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Expect one thing from President Obama’s speech on Thursday: a mini ARRA, a smaller version of essentially the same stimulus plan as that of 2009. He will probably call for putting the unemployed construction workers to work on infrastructure projects, he will propose tax incentives to firms to hire the unemployed, he will keep pushing for the weatherization of buildings and more funding to teachers and schools. He will keep advocating a free trade agenda, whatever form that might take. And if informed pundits are correct, he will ask for about a third of the ARRA funds, around $300 billion. In 2009 ARRA passed a total of $787 billion (which was extended to $840 billion). About a third was allocated to tax cuts, another third went to entitlements and the remaining third (about $275b of which $205b have been disbursed) went to finance various projects through grants, loans and contracts—yes, the same weatherization projects he was advocating at the beginning of his presidency, the same teacher retention programs, school renovations, the same subsidies to firms for (true, mostly green) energy production. It does not appear that we will see much that is new tomorrow, but the approach will be much more timid, given the deficit phobia that has gripped Washington.  To be clear, the Recovery Act worked, but had a… Read More

Leading up to today’s jobs speech the internal debates in the administration (or so the leaks tell us) have been over whether to propose something minimal that might have a chance of passing, or something bold, knowing that nothing has a chance of getting through Congress anyway. Randall Wray and Stephanie Kelton demonstrate what it would look like to “go big”: The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements. The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work… Read More

In a post on Ezra Klein’s blog entitled “The recession’s gender gap: from ‘man-cession’ to ‘he-covery’,” Suzie Khimm notes that the recovery is happening for men but not so much for women. She quotes an Institute for Women’s Policy Research paper that refers to our research, found in this policy brief. Early childhood education and home health care represent great opportunities for improving quality of life for the care recipients as well as for the people who would become employed under these proposals. I will be listening for some mention of them by President Obama tomorrow night.

“There’s a 60 percent probability that most advanced economies will fall into a recession, while authorities are running out of options to provide emergency support.” — Bloomberg News today, describing the views of Nouriel Roubini This forecast from a sometimes-prescient and widely quoted economist brings to mind a question that many people now find irrelevant. Which should we policymakers choose, option A or option B? How about doing whatever is necessary to balance the government’s budget? Increasingly, policymakers believe that is their only option. In some countries, these policymakers may be right. For them, options A through Z are to raise taxes or cut spending. This is what happens when (1) tax revenues are weak, (2) money is needed to make payments on government debt, and (3) the country in question does not or cannot print its own currency and cannot make reserves for its own banks. Here in the United States, point (3) above does not apply. Hence, the federal government can issue any amount of securities, with the Fed purchasing them if necessary, as long as Congress is willing to keep increasing the debt limit. Unfortunately, however, the stimulus package of 2009 is wearing off, and Congress and the President have not acted quickly enough to increase spending or reduce taxes. As a result, combined government employment at… Read More

Economist:  “The economists who studied this were quite surprised to find that fiscal policy in recessions was reasonably effective.  It is just that folks tried a first punch that was too light and that generally we didn’t get big measures until well into the recession.” Congressman:  “That is precisely my point.  That is why I like my porridge hot. I think we ought to have this income tax cut fast, deeper, retroactive to January 1st, to make sure we get a good punch into the economy, juice the economy to make sure that we can avoid a hard landing.” The identities of these tiresome Keynesians?  Kevin Hassett of the American Enterprise Institute and Congressman Paul Ryan of Wisconsin—speaking in 2001. From a purely predictive standpoint, it makes one wonder:  assuming that control of Congress doesn’t change much, are the odds of additional fiscal stimulus higher if there is a Democratic or a Republican President in 2013?

Thomas Masterson and Pavlina Tcherneva were interviewed by the Huffington Post for an article on job creation policy.  Tcherneva discussed the idea of a modern-day WPA, echoing a call she made at the outset of the Obama administration (in this policy note) for the government to provide an explicit employment guarantee targeting the unemployed.  Masterson highlighted his research with a team at the Levy Institute on the employment and distribution benefits of investing in social care services like early childhood care and home health care for the elderly, and poured cold water on the idea of providing tax incentives for new hiring (“If they can’t sell the stuff that they can make now, then why are they going to hire more people?”).

According to wsj.com, the S&P 500 stock price index stood at 1,218.89 at the close of the trading day on Wednesday afternoon, after a month that saw much turmoil in the financial markets. Combining monthly data from the website for Robert Shiller’s book Irrational Exuberance with the average unadjusted closing value for August (closes from Yahoo! Finance), last month’s percentage drop of –10.6 percent was the 26th largest in the 1,687-month period from February 1871 to August 2011.  Shiller’s dataset includes some very large drops, including –26.5 percent for November 1929, the worst in the sample. Some basic theories in finance rest upon the assumption that returns and/or changes in prices can be modeled as random draws from a normal distribution, the familiar bell-shaped curve used by statisticians. The late scientist and mathematician Benoît Mandelbrot showed that many financial data series had so many large increases and decreases that they could not be modeled in this way. (For a posthumous appreciation of Mandelbrot’s work, see science writer James Gleick’s article in the New York Times Magazine.) Mandelbrot hypothesized that many data sets could instead be modeled with the “heavy-tailed” distributions referred to as alpha-stable or stable-Paretian. These distributions allow for many “outliers,” or extreme observations.

Conversations surrounding eurozone disintegration have largely focused on the prospect of Greece making its exit, but the publication of this Hans-Olaf Henkel op-ed in the Financial Times puts the possibility of a German departure front and center.  For an analysis of the consequences should Germany revert to a national currency, see this Levy Institute policy note put together by Marshall Auerback.

All to the same place? You might be excused for thinking so after perusing Tyler Cowen’s post Why didn’t the stimulus create more jobs?, but you would be wrong. First let’s look at Cowen’s post for some obvious red flags. About the number of people hired using stimulus funds who were already employed, Cowen says: You can tell a story about how hiring the already employed opened up other jobs for the unemployed, but it’s just that — a story.  I don’t think it is what happened in most cases, rather firms ended up getting by with fewer workers. OK, so the substance of this is he doesn’t like one story, he prefers another. I quite understand why, Cowen being who he is. I happen to like the other story, myself. However, one might want actual proof rather than preferences (dear as they are to neo-classical economists). A second point requires reading the two studies Cowen refers to. Cowen says that “There are lots of relevant details in the paper but here is one punchline: ‘hiring people from unemployment was more the exception than the rule in our interviews.’” Interesting choice. Especially given that the first bullet point in their summary of results is: “ARRA funds led to worker hiring and retention.” And that is the point after all. The… Read More

From an intriguing interview with David Graeber, author of Debt:  The First 5,000 Years, regarding the history of money and debt: Yes there’s a standard story we’re all taught…  It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money. … Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. … So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later… Read More

There appears to be a standoff brewing over renewal of the federal gas tax.  The tax traditionally funds highway infrastructure projects and is due to be extended September 30th.  But a group in Congress, led by Senator Tom Coburn, is maneuvering to block the extension.  A delay of just ten days, Ron Klain writes in Bloomberg, would mean “the permanent loss of $1 billion in highway funding (and layoffs for thousands of workers).” So not only must we accept the fact that there will be no new infrastructure or public works programs—certainly nothing on a large scale that might begin closing the current employment gap—but there will be an uphill political battle just to maintain existing funding.  In other words, the policy battleground has shifted, such that the choice is not between maintaining the inadequate status quo and investing in a new public works program, but between the status quo and less infrastructure investment.  It is difficult to come up with novel ways of explaining why this is ridiculous.  The fact that the real yield on Treasuries is negative gives us an excuse to rehash the case.

The Congressional deficit reduction committee has numerous government programs on the chopping block, and we may soon see some very severe spending reductions. The committee must agree upon, and Congress must pass, $1.2 trillion in spending cuts and/or tax increases by November 23, or automatic, across-the-board spending cuts will go into effect in 2013. I hope that cuts to Social Security are not among the committee’s recommendations, but fiscal hawks are beating the drum harder than ever with their insistence that spending on the program must be reduced soon. The Social Security issue came to mind a week or two ago, when I read James B. Stewart’s article in the New York Times on possible changes in the way the federal government taxes certain kinds of investment income.  Stewart’s article makes the point that some of the wealthiest taxpayers benefit greatly from the special tax rate of 15 percent that currently applies to capital gains* and dividends: “The IRS reports that for taxpayers with the top 400 adjusted gross incomes, capital gains in 2008 amounted to an eye-popping average of $154 million for each of these taxpayers…and this in a year when the stock market plunged.” Suppose the government taxed capital gains at the same rate as “ordinary income” (wages, salaries, most interest payments, etc.). For the 400 ultra-wealthy taxpayers… Read More