Tag Archives: political economy

Maybe

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…Value Added Taxes aren’t all they’ve been cracked up to be.  The Wall Street Journal reports

China has removed a value-added tax on vegetable distribution retroactively to Jan. 1 as part of efforts to curb rising food prices, which have contributed to inflationary pressure over the past year.

Lifting the VAT on vegetables will lower production costs for wholesale retailers, who typically pass such costs on to consumers.

and

“The lower costs benefit distribution companies, especially vegetable wholesalers,” said Gao Wang, an analyst at Beijing Orient Agribusiness Consultant Ltd.

A year ago, Beijing launched a wide-ranging government drive to increase food supplies, and had taken aim at improving the nation’s agricultural production distribution as part of that effort.

Hmm….

(Un)employment

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The initial employment numbers from December were quite favorable: roughly 200,000 new jobs were added, almost all in the private sector (government employment shrank a small amount), and the unemployment rate ticked down to 8.5%.  These are numbers worth watching, as a recovery may be in progress, despite President Obama’s economic policies.  But  these numbers don’t tell the whole story.

First, Seeking Alpha describes some of “the rest of the story.”  When the current malaise, loss of our edge, and descent into laziness began in December 2007, the civilian non-institutional population* of the United States was 190 million, and the labor force was a tad over 125 million.  As of December 2011, the Bureau of Labor Statistics says that the “civilian non-institutional population” had increased to roughly 194 million, or 3.7 million higher (the difference includes rounding error from my own rounding) than it was those four years ago, and the labor force was 124 million.  BLS also says  that the employment population ratio was 58.5% as of last month.   Multiplying the increase in the U.S. population over the four years by the employment population ratio, says Seeking Alpha, implies that our labor force should have increased by 2 million to more than 127 million, not decreased to the 124 million actually reported: more than three million people are missing in the BLS figures.  (Note that, given the way the unemployment rate is calculated, a smaller labor force produces a better (headline) unemployment rate: dividing the number of employed in December 2011 by the size of the labor force that should exist based on the BLS’ population numbers gives us an unemployment rate of 9.6%, not 8.5%.)

What about those 3 million people, then?  The BLS says these folks left the labor force and that this justifies purging them from the statistics.  It’s certainly true that if 3 million Americans left the labor force—gave up and stopped looking for work—it’s valid for them to be scrubbed from the employment numbers.  (As an aside, note that this departure from the labor pool is a continuing trend: 2011’s labor pool is smaller than 2010’s, despite an increasing total national population.) Thus, it’s not inaccurate—as far as it goes—to say that of the population looking for work, their unemployment rate is the reported 8.6%.  But now think about what it means for 3 million folks to have just given up on finding jobs.  It’s clear that the current recession is continuing (yes, yes, I’m aware that by the consecutive quarters official measure, this recession ended ‘way back in 2009—see how your unemployed neighbor, or your spouse, or yourself feels about that), and no economic recovery has taken place or is in progress.

The Wall Street Journal describes another aspect of the story concerning long-term problems that exist and that will persist as a result of this prolonged recession.

Long-term unemployment remains above 15%, down only trivially from 15.3% to 15.2% last month.  Additionally, our labor market has, over the last 20 years, lost much of the edge it enjoyed over other developed countries.  Some of this is due to the deterioration of our education system, so that our relative gains from the last century due to our education are disappearing.  There are demographic causes, too: we relocate less frequently and change jobs less often, which makes the job market less flexible, as employers are less able to find the workers they want.  If the desired worker isn’t local, the employer has to do without, pay more for more training, or pay more for relocation costs.  And as seen above, a smaller share of us are working.

Additionally, there are 5.6 million Americans that have been unemployed for more than 6 months, and of these, 3.9 million have gone unemployed for a year or more.  Indeed, these 5.6 million out of work for half a year or more represent fully 42.5% of our unemployed.  This, of course, is in addition to those millions that have given up on finding a job.  This long-term unemployment rate forms a vicious circle, also.  The longer people go unemployed, the less (re)hirable they become.  Reasons for this vary, but they include deterioration of skills and the stigma of having already been long-term unemployed.  This can lead, domestically, to the same situation that has occurred in Europe: an underclass of semi-permanently unemployed labor develops, with all of the negative implications for any hope of overall productivity, and regardless of what we might think of social welfare programs, for those programs as well.

There’s another dimension to this negative feedback loop: a National Bureau of Economic Research Working Paper, “Recessions and the Cost of Job Loss,” by Steven Davis and Till von Wachter found that workers who lose their job when unemployment is low—below 6%—lose on average 1.4 years’ worth of earnings.  This is bad enough, but it turns out that those who lose their jobs when unemployment is above 8%—the current jobless population—lose 2.8 years’ worth of their pre-job-loss wages, or twice as much.  Von Wachter, et al., also found that unemployed workers’ earnings fall 1% for each additional month they’re out of work (recall the long-term unemployed numbers above), and that those losses can last for years even after they find another job.  There’s further fallout from this: those lower earnings result in less revenue for government regardless of tax rates and regardless of what we might think of how much money government actually needs.

The longer the government stays in the way of the economy and our recovery, the worse our economy will be and the more difficult and slow any recovery will be because the more entrenched these feedback loops will get.

*BLS-speak for “persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.”

Basic Economics

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A thought on Keynesian economics.  Brad DeLong offers this thought concerning our current debate over government spending:

The government purchases $100 billion of goods, issues $100 billion of bonds, and raises taxes by $3 billion a year in order to amortize the bonds.  Government purchases go up by $100 billion this year.  Private consumption goes down by $3 billion this year.  Net fiscal impetus is not $0 but rather $97 billion.  Cochrane [and other Keynesians] doesn’t understand the Ricardian Equivalence argument he is trying to make.

Keynesians think $97 billion were created through this spending and taxing program and that government spending is a good.  But having sold $100 billion in bonds generate this “demand increment,” from where would those $100 billion have come, and to where would they have gone otherwise?  The Keynesian view can be summarized in either (or both) of two ways: supply creates its own demand, or demand creates its own supply. Talk about trickle down, or building fields of fancy and hoping fanaticizers come.

No, what goes on actually is this.  Falkenblog commenter Aaron Brown explains:

The main point is…that people react to the $100 billion future tax increase (or spending cut, or reduction in value of nominal assets from inflation, or some other loss).  You might argue that people will under-react in some cases, but it’s highly implausible that they don’t react at all, or that they systematically under-react (and there’s no data supporting either implausible contention).  I think systematic over-reaction is plausible (although also has no empirical evidence) since once currency debasement begins i[t] almost always seems to accelerate.

The question of where the $100 billion would have gone otherwise is a different one.  It could come from private consumption or private investment, in either case likely making the net effect of the stimulus spending negative, even before factoring in the future costs.  Government takes money today from privately-selected uses to government-directed ones (loss of utility there) and also must take money tomorrow from privately-selected uses to repay the debt.

And since the economy continues to be depressed from the government having withdrawn so much money from it for its own spending, government must, apart from tomorrow’s taking for current borrowing, repeat the whole borrowing and taxing cycle tomorrow, also.  This continues to hold down the economy, as we saw with the government’s “stimulus” spending in the Great Depression, and as we’re seeing today.  Brown continues:

The Keynesian hope is that today’s $100 billion comes from hoarding or asset bubbles, in which case the net effect could be neutral or even positive.  The further hope would be that the future debt repayment will go to sound private investment or elimination of future wasteful spending (sort of “stuff then starve the beast”).

However “hoarding” and “bubble” are in the eye of the beholder. So even if you make the assumption people under-react to the future implications of stimulus spending, you also have to assume that the government’s judgment using other people’s money, with officials being paid whether they are right or wrong, is better than people making choices with their own money, bearing the losses if they are wrong.

If people are correctly preparing for future bad times instead of “hoarding” or correctly anticipating a rise in nominal asset prices instead of feeding a “bubble”, then the stimulus will be doubly harmful.

But the fact is, we don’t hoard.  We (both individual and business) save/invest.  We may have a good idea of why we’re saving—a new house, future retirement, or future expansion—or we may not, saving only against an inchoate reservation about the future—but this isn’t “hoarding.”  And government judgment?  We’re seeing how that’s playing out with the government’s substituting its judgment for ours in its use of our money for its entitlement programs.  Keynesians are all about the superiority of government’s judgment.  Otherwise, they wouldn’t keep taking our money and spending it for us, even (especially) when we don’t want to spend, in order to stimulate our economy (which, just incidentally, Keynesians also view as government’s economy).

h/t to Eric Falkenstein at Falkenblog.

National Defense or National Security

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When did they become mutually exclusive concepts?  In the Progressive meme, the downsizing of the US’ status in the world is in full force.  Because of cuts to our national security—our defense—budget driven by Progressive intransigence in cutting spending anywhere at all and their parallel intransigence in demanding increased taxes, our military capability is shrinking dramatically.  Rather than being able to fight two wars simultaneously, which we have been able to do for decades, the defense cuts will reduce us to being able only to

…fight and win one major conflict, while also being able to “spoil” a second adversary’s ambitions in another part of the world while conducting a number of other smaller operations, like providing disaster relief or enforcing a no-flight zone.

Notice that: we’ll be able to win once (maybe—war always is an iffy thing) and only hold elsewhere, hoping for a miracle there.

This is based on the idea of a superfluous military—we won the Cold War 20 years ago, for crying out loud, and if we hadn’t had this large military-industrial complex, we would never have been able to start those evil wars in Iraq or Afghanistan.  Besides, defense spending has been going up and up and up, and we need to stop it.

But here’s a graph that sheds some light on that last (I’ll not dignify the others with a response.  (a hostile Russia and China, 9/11, a nuclear Iran, Saddam’s inhuman butchery are sufficient answer.)

Notice that.  As a percent of GDP, defense spending has been remarkably stable.

Nevertheless, for the sake of national security, defense spending must be cut—the deficits and debts are too great and they threaten the weal and the safety of the nation.  The debt and the deficit picture certainly are as threatening as they’re made out to be, but consider: with no defense capability, where is the security?

What do we gain, though, by cutting defense?  Consider these items, courtesy of Neptunus Lex:

…shutting the doors on DoD entirely would still result in an $800 billion increase to next year’s aggregate deficit….

…radically reduce the ground forces, a couple of fighter wing equivalents and at least one or two aircraft carriers—the same forces which have allowed the US since the Cold War days to provide forward presence and deterrence.

Which is actually OK, because the Islamic Republic of Iran has just told us that the USS John C. Stennis is no longer welcome in their neck of the woods….

Well, at least one of those carriers won’t be needed, since it’s worn out its welcome in Iran as well as in DC.

One Progressive argument is that we can get away with such draconian cuts.  Even with cuts as deep as 90%, we can still wipe our attackders off the face of the earth.  But there are a couple of flaws with this argument.  The first is a moral one—and so a practical one.  With such deep cuts, we could wipe our enemies off—by going nuclear.  But with no intermediate capabilities, we’re stuck with the moral, and practical, choice of nuclear war or surrender.  There aren’t any intermediate options with such deep cuts.

The other flaw, though, goes to that ability to go nuclear.  Our nuclear weapons are aging.  They need testing and upgrade.   That takes money that’s being cut from the defense budget.  In the end, we have to ask ourselves, “what is the value of our nuclear weapons when we can’t count on them working?”  while our enemies are asking us, “Do you feel lucky, punk?  Well, do you?”

But the whole “we can cut defense” attitude suffers from another fundamental misconception.  It assumes that our enemies think like us, that their pain level is similar to ours, that their goals are similar to ours.

What do we gain by cutting defense rather than cutting somewhere else?   We keep three entitlement programs that are bankrupting us, and that will continue to do so, even after gutting national defense: Social Security, and Medicare, Medicaid.  But those are the programs that politicians use to buy votes with which to stay in power.

In the end, national defense and national security aren’t mutually exclusive.  Without both, we have neither.

Gridlock Works

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Lost in the hoo-raw over the payroll tax reduction extension at the end of the year was Congressional inaction on a couple of other weighty matters—and this inaction redounds to our benefit.

Congress failed to continue a 45 cent per gallon tax credit for corn-based ethanol and a 54 cent per gallon tariff on imported ethanol (mostly from Brazil—Obama wants us to be one of their best customers).  Since these two items were among the few things Congress even constructed reasonably—they actually had sunset clauses—they expired Dec. 31.  Of course we can expect the Progressives to attempt to redress this egregious failure or to score the evil Republicans for stopping a resumption—that is, if the Republicans find their courage, lost in the debt ceiling fiasco and which loss was underscored by their screw-up on the payroll tax reduction, and block a resumption.

Another useless “green” subsidy expired through Congress’ inaction, also: the thousand dollar tax credit for installing an electric car charging station in a residential garage expired, as did the related tax credit (up to $30 thousand) for installing a commercial charging station.

Unfortunately, the gridlock didn’t achieve a sweep: fuel refiners still are required to add 36 billion gallons of ethanol to their fuel mixes by 2022, and the (maximum) $7,500 tax credit for buying an electric car remains in place.

Of course, as with all subsidies, these had just made the subsidized items more expensive.  The 45 cent credit for the ethanol-in-gasoline just followed the fuel right into your cost at the pump, for instance.  The $6 billion per year we taxpayers were being hit for this credit bought everyone else’s ethanol gasoline.  And we paid those $6 billion even when we bought an electric car, instead.  Those of us that have bought one; sales are steady, but far from outstanding.

That credit for buying the electric car is interesting in its own right.  Just to take an anecdote for an illustration, a Ford Fusion (ignoring the usual haggling, and only looking at MSRP) runs around $20 thousand.  The correspondingly ungussied-up Fusion Hybrid is a bit under $29 thousand.  With the subsidytax credit, that drops the Hybrid to a shade over $21 thousand.

In some cases, the credit doesn’t do the buyer as much good, though.  The Tesla’s Model S is a $50 thousand electric car, and their Roadster seems, from Tesla‘s Web site, to be of a price that if you have to ask, you can’t afford it.  The tax credit doesn’t have so much practical effect here.  As to the Fisker Karma, well, that electric car isn’t available at any price, at least for a while: its batteries are…defective.  The credit is useless for it.

Maybe instead of renewing the ethanol subsidies, we can get Congress to eliminate the electric car subsidy and the requirement to dump ethanol into our gasoline, too.  Keep in mind that ethanol is hard on your car‘s engine.

Or am I hoping for too much change this year?