Tuesday, August 10, 2010
"How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it."--Adam Smith; The Theory of Moral Sentiments
The potential savings Mr. Gates outlined are likely to be relatively modest in the context of a total Pentagon budget, including war fighting costs, projected to top $700 billion next year. The most significant step — in symbol and in substance — was his plan to close the military’s Joint Forces Command in Norfolk, Va.
The command includes about 2,800 military and civilian positions supported by 3,000 contractors at an annual cost of $240 million. Its responsibilities, which include managing the allocation of global forces and running programs to press the armed services to work together on the battlefield, will be reassigned, mostly to personnel working under the chairman of the Joint Chiefs of Staff at the Pentagon.
Mr. Gates also called for a 10 percent annual reduction in spending on contractors who provide support services to the military, including money for intelligence-related contracts, and he placed a freeze on the number of workers in the office of the secretary of defense, other Pentagon supervisory agencies and the headquarters of the military’s combat commands.
And he went after one of the military’s most sacrosanct personnel structures, placing a cap on the number of generals, admirals and senior civilian positions.
Beyond that immediate freeze, the Defense Department will move to cut at least 50 general and admiral posts and 150 senior civilian positions over the next two years. There are now just under 1,000 general and flag officers, a growth of more than 100 since the attacks of Sept. 11, 2001.
For months, Mr. Gates has been arguing that if Congress and the public allow the Pentagon budget to grow by 1 percent a year, he can find 2 percent or 3 percent in savings within the department’s bureaucracy to reinvest in the military — and that will be sufficient to meet long-term national security needs.
“Our country is still fighting two wars, confronts ongoing terrorist threats around the globe, and faces other major powers investing heavily in their military,” Mr. Gates said Monday. “It is important that we not repeat the mistakes of the past, where tough economic times or the winding down of a military campaign leads to steep and unwise reductions in defense.”
But members of Congress tend to fight to protect jobs and spending in their districts, and some of the proposed cuts — in particular eliminating the Joint Forces Command — are certain to earn strong opposition.
Just minutes after Mr. Gates announced his initiatives at a Pentagon news conference, Senator Jim Webb, a Virginia Democrat who is on the Armed Services Committee, released a statement vowing to “carefully examine the justifications for this decision as well as its implications for the greater Norfolk community.”
Representative Ike Skelton, the Missouri Democrat who is chairman of the House Armed Services Committee, said the proposals “appear to efficiently find savings within the defense budget without taking away resources from our war fighters.”
But the ranking Republican on the committee, Representative Howard P. McKeon of California, said, he was unconvinced “that these savings will be reinvested into America’s defense requirements and not harvested by Congressional Democrats for new domestic spending and entitlement programs.”
Assessing his prospects for convincing Congress not to use its power over budgets to block these efforts, Mr. Gates said, “Hard is not impossible.”
Two other Defense Department agencies will also be closed, with their functions eliminated or reassigned. They are the office of the assistant secretary of defense for networks and information integration, with 200 employees, and the Business Transformation Agency, with 350 people.
Pentagon spending has averaged a growth rate of 7 percent a year over the last decade, adjusted for inflation (or nearly 12 percent a year without adjusting), including the costs of the wars. Mr. Obama has asked Congress for an increase in total spending next year of 2.2 percent, to $708 billion — 6.1 percent higher than the peak in the Bush administration.
Mr. Gates bemoaned that “this department is awash in taskings for reports and studies,” and he ordered a freeze on the number of such internal assessments. For those that remain and others ordered by Congress, the Pentagon will publish the cost of preparation in each document.
Mr. Gates has already canceled or trimmed several dozen weapons programs, with long-term savings, based on projections of what the programs would have cost, predicted at $330 billion.
Mr. Gates has ordered the armed services and the Pentagon’s agencies to find $100 billion in spending cuts and efficiencies over the next five years: $7 billion for 2012, growing to $37 billion annually by 2016.
Mr. Gates was asked at the end of his briefing what would happen to Gen. Ray Odierno, who is ending a command tour in Iraq to take over the Joint Forces Command, now slated to be closed.
“I’ve told Ray that his assignment at JFCOM is essentially the same as his assignment in Iraq, and that is to work himself out of a job,” Mr. Gates said. “And then I’ll find a new and better one for him.”
A few articles of interest ...
From the BEA: Personal Income for Metropolitan Areas, 2009Personal income declined in 2009 in most of the nation’s metropolitan statistical areas (MSAs), according to estimates released today by the U.S. Bureau of Economic Analysis.The per capita income in my MSA fell 3.8% last year. From Travis Berge and Oscar Jorda at the San Franscisco Fed: Future Recession RisksAn unstable economic environment has rekindled talk of a double-dip recession. The Conference Board’s Leading Economic Index provides data for predicting the probability of a recession but is limited by the weight assigned to its indicators and the varying efficacy of those indicators over different time horizons. Statistical experiments with LEI data can mitigate these limitations and suggest that a recessionary relapse is a significant possibility sometime in the next two years.The authors make some adjustment to the LEI, including removing the yield curve:However, the term structure may not presently be an accurate signal. Monetary policy has been operating near the zero lower bound to provide maximum monetary stimulus. In addition, the Greek fiscal crisis has generated a considerable flight to quality that has pushed down yields on U.S. Treasury securities. Indeed, ... omitting the rate-spread indicator generates far more pessimistic forecasts. For the period 18 to 24 months in the future, the probability of recession goes above 0.5, putting the odds of recession slightly above the odds of expansion. From Ben Bernanke (1999): Japanese Monetary Policy: A Case of Self-Induced Paralysis?* (via Paul Krugman: Self-induced Paralysis) There is quite a bit about deflaton and monetary policy in this 1999 paper from Ben Bernanke, including arguing for a higher inflation target of 3% to 4%. Bernanke even made some "helicopter drop" comments before his well known speech in 2002: Deflation: Making Sure "It" Doesn't Happen Here From the 1999 paper:An alternative strategy, which does not rely at all on trade diversion, is money-financed transfers to domestic households—-the real-life equivalent of that hoary thought experiment, the “helicopter drop” of newly printed money. I think most economists would agree that a large enough helicopter drop must raise the price level.And relevant to the FOMC meeting tomorrow:A nonstandard open-market operation ... is the purchase of some asset by the central bank (long-term government bonds, for example) at fair market value. The object of such purchases would be to raise asset prices, which in turn would stimulate spending (for example, by raising collateral values). I think there is little doubt that such operations, if aggressively pursued, would indeed have the desired effect ... From Professor Tim Duy on the FOMC meeting tomorrow: Waiting for Nothing?Incoming data give the Fed a green light to ease further. There is frequent chatter from unnamed sources that the Fed can do more and will consider more at this Tuesday's FOMC meeting. The public stance of Fed officials is recent weeks has tended to downplay the necessity for action at this juncture. This combination leaves the outcome of this week's FOMC meeting in doubt. My baseline expectation is that the FOMC statement acknowledges the weakness in recent data, but leaves the current policy stance intact. There is a nontrivial possibility that the Fed either implicitly or explicitly ends the policy of passive balance sheet contraction. I believe it very unlikely that the Fed sets in motion an expansion of the balance sheet.There is much more in Duy's piece.
From the Association of American Railroads: Rail Time Indicators. The AAR reports traffic in July 2010 was up 4.1% compared to July 2009 - and traffic was 14.6% lower than in July 2008.Click on graph for larger image in new window. This graph shows U.S. average weekly rail carloads (NSA). Traffic increased in 14 of 19 major commodity categories year-over-year.From AAR:• U.S. freight railroads originated 1,122,308 carloads in July 2010, an average of 280,577 carloads per week — up 4.1% from July 2009 (see chart) but down 14.6% from July 2008 on a non-seasonally adjusted basis. • On a seasonally adjusted basis, U.S. rail carloads rose 3.2% in July 2010 from June 2010 after falling 1.2% in June 2010 and 0.9% in May 2010. The seasonally adjusted weekly average of 289,320 carloads in July 2010 was the highest such figure since November 2008.As the graph above shows, rail traffic collapsed in November 2008, and now, a year into the recovery, traffic has only recovered part way. Seasonally there is usually a decline in traffic in July, so seasonally adjusted traffic increased last month. However traffic is only up 4.1% compared to July 2009.
excerpts with permission
If approved by voters in 2012, it is expected that the sales tax would generate about $7 billion over its 10-year life span. So the big test will be how those $7 billion will be invested.
The framework for making those decisions is beginning to come light.
On Thursday, Todd Long, director of planning for the Georgia Department of Transportation, released the “draft” criteria that will be considered in coming up with the project list.
People need to keep in mind that the sales tax will only raise about one-tenth of the money that the region estimates is needed to meet most of transportation needs.
The Regional Transit Committee has estimated that it would cost about $55 billion just to implement a metrowide transit plan as outlined in Concept 3.
So the tug-of-war of how that money will be divided will keep everyone busy between now and next year, when that project list is expected to be presented to the public.
At the Sustainable Atlanta Roundtable meeting Friday morning, Long summarized the criteria that is being put in place.
“The projects have to be strategic in nature,” Long said as part of a panel discussion on Georgia’s Transportation Future. “The projects have to be deliverable in the period of the tax. And projects have to be appealing to the public.”
The criteria also puts together a minimum and maximum range of what can be spent on road, transit and other transportation projects. For example, the range for roadway capital is between 20 to 50 percent. The range for transit capital is between 10 and 40 percent. The range for transit operations and maintenance is between 5 and 20 percent.
The balance would be spent on safety, traffic operations, freight and logistics, non-motorized transportation, aviation and roadway and bridge maintenance.
In other words, according to the criteria, the share that transit could get is as low as 15 percent and as high as 60 percent.
The Georgia Department of Transportation is working with its counterpart in Tennessee to seek $34 million in federal funds to build a high-speed rail line linking Atlanta with Chattanooga, Tenn.
Earlier this summer, the Federal Railroad Administration announced that states could apply for funding through the U.S. High Speed Intercity Passenger Rail program created by Congress last year. The money would be used to plan and implement high-speed rail service along approved corridors.
“Even before the federal … program was announced, Georgia was already planning several related projects,” State Transportation Commissioner Vance Smith said Monday in a prepared statement. “We expect to fit right in.”
In May, the State Transportation Board voted to seek $14.5 million in federal planning grants for three other high-speed rail projects.
The Georgia DOT is working with other Southeastern states on a rail line linking Atlanta and Charlotte, N.C., and a line between Atlanta and Macon that would continue on to Jacksonville, Fla.
The third project approved as part of the funding application authorized in May calls for an in-state rail loop linking Atlanta, Athens, Augusta, Savannah and Macon.
Georgia received short shrift earlier this year when President Barack Obama announced that $8 billion in federal stimulus funds were going out to state and local governments for high-speed rail projects. While some states received hundreds of millions of dollars, Georgia’s share was a relatively paltry $750,000.
The proposed Atlanta-to-Chattanooga line would continue on to Nashville, Tenn., and Louisville, Ky. The project received $14 million from the feds last year.
FOR IMMEDIATE RELEASE – August 9, 2010Contact: Sen. Gail Buckner 770-473-9039 or 404-932-2427 or firstname.lastname@example.orgSECRETARY OF STATE CANDIDATE GAIL BUCKNERRESPONDS TO OPPONENT’S LAST-MINUTE ATTACKState Sen. Gail Buckner (D-Morrow), the front-running Democratic candidate for Georgia Secretary of State, released the following statement in response to the false, negative attack message used by her opponent in a last-minute mailer prior to Tuesday’s Run-Off.“I am very disappointed that my opponent resorted to sending this false, negative attack on me to the voters on the eve of the Democratic Run-Off vote for Secretary of State. This desperate maneuver is the type of political tactic one would expect from the Republican Party, not from a fellow Democrat.“The attack mailer, which exploits my vote that took place seven years ago on a piece of legislation that passed overwhelmingly with the support of 72 other Democratic House members, fails to tell the whole story and implies that I am not on the side of everyday Georgians in dealing with the current economic crisis. Nothing could be further from the truth.“Many Democratic legislators, including most our caucus leaders, voted in favor of HB 53, which was seen as a common-sense solution on the predatory lending issue. And as one panelist has pointed out, that vote taken seven years ago has nothing to do with the responsibilities of the Office of Secretary of State.“My opponent’s attack mailer also claims she is endorsed by a number of individuals, some of whom have indicated that they neither endorsed my opponent nor gave her permission to use their names. This is desperation politics at its worst, coming from a candidate who was losing badly after the primary and will say or do anything to mislead the voters.“In my 18 years of elected office, I have served in areas relevant to the Office of the Secretary of State, including Elections, Licensing, Archives, Securities and Small Business. That is not only true but also important!”In the July 20 Democratic Primary for Secretary of State, Buckner was by far the top vote getter among five candidates, receiving 35.1 percent of the vote, compared to only 22.6 percent received by the second-place finisher. Buckner has been endorsed by the Georgia AFL-CIO, Planned Parenthood of Georgia, GA Liberal, Atlanta Progressive News and the Atlanta Inquirer.-end-
Health experts say proposed provider fees on hospitals would force some providers out of business, cost thousands of jobs and stall economic development in those communities.
"Public health is critical to the well-being of our state," Russ Toal, of the Georgia Public Health Association, told state lawmakers Thursday during a budget hearing on health care.
"Almost 40 percent of public health positions across the state are vacant and, with reductions in fiscal year 2011, more staff will be let go," Mr. Toal said.
Lawmakers listened but said little during the three-hour hearing of a joint House and Senate appropriations subcommittee.
Many speakers opposed the so-called "bed tax" or "sick tax," a proposed 1.6 percent fee for hospitals and health insurance providers.
The fees would help the Legislature cover a $300 million shortfall for Medicaid in the fiscal 2011 budget and a $700 million shortfall in fiscal 2012, according to the Georgia Budget and Policy Institute.
Georgia's declining tax revenue and loss of federal stimulus and other one-time funds contribute to the shortfalls.
Lawmakers rejected a similar fee last session. If they do the same thing this year, Gov. Sonny Perdue has proposed a 16.5 percent Medicaid cut to all health care providers.
Carie Summers, of the Georgia Hospital Association, said the 16.5 percent cut would cost hospitals more than $350 million. She said such a cut could force health-care providers to eliminate nearly 22,000 jobs across the state.
"Communities lose an economic engine and future economic development," Ms. Summers said.
Jimmy Lewis of Hometown Health, an organization of rural and small hospitals, pegged the job loss at nearly 17,000 and said as many as 20 rural hospitals could be forced to close.
"In those 20 counties, we would disrupt the access to health care," Mr. Lewis said. "We would create a tremendous economic devastation to all of rural Georgia."
The dental industry, which provides health care to Medicaid recipients, also would be affected, Georgia Dental Association Executive Director Martha Phillips said.
BY THE NUMBERS
* $77 million: Loss to hospitals under a 1.6 percent hospital provider fee
* $365 million: Loss to hospitals under a 16.5 percent rate cut in Medicaid to all health care providers
* $1 billion: Shortfall in Medicaid funding for fiscal 2011 and 2012
Source: Governor's Office of Planning and Budget, Georgia Budget and Policy Institute
"If dentists receive another fee cut, oral health care will be affected, and many small towns will lose access to oral health care," she said.
In addition to job losses, Ms. Summers said the fees and rate cuts would force hospitals to cover expenses by raising prices to families and businesses. She estimated that costs for insured families would go up by an estimated $700 per year.
Health care representatives are pushing for a 1 percent increase in the tobacco tax as an alternative funding source for Medicaid, but legislators and experts agreed that such an increase wouldn't be enough.
"This tax would not cover all the Medicaid deficit, and I agree there have to be other streams to fill the gap," said Cynthia Mercer, president of the Georgia Obstetrical and Gynecological Society.
In what has become an annual tradition, the Board of Regents Tuesday will vote on budget reduction plans for the 35 colleges in the University System of Georgia.
The proposals outline how campuses would cut spending by 4, 6 and 8 percent for the current 2011 fiscal year should the economy worsen. The options include what students have come to expect in recent years: bigger class sizes, fewer course sections, more part-time professors, faculty hiring freezes, shorter library hours and no new journal or book acquisitions.
"We all know more cuts are coming and we're anxious because we don't know the details," said Ryan Haney, a Georgia State University graduate student who organized protests last winter and spring over budget cuts and fee increases.
Public colleges and other state agencies have become accustomed to the spending cuts because of weak tax collections. The University of Georgia has made 27 budget adjustments over the past two years, President Michael Adams said in a recent interview.
The reduction plans are due to the state Office of Planning and Budget by Sept. 1.
Last month Gov. Sonny Perdue ordered 4 percent spending cuts among state agencies because about $375 million in extra Medicaid stimulus money had not yet been approved by Congress. The U.S. Senate approved that money last week and the House is expected to vote this week.
Some are cautiously optimistic that the financial situation may be better, noting that state tax collections improved last month.
More proof of how painful it has been: Per capita income in metro Atlanta last year fell nearly three times as much as the U.S. average.
Government data released Monday shows income falling in most American metro areas in 2009, with Atlanta down 4.8 percent – a loss of nearly a dollar in each $20.
Nationally, personal income slid 1.8 percent in 2009, according to the report by the Bureau of Economic Analysis.
Personal income includes earnings of various kinds, including paychecks, rental income, dividends and interest, as well as payments from the government. So the loss of jobs alone often does not push an area’s income down.
But in 2009, Atlanta was losing on a range of fronts, from jobs to stock holdings to home values.
The area lost 133,808 jobs during 2009, while the unemployment rate surged from 7.6 percent to 10.1 percent, according to the U.S. Bureau of Labor Statistics.
By early this year, the official jobless rate was 10.8 percent. Since then, job growth – tentative and modest – has begun again. But the state's most recent jobless rate was still 10.3 percent.
Of 223 metros measured in the federal report, Midland, Texas, was pounded hardest, with personal income down 8.4 percent. Among larger metro areas, the worst damage came in the bedroom communities of coastal Connecticut, where incomes fell 6.8 percent.
Other cities with sharper drops were Las Vegas, down 6.2 percent; Charlotte, down 5.7 percent; Dallas and Phoenix, each down 5.2; and Houston, down 4.9 percent.
Of the 134 metro areas with higher earnings, most came on various kinds of government payments, according to the BEA. Of those cities, less than half saw other kinds of income increase – and those gains were almost all in places dominated by military and other federal government payrolls, according to the BEA. Topping the list, for instance: Jacksonville, N.C., home of the Camp Lejeune Marine Corps base.
Growth in overseas sales from China, which overtook Germany last year as the world’s biggest exporter, moderated from 43.9 percent in June. The jump in shipments last month was more than the 35 percent median estimate in the Bloomberg survey.
The pace of expansion in imports, which compared with the survey’s median estimate of 30 percent, softened from 34.1 percent in June and was the smallest gain since growth resumed in November after 12 straight monthly declines.
The trade surplus is the biggest since January 2009 and compares with $20 billion in June and $10.63 billion in July 2009.
The unexpected widening of the surplus and stronger-than- expected jump in exports risks stoking tensions with the U.S. and Europe. China has become the “top target” of global trade friction and the biggest “victim” of trade-related investigations, Zhong Shan, vice minister of commerce, said in June.
With mid-term elections in the U.S. due in November, today’s numbers may provide lawmakers with fuel to increase demands for the Obama Administration to take action against China, which they claim is deliberately keeping its currency undervalued to give exporters an unfair advantage.
China’s trade surplus with the U.S. rose 10 percent to $93 billion in the first five months of 2010, according to the American Commerce Department. China’s customs bureau puts the surplus at $59.4 billion, 18 percent higher than a year earlier.
Democratic Representative Brad Sherman unveiled a proposal on Aug. 4 calling for China’s permanent normal trade relations status, which lowers U.S. duties on its imports, to be revoked, Agence France-Presse reported.
Staff from the International Monetary Fund concluded the yuan is “substantially” undervalued, according to a statement released by the Washington-based lender last month after releasing its annual assessment of the country’s economy. Some IMF directors said an appreciation of the yuan would help the country rebalance growth away from exports and investment to private consumption, the fund said.
Premier Wen Jiabao may allow some gains even if export growth slows as recoveries in the U.S., European Union and Japan, China’s biggest markets, falter. Companies have become “increasingly resilient” to exchange-rate reform and exports haven’t been “substantially affected,” central bank deputy governor Hu Xiaolian said in a July 30 statement.
“If China runs large monthly trade surpluses, it’s very likely to invite more external pressure for the renminbi to appreciate,” Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd., said before today’s release, using another term for the yuan. “The trade balance will be an important indicator of the renminbi’s valuation.” Liu expects the yuan to rise 3 percent by the end of the year.
Economist Max Wolfe has none of the political restraints of power. At the news of another 131, 000 jobs gone, at all the talk of permanent unemployment as the “new normal,” he sighed with a tinge of optimism:
“We have been in the present labor market swoon since December 2007. We are 30 months into the process. Nearly everything is not getting worse fast. Most economic indicators have seen slow, uneven progress. We are a weary nation and hope, is running low. All lethality is dosage and we have received a massive dosage- an overdose- of bad economic news since the winter of 2007. Things are getting ever so slightly less bad in the aggregate.
“The sheriffs of this rough economic neighborhood are running low and out of ammunition. The populace is fed up. Our Sheriffs are The Treasury and The Fed and they have spent, cut taxes, slashed rates, bought securities and ballooned their balance sheets. They have made the bad less worse, but not appreciable better enough for many. All that economic toxin still pumps the blood of this economy. Now, the state is having a contractionary direct impact on employment.”“Contractionary? I am a first-time contractionary word user so I will leave it to Stephen Colbert to take that term apart, but it can’t be a good thing.
The bigger surprise is being buried. The more serious problem is more systemic and rooted in the structure of our economy. These structural problems used to be referenced to show how deep the rot goes and why more fundamental reforms are needed, but now, as Paul Krugman has argued, this very idea is now being used to encourage acceptance of the problems because they are beyond repair, as in, “we can’t change that because it is, so, um, “structural!”) Thus, the existing power relations can’t be questioned because they are the existing power relations
Makes sense, doesn’t it?
Part of the problem is that while the livelihoods of workers and homeowners are sinking, the economic and political elite is doing just fine, as the Automatic Earth Website explains:
“Perhaps what we witness is an ongoing and deepening chasm that divides the world of finance and politics on the one hand and the world of everyday people on the other, as Rasmussen Reports indicates: 67% of Political Class Say U.S. Heading in Right Direction, 84% of Mainstream Disagrees. This chasm was greatly facilitated by governments relying on policies based on the notion that too-big-to-fail -financial- institutions needed to be bailed out at any cost. Later in the year, as a direct consequence of these policies, we will see another round of insane banker and trader bonuses, just as citizens’ sentiments and incomes fall, and unemployment and poverty keep rising.”When you create and enable a casino economy, the public becomes a player too, taking risks they shouldn’t at the behest of bankers and finance companies who assure them all is fine.
Last week, Countrywide, the country’s mortgage fraud factory, reached a settlement with the SEC for more than Goldman Sachs settled its last complaint for a whopping $600 million. Their shark-in-chief, Anthony Mozillo, still facing a criminal investigation, later said he was pleased when the federal regulators admitted that the investors were not defrauded, because they knew what kind of projects they were funding. How reassuring!
So the circle of complicity widens. We now learn that the companies and individuals that invested in the subprime/subcrime mortgages KNEW people were being ripped off but did it anyway because there was so much money to be made.
And because security laws only protect investors, who were defrauded, many have no case. What about the borrowers, the homeowners now facing foreclosure? They are apparently not worthy of protection. This is comparable to the Madoff investors who profited in his illegal scheme and knew his returns were too good to be true but shoveled money to him anyway. They became partners in the ponzi, not just “victims” trying to be made whole.
Is anything changing? The banks say they will not change the way they finance mortgages so it is still buyer beware. The Wall Street Journal reports another instant crash of the markets is possible. And General Motors that was down and on the way out is back thanks to the government’s largesse but sniping at its rescuers, insisting an end to government ownership would be good for their image and “employee morale.” Huh?
“We want the government out period,” blusters GM’s ungrateful CEO Edward E. Whitacre Jr. This same company recently spent $3.5 billion buying a new subprime lending company to replace GMAC, the GM lender whose bad loans sunk GM. On top of that, these geniuses just produced The Volt electric car that sells for $40,000, hardly a brilliant move in this economy. Of course they blame all their problems on the government, never themselves.
Like so many others, they seem to be banging on Obama, everyone’s target of choice. If that’s your inclination, let’s blame him also for what he has not done.
He hasn’t led a consistent push back against Wall Street, perhaps because he hopes in vain that big business will create private sector jobs and wants to show naysayers how pro-business he really is. This has turned him into an inversion of FDR.
As Ezra Klein of the Washington Post observed: “The reality is that America’s supposedly anti-business president has led an extremely pro-business recovery.
Businesses are sitting on about $2 trillion in cash reserves. Business spending jumped 20 percent last quarter, and is up by 13 percent against 2009. The Obama administration has dropped taxes for small businesses and big ones alike.”
Monday, August 9, 2010
I've been having discussions with some associates about what it means when a measured short-run multiplier is positive yet less than one. It is occasionally suggested that a multiplier less than one means that fiscal policy is necessarily a bad idea, but I don't see it that way.
Keep in mind there is no a priori argument that the government purchases "don't count," even though sometimes they don't produce much value ex post. And the borrowed dollar isn't "taken out" of the economy in a meaningful way. It can come from abroad or it can accelerate velocity, at least potentially.Let's say the multiplier is 1.0. That typically means a dollar is spent on a road (or whatever), which is in the plus one column. There is some crowding out of private investment but not usually one hundred percent. Let's say that's minus 30 cents. The spending on the road, and road workers, has some positive second-order effects. Let's say those are plus thirty cents per dollar.In that particular case, the multiplier ends up as equal to one and that is net, all things considered. The spending still would yield a short-term positive for gdp if the multiplier were 0.5.The case against fiscal policy should examine long-term budgetary costs, possible confidence factors, implementation lags, political economy problems, difficulties in targeting unemployed resources, and also the (underrated) notion that sometimes fiscal policy postpones problems into the medium run rather than solving them through jump-starting a recovery. But it is difficult to deny that fiscal policy brings some economic benefits in the short run, or can brake an economic decline, even if the measured multiplier is less than one or for that matter well under one.
As an aside, I do not prefer to emphasize the notion of "investment crowding out" for analyzing fiscal policy. The notion is a coherent one, but frequently analysts, and audiences, end up confusing nominal flows of finance with real resource opportunity costs. I instead prefer to ask how effectively the fiscal policy is targeting real unemployed resources and to deemphasize the financial angle, at least for the first-order analysis.
In congressional testimony last month, Ben Bernanke noted “unusual uncertainty” in the economic outlook and in a speech last week the Fed chairman warned of a “considerable way to go” before the US achieves a full recovery.
Although Fed policymakers still believe the basic trajectory of the economy remains one of moderate expansion, there may be more attention given to heightened dangers of a sharp slowdown. “The FOMC will have to tone down its assessment of the economy in view of recent weak indicators on real growth, real consumption spending and employment,” said Brian Bethune and Nigel Gault, economists at Global Insight.
The latest poor reading came in Friday’s monthly employment report, which showed the US private sector creating only 71,000 jobs in July – not enough to keep up with population growth, let alone bring down the unemployment rate. That followed news a week earlier that growth in US gross domestic product slowed from an annualised rate of 3.7 per cent in the first quarter to 2.4 per cent in the second quarter.
“Given how low inflation already is, and given the potential for the recovery to falter, we expect Fed officials will highlight downside risks and signal a bias to ease in the FOMC statement,” said Jim O’Sullivan, chief economist at MF Global.
There is little, if any, doubt that the FOMC will maintain interest rates at their current low target range of 0-0.25 per cent
Thursday, August 5, 2010
"Since 1979 Republicans have regularly been offering deficit-exploding plans while claiming that they are deficit-reducing plans. Paul Ryan is simply the latest in a 31-year tradition of fiscal policy three-card-monte...
Fool me once, shame on you; fool me for thirty-one consecutive years...
Congress took a decisive step Wednesday toward finalizing a $26 billion bill offering aid to states, a surprise win for Dmocrats keen to demonstrate they're taking action on an economy showing signs of weakness.
Senate Majority Leader Harry Reid of Nev., gestures during a news conference on Capitol Hill on Wednesday after the vote.The bill, designed to prevent teacher layoffs and help states with their Medicaid payments, comes after months of foot dragging by Congress. Lawmakers have proven reluctant to spend money on everything from stimulus projects to additional unemployment insurance, amid increasing voter concern about the size of the U.S. budget deficit.
But Wednesday's action, which won the support of two Republicans, suggests members of Congress are sufficiently concerned about the mixed signals from the economy that they're willing to approve narrow spending bills, particularly those with political resonance ahead of this year's midterm elections.
Wednesday's 61-38 vote in the Senate overcame a filibuster and made final passage in the Senate likely as soon as Thursday. House Speaker Nancy Pelosi (D., Calif.) responded by taking the rare move of calling House members back from their summer recess next week to pass the bill and send it to the desk of President Barack Obama...
Most Republicans opposed the bill. Only Maine's two Republican senators, Olympia Snowe and Susan Collins, joined Democrats in favor.
To win the Maine senators' support, Democrats dropped plans to cut $107 million in funds expected to go largely to Bath Iron Works, a General Dynamics Corp. facility that builds Navy ships in Maine. The Iron Works is one of the biggest private employers in the state with 5,000 workers.
Ms. Snowe said she voted for the bill only because she agreed the potential teacher layoffs constituted an emergency. She also demanded the House return to Washington from its recess to pass the bill.
House members, who often mock the Senate for its slow pace, may feel frustration at being asked to drop their campaigning and return to Washington because of the Senate's action. The Senate is expected to leave the capital at week's end. House leaders, however, concluded the measure was urgent and politically appealing. Congress isn't scheduled to return for a regular session until mid-September, after the school year begins for most students.
The last time the House returned from a recess was 2008, when lawmakers sought to pass an aid package for the auto industry. Before that, the House came back to Washington in 2005 to deal with the case of Terri Schiavo, a brain-damaged woman whose husband was seeking to remove her feeding tube.
Wednesday's bill includes $10 billion to help states avoid layoffs of teachers, police officers and fire fighters and another $16 billion to help states make their Medicaid payments.
Ethan Harris, head of North American economics at Bank of America/Merrill Lynch in New York, said the bill "is worth maybe a tenth of a percentage point in growth over six months." But it is vital for states, he said, which have "cut all the easy stuff, so they're cutting into much more popular programs."
Adds Mark Zandi, chief economist at Moody's Analytics: "If they didn't get this, the job cutting and tax increases states would have to make over the next six months would put a significant weight on the fragile recovery."
Republicans warned that states were becoming too dependent on federal aid. "For the first time in our history, the federal government is the single largest source of revenue for the states," Senate Minority Leader Mitch McConnell (R., Ky.) said on the Senate floor. "When does it end?
Republicans also complained about the bill's revenue source. The legislation is paid for, in part by imposing new limits on foreign tax credits used by U.S. multinationals to lower the taxes they pay in this country. Republicans said this would drive companies, and jobs, overseas.
For several months now, Georgians for a Healthy Future has been monitoring efforts in the U.S. Senate to extend the enhanced matching rate for Medicaid funds (known as FMAP). Today, by a vote of 61 to 38, the U.S. Senate cleared a crucial procedural hurdle by voting to end debate (known as cloture) on legislation to extend the enhanced FMAP funding for an additional six months, through June 30, 2011. The Senate has scheduled a final vote on this legislation for tomorrow evening.
Though Senators Chambliss and Isakson did not vote in favor of cloture, 61 Senators voted to allow a vote to proceed to provide this critical fiscal relief to states. Also today, the Speaker of the U.S. House of Representatives called House Members back from August Recess to take up the legislation next week.
Georgia had been relying on Congress to pass a six-month continuation of the enhanced matching funds for Medicaid when the Legislature and Governor Perdue approved the FY 2011 budget, which runs from July 1, 2010 through June 30, 2011. Despite having built this assumption into our state's budget, the enhanced funds had been set to expire on December 31, 2010. The six-month extension contained in this legislation will extend the enhanced funding to states until the end of Georgia's fiscal year, bringing in an estimated $375 million in federal dollars to our state.
Without the enhanced FMAP, Georgia may have to make cuts to essential health care services for our most vulnerable families or cut reimbursement rates to providers, potentially limiting access to care and further harming our state's fragile economy. In these difficult economic times, more Georgians are in need of safety net programs such as Medicaid and PeachCare. This funding extension will ensure, at least temporarily, that the state can continue to meet these most basic needs. While there is still much work ahead, today's vote is a small victory worth celebrating.
Lately, there has been a fair amount of buzz in the economics blogosphere about the issue that I've been discussing here: Structural Unemployment.
If you read through these posts, however, you won't see a lot of discussion about the case I've been making, which is that advancing technology is the primary culprit. I've been arguing that as machines and software become more capable, they are beginning to match the capabilities of the average worker. In other words, as technology advances, a larger and larger fraction of the population will essentially become unemployable. While I think advancing information technology is the primary force driving this, globalization is certainly also playing a major role. (But keep in mind that aspects of globalization such as service offshoring--moving a job electronically to a low wage country--are also technology driven).
The economists sometimes mention technology, but in general they find other "structural" issues to focus on. One that I have seen again and again is this idea that people can't move to find work because their houses are underwater (the mortgage exceeds the equity). The emphasis given to this issue strikes me as almost silly. Are there any major population centers in the U.S. that have really low unemployment?
Even if people could sell their homes, would they really be motivated to load up the U-haul and move from a city with say 12% unemployment to one where it is only 9%? Have the economists lost sight of the fact that 9% unemployment is still basically a disaster? The few locales I've seen with unemployment significantly lower than that are rural or small cities (Bismark ND, for example)--places that are simply incapable of absorbing huge numbers of hopeful workers. Let's get real: playing musical chairs in a generally miserable environment is not going to solve the unemployment problem.
Another thing the economists focus on is the idea of a skill mismatch. Structural unemployment, they say, occurs because workers don't have the particular skills demanded by employers. While there's little doubt that there's some of this going on, again, I think this issue is given way too much emphasis. The idea that if we could simply re-train everyone, the problem would be solved is simply not credible. If you doubt that, ask any of the thousands of workers who have completed training programs, but still can't find work.
Economists ought to realize that if a skill mismatch was really the fundamental issue, then employers would be far more willing to invest in training workers. In reality, this rarely happens even among the most highly regarded employers. Suppose Google, for example, is looking for an engineer with very specific skills. What are the chances that Google would hire and then re-train one of the many unemployed 40+ year-old engineers with a background in a slightly different technical area? Well, basically zero.
If employers were really suffering because of a skill mismatch, they could easily help fix the problem. They don't because they have other, far more profitable options: they can hire offshore low wage workers, or they can invest in automation. Re-training millions of workers in the U.S. is likely to make a killing for the new for-profit schools that are quickly multiplying, but it won't solve the unemployment problem.
Why are economists so reluctant to seriously consider the implications of advancing technology? I think a lot of it has to do with pure denial. If the problem is a skill mismatch, then there's an easy conventional solution. If the problem's a lack of labor mobility, then that will eventually work itself out. But what if the problem is relentlessly advancing technology? What if we are getting close to a "tipping point" where autonomous technology can do the typical jobs that are required by the economy as well as an average worker? Well, that is basically UNTHINKABLE. It's unthinkable because there are NO conventional solutions.
The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.
The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.
Alexis de Tocqueville, the great French chronicler of early America, was once misquoted as having said: “America is the best country in the world to be poor.” That is no longer the case. Nowadays in America, you have a smaller chance of swapping your lower income bracket for a higher one than in almost any other developed economy – even Britain on some measures. To invert the classic Horatio Alger stories, in today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.
Combine those two deep-seated trends with a third – steeply rising inequality – and you get the slow-burning crisis of American capitalism. It is one thing to suffer grinding income stagnation. It is another to realise that you have a diminishing likelihood of escaping it – particularly when the fortunate few living across the proverbial tracks seem more pampered each time you catch a glimpse. “Who killed the American Dream?” say the banners at leftwing protest marches. “Take America back,” shout the rightwing Tea Party demonstrators.
Statistics only capture one slice of the problem. But it is the renowned Harvard economist, Larry Katz, who offers the most compelling analogy. “Think of the American economy as a large apartment block,” says the softly spoken professor. “A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.”
Unsurprisingly, a growing majority of Americans have been telling pollsters that they expect their children to be worse off than they are. During the three postwar decades, which many now look back on as the golden era of the American middle class, the rising tide really did lift most boats – as John F. Kennedy put it. Incomes grew in real terms by almost 2 per cent a year – almost doubling each generation.
And although the golden years were driven by the rise of mass higher education, you did not need to have graduated from high school to make ends meet. Like her husband, Connie Freeman was raised in a “working-class” home in the Iron Range of northern Minnesota near the Canadian border. Her father, who left school aged 14 following the Great Depression of the 1930s, worked in the iron mines all his life. Towards the end of his working life he was earning $15 an hour – more than $40 in today’s prices.
Thirty years later, Connie, who is far better qualified than her father, having graduated from high school and done one year of further education, makes $17 an hour. The pace of life has also changed: “We used to sit around the dinner table every evening when I was growing up,” says Connie, who speaks with prolonged vowels of the Midwest. “Nowadays that’s sooooo rare.”
Connie’s minimally educated father earned enough to allow her mother to remain a full-time housewife and still fund two children through college. Connie and Mark, meanwhile, struggle to pay off the stream of bills in a dual-income household. The state of Minnesota pays for Andy, their 20-year-old son, who suffers from acute autism, to study theatre at the local community college.
Strictly speaking, Connie actually lives in a four-income household. “When Andy was two, I was told to buy a karaoke machine because autistic children sometimes respond well to it,” says Mark, pointing at what can only be described as a postmodern antique. “That’s how I got into my karaoke business. I get about $100 every Wednesday evening. And on Saturdays I manage the local liquor store. We need all four jobs to keep our heads above water.”
So much for the rising tide.
From the point of view of most economists, the story so far is uncontroversial. Most agree on the diagnosis. But they diverge on the causes. Many on the left blame the Great Stagnation on globalisation. The rise of China, India, Brazil and others has undercut wages in the west and put America’s unskilled, semi-skilled and even skilled workers out of jobs. Manufacturing now accounts for only 12 per cent of US jobs. Think of the typical Detroit car worker 30 years ago, who had a secure middle-class lifestyle, good healthcare and a fat pension to look forward to. Today, he lives in Shenzhen.
Another group singles out the explosion of new technology, which has enabled the most routine and easily automated jobs to be replaced by computers. Think of the office assistant, who once took dictation and brewed the coffee. She is now a BlackBerry who spends half her life in Starbucks. Or the back office person who, much like those shoemakers in the fairy tale, now stitches your accounts in Bangalore while you sleep.
Then there are those, such as Paul Krugman, The New York Times columnist and Nobel prize winner, who blame it on politics, notably the conservative backlash which began when Ronald Reagan came to power in 1980, and which sped up the decline of unions and reversed the most progressive features of the US tax system.
Fewer than a tenth of American private sector workers now belong to a union. People in Europe and Canada are subjected to the same forces of globalisation and technology. But they belong to unions in larger numbers and their healthcare is publicly funded. More than half of household bankruptcies in the US are caused by a serious illness or accident.
. . .
What, then, is the future of the American Dream? Michael Spence, a Nobel Prize-winning economist, whom the World Bank commissioned to lead a four-year study into the future of global growth, admits to a sense of foreboding. Like a growing number of economists, Spence says he sees the Great Stagnation as a profound crisis of identity for America.
For years, the problem was cushioned and partially hidden by the availability of cheap debt. Middle-class Americans were actively encouraged to withdraw equity from their homes, or leach from their retirement funds, in the confidence that property prices and stock markets would permanently defy gravity (a view, among others, promoted by half the world’s Nobel economics prize winners, Spence not included). That cushion is now gone. Easy money has turned into heavy debt. Baby boomers have postponed retirements. College graduates are moving back in with their parents.
The barometer is economic. But the anger is human and increasingly political. “I have this gnawing feeling about the future of America,” says Spence. “When people lose the sense of optimism, things tend to get more volatile. The future I most fear for America is Latin American: a grossly unequal society that is prone to wild swings from populism to orthodoxy, which makes sensible government increasingly hard to imagine. Look at the Tea Party. People think it came from nowhere. While I don’t agree with their remedies, most Tea Party members are middle-class Americans who have been suffering silently for years.”
Spence admits he is thinking aloud and going “way beyond the data”. And he concedes that America probably still retains its most vibrant strength in its still world-beating capacity for technological innovation. Most economists are not as bleak as Spence. But it is in the neighbourhoods among ordinary Americans that his pessimism gets its loudest echo. “To be pessimistic about the future is so new for Americans and so strikingly un-American,” says Spence. “But most people grasp their own situations way better than any economist.”
. . .
Every now and then the Freemans invite their neighbours round to their front porch, to watch the world go by, drink beer and eat Connie’s justly renowned dish of Minnesota wild rice. In the best American spirit, Mark and Connie are active neighbourhood people. They are the types who shovel your snow, volunteer for school events, and coach the baseball little league – Mark has done all three.
It takes optimism to be like this. But in the past few years the Freemans have been running low on it. “I guess the penny dropped in the last 18 months when we finally realised that it’s always going to be like this – we are never going to be able to retire on our savings,” says Connie. “As for Andy,” she says, referring to her painfully shy but acutely observant son, “the future really frightens me. If you’re young, it’s bad enough nowadays. But for a kid with autism?”
When I asked what the American Dream means to them, Mark looked despondent. “It’s not a dream,” he said. “I would hate to sound like one of those Tea Party people but I really do want my country back. I just don’t feel like that is going to happen.” His words reminded me of a famous quip by George Carlin, the late, great American comedian – “It’s called the American Dream because you have to be asleep to believe it.”
Both Mr. Geithner and the president hammered on the theme that administration policies point the way forward while Republicans would take the country back to the days of the Bush administration, and not just on tax policy.
Mr. Obama told the labor leaders they must remind their members, “this election is a choice,” between “these folks who drove America’s economy into a ditch” and the Democrats who for 20 months have “been shoving that car out of the ditch inch by inch” as Republicans stood by.
“And now we’ve finally got that car up on the blacktop there, about to drive, and they say they want the keys back. Well, you can’t have the keys because you don’t know how to drive,” Mr. Obama said, to laughter.
He added, “Somebody pointed out to me that when you’re in a car and you want to go forward, you put it in ‘D.’ You want to go back in the ditch? You put it on ‘R.’ ”
All of the 2001 and 2003 income tax cuts are scheduled to expire after this year, an expiration written into law at the time they were passed to hold down estimates of the measures’ impact on future annual budget deficits.
Mr. Obama pledged in his election campaign that he would maintain the tax cuts past 2010 for the roughly 98 percent of American households in which families make less than $250,000 a year or individual filers make less than $200,000.
Republicans, who have opposed the administration’s other stimulus spending and tax cuts, have seized on the recovery’s slowdown to argue that the Bush tax cuts should continue for wealthy Americans, emphasizing that the group includes some small-business owners who file their tax returns as individuals.
The administration and most Congressional Democrats counter that just 2 percent of small businesses have enough income to be affected should the top tax rates revert to their pre-Bush levels. More generally, they argue that extending the tax cuts for the rich would add to the nation’s dangerously rising debt; so do the tax cuts for everyone else, but Democrats point to nonpartisan studies showing that tax cuts for lower-income households are a far more effective way of spurring the economy because they spend the extra money while most wealthy taxpayers generally save it.
Yet a few Congressional Democrats in Republican-leaning districts and states are reluctant to have the tax fight right before November’s elections. That has led to talk that all the tax cuts will be extended for a year or two.
Mr. Geithner said even a temporary extension would be a mistake. In international forums, he has cited the tax cuts’ expiration as a major way in which the United States will begin reducing its projected debt.
“The world,” he said, “is likely to view any temporary extension of the income tax cuts for the top 2 percent as a prelude to a long-term or permanent extension, and that would hurt economic recovery as well by undermining confidence that we’re prepared to make a commitment today to bring down our future deficits.”
As stimulus, Mr. Geithner added, the $30 billion needed for a one-year extension would be better spent for more middle-class tax cuts, business investment incentives or aid to hard-pressed states.
And he dismissed as “myths” Republican arguments that tax cuts pay for themselves, by bringing in new revenues from economic growth, and that small businesses would be hurt. “This is a political argument masquerading as substance,” he said.
Tim Geithner, US treasury secretary, on Wednesday suggested there was little room for compromise on the Obama administration’s plans to let tax cuts for wealthy Americans enacted under George W. Bush expire at the end of the year, saying even a delay until 2011 would hurt the economic recovery.
“The world is likely to view any temporary extension of the income tax cuts for the top two percent as a prelude to a long-term or permanent extension,” Mr Geithner said. “That would hurt economic recovery by undermining confidence that we are prepared to make a commitment today to bring down our future deficits.”
The US government plans to renew the Bush tax cuts for Americans earning less than $250,000 per year, but has faced criticism from Republicans and some centrist Democrats over its push for increases in higher-income tax rates to take effect immediately.
The fight over the tax cuts is expected to be a significant point of friction between Republicans and Democrats in the run-up to the midterm congressional elections, scheduled for November. In an interview with the FT last month, Paul Ryan, a leading Republican in the House of Representatives, said the battle over the Bush tax cuts was also a “dress rehearsal” for the 2012 presidential election.
Monday, August 2, 2010
Students and their parents better start saving more money for college.
Georgia’s popular HOPE scholarship is at the tipping point as demand outstrips its funding.
"This is not a train wreck about to happen," said Rep. Len Walker (R-Loganville), chairman of the House higher education committee. "The train wreck has happened."
Lawmakers agreed Monday that changes are needed to keep the merit program used by more than 200,000 students annually financially viable. That legislation isn't expected until this winter. Instead a joint meeting between the House and Senate higher education committees served to shock lawmakers into understanding the severity of the situation.
The Georgia Lottery, which supports the scholarship and prekindergarten programs, is one of the most successful in the country but it can’t keep up as more people attend college and tuition rises.
Projections show a shortfall of about $244 million for this fiscal year, said Tim Connell, president of Georgia Student Finance Commission, which oversees HOPE. The shortfall is estimated to be about $317 million for the 2012 fiscal year, he said.
The scholarship has reserves to cover the shortfall. But those accounts, which totaled about $1 billion earlier this year, will drop to about $371 million by the end of the 2012 fiscal year.
Some lawmakers wondered whether the money was flowing to the correct students.
Of the 24,415 students who started with HOPE in the fall of 2003, only 46 percent maintained grades high enough to keep the scholarship after their freshman year, Connell said.
Sen. Nan Orrock (D-Atlanta) questioned whether it was time to re-instate an income cap for eligibility.
When the program began, only students whose families earned less than $66,000 a year were eligible. The cap was later lifted to $100,000 and then eliminated.
"If we are spending loads and loads on families whose students were always going to go to college because their families had the income and then we are getting significant failure rates, what are we really doing?" Orrock asked. "We all hear the anecdotes about the families buying condos in Athens or buying their students cars because they are getting HOPE."
Another lawmaker suggesting funding HOPE at just 70 percent. Others said they wanted to compile suggestions from agency heads and university leaders.
HOPE provides full tuition and some book and fee money to college students who maintain a 3.0 grade-point average.
Lawmakers addressed HOPE's finances in 2004 when they tightened eligibility requirements and instituted triggers that would reduce benefits if reserves got too low.
The first reduction, cutting book awards from $300 to $150, will take place next fall, said David Lee, vice president of strategic research and analysis for the commission. The subsidy would be eliminated altogether the following year. Starting with fall 2013, students would no longer get money for mandatory fees, Lee said.
These cuts won't save much money. Slicing book awards in half saves about $20 million, Connell said.
Some lawmakers questioned if lottery sales will improve once the economy rebounds. Georgia Lottery President and CEO Margaret DeFrancisco said the goal is to increase sales but she couldn't predict "astronomical increases."
During the 2010 fiscal year, which ended June 30, the lottery paid out more than $2.1 billion in winnings while depositing about $884 million into the education accounts for HOPE and prekindergarten. That wasn't enough for the scholarship, forcing the commission to dip into reserves for the first time in nearly a decade.
"Lottery revenues will never, in my opinion, approach the HOPE expenditure again," Walker said.
Walker said the higher education committees will meet again in November to discuss solutions.
"I hope we can work in a unified, bi-partisan way to deal with this issue," he said.
Sunday, August 1, 2010
ACROSS the United States, thousands of federally financed stimulus projects are under way, aimed at bolstering the economy and putting people to work. The results so far have not been spectacular.
Why not? There’s nothing wrong with the idea of fiscal stimulus itself. We need more stimulus, not less — but we need to focus much more on actually putting people to work.
Two friends of mine, both economists, came upon a stimulus project recently that illustrated the problem. On a Wyoming highway they saw a sign that read “Putting America to Work: Project Funded by the American Recovery and Reinvestment Act” and prominently featured a picture of a worker digging with a shovel. Out on the road, there was plenty of equipment, including a gigantic asphalt paver, dump trucks, rollers and service vehicles. But there wasn’t a single laborer with a shovel. That project employed capital, certainly, but not many human beings.
Like many such stimulus projects, it could be justified if you accept the idea that gross domestic product, not jobs, is central — a misconception rooted in economic theory, or at least in the way that Keynesian economic theory has evolved.
The conventional concept of “recession” has been defined in terms of G.D.P., not unemployment, which is perceived as a “lagging indicator.” It is widely assumed that jump-starting “the economy,” as measured by G.D.P., is the most fundamental move we should make.
Stimulate the economy, so the theory goes — get that economic engine humming — and it will provide plenty of rides for the unemployed, and good rides too, as healthy businesses expand. In addition, focusing on increasing the G.D.P. rather than on creating jobs is related to the notion that we need real jobs, jobs that are not make-work, jobs with a future. And there is something to this: We would not want to see teams of laborers with shovels at construction sites that could operate more efficiently without them.
Yet unless we take new measures, we face the prospect of protracted unemployment. In June, the unemployment rate stood at 9.5 percent and the rate of long-term unemployment, defined as joblessness for at least 27 weeks, was 4.4 percent — its highest level since 1948. Both Ben Bernanke, chairman of the Federal Reserve, and Christina Romer, chairwoman of the White House Council of Economic Advisers, recently said that high unemployment was likely to persist for years.
This would have an enormous human cost, and it is especially worrisome for people who are young or otherwise vulnerable and may be inclined to give up and drop out entirely. Ultimately, of course, this will show up in the traditional measures of G.D.P., as well.
So here’s a proposal: Why not use government policy to directly create jobs — labor-intensive service jobs in fields like education, public health and safety, urban infrastructure maintenance, youth programs, elder care, conservation, arts and letters, and scientific research?
Would this be an effective use of resources? From the standpoint of economic theory, government expenditures in such areas often provide benefits that are not being produced by the market economy. Take New York subway stations, for example. Cleaning and painting them in a period of severe austerity can easily be neglected. Yet the long-term benefit to businesses from an appealing mass transit system is enormous. (This is an example of an “externality,” which the market economy, left to its own devices, will neglect.)
Such benefits are hard to measure precisely because there is no current market price for them. Cost-benefit analysts tend to be in endless debate about such programs, and so the social impetus for them often becomes blurred. Keep this in mind, though: Whatever the merits of specific programs, the cutoff that we choose for classifying a project as “good” or “bad” should be adjusted downward in periods of widespread unemployment.
Some researchers have expressed doubts, for example, that “throwing more resources” at students — providing more teachers and aides — is cost effective, in terms of objective measures of educational outcome.
In a period of severe joblessness like this one, however, someone who is sitting unemployed who would rather be working at a modest salary as a teacher’s aide should be given a chance, at least until the economy improves. In other words, the unemployment rate itself should be a major factor in evaluating such programs.
In 1936, John Maynard Keynes made much the same point: “Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the ‘financial’ burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment.”
PRESIDENT FRANKLIN D. ROOSEVELT’S New Deal, though no more than partly successful, was much more focused on job creation than our current economic stimulus has been. It seems that the New Deal was also more successful at inspiring the American public.
Consider one of the most applauded of Roosevelt’s programs, the Civilian Conservation Corps, from 1933 to 1942. The program was open to young men, initially those 18 to 25, a group that was quite vulnerable economically. The C.C.C. emphasized labor-intensive projects like planting trees.
The public appreciated the tree planting because the projects addressed big problems that had been ignored. Major dust storms in and around Oklahoma raged from 1930 to 1936, denuding whole regions of agricultural land. The storms were vivid evidence of an externality that environmentalists had warned about for years, to little avail. Unregulated farming and lumbering had allowed pervasive soil erosion.
Aside from the environmental benefits, the C.C.C. encouraged a sense of camaraderie, taught young men new skills and gave its workers a sense of participation in something historic.
Congress has recently set plans for tripling the size of AmeriCorps, the modern counterpart of the C.C.C., which now takes both sexes and has no age cap. At its peak, the C.C.C. employed 500,000 young men. Under current plans, AmeriCorps would top out at 250,000 people in 2017, even though the nation now is two and a half times larger. We ought to be bolder.
Big new programs to create jobs need not be expensive. Suppose the cost of hiring a single employee were as high as $30,000 a year, several times typical AmeriCorps living allowances. Hiring a million people would cost $30 billion a year. That’s only 4 percent of the entire federal stimulus program, and 0.2 percent of the national debt.
Why don’t we just do it?