Economics

I thought I recognized that name !

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Obama has announced his new appointment for economic adviser. It is a Princeton economist named Alan Kreuger. I am not an economist or an expert on economists but that name rang a faint bell. Then I saw that someone else had remembered him, too.

In a 1994 paper published in the American Economic Review, economists David Card and Alan Krueger (appointed today to chair Obama’s Council of Economic Advisers) made an amazing economic discovery: Demand curves for unskilled workers actually slope upward! Here’s a summary of their findings (emphasis added):
 
“On April 1, 1992 New Jersey’s minimum wage increased from $4.25 to $5.05 per hour. To evaluate the impact of the law we surveyed 410 fast food restaurants in New Jersey and Pennsylvania before and after the rise in the minimum. Comparisons of the changes in wages, employment, and prices at stores in New Jersey relative to stores in Pennsylvania (where the minimum wage remained fixed at $4.25 per hour) yield simple estimates of the effect of the higher minimum wage. Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent.”

This was tremendous news, especially for Democrats. Raising the minimum wage did not increase unemployment as classical economics had said since the issue first arose.

Unfortunately, their study was soon ripped apart by other economists who used more objective methodology.

It was only a short time before the fantastic Card-Krueger findings were challenged and debunked by several subsequent studies:
 
1. In 1995 (and updated in 1996) The Employment Policies Institute released “The Crippling Flaws in the New Jersey Fast Food Study”and concluded that “The database used in the New Jersey fast food study is so bad that no credible conclusions can be drawn from the report.”
 
2. Also in 1995, economists David Neumark and David Wascher used actual payroll records (instead of survey data used by Card and Krueger) and published their results in an NBER paper with an amazing finding: Demand curves for unskilled labor really do slope downward, confirming 200 years of economic theory and mountains of empirical evidence (emphasis below added):

I would suggest reading the entire post which demolishes the study by Kreuger and Card. This is the new Chairman of the Council of Economic Advisers. More academics with no real world experience and this one is incompetent even as an academic. Spengler has a few words on the matter, as well.

Would Creating Hyperinflation be Treason ?

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Last week Rick Perry made a comment that got wide attention in mainstream media.

Mr. Perry brought the Fed directly into the campaign debate Monday night by saying it would be “almost … treasonous” for the central bank to play politics by expanding the money supply.

“If this guy prints more money between now and the election,” Mr. Perry said in Cedar Rapids Monday night, without naming Mr. Bernanke, “I don’t know what y’all would do to him in Iowa, but we—we would treat him pretty ugly down in Texas.”

Today, on Meet the Press, Peggy Noonan showed that she is completely clueless on this subject by going off on a riff about how a president has to appear “nice.” She never did address the subject.

Others, who appear to know more about monetary policy had a somewhat different take.

Thomas Gallagher, a principal and economic policy analyst at the Scowcroft Group in Washington who advises Wall Street firms, said Mr. Perry’s comments will be the first thing many investors learn about his candidacy. And the comments are “drawing a fair bit of attention.”

“Voters may not care as much, but investors, like the chattering class, expect a candidate to know what he’s talking about when he talks about the Fed,” he said. “It’s one thing to oppose what the Fed is doing, but it’s another to call it almost treasonous.”

I don’t know that treason was the right word to use but the point is that the Fed is feeding inflation which is far more apparent to those of us who buy our own groceries than most politicians. Ron Paul has been railing at the Fed for years and he is gaining allies.

Libertarian Rep. Ron Paul, who fell 152 votes short of winning the Iowa GOP’s straw poll on Saturday, has been railing against the Fed for years, and former House Speaker Newt Gingrich has joined in with an “Audit the Fed” petition. Other conservatives complain that the Fed’s policy of using monetary policy to stimulate the economy, which it indicated last week it might renew, could be sowing the seeds of inflation.

I would say we are past the “seeds” stage.

The US Treasury has been the largest buyer of new Treasury bonds. How can this be ? The Federal Reserve is printing more money that is then used to buy the debt. Is this an example of the elusive perpetual motion machine ?

Ӣ Turning government bonds into circulating money is called monetizing the national debt.

”¢ Quantitative easing is a euphemism for creating money out of thin air. In the vernacular, we call it “printing money,” even though it really has nothing to do with the U.S. Bureau of Engraving and Printing.

”¢ The way it’s supposed to work is that the Fed buys securities in the open market, paying with a government “check.” (That’s how the money is created.) The sellers deposit those checks into their banks. The banks redeploy those deposits as loans to consumers and business. The money supply expands and, in turn, so does the economy.

What effect will this have on the dollar ? The economy hasn’t exactly expanded while this has been going on.

One factor may be saving us the worst of the effects of this reckless policy. Troubles in Europe and elsewhere in the middle east have caused many investors to engage in a “flight to quality,” although I wouldn’t call the dollar “quality” right now. The Euro, however, seems to be in even worse trouble.

We’ll see what effect Perry’s comment has on his candidacy.

Cokie Roberts Blurts Out the Truth

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I watch the Sunday talk shows, usually flipping back and forth between them. I was struck today by a comment made by Cokie Roberts on ABC’s This Week. In the discussion of the downgrade of US Treasury bonds, she was arguing with a tea party affiliated Congressman from Utah named Chaffetz and she made the following statement: (The comment begins at 8:55)

The reason why they (S&P) like France and England is because they have parliamentary government,   because the majority gets what it wants. There is no divided government where both parties have to agree.

I thought that an astonishing but revealing statement. First, Britain and France have not been exemplars of fiscal probity the past 50 years, with the exception of Margaret Thatcher’s era. She even mentioned that England now has an austerity program. Also, she didn’t mention that Obama had undivided government for two years and spending increased 24%. In fact, there has been no national budget for two years, probably because the Democrats did not want to expose their plans prior to the 2010 election.

Her second comment was also revealing:

The problem is with the US Constitution.

There, in a nutshell, is the Democrats’ complaint. The Constitution restricts the ability of one political party to spend at will without regard of the consequences. God knows we have had excessive spending since 1965 in this country under both parties and with the Constitution intact. But, for Democrats, that has not been enough. I don’t think I have seen a more revealing comment.

An Explanation for Obama’s actions

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The debt ceiling debate has dragged on creating frustration and some anxiety about the economic consequences of default. President Obama has even threatened to withhold Social Security checks, claiming there would be no money for payment. Through most of this he has seemed to me to be unserious about the matter and using it chiefly to try to improve his chances for re-election. Fred Barnes has now come up with what I consider a good explanation for his behavior, including the last moment maneuvers yesterday.

First, the trade treaties:

The path to ratification by Congress was greased after President Obama renegotiated trade treaties with South Korea, Colombia, and Panama. Obama would supply Democratic votes. Republicans were already on board, President Bush having put together the treaties in the first place. It had the look of a done deal.

It wasn’t. In May, the White House suddenly insisted the treaties be accompanied by roughly $1 billion in Trade Adjustment Assistance, or TAA as it’s known in Washington. Organized labor was demanding TAA funds be set aside for workers whose jobs might be lost as a result of the treaties. Obama took up the cause.

Then there was the oil pipeline from Canada:

The Keystone XL pipeline from the oil sands in Canada to refineries on the Gulf Coast is another win-win issue for Obama, if only he’d embrace it. Canada is America’s leading foreign supplier of oil. The more Canada exports to the United States, the less we’re forced to rely on unfriendly folks in the Middle East and on Latin American countries (Mexico, Venezuela) whose oil production is declining. With the new pipeline, Canada would increase its exports by as much as 700,000 barrels a day. (The United States consumes 10-11 million barrels daily.)

A permit to build the pipeline was requested nearly three years ago by TransCanada. Because it would cross an international border, approval must be granted by the State Department. This was expected to be a snap, particularly after gasoline prices reached $4 a gallon. White House aides thought so, and Secretary of State Hillary Clinton indicated she was ready to approve it.

Then the environmental lobby, led by the Natural Resources Defense Council, began a campaign against approval, and the Environmental Protection Agency joined in. It criticized the State Department’s first environmental impact statement, which found the pipeline would have little effect on the environment. Clinton buckled, and a second impact statement was ordered. Last month, EPA said the new study was “inadequate.”

Both of these initiatives promised thousands of new jobs and would seem to be helpful to Obama in his quest for a second term. In both cases, a left wing member of his base intervened and his support collapsed.

Now, the debt ceiling:

The Speaker and the President had nearly agreed on a plan that included $800 billion in “revenue enhancements” but did not raise rates. What happened ?

House Speaker John Boehner’s (R., Ohio) office is pushing back against White House claims that the new revenue in the “framework” being discussed in the now defunct negotiations would have been generated by letting current tax rates expire. “That is simply false,” writes Boehner spokesman Michael Steel.

In reality, Steel writes, the White House offered a “ceiling” of $800 billion in new revenue over 10 years that would be achieved through comprehensive tax reform (e.g., eliminating loopholes, credits and deductions) in a way that would stimulate economic growth. This would not constitute a tax increase.

Following the release of the Gang of Six proposal, however, the White House then insisted on an additional $400 billion in actual tax increases, for a total of $1.2 trillion in revenue that would become the new “floor” for revenues. Additionally, the administration backed away from several aspects of the tax reform package they had already agreed to, including a protection against tax hikes on small businesses and a guarantee that they would only be three tiers of tax rates, the highest of which would be below 35 percent.

In regard to Social Security, the two sides had agreed on a change in the way the government calculates inflation (the so-called “chain CPI”) that would extend the program’s solvency. However, the White House reneged on a previously agreed-upon solvency target and offered a weaker target that would yield 25 percent less in savings.

What had happened was that the “Gang of Six” report was released and the revenue (tax) increases there looked better to Obama so he reneged on the pending deal with Boehner. There was also considerable discussion that Democrats were furious with him because he had not insisted on tax increases. Revenue from loophole closing was not enough.

No. I think what happened is Congressional Democrats got a whiff of a possible deal where you get entitlement cuts and tax reform, say, next year — which might increase revenue or might not — and they panicked because a) they have a religious belief in raising the taxes. If you don’t have that, you can’t have a deal, so it created a kind of a theological panic.

Obama, it seems, cannot stand up to the rest of his party. He will negotiate but once some interest group objects, he is gone. No deal.

It’s a good thing the Soviet Union is gone.

Poverty and Statistics

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I am repairing a gap in my education by reading Thomas Sowell’s classic, Vision of the Anointed, which was written in 1992 but is still, unfortunately, as valid a critique of leftist thought as it was then. As an example of his methods, he constructs an experiment in statistics. This concerns poverty and inequality and, in particular, the poverty of leftist thinking.

He imagines an artificial population that has absolute equality in income. Each individual begins his (or her) working career at age 20 with an income of $10,000 per year. For simplicity’s sake, we must imagine that each of these workers remains equal in income and at age 30, receives a $10,000 raise. They remain exactly equal through the subsequent decades until age 70 with each receiving a $10,000 raise each decade. He (or she) then retires at age 70 with income returning to zero.

All these individuals have identical savings patterns. They each spend $5,000 per year on subsistence needs and save 10% of earnings above subsistence. The rest they use to improve their current standard of living. What statistical measures of income and wealth would emerge from such a perfectly equal pattern of income, savings and wealth?
 

Age

Annual Income

Subsistence

Annual Savings

Lifetime Savings
 
20

$10,000

$5,000

$500

$0
30

$20,000

$5,000

$1,500

$5,000
40

$30,000

$5,000

$2,500

$20,000
50

$40,000

$5,000

$3,500

$45,000
60

$50,000

$5,000

$4,500

$80,000
70

$0

$5,000

$0

$125,000

 

Unfortunately, even with an Excel spreadsheet, I cannot get these numbers to line up properly.

[Jonathan adds: Many thanks to Andrew Garland for providing html code to display these numbers clearly.]

Now, let us look at the inequities created by this perfectly equal income distribution. The top 17% of income earners has five times the income of the bottom 17% and the top 17% of savers has 25 times the savings of the bottom 17%. That is ignoring those with zero in each category. If the data were aggregated and considered in “class” terms, we find that 17% of the people have 45% of the all the accumulated savings for the whole society. Taxes are, of course, ignored.

What about a real world example ? Stanford California, in the 1990 census, had one of the highest poverty rates in the Bay Area, the largely wealthy region surrounding San Francisco Bay. Stanford, as a community, has a higher poverty rate than East Palo Alto, a low income minority community nearby. Why ? While undergraduate students living in dormitories are not counted as residents in census data, graduate students living in campus housing are counted. During the time I was a medical student, and even during part of my internship and residency training, my family was eligible for food stamps. The census data describing the Stanford area does not include all the amenities provided for students and their families, making the comparison even less accurate. This quintile of low income students will move to a high quintile, if not the highest within a few years of completion of graduate school, A few, like the Google founders, will acquire great wealth rather quickly. None of this is evident in the statistics.

Statistics on poverty and income equality are fraught with anomalies like those described by Professor Sowell. That does not prevent their use in furthering the ambitions of the “anointed.”