2 reads and something very funny 2/3/2010

1. The Job-Subsidy Plan

The President is asking Congress to enact a one-year $33 billion job-subsidy plan. An employer would receive a $5,000 tax credit in 2010 credit for increasing his labor force by one person and an additional subsidy for giving an employee a wage increase greater than the inflation rate. The total subsidy would be limited to $500,000 per employer, in the hope that the principal recipients would be small businesses. I do not know why the ceiling should be expected to have that effect. Even big businesses like $500,000 windfalls. If a big business happens to be increasing its hiring or its wages, why wouldn’t it claim the subsidy?

That point to one side, and disregarding also the abundant possibilities of gaming the program, stressed by Becker, the proposal is unlikely to be effective because it violates the economic principles that ought to guide stimulus programs.

The theory of stimulus is Keynes’s, is (in my opinion) sound, and is as follows. If, because a high rate of unemployment creates pessimism about the economic situation, people increase their savings at the same time that business is reducing its investing—and that is our situation today—the government can by financing projects through borrowing put the inert savings to work (inert because businesses aren’t borrowing people’s savings). The projects require workers, so unemployment falls, and with it pessimism and the cash hoarding, by consumers and businesses alike, that pessimism induces.

With Keynes’s theory understood, it becomes possible to list the principles of effective stimulus:

The stimulus must be large in order to make a substantial dent in unemployment. The $787 billion stimulus enacted last February may have been too small; a $33 billion jobs subsidy is a drop in the bucket.

The stimulus must be implemented before recovery from a depression or recession is well under way—otherwise the government’s borrowing to finance the stimulus will slow the recovery by pushing up interest rates. (That is, at some point in the recovery, business will resume investing and so will be competing with the government for capital.) If enactment of the job subsidy is delayed in Congress, or if procedures for preventing the gaming of the program are cumbersome, the subsidy expenditures may come too late to do any good.

The stimulus must be targeted on industries, and areas of the country, in which unemployment is high. Like the $787 billion stimulus, the job-subsidy plan flunks this test as well.

Most important, a stimulus is designed to stimulate demand, not supply. The economic problem for which a stimulus program is a solution is insufficient demand relative to the economy’s labor and other resources. Because of overindebtedness and continued weaknesses in the financial system, consumers and businesses are reluctant to spend. Businesses are reluctant to hire (that is one aspect of their reluctance to spend), so unemployment is high and wages are stagnant, which further depresses demand. The idea behind the stimulus is for government demand to take the place of the missing private demand. Government “buys” new roads, in lieu of consumers’ buying SUVs, and contractors meet the government’s demand by hiring unemployed construction workers. The job-subsidy plan is not demand-focused, and so is unlikely to contribute to the economic recovery. Suppose a firm in a depressed economy sells 100 earth-moving machines a year, and employs 200 workers. If the government tells the firm it can save $5,000 on its taxes by increasing its work force to 201, the firm’s total costs will increase (by the wages and benefits of the additional worker less $5,000), but its revenues will not increase because adding a worker does not increase the demand for its product.

There is an enormous amount of idle productive capacity in the U.S. economy at present. There is thus a case, as liberal economists such as Paul Krugman keep urging, for further stimulus spending. The problem is that such spending is irresponsible unless coupled with a credible commitment to repay, after the economy recovers, the money borrowed to finance the spending. Not only is there no such commitment; at present the only realistic prospect is of staggering deficits stretching indefinitely into the future. As a result there is at present no stomach for additional stimulus spending. The government is reduced to impotent gestures, of which the job-subsidy plan is one.

2. Inequality in times of crisis: Lessons from the past and a first look at the current recession

The debate on the adverse consequences of the economic crisis in the US flags rising unemployment as the most pressing issue. But crises are also bad for income distribution (Coile and Levine 2009). Households in which a bread-winner becomes unemployed face a significant decline in earnings. Thus rising unemployment mechanically causes the bottom of the earnings distribution to fall off relative to the median, increasing inequality in earnings.

A key question for the policy debate is to what extent this loss of earnings power at the bottom of the earnings distribution translates into a decline in living standards.

The figure starkly illustrates the fact that the households in the bottom percentiles of the earnings distribution suffer the largest earnings declines in recessions. Moreover, declines at the bottom of the earnings distribution can be very persistent. For example, earnings at the 10th percentile declined by 20% in the 1980-82 recession; they did not return to pre-recession levels until the late 1990s.

owever, labour earnings are not the only source of income for households. In particular, at the bottom of the earnings distribution, government and private transfers such as unemployment insurance, welfare, food stamps, and pension income are counter-balancing sources of income that tend to rise when earnings fall, thereby mitigating widening earnings inequality.

Compared to Sweden, the government in the US plays a smaller role, and taxes and transfers only partially offset widening earnings inequality in recessions. In particular, inequality in total household income increased during the recessions of the early 1980s and early 1990s.

Did these increases in income inequality translate into widening inequality in welfare and living standards? Because consumption of goods and services is more closely connected to welfare, we have examined the extent to which rising income inequality during recessions translates into consumption inequality. Figure 4 plots inequality in total after-tax income against inequality in non-durable consumption.²

Recent evidence shows how the distribution of resources changes in recessions in complex ways.

• The bottom of the earnings distribution falls off substantially relative to the median, causing earnings inequality to increase in recessions.
• This increase is substantially mitigated by government and private transfers. This mitigating effect, together with the fact that households can use borrowing and lending to smooth income declines, causes the consumption distribution to typically move very little during recessions.
• The current recession appears somewhat unusual. So far, consumption inequality has declined sharply, perhaps because the consumption-rich have been disproportionately hurt by declining asset prices.

3. From A Poll of Conservatives

I can't seem to get the whole table to show up. Follow the link on the title to see the whole chart.

I will let the numbers speak for themselves:

Question	Yes	No	Not Sure
Should Barack Obama be impeached?	39	32	29
Do you believe Barack Obama was born in the United States?	42	36	22
Do you think Barack Obama is a socialist?	63	21	16
Do you believe Barack Obama wants the terrorists to win?	24	43	33
Do you believe ACORN stole the 2008 election?	21	24	55
Do you believe Sarah Palin is more qualified to be president than Barack Obama?	53	14	33
Do you believe Barack Obama is a racist who hates white people?	31	36	33
Do you believe your state should secede from the United States?	23	58	19
Should openly gay men and women be allowed to teach in public schools?	8	73	19
Should contraceptive use be outlawed?	31	56	13
Do you believe the birth control pill is abortion?	34	48	18