DougJ’s post on the pure unadulterated badness of the recession has had me reading through the last few posts by Karl Smith over at Modeled Behavior. From the one DougJ linked to, this particularly compelling passage:
We have very low capacity utilization (75%) and very high unemployment (10%).
That is, we have factories sitting idle for lack of workers – low capacity utilization. At the same time we have workers sitting idle for lack of factories – high unemployment.
There are machines waiting to be worked and people waiting to work them but they are not getting together. The labor market is failing to clear.
This is a fucking disaster.
Excuse my language, but you have to get that this is a big deal. This is not a big deal like the GOP doesn’t appreciate public goods. Or, Democrats don’t understand incentives. Or some other such second order debate that could reasonably concern us in different times.
This is a failure of our basic institutions of production. The job of the market is to bring together willing buyers with willing sellers in order to produce value. This is not happening and as a result literally trillions of dollars in value are not being produced.
Let me say that again because I think it fails to sink in – literally trillions of dollars in value are not being produced. Not misallocated. Not spent on programs you don’t approve of or distributed in tax cuts you don’t like. Trillions of dollars in value are not produced at all. Gone from the world entirely. Never to be had, by anyone, anywhere, at any time. Pure unadulterated loss.
A couple posts down, Smith writes about his preferred methods of patching up the recession, noting that a payroll tax holiday would have been the quickest way to increase spending across the economy.
The key difference here is that is that payroll tax funds would have been spent nearly three times faster than the stimulus we actually got. At the current rate we were only stimulating a little over $300 Billion a year and nearly half of that was tax cuts.
The gain in multiplier effect from spending is simply dwarfed by the speed at which spending can be efficiently performed. Indeed, if you believe Zandi’s estimates that many of the tax cuts enacted as a part of ARRA had lower multipliers – in some cases much lower – than a payroll tax holiday then ARRA may have had no multiplier advantage at all. All we were looking at was a smaller, slower stimulus.
Note that this is argument doesn’t require you think that big government is bad for the economy or that tax cuts for the rich will stimulate entrepreneurship. We are merely analyzing the fastest way to get spending power into the hands of ordinary Americans. It seems clear to me that this was and has always been a payroll tax holiday.
His list of priorities:
1) Higher Inflation Target (and hence lower real rates)
2) Qualitative Easing (and hence easier credit)
3) Payroll Tax Stimulus (fast and fun!)
4) Other Stimulus (messy but better than nothing)
I guess my question would be how these two arguments jibe. If this is a “failure of our basic institutions of production” I’m not sure how a payroll tax holiday will really work the way it does in theory. I understand that the payroll tax holiday is the quickest, most efficient way to pump money into the economy and increase spending, but – if A) overly indebted consumers and businesses simply save the extra cash or use it to repair their balance sheets and B) the idle factories and idle workers still don’t end up connecting with one another due to a failed increase in private demand, how will the tax holiday actually lead to increased economic activity, lower unemployment, etc? Uncertainty over prices – especially deflation in the housing market – makes this more pronounced.
I understand how a higher inflation target and qualitative easing should lead to increased borrowing and lending and get our economic cogs turning to some degree, and if that’s happening already I can see how more people might be willing to part with their saved tax dollars. But that’s not happening. Maybe we haven’t done enough, but rational consumers are still not spending, firms are still not really hiring, lenders are still not really lending. And again – if workers still can’t find their way to the machines -then what?
Messy as direct government spending may be, doesn’t it make sense to generate demand with public dollars rather than gamble on an increase in demand by private consumers? Think of it like an economic defibrillator. You need to get the economy moving again, out of this state of paralysis and shock, and the only actor who can spend without risk is the government. Consumers, firms, lenders are all acting under the influence of massive uncertainty.
As Krugman notes, there are some places where government spending is simply necessary. Namely, infrastructure – though I was also surprised (though not that surprised) by how relatively tiny the $50 billion the president proposed for infrastructure stimulus was. Why not start big and whiddle your way down? The Bush administration, for instance, brought an entire Axis of Evil to the table, but settled for just one of three. Why can’t Democrats propose a $500 billion infrastructure bill? Anyways…
So suppose we’re going to put $50 billion of resources that would otherwise be idle to work. Is it better to use them to produce public goods like improved roads, or private goods like more consumer durables? That’s not at all obvious — and anyone who tells you that basic economics settles the question, that is says that devoting more resources to production of private goods is better, doesn’t understand Econ 101.
And there’s a pretty good argument to be made that we are, in fact, starved for public goods in this country, so that it would actually be a good idea to shift some resources to public goods production even if we were at full employment; in that case, we should definitely give priority to public goods when trying to put unemployed resources to work.
Infrastructure and other public goods aside, isn’t the point of stimulus to get the economy’s heart beating again? Unlike tax cuts, public spending will lead to an increase in demand by definition (supposing the money is actually spent in a timely fashion); demand will lead to a ramping up of production; this in turn leads to increased hiring, etc. Even if the spending is temporary, it still also generates secondary sources of demand. Newly hired workers will have money to spend on goods and services, leading to increased hiring in those sectors. Increased confidence economy wide will lead to increased borrowing and lending. If the government decided to purchase a new fleet of hybrid cars, for instance, this would immediately lead to workers finding their way to factories. And so on and so forth. At this point a payroll tax holiday might really pay off.
[Edit – the formatting, as far as I can tell, goes entirely bonkers at this point and I can’t seem to fix it. Have amputated the last bit entirely until such a time as I can make proper repairs.]
arguingwithsignposts
You have a link tag fail there.
Punchy
Is this the first time a poster just screwed his own posting?
I see more strikeouts than a King Felix start.
Paris
It doesn’t have to. Ideology should always be the first priority
p.a.
a truism: human psychology, consumer psychology, producer psychology, whatever aspect one wants to focus on, is complicated. under any stimulus scenario, the straight economic argument can be made that ‘it will be minimally effective because people will (rationally) pay down debt, not spend to expand the economy.’ and that’s true as far as it goes. but psychologically i think the argument can be made that the extra income can be seen as providing a breathing space for individuals, a bit more light at the end of the tunnel (not an oncoming train at least!). the hope is that optimism drives economic growth, not vice-versa. I change my opinion on this almost every time i hear/read a convincing argument on either side.
KG
I would think that inflation, during a period of high unemployment, would be a disaster. Costs go up while a decent chunk of the population has no income? Income stagnates because, “I can always hire someone willing to work for less than I’m paying you”? That just doesn’t seem like a smart idea, at all.
As for the payroll tax holiday, I would be skeptical of it. I’ve often heard it floated by those who are generally opposed to unemployment insurance and social security to begin with. Me thinks that at its core, it is a plan to get people upset about how much they pay in taxes and thereby get the rabble going to cut the taxes.
mr. whipple
It doesn’t matter at all to manufacturing if you give people a few extra bucks to spend through the tax holiday if they spend it on crap made in China.
Zifnab
Well, you’re thinking in the very highest levels. The economy is more granular than that. If I increase government spending on road construction, for instance, and I’ve got a bunch of idle construction workers then we should see an uptick in the employment numbers.
But if I’ve got a bunch of idle English majors, construction projects are a total waste. You should be spending the money on hiring school teachers or government bureaucrats editing IRS forms or something.
Furthermore, if we have the government buy a bunch of wool sweaters to hand out to homeless veterans (or create a “wool sweater tax credit”), but all the wool sweaters are being produced in China, we’re not really creating new American jobs.
Of course, all these questions may be trivial because you don’t have to look past the most recent unemployment report to notice that private employment is ever so slightly up while public employment is increasingly down. That suggests the best stimulus may be block aid to states to preserve a plethora of public sector jobs being lost to state-by-state budget shortfalls.
Given that any stimulus we get out of Congress is going to be painfully small, it’s that much more important to aim the benefits to be as effective as possible. Arguing “tax cuts versus government spending” really only scratches the surface of the problem.
It’s a shame our debate must remain so perpetually superficial.
El Tiburon
First off, I see you have the same “unlimited typing” plan that Greenwald has.
And all the points made by you and the others in your post are quite lovely and all true, I’m sure, but so what?
The problem is not manufacturing capability or the means of production or any of that other crap. The problem is that most of the people in power could give a rat’s ass about employing American workers. Period. Up to and including President Obama and his team.
“Fuck the UAW” simply put means “Fuck the American worker”. The American worker is simply not an important enough constituency to care about.
So until we get politicians in power who truly care about workers, none of that other shit matters not.
RalphW
I think this is a flawed premise, and errors flow from there. Factories are sitting idle because of a lack of demand for the goods, not for lack of workers to operate them.
Now, maybe a payroll tax holiday would stimulate enough demand to increase shifts, start up lines, etc. But I think most of that increase would land in Chinese, Indian and other Asian and/or low cost production areas.
The glimmer of hope is that China is actually increasing demand for what we in the US do actually produce. But it will take a while of Americans buying TVs from China before China buys more Caterpillar tractors or engineering solutions from us.
debbie
With all the trillions that banks and businesses are sitting on because they’ve suddenly become so risk-averse, am I the only one who thinks there’s a possibility that they’re doing this solely to screw Obama and make the recovery look as weak as possible and improve the chances of Republican gains in November?
Bill Murray
When was the last time modern conservatives took a responsible, measured, well-reasoned approach to the world? Didn’t that finish with Eisenhower’s presidency?
licensed to kill time
E.D. Kain rivals mclaren in sheer wordiness.
Mark
@KG
It actually works the other way around. In general, low unemployment = high inflation. Imagine everyone in the country taking a pay cut so that everyone can stay employed.
ChrisS
@KG:
Me thinks that at its core, it is a plan to get people upset about how much they pay in taxes and thereby get the rabble going to cut the taxes.
After talking with an all-taxes-are-evil ideologue, I agree. He was part of a group that was trying to get the automatic witholding done away with so people would have to write out checks every April 15th.
I don’t know, if I had a payroll tax holiday, I’d just pay down debt (mostly just minor student loans with absurdly low interest rates). I’ve gotten quite a bit of consumer-ing out of my system.
Bill Murray
@Zifnab: Most English majors I know could in fact work in construction.
Corner Stone
@Zifnab:
Instead of a 22 – 1 mandatory maximum of students to teachers, we should lower that to 18 – 1 (or some number), and use stimulus funds to create new state jobs. Along with all the accoutrement that go with that, construction of new classrooms, more admin staff, more cleaning staff, more equipment, etc.
Bill Murray
@KG:
well it depends on how inflation is brought about and how much price inflation occurs.
Zifnab
@El Tiburon:
So unemployment was hovering in the 5% range back between ’03 and ’06. Are you suggesting that Bush and the GOP Congress powered the jobs market through the magical rainbow power of caring and feelings?
Stimulus is a political problem. But a jobs gap is an economic problem. Suggesting that plants are being idled and workers are losing their jobs because Congress isn’t showing enough TLC is absurd. Giving a damn doesn’t give anyone a job. Any stimulus will, at best, be temporary. We’re arguing technical points here, not political cheerleading points. You are posting in the wrong thread.
Corner Stone
@El Tiburon: We only make one thing in this country, bankster millionaires.
Sentient Puddle
I’ve heard that there are two sides to the payroll tax, and a holiday on one would be vastly preferable to the other. I wish I could find that analysis to read again because as it is, I more or less don’t know what I’m talking about. Bah.
But near as I can tell, I think you’re absolutely right to be skeptical of a payroll tax holiday, and for pretty much all the reasons you say. If we could guarantee that companies would spend the difference on investments, then yeah, it’d make all kinds of sense. But I don’t know if we can use tax policy to really accomplish that at the moment (some might point to the proposal to make the R&D tax credit permanent, but that thing’s been temporarily extended for so long that making it permanent now would basically be a clerical thing).
cgp
E.D.: It’s a long post, but don’t listen to the haters. It’s topical, timely, and dead on.
Tonal Crow
I don’t understand Smith’s logic when he argues:
Sure, the machines and the workers are sitting idle. But it’s not because there’s some huge market failure between workers and employers. It’s because there isn’t enough demand for the goods that the workers working the machines would produce. It’s not any more profound than that.
El Cid
One of the assumptions, traditionally matching empirical findings, is that at the low ends of the pay scale, virtually all income is spent into the economy. Not quite as completely as unemployment benefits, but closer from the lowest wages up. Robert Reich:
This would be aimed as an economic stimulus to improve consumer demand.
In addition, the argument would also be that it would be cheaper for businesses to hire workers at the lower end of the payscale.
liberal
IMHO this will do little. Banks aren’t lending because aggregate demand is depressed. QE will probably just fatten bank reserves.
Put me in the “fiscal stimulus not tax cuts/holidays” camp.
liberal
@Tonal Crow:
IIRC that’s a huge “market failure” by the standards of neoclassical economics.
Llelldorin
@KG:
I am not an economist (IANAE?) but I think the idea is that when inflation is very low or negative, a lot of businesses become very reluctant to spend any money at all (with deflation, businesses and wealthy individuals can effectively earn a profit by keeping money in a safe). With moderate inflation, businesses would have to conduct enough business to keep ahead.
With most Americans in debt, inflation also has the effect of gradually reducing the burden of those debts. For example, inflation could in principle reduce the number of Americans underwater on their mortgages without requiring an unlikely actual increase in the market values of their homes.
roshan
__
Buddy, what happened? We might be on minimum wage but we aren’t eating dirt yet, or at least some of us aren’t if not all. But what you said just hits harder now given the dire situation. Thoughts of mortality are painful even when the bank accounts are full, forget thinking about it at this point.
Corner Stone
@Llelldorin:
And this is precisely why the economic “owners” fight so damn hard to keep everyone scared of inflation.
Tonal Crow
Does anyone know whether the Federal Reserve’s enabling statutes permit it to make loans directly to nonbank businesses or individuals? If so, the administration could bypass the sclerotic banks to fund, for example, mega-scale low-carbon energy projects to stimulate jobs while minimizing climate change — a win/win.
Lirpa
You get to the basic rub with Republican “plans” for economic recovery. Tax cuts didn’t produce a wealth of jobs in the mid 2000s. Instead, tax cuts for the wealthy did what they have always done; allowed the wealthy to stop investing in actual businesses making things (they reinvested before taxes were lowered to lower their tax burden) but invest in money making schemes that produce nothing but paper profits for a very few. Now we have the rich and big biz sitting on cash, still not investing in businesses making things. So with the problem you identified, excess production capacity and excess labor, tax cuts help this how, exactly? I see that tax cuts just give the rich and big biz a larger pile of money to sit on or gamble in money schemes and the same excess capacity and labor sitting on the sidelines. And we still have ancient infrastructure, deteriorating state financial situations, and more people thrown to the mercy of our declining safety net. This is a solution?
We must find a way to put the people to work. Biz isn’t doing it. Individuals cannot do it. We must have demand start somewhere. We have shortchanged our country since the 80s with our crazy “taxes are evil” thinking, allowing our roads and bridges to atrophy because we are currently too selfish to do our generation’s part in taking care of this frikken country. The correct course of action is clear even if the strength of will to take on mistaken public opinion and the nihilistic talkers on the right is not so clear. Start investing, big time, in new energy transmission lines. Start investing, really big time, in clean energy R & D and batteries. Start spending, big time, on good old roads and bridges. These actions ARE appropriate government investments, like government support of railroad building and oil extraction were generations ago. No other actor in society can take these steps. It may not be perfect, but at least it is a plan that addresses real problems.
Downpuppy
The big problem with the payroll tax holiday as proposed is that it covers both halves. The employee side will get quickly spent (maybe even some of it on American goods) but the employer side will just sit there subsidizing companies with nothing to use it one.
Plus, it’ll just be another excuse to cut Social Security benefits.
And is it likelier that they’ll pay out the extra to workers or cut pay on the grounds that takehome just increased?
Martin
@Corner Stone: Government needs to create beneficial inefficiencies – smaller class sizes, carbon caps, etc. They need to fuck with regulations in important places to artificially stimulate demand in areas that we can meet (and can’t outsource).
That’s ultimately what much of the New Deal was. We didn’t need ranger stations and national parks and they were economically inefficient (they don’t produce anything), but they were beneficial to society and so we used the opportunity to create labor demand.
ThatLeftTurnInABQ
Really bad analogy here. Nothing is going to shock the economy back to “normal” quickly and suddenly. This parrot wouldn’t “voom” if you put four million volts through it!
A better analogy would be the victim of a severe stroke going thru rehab to regain speech and movement. It is going to take a long time, and we may never get back to where we were before.
You want evidence? – look at the experience of Japan (1990s) and the US (1930s) with deflationary recessions. They last a long time. This one won’t end until the middle class achieves large net positive cash flow and finishes repairing their balance sheets. And that won’t end until we take the mechanisms of class warfare which have been pumping money out of the middle class and into the hands of the very, very wealthy for the last 30 years and, not only stop them, but put them into reverse. Short of violent revolution and expropriation of all large concentrations of wealth (not ganna happen) this will take decades, even in the best case scenario.
Take a good look around. This is what a lost decade (or two, or three) looks like.
bloodstar
And that point is the thing that a lot of people don’t understand. If you cut taxes, businesses and people *aren’t* going to spend that money, they’re just going to save it. And while that’s a positive event for a single person, the more people who save, the more negative the impact is on the economy.
I’m don’t have exact numbers, but IIRC the cash reserves of companies has grown dramatically over the last couple of years. And Kain’s earlier point illustrates why, If you have 75% utilization, there’s no reason to invest into further increasing capacity. So horde the money and pay your share holders dividends.
And if anyone thinks Kain’s post is TL;DR, then you need to quit thinking in cable news 30 second soundbites.
Stooleo
@Tonal Crow:
I had the same thought. It would also give some competition to banks that have tightened up their lending. Of course the GOP would characterize this as a nationalization of the banking system.
Karmakin
A lack of demand is the real problem. And the thing driving the lack of demand is rising productivity. Employers are finding ways to do more with less people. In CW Economic land, this results with those less people being paid more. In reality, without aggressive full employment, it results in those people being paid less.
And without aggressive full employment to get wages, and thus demand back up, there’s really no getting out of this mess. And unfortunately, that’s a political non-starter because there will be some inflation, and less investment profits, and that will upset the middle class.
Also I think the idea that the person who is cooking their fast food is making 80% of what they’re making peeves people off. The problems are not just economic, or even political. They’re cultural as well.
Martin
@Corner Stone: The flipside to inflation is that consumer demand goes down unless that inflation translates into higher wages. In the past that was accomplished by regularly raising minimum wage and through labor unions negotiating wage agreements that tracked with inflation. Minimum wage is now so low as to be almost meaningless, and any raise that would have the desired effect would be prohibitively difficult to do, and the power of unions has been so marginalized that labor has no reasonable expectation that wages would rise.
But it would be a very nice assist, not just to the housing situation but to lending in general. What’s the point of a bank lending money at 5% interest when there are better investment returns out there?
Brachiator
Economists, including Robert Reich, are guessing on this. At this point, no one, abso freakin lootly no one, knows what will jump start the economy.
The mainstream media and lazy pundits ignore the plain fact that the past tax policies, approved by both Democrats and Republicans, included extremely generous bonus depreciation deductions for new equipment, overly generous net operating loss rules that potentially let businesses free up money from earlier tax years, and exclusions on the gains from the sales of small businesses. Self-employed individuals could knock off a portion of their self-employment taxes. The upcoming year sees some tax credits related to employee health care costs.
And yet businesses continued to fail and employers did not use their savings for new hires.
And lending continues to be anemic. Banks won’t lend even though interest rates are low. They are hoarding the money that they don’t pay out in bonuses. On the other hand, interest rates are excessive if businesses have to use their shrinking receivables as collateral.
But suddenly the new conventional wisdom (which some GOP candidates called for back in the presidential primaries) is that a payroll tax break is the magical road to prosperity.
The president needs to do some serious arm twisting to get banks to lend.
Next, he needs to push for more stimulus, direct programs that will put people to work. But he needs to expand beyond infrastructure and construction jobs, which tend to employ men more than women, and are no longer sufficient when equal numbers of men and women are in the work force.
Tonal Crow
@Stooleo: The critical thing is that if the statutes permit, it could be done without pushing anything through Congress. Get the job done, and let the teatards whine. They’re not going to praise Obama, no matter what he does.
jl
@El Cid: Thanks for the link to the Reich article. I think he makes a good case that a payroll tax holiday for lower wage workers paid for by increasing the maximum level of taxable income. My main concern about a payroll tax holiday would that it be consistent with the principles of social insurance, and I think Reich’s proposal does this.
I personally think that there should be no upper limit to income taxed, with adjustments only made for any unintended incentive issues for rates at very high incomes. Economists almost always look at welfare economics under uncertainty from an ex ante perspective (what is the best decision before the uncertainty is resolved, not what happens after the smoke clears). Social insurance should follow the same principles. The uncertainty in lifetime earnings at the beginning of adulthood is high. So the whole distribution of possible future income should be taxed at some rate. The flip side of this is no more complaining about the supposed unfairness of multibillionaires getting some crummy little social security payment when they are old. The proper perspective for insurance is the risk that multibillionaire faced when he was a college dropout.
As long as the payroll tax holiday can pay for itself and follows sound insurance principles, I have no problem.
I think a good stimulus policy should have a large direct public investment component also, for one main reason.
As Krugman has pointed out, Keynesians do too worry about the long run debt of the US government. As Stiglitz has pointed out, it is very very difficult to reconcile the housing boom and many of the financial innovations that facilitated it with an intertemporal welfare maximizing general equilibrium of the economy. Any stimulus should be designed to provide investments that are likely to lower the public debt and external trade deficit in the future. This should be done to help correct for the obvious misallocation of real capital during the massive housing bubble. A direct spending stimulus, such as a crash energy efficiency program, including for example, mass training of contractors, would do this.
As for worrying about relative efficiency of public versus private spending, and getting bogged down in theoretical arguments about that, best to forget about it.
Stiglitz often makes the shocking assertion (for a red blooded US economist) that Adam Smith was wrong, there is no invisible hand maximizing anything for the economy as a whole. I think what Stiglitz says is true: there is no economic theory that says that a general equilibrium will be achieved in a modern economy with complex financial markets. None. When you hear that there is theory or evidence for that, it is just bald assertion. That research project has failed, both theoretically and empirically.
The school of intertemporal equilibrium neoclassical macroeconomic Washington Consensus lies in ruins, and very smart economists have made fools and knaves of themselves recently. I don’t know how it looks to noneconomists, but to some one who was foolish enough to learn the theory, and is nerdy enough to look at the numbers, and nasty enough to keep track of what Very Serious People have predicted over the last ten years the intellectual collapse is shocking.
Krugman is correct when he says people are just saying stuff and making it up as they go along. From my perspective that is a true statement. It is really disappointing.
slag
Agreed. And on a very tangential note: I totally get the idea behind Obama’s plan to reestablish our economy on a more sustainable foundation. But what I can’t understand is why, if he’s serious about his ideas, he doesn’t get serious with his proposals? Is it even possible for us to go big anymore?
Also, yes, if lack of demand is the problem, then a payroll tax holiday doesn’t sound like that great of a solution. At least not in the short term.
PeakVT
I understand that the payroll tax holiday is the quickest, most efficient way to pump money into the economy
It’s quick and has low overhead, but it doesn’t have the largest multiplier. Food stamps and the like have a multiplier of 1.7, meaning for each $1.00 the government spends $1.70 of economic activity is generated. A cut in the payroll tax has a multiplier of 1.3. Tax cuts for the rich have a value below 1.0. So a payroll tax cut isn’t a bad idea on it’s face. But it’s not likely to direct a lot of activity to the sectors that have suffered most in this recession, which are construction and manufacturing. Infrastructure spending, OTOH, would. I’ve seen a number of values for the multiplier for this category of spending, ranging from 1.0 to 1.6. Using the midpoint yields a value equal to that for a payroll tax cut. That doesn’t account for the time lag inherent in infrastructure, however.
@KG: Remember that this is a “balance-sheet” recession, not the typical post-WWII recession where the Fed jacked up interest rates to head off inflation. All sectors of the economy have too much debt, especially households. (The subset of large corporations are the exception, as they are sitting on records amount of cash.) Higher (between 4-7%) inflation rate would help grind away the real value of debt, which is what is limited a lot of entities from spending and investing. But right now we are experiencing low AND declining inflation, and seem to be verging on deflation. Deflation increases the real value of debt, which obviously would make things worse for a great number of people. So, right now, we could use some higher (but not high) inflation.
Martin
@Karmakin: Yeah, I think without the trade deficit returning, the national labor demand is simply being wrecked by high efficiency.
I’d like to see at least a debate take place about correcting that structurally. I’m not sure how to change the direction of the trade deficit, but a move to simultaneously reduce the work week (or equivalent) and increase minimum wage would be a start. There was a small discussion over at Sully’s of why Europe has such generous vacation benefits, and they seemed to completely overlook that it’s designed to decrease efficiency. Every extra week of vacation lowers productivity by 2%. Another consideration would be significant regulation around overtime as it’s currently cheaper in a great many situations to pay overtime than it is to hire additional workers. That’s the reverse of what it should be and is something that can be corrected through regulation.
El Cid
@jl:
Welcome to a generation and a half of Reaganite bullshit, with slipshod and insanely pro-ultra-rich and economic-system-risk fetishizing deregulation and anti-regulatory ‘enforcement’. The dominant economic arguments are and have been utter shit for decades.
orogeny
What effects would a payroll tax holiday have on Social Security and Medicare? A two month holiday would cause them to lose ~$120 billion…is this not a significant loss to already cash strapped programs?
georgia pig
@Martin:
Bullshit, that plays into right wing simplistic notions of value as only short-term extractive exploitation. While these things did create labor demand, they also created enduring value where none existed. Otherwise, those places would have been logged and mined out of existence years ago (go to Great Smoky Mountains National Park and then Copperhill TN if you want a contrast). Do you think anything would be going on in West Yellowstone MT or Jackson Hole if Yellowstone and Teton National Parks weren’t there? Just this last week, I was up in SW Virginia on the Dan River. My boys and I went up and fished Townes Reservoir, which is part of the Pinnacles Hydroelectric Project financed by the Public Works Administration in the 1930’s. 80 years later it still is producing 1100kW. That’s the type (not hydro per se) of investment that needs to be made. It’s long term investment and there’s no better time to do than when money is cheap. That’s what Krugman keeps saying, deficit hawkery is false economy, short term thinking.
Martin
@slag: It’s not possible to go big any more. The right is too effective at rallying around the big stuff. I think we’d be better off with ten $50B stimulus plans. HCR nearly died at the feet of a tiny provision when it got turned into death panels. Aspects of the bill that even conservatives should have supported were lost. Had that been broken up, there’s a chance that parts would have been ignored while others were attacked.
In the case of stimulus, even if some proposals fail while others succeed, at least some would succeed.
Zifnab25
Ultimately, I think the problem that we are going to have to overcome is realizing that while the government is poor and the middle class is dwindling, the money still exists. Rich people still exist. Forcing the rich to pay higher salaries to the poor will reinvigorate – not bankrupt – the system.
jl
And I agree with commenters above who point out that to the extent the problem is a deficiency in demand due to recent loss of perceived wealth, tax cuts of any kind will be inefficient. So, not sure about the argument about payroll tax cuts making hiring cheaper for businesses will have fully intended effect.
Also, middle class people will divide payroll tax cuts into spending and repairing balance sheets. The latter is good, a actually essential, for long run recovery of the economy.
Of course the argument based on demand deficiency requires that at the macro level, the economy is not in equilibrium, and will not move their on its own rapidly.
People who believe that the economy is always at or very close to an intertemporal welfare maximixing equlibrium cannot admit such a thing might happen. If that is not true, and they think Keynesian theory is bunk, then they simply have nothing to say.
Their dream was to do macroeconomics patterns after classical celestial mechanics. Even parts of physics, as a whole, does not meet their stringent requirements for analyzing the economy on a few first principles that conceptual correspond to Newton’s laws. Their intellectual project lies in smoking post nuclear war ruins and they are just saying stuff.
In my opinion they have been just saying stuff for years. They prate about how their approach is the only one based on sound principles of general equilibrium economics. This is not true. Theoretical developments in general equilibrium have increasingly cast doubt on their project over the last35 years, but they did not care.
They have truly been doing applied mathematics with no applications, as the mathematician’s joke about economists goes.
Sentient Puddle
@georgia pig: Uh, I think you’re agreeing with Martin there.
Put another way, you can’t rely on the free market to make all your decisions for you. Some things you just can’t attach a monetary value to.
Martin
@georgia pig: Hey, I said they were beneficial. In the short term, they weren’t cost effective, but over a century they most certainly have been (though they didn’t know for certain at the time this would happen). Whatever investments we’ve made in our national park system have paid for themselves many times over in tourism – likely even beyond the opportunity cost of logging them bare in many cases.
These are investments and should be promoted as such. The payoff is always down the road, but the payoff isn’t guaranteed. You can’t win if you don’t play, though.
b-psycho
@orogeny: Sounds to me like a case for changing what tax funds those two entirely…
jl
“Also, middle class people will divide payroll tax cuts into spending and repairing balance sheets. The latter is good, a actually essential, for long run recovery of the economy.”
I forgot to add that while saving to repair balance sheets is essential for long run and permanent recovery, it is bad in the short run for getting unemployment down, and production of anything (investment goods, consumption goods) in the short run.
People like Krugman, Stiglitz and Galbraith have been emphasizing this since the onset of our current great recession.
The current situation is depressing. Krugman said recently that we are in 1938. That is a short run analogy appropriate for the election year. Unless something changes a better analogy will be that we are in 1939, but will stay there for an indefinite span of time, Which will not be good for our society.
Listen to the beginning of the famous War of the Worlds radio broadcast, before the Martian invasion begins, and you get a sense of the glum mood of the times.
kwAwk
Okay, shit like this is driving me nuts.
The reason we have idle workers AND idle factories is that this recession is caused by a lack of DEMAND.
Until the people in Washington get this through their skulls (Obama included) that we have a recession caused by a lack of demand and quit trying to solve this recession with SUPPLY SIDE solutions, then we’re going to continue treading water.
More tax cuts for companies and people who are already sitting upon mountains of cash isn’t going to help things.
A payroll tax holiday for companies isn’t going to encourage them to hire more people if there isn’t any demand for products that those people hired would produce.
georgia pig
@Martin: Yeah, but I don’t think that people at the time thought of them as anything other than beneficial, i.e., they thought they were good long term bets. When you start conceding the “weren’t cost effective” part, you’ve lost the argument by conceding to false premises. The government has eons to collect on infrastructure investments, and I doubt that anyone during the New Deal believed that investments in dams and bridges wouldn’t pay off some time in the future. By the same token, for example, it is almost beyond debate whether improving electrical transmission capacity (or subsidizing the construction of solar or wind) in the US will eventually pay off. Saying it’s in doubt is like saying it’s still in doubt whether smoking causes lung cancer. Yeah, maybe there is some small amount of doubt, that someone will invent some magic energy source that will fit in your basement, but that’s not very likely. The problem is that private entities will not make these long-term investments precisely because (1) they can’t raise the capital (bankers!) and/or (2) they don’t have short term payoffs and/or (3) they want to lock in the value of their own assets in a resource-constrained environment.
Brachiator
@kwAwk:
Exactly.
Warren Terra
Seemingly missing from this thread are a couple of points:
1) While there was no absolute “payroll tax holiday”, there was a temporary reduction in the payroll tax. As noted upthread, payroll taxes are the most regressive we’ve got, and the payroll tax cut that happened had the effect of quietly slipping a bit of extra cash to those workers most likely to need it, and to spend it. Maybe this should have been done on a larger scale, but we shouldn’t pretend that it didn’t happen or that Democrats were or are opposed to such an approach.
2) One drawback of a payroll tax cut (at least a partial one as happened) is that the payroll tax is something of a stealth tax (your employer pays an equal amount that doesn’t even appear on your pay stub, and though the other half is listed on your pay stub you never actively pay it). As you might expect from this, payroll tax cuts are stealth tax cuts – one of the irritating aspects of the debate over the stimulus’s effectiveness has been all the false claims that none of it went into the workers’ pockets, that it was all top-down spending on big projects that are often slow to happen and may be misjudged entirely. This simply wasn’t the case, but a lot of people seemed to believe it. Now, maybe a total holiday would attract enough comment to avoid this problem – but perhaps not.
3) A payroll tax cut may help the aggregate economy, but it has the unfortunate feature that it will disproportionately help those regions with a healthy economy, and disproportionately pass by those regions with extremely high unemployment and little endogenous activity to stimulate.
Basically, I think we’ve got a category error here: I’d be willing to be convinced that a payroll tax holiday was the best stimulus strategy. But so long as the Republicans remain The Party Of No and refuse to engage with or even to accurately describe the actual existing world around us, these sorts of debates are like determining the number of angels that can dance on the head of a pin – if we know that no actual worthwhile plans can happen happen, proposals should be made primarily on their rhetorical effectiveness, at least as much as on the basis of what the economists say.
Pangloss
The GOP candidate for Illinois Governor has a plan to fix the state budget with a 10% across the board spending cut.
This is what passes for public policy proposals today in the Republican party. When presented with a problem, propose a solution that a) fits with the ideology, b) can fit on a bumpersticker, c) is draconian, and d) hurts the poor most. Voila, the GOP solution.
They are not serious about public policy, period.
Martin
@Pangloss: Better than our GOP candidate for governor that will solve the 12.5% unemployment problem here by immediately laying off 40,000 state workers.
daryljfontaine
@debbie: Given Blackstone CEO Stephen Schwarzman’s remarks on the proposed closing of the “carried interest” tax loophole:
Yes, these overpaid, overstuffed pieces of shit are dragging their heels as long as possible to the detriment of anyone who would benefit from jobs, investment, lending, spending, etc., just so they can get their trained lapdogs back in control of the checkbook. Fuck them with a rusty pitchfork.
D
Warren Terra
@Pangloss:
A mere piker, I assure you. Why, in 1996 the Republican candidate for Governor proposed a 1/3 cut in state taxes, together with a 1/3 cut in the state budget that wouldn’t touch education or law enforcement. Turns out, education and law enforcement are 2/3 of the state budget.
Of course, she also promised to have an administration composed only of “wise and Godly people” (when challenged, she amended this to say that they would have to be wise or Godly, but not necessarily both), so maybe her crack team could have made it work.
Cermet
ED, what world do you live in? Because most people who live on $36 K or less and have two or more kids will always spend such a small sum of money (what vast sum worth saving? For these people a single paycheck tax holiday isn’t much and would mean some extra food, cloths or a very special bill – save it? A few hundred at best? Get real!) You either make far too much money or are so white middle upperclass that you don’t know what living from paycheck to paycheck really means when done for years.
Jewish Steel
@E.D.
I think you mean *whittle for whiddle.
A minor quiddle.
And I do agree that a payroll tax holiday relies on the hope that it will find it’s way into the economy, “trickle out” style.
El Tiburon
@Zifnab:
And exactly what policies were Bush, et al implementing (or continuing to implement) that led to this level of employment?
That jobs may be produced (as long as it is not union jobs) is simply a by-product of any policy decisions.
Exactly what policies have been implemented to produce solid, US jobs in the past 30 years that rival NAFTA, the assault on unions, inability to raise the minimum wage to a level that sustains life and so on.
But by God, if AIG and Goldman need billions -BOOM- it is there.
Zifnab
@El Tiburon:
That’s kinda my point. Bush and the Congress did very little to facilitate high employment and yet we had high employment. Suggesting that employment and Super Enthusiastic Congress are not necessarily functions of each other.
If you’re exploring the causes of unemployment, leaping to the conclusion that the problem is caused by a lack of Congressional action puts the cart before the horse. Until you know what Congress can do to fix the problem, bemoaning a lack of action is pointless.
Kain was addressing what, specifically, in the economy was broken and suggesting how to fix it. Congress is the (arguable incompetent or disinterested) plumber, not the leaky faucet.
jhh
We’ve been here before, and it is getting more like the 30s every day. Similar debate around FDR concerning contracting with companies for jobs and work vs direct gov’t hiring. There was so much resistance to the idea of direct hiring that FDR emphasized contracting first. Problem was, all the negotiations, contracts and middlemen took time to sort out (this was pre fax machine, pre internet, pre FedEx, it was mail and telegraph), and stimulus was slow in arriving. But FDR had his triage: “relief, recovery, and reform” and understood that he needed action on all 3Rs. So he turned to his inside man Harry Hopkins , and said get some stimulus out there faster while other wheels grind. This led to things like WPA and the Civilian Conservation Corps (commanded by Douglas MacArthur, interestingly)–the one giving us among other things some outstanding art (all those famous photos of workers and migrants) and the other giving us TVA and other dams around the country and a lot of the Appalachian Trail. Some things are different this time—in particular, so far, there appears to be a huge divide between those with high level educations and good salaries and those lower down. But if the extreme GOPers actually force the govt to shrink expenditures during a deepening crisis, the meltdown could take down more of us. It is well worth it to read up on that time (and you can skip most of the right wing revisionism from the likes of Amity Shlaes). As Santayana remarked, “Those who do not learn from history are doomed to repeat it.” For the record, my favorite stimulus points are reworking and expanding electric distribution (which has 30% losses and could be made much more efficient with smart power electronics), massive energy efficiency upgrades for public and private buildings (eg, there has been tremendous progress in HVAC—I just put in a new system that will cost 30-50% less to operate), road and bridge repair (just ask residents of Minnesota and other northern states with rotting bridges), train upgrades where traffic is heavy enough to support them, and broadband everywhere. I also know enough professionally about nuclear matters to say that we have to do the Yucca Mtn repository—which is in the middle of the frigging Nevada (nuclear weapon) Test Site, fer chrissake. If we do that, we can get the waste out of local ponds and corroding casks, and start thinking about nuclear power expansion that might eventually support extensive use of plug in hybrids—the one way I see right now to cut off the money flow to sheiks who hate us. (Emissions reduction comes as a side benefit, and BTW, puttng Yucca in Nevada gives those Red Staters huge carbon credits to sell).
jl
@Zifnab:
“That’s kinda my point. Bush and the Congress did very little to facilitate high employment and yet we had high employment.”
I disagree. The Bush II recovery from the 2001 recession was by far the worst and slowest postwar recovery since WWII in terms of job creation. Later drops in the unemployment rate were the result of the housing bubble, facilitated by an irresponsible and fragile financial system that was allowed to evolve through irresponsible deregulation and lack of oversight. The Executive and Congress did have quite a hand in that deregulations since the early 1990s.
And I can’t help adding that Joseph Stiglitz did start writing in 1993 about what would probably happen over the next ten years, and what he predicted did happen. You can find the papers on his website.
I agree with Krugman that what has happened is not a big mystery, and we do understand which direction to go in to improve both the jobs and deficit problems.
Warren Terra
@jhh:
Dude, Paragraph Breaks.
I say this as someone who is myself given to posting long, turgid comments: if it seems to be of an unmanageable size, people won’t make the attempt.
Mnemosyne
@Zifnab:
Actually, we didn’t. The Bush years had the slowest employment growth on record.
We had less unemployment — as in fewer people all laid off at the same time — but that’s not the same thing as high employment, especially once you factor in the discouraged workers.
Bill Murray
@orogeny: There would be essentially zero effect on social security. It is not currently cash strapped at all, and is probably the healthiest government program — which is why the Republicans and Blue Dogs are set on destroying it.
El Tiburon
@Zifnab:
Others here have addressed this, especially regarding Bush’s regime.
Regardless, you did not refudiate my point – and perhaps your intent was not to, but what major policy initiatives have we seen that were geared to the American worker? The Hi-Tech and Housing Bubbles may have led to greater employment, but it was not their main function.
So again: Who in Power cares about the American worker? No one really, so all this fluff is simply white-noise
Zifnab
@jl: @Mnemosyne: @El Tiburon:
From the original quote of El Tiburon…
The problem IS in manufacturing capability / means of production / supply / demand / etc / etc. The “Congress gives a rat’s ass” is meaningless. Republicans want to cut taxes. Most Democrats want to increase domestic government spending. These are the two supposed solutions to the same problem. When evaluating which of the two (or whether a mystery third option) will improve economic growth and employment figures, the first question to ask should not be “Does the Congress give a rat’s ass?” because that question does not get us any additional useful information.
Congress has, historically, turned on the economy. A stronger economy offered better odds at reelection. A low unemployment rate correlates with high incumbency. So the Congress has a vested interest in per capita income. Even the Republicans want the economy to get better – just not until they are back in office.
The Bush Tax Cuts were, ostensibly, designed to spur economic growth. The Obama stimulus package was aimed directly at the economy. The Greenspan Era rock bottom interest rates, the deregulation, the green jobs initiative, the re-regulation, the health care bill – all were designed to improve the US Economy for at least some subset of Americans.
So yes. Everyone wants the economy to get better. Congress does give a rat’s ass. The only question remaining is which plan to embrace. Arguing over how much rat ass the current / past / future Congress gives does not lend to that debate.
moderate indy
One problem I have with any policy is the unintended consequences.
My guess about how many companies will handle such a holiday is come will hire a few more workers, most will take the part that they get and save it or pass it on as income to the owners of the company. Particularly, when we are talking about small and privately owned companies. But what I imagine a lot of companies will do, particularly smaller companies, is they will see the employees take home pay increasing , and will use that as a chance to increase the employees contribution to health care costs. The take home check would still be larger for a time, but much of the stimulative effect will be muted,
Talking to quite a few small biz owners, one thing has become clear. Their health care costs are crushing them. Every year they pay more while trying to keep employees contributions as reasonable as possible. This leads to them not being able to give better bonuses or raises.
If they do take the holiday as a chance to increase employees end of the health care cost, that extra that the employees will be on the hook for won’t be lowered when the holiday expires, thus you’ll have employees at the end of it with a smaller check, which means less cash for spending. The employer then gets to blame it all on the “tax hike” that will happen when the holiday expires.
I’m not certain that this is how most companies will deal with it, but I suspect it might be too tantalizing an opportunity to shift significant costs off their books to pass up. Particularly when the regular guy won’t really notice that he is getting screwed till after the holiday ends.
Bob In Pacifica
@El Tiburon: Yes.
Bob In Pacifica
GATT, NAFTA et al are gaping wounds. Until those agreements are corrected so that America can have an industrial base again there is little hope. Money is free to cross borders, product can cross borders, but labor (and thus consumers) are fenced in.
El Tiburon
@Zifnab:
If by economy you mean Wall Street, then agreed. If by implementing policies that strengthen Average Joe Worker, then please enlighten.
Since Reagan there has been a war on the working class in this country. And the deems act like Great Heroes when they get 15 cents added to the minimum wage.
Average joes can’t afford to raise a family, go on vacation, send kids to college, live without fear of being laid off; yet in the past 35 years the wealthy have accumulated more wealth than most can imagine.
So, please, do tell who gives a fuck about the working class?
Billions for war and tax cuts for the wealthy. A big Fuck You to the rest of us.
El Tiburon
@Zifnab:
If by economy you mean Wall Street, then agreed. If by implementing policies that strengthen Average Joe Worker, then please enlighten.
Since Reagan there has been a war on the working class in this country. And the deems act like Great Heroes when they get 15 cents added to the minimum wage.
Average joes can’t afford to raise a family, go on vacation, send kids to college, live without fear of being laid off; yet in the past 35 years the wealthy have accumulated more wealth than most can imagine.
So, please, do tell who gives a fuck about the working class?
Billions for war and tax cuts for the wealthy. A big Fuck You to the rest of us.
MNPundit
Krugman supports a payroll tax holiday.
mclaren
This is another way of saying the output gap is large.
Krugman has been beating the table and screaming about the unprecedented size of the huge output gap since early 2008 — so have Robert Reich and Brad DeLong, and the other economists with a clue.
I think the reason people never got exercised when they heard “the output gap is huge” is that people don’t know what it means. Economists tend to speak economese…”output gap” sounds innocuous, like some property of a transistor.
But out here in the real world “large output gap” means we’ve got empty factories sitting idle, warehouses full of goods that aren’t getting shipped, fleets of 18 wheelers parked in chained lots because there’s not much merchandise being sold that has to be shipped, restaurants sitting empty without customers, docks like San Pedro that have turned into ghost towns because there aren’t any exports to ship, and xerox shops and barber shops and sawmills where everyone is sitting around reading USA TODAY because there are no customers.
A large output gap is a real disaster. It’s the economic equivalent of a heart attack.
RalphW is correct, though — the problem isn’t lack of workers. The problem is lack of demand. Aggregate demand has fallen off a cliff. That’s economese for “nobody’s buying stuff because they’re in debt up to their asses.” People are paying their property taxes and their mortgages and their car payments instead of buying flat-screen TVs or going on Hawaiian vacations. Even those people who are doing well are saving instead of spending, because they know damn well they could be fired tomorrow.
FDR’s brain trust figured out how to deal with this situation. If necessary, use the government to pay people to dig ditches and pay other people to fill ’em up. You get people working, you put money back into the economy, demand picks up. Eventually the deficits drop because the economy restarts. Worrying about inflation when you’re in the middle of a huge output gap with a collapse in aggregate demand like we have now is equivalent to refusing to shock a heart attack patient back to life because you’re worried about giving him high blood pressure. Dammit, first get the guy breathing again…then worry about his blood pressure.
mclaren
@jl:
Exactly right. In fact, John Maynard Keynes proved mathematically with his General Theory of Employment, Interest and Money in 1936 that the economy can wind up trapped in a disequilibrium state far below the optimum, indefinitely.
That’s why Krugman and the others are so enraged. These facts have been known for 75 years. This isn’t news. Economists have known this for nearly a century. Yet we still hear gibberish from the Milton Friedman and Friedrich Hayek macro guys that “equilibium will naturally reassert itself.” It’s just not true. And Keynes proved mathematically that it wasn’t true, back in 1936.
Ives
Karl Smith noted that “There are machines waiting to be worked and people waiting to work them but they are not getting together. “
Who woke Karl Smith up? That is true of every recession. The absurdity of an today’s excess of homes and an excess of homeless, or more generally, the fact that social needs lay unaddressed while there is both excess capacity and high unemployment is common to all market failures. In past societies, catastrophic natural events threw them into crisis; a bad harvest for example. In a market system it is not shortages of goods, labor, or means of production that are lacking. It is the inability to turn a profit using those resources that prolongs the crisis.
As far as suggestions…I watched Danny Schecter’s (sp?) film “Plunder” on Netflix last night. Highly recommend it if you have a Netflix subscription…can be watched online. Anyways, one person interviewed during the film is the economist Michael Hudson. He related the pretty startling statistic that by 2006 a full 70% of all capital gains income was controlled by the top 1% of the population. This is returns from stocks, bonds, dividends etc. Sit on your butt money in other words.
Well, I say one way to help solve our economic mess would be to progressively tax this rentier class. As of today, capital gains income is taxed at only 15%, and is exempt from any Social Security or Medicare contributions. It is taxed far less than labor that actually produces useful goods and services. Since this top 1% has benefited mightily by the government’s bailing out of the investment banks, it seems reasonable to me that they should bear a large brunt of the burden of replenishing the state coffers.
There is not a chance in hell of this idea ever becoming a reality of course.