Layoffs Make People Unemployed

Regardless of what he said, Reagan knew that a huge demand slump needed a huge growth in government spending, so between inauguration and his "Morning in America" ad, Government spending rose by nearly 30%.



Mark Thoma sends us to a picture that shows, in a nutshell, why this recovery has sucked so much: government  has been laying people off.

Economic Policy Institute

Santorum on Race

The quote is "I don't want to make BLACK people's lives better by giving them somebody else's money.

The question was about foreign policy, the comment was about welfare and medicaid, and his answer was about BLACK people.  He felt no need to object to making poor white people's lives better by giving them money for things like food and medical care, no, he objects to giving that money to black people.  Watch the clip. Then watch it again, because you might have missed the word "black" thrown in there.  Then watch it one more time so you know you weren't seeing things.  

And remember, this guy tied for first in the Iowa caucuses.

Also relevant, the breakdown of Iowan food stamp recipients, by race (From CBS)

9% Black

84% White

Edit:

Links:

http://thinkprogress.org/economy/2012/01/03/396428/santorums-racist-welfare-rant/

http://www.cbsnews.com/8301-503544_162-57350990-503544/santorum-targets-blacks-in-entitlement-reform/

Reid and Overton

The Overton window, or the span of ideas that people thing are more or less centrist, tends to fall between the ideas that are considered unthinkably radical on each end. This means that while right-wing nut-jobs don't get taken seriously, they do pull the "reasonable" span of ideas towards the right.

Democrats are as bad at this as tea partiers are good at it. While conservatives look moderate by pointing to Rand Paul's claim that the Civil Rights Act was a governmental overstep, the most radical thing democrats can point to is Elizabeth Warren's assertion that nobody makes a fortune without the help of government financed roads, schools, police and fire departments.

The net result is that the "middle" gets pulled progressively farther rightward, until sooner than later what was a moderate republican position (take for example Richard Nixon's Environmental Protection Agency) becomes seen as leftist.  Perhaps more importantly though, pundits like Thomas Friedman lament the absence of anybody to put forward a moderate centrist position such as expansionary fiscal policy now to help the recovery and long-run belt tightening to get the deficit back on track.  These same pundits miss the part where this is exactly the current position of the democrats.

Which is why I was relieved to see this headline:

Obama Says He Would Accept a Surtax on High IncomesBy HELENE COOPER49 minutes agoPresident Obama said on Thursday that he was “comfortable” with a Senate proposal to pay for his jobs plans with a tax surcharge on income above $1 million.

For once, the conversation is not between a slightly right of center idea and a radical right wing position, but instead between a moderately left of center and the same right wing position.  With Reid finally proposing policy that looks like it was written by a democrat, we might have a chance that with control of the senate as well as the white house the democrats might get something passed that is, at minimum, not too far right for Milton Friedman.

Human Suffering

While I at times argue detailed and lengthy economic points, my position is simple:
When nearly 1 in 10 people who counts themselves in the work-force is out of work, hiring people and giving individuals money with which to hire people will reduce unemployment and human suffering.  Further, I believe that when we have the opportunity to borrow that money at rates below the rate of inflation (meaning that in real terms every dollar spent today will cost less than a dollar to pay back when the loan comes due in 10 years), it is a moral imperative to feed the hungry now and pay for it when the economy is once again strong.

I can talk for hours about aggregate demand and sticky wages and macroeconomics, but the core of it is simple: People are hurting, and we can make it better.  Every day a child sits in an over-crowded classroom while last-year's teacher sits at home because they were laid off is a waste, pure and simple.  We can fix this, we can fix it now, and to do otherwise is a crying shame and a human tragedy.

To argue otherwise seems to requires at least one of three implicit assumptions:

1) In current conditions, government laying people off does not raise unemployment and government hiring people does not reduce it.

OR

2) To make the suffering better with a borrow-and-hire strategy would have negative consequences that are worse than the current suffering.

OR

3) The current suffering serves an important purpose moral purpose, and to subvert it would be to upset some natural order of things.

In times of full employment, number 1 has solid traction: crowding out through interest rates and labor costs is a real phenomenon.  With interest rates stuck at zero only because anything lower makes no sense, and employees scrambling for jobs already, these arguments hold little water.

Number 2 has many potential sub-types, but with current suffering so bad, and interest rates so low, its hard to find a reason to justify letting Americans go hungry.

As for number three: If you do not live in poverty (15% of the population, $15 per person per day for a family of four) then its not your morally righteous suffering to defend.

Economics As a Science

Scientists come up with an idea of how the world works, compare it with real evidence of how the world works, and then if the idea about how the world works fits the evidence well enough, then they publish a paper explaining their idea and why they think it is a reasonable description of how the world works.  For instance: my wife did her senior thesis looking at the role of a particular gene is involved in the leg development of a particular bug.  Her idea about how the world works was that this gene was needed, and she tested it by blocking expression of the gene, and observing that the legs did not develop.  An economist would say that her model of how the world works looked like this:

She thinks this is a reasonable model, because when you block the step in red, you don't get leg development. This is also how economics is supposed to work, and it is how it generally does work.  The model is usually a little more complicated than this, because there are a lot more moving pieces. Still, the model could be as simple as this:

Which with only a little bit of math and thought gives us this:

This is the model of supply and demand, it has a TON of evidence behind it, and it is the idea that prices shift until there is as much supply as demand. This is called markets "clearing" (because there is nothing left unsold), and it is the basic model that economists fall back on to underly everything.  It is to economics what F=MA is to physics.

Further, we can understand a lot of the world of economics by using variations of this on this idea, so much so that its easy to get the idea that we really understand what is going on here.  But there is a catch.  Like F=MA, this is true, almost.  Just like F=MA does not explain everything in the universe (F=MA stops working when you have really big and fast objects), models based on markets clearing also fail in particularly weird cases.  Like recessions. Specifically, the market clearing explanation of recessions, the Real Business Cycle theory, does not include real, involuntary, unemployment.  Seriously, the wikipedia page linked literally does not mention unemployment.

And so we are left with two major camps of economics:  the ones that base all of their work off of the assumption that markets clear, and the ones that relax the market clearing assumption, and come up with a model of how the world works that explains our current experience.  The ones who did the former can be found in the pages of the Wall St. Journal, and the ones who did the latter trace their conceptual roots to Keynes.

With unemployment running at 9.1%, I think we can agree that the evidence pretty profoundly discredits the market clearing models, which leaves us with only one major group of models about how the economy works, and they all say some variation of: "Stimulus, for God's sake the government needs to borrow and spend!"  If you are against stimulus, I challenge you to carefully lay out an explanation of how we get unemployment.  I'm not saying an exact description of the world, I'm just saying a sort of story, like the bubbles for supply and demand, that explains why we have unemployment.  As an example, here's mine:

Consumer Confidance

Jacques is nothing if not confidant.  He seems always confidant he can take on another dog in a fight, always confidant that I will re-fill his food bowl, and always confidant that when I come in the front door it is because I want to play with HIM.  Perhaps his overwhelming confidence that I will continue to feed him and give him treats is why he never saves for later.  This is also exactly how consumer confidence works.  If consumers are confidant, they spend, if they're less confidant, they save, which is why when a pundit on NPR not long ago said this: "the economy needs consumer confidence to come back, it will recover when consumers start spending again," I asked myself "spending what money?"

It is not a psychological quirk that is making the average consumer try their best to spend less than they earn (my explanation of what impact that has here, Krugman's careful model of how that works in this paper), they are trying to save money because their combination of debt, assets and rational economic outlook make saving the only sane choice.

With the economy the way it is, asking people to spend instead of save, that is asking to take on yet more debt, is both impractical, and more importantly a really bad idea. Remember that the economy took a dive because people realized all at once that consumers had too much debt, and couldn't repay all of it. Asking them to shut their eyes, pretend like they didn't realize that, and pull out their credit cards would only set us up for another 2008. This recession will get better when there is a way for the private sector to get out of debt, whether it is through inflation that makes the debt worth less, default in which the creditors just get hosed, or through expansionary fiscal policy in which the government borrows so the private sector can save, giving us new infrastructure ad a side effect.

Until that happens, I only foresee more malaise, and my biggest fear for the economy is that, like Japan, the whole world will see a "lost decade" that could well drag on for 20 years or more.

Saving the Economy

Jacques doesn't get savings and investment.  I've never seen him store a bone for later, and he doesn't seem to have any conception that he might want to save something up.  Which is fine, because he's a dog, he's not supposed to get how savings works.  But I realized that the concept of savings is something I don't think much about either. When I do, it is usually an issue of how much I have saved in the bank, but stopping to give it more thought, its actually a lot more interesting.

The reason it's interesting is that every single dollar that every single person has can either be consumed, or invested. Because dollars represent real wealth, some valuable service or product, it has to be somewhere.  If its a physical good, it can be sitting in a warehouse, or it can be a gizmo helping an assembly line run, but it has to be somewhere. If it's a service, for obvious reasons it has to be consumed on the spot. Because really, you can't "store up" an oil change or a manicure.  What this means is that every dollar's worth of wealth created must be either consumed or invested.

Another important way to look at it is this: every dollar that you save is really a dollar that you're lending to somebody else. Even if you're just stuffing dollars bills into the mattress, those are effectively IOUs for goods or services that you'll buy back later. The problem with this is that if I'm saving, somebody else has to be borrowing, which means that not everybody can save money at once. If my balance sheet gets another dollar into the black, that means somebody else's just got another dollar into the red.

Normally this is just fine. If people in general decide they want to save more, the supply of bonds goes up and banks have more money to loan, which means that the terms for saving get less favorable for the savers (you bank pays you less interest) and more favorable for the borrowers. This makes more people willing to borrow, since the rates are a bit nicer, and less people want to save, since the rates are a bit less nice. In other words, the interest rates are the price of money, and the price will shift until the supply of money equals the demand of money. Obviously, the situation is more complicated than this, but its really not that much more complicated. Your personal decision about how much money to save or borrow is influenced by interest rates, and the interest rates shift until there's exactly as much desire to save as there is to borrow.

Here's where it gets tricky though. Sometimes, everybody gets scared, and wants to save. Something happens, and everybody realizes all at once that they're not saving enough (maybe the house that they were counting on getting them through retirement just became worth less than their mortgage). In normal times, this would be accompanied by a downward shift of interest rates until somebody wanted to take their money and spend it, often by investing in a business. These are not, however, normal times.

Because very quickly, in 2008, we discovered that interest rates have an inherent lower bound. They cannot be significantly less than zero, because stuffing cash in your mattress is effectively saving money at a 0% interest rate. What this means is that, if a 0% interest rate is not enough to get people investing, then people just won't spend or invest everything they earn. Which cannot happen.

What can happen is that the total amount of wealth created drops (and people get laid off) until people once again spend everything they earn, but now because they have to (groceries and heating bills are pretty much unavoidable). This is what's called a liquidity trap—everybody wants safe, or "liquid" assets all at once, and the interest rates cannot go lower than zero, so they can't be convinced to put their assets into riskier investments. There is a shortage of liquidity, and this is what happened to Japan around 1990, after which they had a span of anemic growth and bad times for their people. When the economics textbook on my shelf was published, this was called their "lost decade," though as it continues into roughly year 18, its hard to know exactly what to call it.

What this means for our economy today is this: there is not nearly enough spending, we cannot ask individual households to spend, since they are already in risky fiscal positions, and without being able to lower the interest rate further, businesses are unlikely to invest either, given the terrible economy they face. So, to fix this, we need to do one of two things: All agree to invest at once, or find a way to lower the interest rates below zero.

If we all agreed to invest at once, it would work out great for everybody. We'd get the stuff that we bought (I suggest things like fire trucks, schools and water systems), and once the economy picked up again businesses would be more willing to invest and borrow, which would let consumers save, allowing us to go back to "normal times." This option is, of course, government spending, in which we all agree to borrow money at the fantastically low rates the government has available (2.17% for a 10 year loan as of Wednesday) and spend it on things that need fixing, like our abysmal school and elderly water distribution system.

The other option is to find a way to further lower interest rates. The reason that this is possible is that nobody really cares about the nominal interest rate, they care about the interest rate compared to inflation. What that means is that the real interest rate, that is the nominal rate less the rate of inflation, can be less than zero. So, if we had some solid inflation, perhaps 4%, we would have room to make real interest rates negative, which would encourage investment and spending, which would, at the very least, lead to full employment.

Either one of these options would help the economy. The government spending option has the huge advantage of leaving us with better roads, water systems, and schools, as well as avoiding the risk of another housing bubble style side effect of low interest rates.  However, as a young person with a bright red balance sheet myself (school was expensive), I'd be happy with either option, because both would make it much more likely for me to spend the next decade with a good job.

In Which I talk to Jacques About the Stimulus

So, Jacques came home from the dog park and said one of the popular dogs was telling everybody that the trillions of stimulus had failed completely. So, I told him that there are two issues here—the 8 trillion number needs to be broken into two pieces: about 800 billion in actual spending/tax cuts to stimulate the economy, and the balance in loans to banks to avoid economic disaster. While we should probably have gotten more back for our loans, they did their job by keeping banks from failing and throwing us into a large depression.

As for the 800 billion of stimulus, I said he should ask the other dog how he KNOWS that it failed? The economists using a Keynesian model said all along that the stimulus was too small, that it would pull us out of a recession, but leave the economy scraping along at about 9% unemployment, leading people to say that the stimulus failed. If they don't believe you, read what Paul Krugman said about the stimulus before it was passed, in January 2009 (the last paragraph is particularly presentient). Without the stimulus package, we'd be looking at a much worse picture, or so says the CBO. 

The especially important thing to see about the stimulus is that there were two different camps that predicted it's failure. There was the WSJ crowd, who predicted (more than 2 years ago) that sooner than later the bond market would lose faith in the US government debt, and we'd see soaring bond rates. The inflation adjusted interest rate on a 10 year Treasury is currently less than zero, the absolute rate is less that 2.2%. 

What I take that to mean is that one side predicted the outcome almost perfectly (seriously, because you might not like links, I've quoted the last paragraph of the Krugman piece below), and one side keeps talking about the bond vigilantes who never come. One side is using the economic models I learned about in Econ 101, the other side keeps talking about confidence. I'll take the models that accurately predict the market 2 years out over talk of confidence and fear of bond vigilantes that never come.  And that's what you tell the other dogs!


Krugman:

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”