I’d like to draw your attention to an amusing video from Reuters financial columnist Felix Salmon on what to do about the economy. It’s sort of Schoolhouse Rock meets Monty Python meets Business Week in Review. It doesn’t appear to be embeddable or I’d embed it. It’s short so cruise on over there and take a look.
Essentially, his message has the same core message as Federal Reserve Board Member Kevin Warsh’s op-ed in the Wall Street Journal I commented on a bit ago: monetary policy as effected by the Federal Reserve is no substitute for action by the Congress. Unlike Mr. Warsh, Mr. Salmon’s view is that the preferred action would be another spending bill but he’s skeptical that will happen given the likely mood in the next Congress so he’s willing to settle for a tax cut.
That’s essentially the reasoning I’ve been using when pitching the idea of suspending (or eliminating) FICA, what’s usually referred to as a payroll tax holiday. The way the tax code is structured at this point people in the two lowest income quintiles don’t pay much in income taxes so cutting marginal tax rates mostly benefits the top two income quintiles, hence tax cuts for the rich.
Preserving the Bush tax cuts will at best preserve the status quo. Only in Washington, DC would anyone characterize maintaining the status quo as a stimulus.
According to the Department of Labor employment is, essentially, moving sideways.
Suspending FICA would immediately reduce the cost of employing workers earning at or below FICA max (currently $106,800) by 15%. In rough terms that means you could employ seven workers for what you used to pay to employ six workers. I think that at least at the margins that would itself increase employment. But that’s where the critique of those who say that our (only) problem is aggregate demand comes in. Without more sales or the prospect of more sale there won’t be any work for additional workers to perform. Without adequate work for the prospective new workers to perform, employers won’t hire. That’s why the AD boosters, whose dean is Paul Krugman, insist on more and larger federal spending programs. Other than for reasons of their non-economic preferences, I mean.
By nearly anybody’s reckoning the first stimulus package was a disappointment. Only by handwaving and strained apologetics can it be construed as a success: whatever statistics you muster to defend it, it did not have the results that its proponents predicted.
IMO that tepid, at best, success was entirely predictable. Funds that were directed at state and local governments were used to prop up the status quo. Cuts in taxes were saved or used to pay down debt, and what is referred to as infrastructure spending mostly went to earners in the highest income quintiles and were saved or used to pay down debt. We don’t build roads and bridges the way we did 80 years ago with large gangs of unskilled and semi-skilled workers and animals. We use much smaller teams of skilled and semi-skilled workers (and a few unskilled workers) and lots of machines. The machines have already been bought and capitalized—we have enormous over-capacity in construction.
The Fed hasn’t fared a great deal better. Interest rates have been near zero for some time and appear likely to stay there for the foreseeable future. The first round of quantitative easing was, at best, a qualified success. The second round may have the perverse consequence of stimulating employment in places other than the United States:
Chairman Ben S. Bernanke and his colleagues appear to be fueling a foreign-investment surge, underscoring the difficulty of stimulating the economy through monetary policy with interest rates already near record lows.
“You’re seeing leakage from quantitative easing,” said Stephen Wood, chief market strategist for Russell Investments in New York, which has $140 billion under management. “That leakage is going into emerging markets, commodity-based economies, commodities themselves and non-U.S. opportunities.”
U.S. corporations have issued more than $1.07 trillion in debt so far this year, according to data compiled by Bloomberg. Foreign companies also are tapping U.S. markets for cheap cash, selling $605.9 billion in debt through Nov. 15 compared with $371.8 billion for all of 2007, before the Fed cut the overnight bank-lending rate to a range of zero to 0.25 percent.
To the extent that QE2 increases commodity prices it may actually reduce employment.
It’s not entirely clear to me what sort of spending program would create jobs here in the short run. There are plenty of ideas for creating jobs in the long run but, as I’ve said before, God send us a cure—the disease is already here. More consumer spending might create a few jobs in retail but most of the jobs created would probably be in China. Boosting business spending might have the same effect.
Infrastructure spending (which I think we should start referring to as mid-20th century infrastructure spending) won’t create lots of jobs. As people finally noticed there just aren’t that many shovel-ready projects, and, worse, there aren’t very many qualified vendors and those vendors have incentives to space the work out so they can execute it with the staff they have rather than taking on new staff.
Healthcare spending won’t create lots of jobs. Employment in that sector is relatively inelastic. Under the circumstances pouring more money into that sector just pays the people who are already in that sector more and may have the perverse effect of increasing the cost of future healthcare.
Wishing that we could return to the days of the housing bubble probably won’t create a lot of jobs, either, if only because wishing won’t make it so.
Kevin Warsh was right: we need to make substantial changes to our trade, fiscal, and regulatory policies. We need to reorient the relationship between business and government so that it’s more productive and less adversarial and cozy by turns.
The preferred solutions appear to be dreaming of winning the lottery, hoping that human nature will change, and phantasizing that the Fed will pull a rabbit out of its hat.