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In this morning’s Wall Street Journal, Princeton’s Alan Blinder suggests a way to increase fiscal stimulus, deliver aid to those who need it most and avoid increasing federal deficits–all at the same time. Here’s his plan, in his own words: Let the upper-income tax cuts expire on schedule at year end. That would save the government an estimated $75 billion over the next two years. However, it would also diminish aggregate demand a bit. So, instead of using the $75 billion to reduce the deficit, spend it on unemployment benefits, food stamps and the like for two years. That would surely put more spending into the economy than the tax hike takes out, thus creating jobs. How much more? Getting a numerical estimate requires the use of a quantitative model of the U.S. economy. In recent testimony before the House Budget Committee, Mark Zandi of Moody’s Analytics used his model to estimate that extending unemployment insurance benefits has almost five times as much “bang for the buck” as making the Bush tax cuts permanent. Based on his estimates, the budgetary trade I just recommended would add almost $100 billion to aggregate demand over the next two years—without adding a dime to the deficit.

Paul Krugman and James K. Galbraith agree that this is a time for fiscal stimulus, not austerity. But they differ on a larger question: do government deficits ever matter? Or is the government so special–by virtue of its ability to create money out of thin air–that its spending can exceed income forever, by any amount? In an interesting blog post (warning: not safe for the equation-challenged), the New York Times columnist and Nobel laureate Krugman argues that, carried to extremes, deficit spending by government can lead to runaway inflation. But, he adds, “we’re nowhere near those conditions now. All I’m saying here is that I’m not prepared to go as far as Jamie Galbraith. Deficits can cause a crisis; but that’s no reason to skimp on spending right now.” Krugman wrote this in response to testimony by Galbraith, a Levy senior scholar, to the federal Commission on Deficit Reduction. Galbraith responds in the comments by asserting that Krugman’s conclusion is the result of a modeling error. But his key graf comes earlier: If the government spent but declined to “borrow,” what would happen? Nothing much. Banks would hold their reserves as cash rather than bonds, and their earnings would be a bit lower. It is *not* true, as a rule, that people (or banks) move readily to substitute lumps of coal for… Read More

The Harlem Children’s Zone is an organization bent on addressing all the problems of poor families in its Manhattan catchment area.  The project involves many government and nonprofit programs and services that aim to improve the environment for disadvantaged kids outside of school. Established in 1997, it also includes a network of charter schools called, collectively, Promise Academy. Doctoral candidate Will Dobbie and economist Roland G. Fryer Jr., both of Harvard, recently published a careful study of the Zone’s  impact on student achievement. They’ve shown that high quality schools—with or without community investments in health, parenting, and early childhood program—boost student achievement, while community investments without high quality schooling have little effect. They’ve shown, to oversimplify, that schools matter. One is tempted to say: Of course they do! Then again, ever since James Coleman’s 1966 study, Equality of Educational Opportunity, which convinced people that family effects dwarfed anything schools could do to promote equality, the importance of schooling is always worth demonstrating. Interestingly, though this was not their primary focus, Dobbie and Fryer have also shown that money (doubtless well spent) is also vital in creating high quality schools. The successful HCZ schools Dobbie and Fryer studied spent $19,272 per student, while the median school district in New York State spent $16,171 and those at the 95th percentile of achievement… Read More

The sudden turn in the mood in Europe regarding the prospects of the global economy needs commenting. In this context, most European governments announced drastic cuts in government expenses in an effort to avoid following Greece to the precipice of default. It coincides with the outcome of the G20 deliberations a few days ago that dropped support for fiscal stimulus and emphasized the risk of having sovereign debts getting out of control. This turn is happening in an environment where the politicians seem to be incapable of directing stimulus to productive directions, while at the same time, the public continues to reject any tax increases to cover the future deficits that today’s stimuli may create. The critical issue is whether we need more and cautiously directed stimulus to enable the global economy to retain current economic activity, or whether we need a fiscal exit. Nobody would disagree with safety nets or government support to post-secondary education, investment in clean energy and new transport infrastructure. After all, these are all Keynesian measures indeed. Keynes never claimed either that his proposed policies can provide deleveraging overnight, or that they can correct the excesses that “Madoff economics” and unregulated markets usually bring about. But Keynes’s way might make deleveraging smoother and with the least possible negative repercussions, especially if appropriate monetary accommodation complements… Read More

The Wall Street Journal reports on signs that risky lending is once again on the upswing. For example: Credit-card issuers mailed 84.8 million offers of plastic to U.S. subprime borrowers in the first six months of this year, up from 43.7 million a year earlier, estimates research firm Synovate. Nearly 8% of loans for new cars in the latest quarter went to borrowers with the lowest range of credit scores, up from 6.2% in 2009’s fourth quarter, according to J.D. Power & Associates and Fair Isaac Corp. The lenders say they’re being careful–really!–and of course things aren’t as bad as they once were. But there are disturbing anecdotes of people who are essentially broke getting credit-card solicitations, and apparently these aren’t isolated incidents: Kathleen Day, a spokeswoman for the Center for Responsible Lending, said the consumer group is “seeing banks re-enter the subprime market at a steady clip and make loans to borrowers who don’t have the ability to repay.”

A Wall Street Journal “Heard on the Street” item plays up the early good news from Greece’s austerity program: In the first half, Greece’s budget deficit came in at €9.6 billion, down 46% from the same period of 2009, the Finance Ministry said this week. Revenues rose 7.2%, while spending fell by 12.8%. Revenue growth remains below target, but not all of the revenue measures have come into effect yet and spending cuts are well ahead. That continues the positive trend identified by the European Commission, IMF and European Central Bank in June’s interim review, and makes this year’s deficit target of 8.1% achievable. The writer’s conclusion is that perhaps a Greek tragedy can be averted after all. This assumes, of course, that the numbers can be believed.

A post in the Wall Street Journal’s Real Time Economics blog notes that counting research and development as investment rather than as an expense would have increased gross domestic product by 2.7 percent between 1998 and 2007 (they refer to new numbers from the BEA). If this were standard national accounting practice, then measured GDP would have grown 0.2 percent faster, or an average of 3 percent annually. It makes some sense to treat R&D as an investment, but this item begs the question: would anyone have been better off if we did?

People often say that the problem in Greece is profligacy. Greece, the story goes, is a nation living beyond its means. Reading the press, in fact, one gets the impression that Greeks must enjoy one of the highest standards of living in Europe while making the frugal Germans pick up the tab. In reality, Greece has one of the lowest per capita incomes in Europe, much lower than the Eurozone 12 or the German level. Furthermore, the country’s social safety net might seem generous by US standards but is truly modest compared to the rest of Europe. As to borrowing, Greece is far from unique in its level of overall indebtedness as a percentage of gross domestic product. So what’s the real problem? It all started when Greece embraced the Euro, which some saw as the country’s salvation. But as is so often the case, what once seemed a strength turns out to be weakness. The same might be said of Greek social programs; once seen as a pillar of the state, in hard times they automatically swell government deficits. Remember that as Europe slid into recession, tax revenue fell and social transfer payments (such as unemployment benefits) rose, opening a larger gap between tax receipts and spending. The same thing happened in the United States. But the United States… Read More

There is no alternative to free-market capitalism, Margaret Thatcher used to say, and about this, like so many things, she was wrong. In fact a variety of alternatives are functioning quite well, and a number of them are succeeding by operating according to the principles of the Solidarity Economy. What is the Solidarity Economy? It’s a movement that has brought hope to a world disillusioned by capitalism and too often unaware that economic activity can be conducted with respect for human decency and the planet on which we live. Its five key principles are solidarity, sustainability, equity in all dimensions, participatory democracy and pluralism. The Solidarity Economy isn’t a new idea, even for the United States. Economic practices that fall under the umbrella of the Solidarity Economy have been happening for a long time. They have been growing in recent years. Most people, often including the people practicing the alternatives, aren’t aware of how much alternative economic practice is already happening around them. The project of the U.S. Solidarity Economy Network (US-SEN, ussen.org) is to bring together the people who are practicing the principles of the Solidarity Economy (solidarity, sustainability, equity in all dimensions, participatory democracy and pluralism), disseminate best practices for achieving these principles, and encourage the deepening of economic practices along all these axes.

Under the new financial reform measure hammered out by Congressional negotiators, mortgage lenders “will have to check borrowers’ income and assets.” Here it is, in black and white. A regular sea change.

They stand out, don’t they? Things have been quiet in the Eurozone lately, but today the cost of insuring Greek government bonds set a new record by surging past $1 million (to cover $10 million for five years). The price is said to imply a 67 percent probability of default in the next five years. The full story is here.

The clock is ticking and right now first-time buyers have to close the deal in six days. The incentive is sweet: up to $8,000 from Uncle Sam. The Internal Revenue Service reported that $12.6 billion was credited to 1.8 million home buyers (the final toll will be higher as transactions in 2010 have not been filed yet, not to mention the inevitable fraud). Calculated Risk, a highly regarded blog that tracks these matters, suggests that six months of inventory is normal in the housing market. For new homes, in May, the level rose to 8.5 months from 5.8 in April as sales plunged. Things are little better in the market for pre-existing homes; there we find 8.3 months of supply, in part due to the non-stop flow of foreclosures and short sales. From the data, it seems that the tax credit program has stimulated the market, at least a little, and for awhile. My question to you is, should our uncle in Washington keep the program going? Pros: Propping up shaky home prices may encourage private spending and support aggregate demand. Aiding the real estate market in lowering inventories may keep prices from falling further and generate some construction jobs. Reaching a “normal” level of inventories may improve everyone’s expectations and thus create a virtuous cycle of self-fulfilling recovery. Cons: The tax credit… Read More