to purchase at the lowest possible price, leading to potential savings of $171 per chair over the state listed price.

Tuesday, March 24, 2009

Mikey Likes It!

The markets liked the Treasury plan. As Jonathan Chait reminds us, this doesn't necessarily mean much; the anxious fretting over market reactions to policy announcements reminds me of this:

However, Free Exchange argues there is a placebo effect:
It isn't clear to me why markets are up some 6% today. Or rather, it's clear to me that they're up because of the Treasury plan, but it's not clear why they're up because of the Treasury plan. It's also not clear to me that it matters. Tonight, every newscaster in America will say, more or less, the following words: markets were up strongly today on expectations that the Treasury's banking plan will succeed. Who cares what Mr Geithner was saying on CNBC this afternoon when the Dow added 500 points on the news?

If people become convinced that a plan will work, they'll begin to make bets based on expectations that the plan will work, which will make the plan work regardless of what the plan is. I don't know whether the rally will stick or not, and the broader economy will follow its slow path toward eventual recovery in any case, but this certainly has the potential to change the psychological dynamic that had prevailed, of lost confidence in Mr Geithner and in the banking system. And that would have to be considered a big win for the Obama administration.

Or, we might say there are multiple equilibria, and the new "confidence" shifts us to a better one.

Still, I am more concerned with Paul Krugman's reaction, and he doesn't like it. But Brad DeLong is more hopeful, as is Steven Pearlstein.

Secretary Geithner explained the plan in the WSJ, and there is more at the Treasury's web site.

Monday, March 23, 2009

Whose Tax Cuts?

Last week, the Congressional Budget Office forecast much bigger deficits over the next ten years from the Obama budget proposal than the administration had projected. A large part of that difference is attributable to more pessimistic assumptions about economic growth (the OMB director responds).

EconomistMom makes an important point about the deficit: a significant part of it is attributable to Obama's planned continuation of most of the 2001 and 2003 tax cuts. She writes:
So the biggest single proposal in the Obama budget contributing to the deterioration in the 10-year budget outlook is, contrary to public perception, not big spending on bailouts or stimulus or even longer-term health care reform, and not temporary tax cuts that are designed to provide immediate stimulus to the economy at only near-term cost, but rather permanent extension of most of the Bush (2001 and 2003) tax cuts–with costs that grow dramatically over time. It explains why the Obama budget (according to CBO projections) will not only fail to make trillion-dollar-plus deficits an extraordinary and temporary phenomenon (with the 2019 deficit climbing back to $1.2 trillion), but will fail to stabilize the public debt as a share of GDP (with the ratio exceeding 80 percent by 2019).

President Obama doesn’t have to feel “stuck with” the Bush tax cuts. In fact, Congress will have to write and pass new legislation, which President Obama will have to sign, in order to keep any of the “Bush tax cuts” beyond December 31, 2010. So now that they’re so clearly a central part of the Obama budget, it’s probably time we stop calling them the “Bush tax cuts” and start calling them the ($2 trillion in deficit-financed) “Obama tax cuts.” But we’re still not “stuck with” them.

Under current law, income tax rates would revert to their pre-2001 levels in 2011. The 10% would be folded back into the 15% bracket, the marginal rates on the current 25%, 28% and 33% brackets would rise to 28%, 31% and 36% respectively, and the top rate goes up to 39.6%. While the administration proposes letting the rates rise as scheduled on incomes over $250,ooo, it would make permanent the rest of the current bracket structure, and add a number of other breaks that would apply mainly to low- and middle-income households.

One purpose of the administration's tax proposals is to lean against the trend of widening income inequality and stagnating middle-class incomes by raising taxes on the rich and cutting them for the middle class. In doing so, they seem to have taken a very narrow definition of rich: median US household income is roughly $50,000, so the administration is only allowing income taxes to rise on households making more than 5 times the median (this is a conservative calculation, since "taxable income" is considerably less than income). The administration is also making permanent the "patch" of the alternative minimum tax, which also mainly benefits households that are relatively well-to-do (if not truly wealthy). Moreover, even though incomes have ballooned at the very, very top of the distribution, the administration is not proposing a still higher rate on multimillion-dollar income levels.

Not really soaking the rich, just moistening them a bit...

Update: See also Howard Gleckman's summary of the Tax Policy Center's examination of the tax side of the Obama budget.

Thursday, March 19, 2009

Colbert on New Deal Denialism

Stephen Colbert and Jonathan Chait discuss the argument the New Deal worsened the depression:

Chait's New Republic article: "Wasting Away in Hooverville."

Tuesday, March 17, 2009

Bernanke Speaks!

Fed Chairman Ben Bernanke in a rare television interview:

In part 2, we learn he was born in a small town, and the Fed has money-carrying robots:

He also slips in a plug for his savings glut hypothesis.

Wednesday, March 11, 2009

Health Care: Doing Less With More

This graph, from Jacob Funk Kirkegaard of the Peterson Institute illustrates, that the US spends far more than any other country on health care, without achieving better outcomes: He writes:
It was therefore encouraging that the recently passed $787 billion stimulus package included $1.1 billion for funding comparative research into the relative efficiency of different drugs, medical devices, or surgical procedures for treating the same specific condition. The aim is to steer healthcare expenditures toward the most cost-effective treatment methods. This type of comparative analysis is often revealing.

However, given the scale of the cost challenges facing the healthcare system, the scope of the comparative cost analysis program in the stimulus package was strikingly timid. A far more informative comparative analysis would focus on contrasting the costs of different healthcare systems rather than just treatment options; in other words between the levels of total healthcare spending versus outcomes in different countries.

Not only is the US system seemingly inefficient in a static sense, the problems are expected to get worse over time. The CBO projects massive growth in federal spending for medicare and medicaid: Note that this is largely due to "excess cost growth" - that is, health care costs continuing to increase faster than inflation; the aging of the population makes a relatively minor contribution. While the CBO's projection is for the federal programs, rising costs will only make things worse for the employer-based private system as well.

Therefore, its good that the administration is taking the issue on, once more.... Matthew Yglesias says a political compromise might resemble the Swiss model.

Monday, March 9, 2009


The fight over "earmarks" in appropriations bills is largely symbolic. Earmarks account for a small portion of the overall federal budget, and, as Stan Collender points out, their presence does not affect the total amount of spending:
Lost in all of the debate (and the reporting about the debate) on the earmarks in the omnibus 2009 appropriations bill the Senate is still working to adopt is the basic fact that cutting earmarks doesn't save any money.

This is not open for discussion. An earmark simply a congressional decision to allocate a part of appropriation for a particular purpose. Eliminating the allocation doesn't reduce the appropriation, it simply leaves the allocation decision to a federal department or agency rather than to Congress.

Thursday, March 5, 2009

Schumpeter on Math

One somewhat surprising thing we learn from Prophet of Innovation, Thomas McCraw's delightful biography of Joseph Schumpeter, was that he was an advocate of the use of mathematical tools in economics, even though his own work was not mathematical.
On his own, he performed daily exercises in calculus and tried to master advanced techniques such as matrix algebra. He even raised the question of a new type of math that would capture the dynamic changes he saw as the heart of capitalism. One diary entry of 1948 mentions, with a question mark "Evolutionary math?" - a tool that could do for his own system what conventional math had done for Walras's static equilibrium. But there was no evolutionary math at that time in sense that Schumpeter meant, and there is still not enough today to "operationalize" his system thoroughly. Schumpeter knew that he had little talent in mathmenatics, but he continued to challenge himself and enjoy the chase. "Whatever other advantages math may have," he wrote in his diary, "it is certainly the purest of human pleasures."
Some encouragement for those of us who come to study economics in spite of our natural level of mathematical ability.

Tuesday, March 3, 2009

On the "Output Gap" Gap

The Obama administration's budget proposal forecasts real GDP growth as follows:
2009: -1.2%
2010: 3.2%
2011: 4.0%
2012: 4.6%
2013: 4.2%
and 2.9% thereafter (table S-8). In his elliptical fashion, Greg Mankiw hints these projections might be criticized as unduly optimistic. The "blue chip" average of private sector forecasts are indeed somewhat lower (in a display of Obama-era "refreshing honesty" these are included in the same table of the budget). For reference, over the period 1948-2008, the average annual growth of real GDP is 3.36% (2.88%, 1974-2008).

While Yogi Berra was right that "its tough to make predictions, especially about the future," there is good reason to expect above-average growth coming out of the recession. The Solow model gets things basically right about long-run growth in the US: our economic capacity increases fairly steadily over time due to technological progress and population growth. During a recession, resources go under-utilized (e.g., unemployment occurs) and the actual amount of output falls below capacity (a.k.a. "potential output"). But capacity continues to grow, creating a growing "output gap" between what we are producing and what we can produce. This picture from the CBO's January forecast is a good illustration: Notice that the recovery - closing the output gap and catching back up to the long-term trend - necessarily involves faster than average growth.

Some object to comparisons with the 1981-82 recession (the causes were very different), but it was the last downturn of similar magnitude to the current one. While 1982 was a very, very bad year - unemployment peaked at 10.8% in November and December - the recovery saw several years of rapid growth:
1982: -1.9%
1983: 4.5%
1984: 7.2% (!!!)
1985: 4.1%
At Econbrowser, Menzie Chinn has more discussion, with illustrations, of the issue. On his new blog, OMB Director Peter Orszag explains the gap between the administration and CBO forecasts.

Update (3/3): The CEA makes the same point, with evidence. Mankiw is skeptical.
Update #2 (3/3): Brad DeLong weighs in, responding to Mankiw.

Monday, March 2, 2009

Rotten AIG

The government is shoveling more money into the maw of AIG. The Times' Joe Nocera explains that this is really a bailout of the banks that purchased insurance in the form of credit default swaps from AIG. Its all about the "systemic risk." On his blog, he writes:
[T]he reason A.I.G. is being propped up is that the government fears that if the company defaulted the counterparties would suddenly be faced with tens of billions of dollars worth of unacknowledged losses — and they would go bust. It would make the Lehman fiasco look like a garden party.
He explains further in this column. The Baseline Scenario has a chronology of AIG's bailouts, so far. See also Felix Salmon, Justin Fox.

Reagan Fact of the Day

Bruce Bartlett, one of the architects of Reaganomics, reminds us:
According to a recent Treasury Department study, Ronald Reagan proposed the largest peacetime tax increase in American history as part of a budget deal to get the federal deficit under control. The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 was signed into law on Sept. 3, and most of its provisions took effect on Jan. 1, 1983.

During debate on TEFRA, many conservatives predicted economic disaster. They argued that raising taxes in the midst of a severe recession was exactly the wrong thing to do. "Every school child knows you don't raise taxes in a recession unless you want to make it worse," The Wall Street Journal's editorial page warned. Said Rep. Newt Gingrich, "I think it will make the economy sicker." The Chamber of Commerce of the U.S. said it had "no doubt that it will curb the economic recovery everyone wants."

Looking at the data, however, it is very hard to see any evidence that TEFRA had a negative effect on growth. Indeed, one could easily make a case that its enactment stimulated growth. As one can see, the economy's growth rates after TEFRA took effect were among the fastest in history....

Reagan signed into law major tax increases every year of his presidency after the first. By the end of his presidency, he took back half of the 1981 tax cut in the form of higher taxes. And it should also be noted that when confronted with a crisis in Social Security in 1983, Reagan endorsed a rescue plan drafted by Alan Greenspan that consisted almost entirely of higher taxes.

Sunday, March 1, 2009

Morning in America

Under the headline the Times' David Leonhardt writes:
The budget that President Obama proposed on Thursday is nothing less than an attempt to end a three-decade era of economic policy dominated by the ideas of Ronald Reagan and his supporters.

The Obama budget — a bold, even radical departure from recent history, wrapped in bureaucratic formality and statistical tables — would sharply raise taxes on the rich, beyond where Bill Clinton had raised them. It would reduce taxes for everyone else, to a lower point than they were under either Mr. Clinton or George W. Bush. And it would lay the groundwork for sweeping changes in health care and education, among other areas.

More than anything else, the proposals seek to reverse the rapid increase in economic inequality over the last 30 years. They do so first by rewriting the tax code and, over the longer term, by trying to solve some big causes of the middle-class income slowdown, like high medical costs and slowing educational gains.