New CEA head falls well short of the (macro) mark

The news today is not good and you might want to go to the end and get the music segment rolling before coming back to the start to read the rest. The newly appointment of Alan Krueger to the Chair of the US President’s Council of Economic Advisors (CEA) has been widely applauded. Somehow the press think that he might actually change the course of policy and provide for a resurgence of employment. If you examine his early academic work you realise he has a concern for low-pay workers that many mainstream economists eschew. But he hasn’t published anything substantial in macroeconomics or banking. His recent macroeconomics commentary is not encouraging. My conclusion is that the new ew CEA head falls well short of the (macro) mark.

Alan Krueger takes on a leading economic role in the US Administration after a long-list of failures over the last few years including Lawrence Summers, Christina Romer, and Austan Goolsbee. The press are calling him a labour economist which just means his major work has been studying labour markets. I don’t expect much will change.

His early work on minimum wages was excellent. This article (September 1, 2011) – Minimum Wage Laws and the Labor Market: What Have We Learned Since Card and Krueger’s Book Myth and Measurement? – provides a very contemporary commentary on Krueger’s contribution.

His 1995 book with David Card really set the cat among the conservative pigeons by demonstrating that imposition of minimum wages does not damage employment. The neo-liberals went wild. I attended many presentations by second-raters all taking aim at the book.

Typical stuff – starting with “lets assume we live on the planet X which is not Earth” – “lets assume we collect coconuts and swap them with each other” – “lets assume there is no money in this economy for simplifying the argument” – “lets assume the government doesn’t exist but a minimum wage policy is introduced nonetheless” – then after a page or more of second-rate mathematics – we get the conclusion – “Card and Krueger are wrong – minimum wages stop workers collecting coconuts”. Many times I have heard that sort of rubbish at conferences, workshops, etc.

The most significant response to their work came in 2000 (Neumark and Wascher) which was touted by the conservatives as the definitive repudiation of Krueger and Card. Like most of the mainstream responses to anomaly (that is, when their predictions fail dramatically) this work was poor and failed the most basic tests of controlling for multiple influences on the item of interest. As a critique it failed badly.

Such has been the robustness of Card and Krueger’s minimum wage work that even the OECD has started to back off its extreme neo-liberal position. The 2006 OECD Employment Outlook entitled Boosting Jobs and Incomes, is based on a comprehensive econometric analysis of employment outcomes across 20 OECD countries between 1983 and 2003. The sample includes those who have adopted the 1994 OECD Jobs Study as a policy template (that is, pushed for lower minimum wages and other labour market deregulation) and those who have resisted labour market deregulation.

The report provides an assessment of the Jobs Study strategy to that date and reveals significant shifts in the OECD position. OECD (2006) finds that:

• There is no significant correlation between unemployment and employment protection legislation;
• The level of the minimum wage has no significant direct impact on unemployment; and
• Highly centralised wage bargaining significantly reduces unemployment.

No mainstream research has convincingly showed the opposite despite students being taught every day that wage increases damage employment particularly at the low-pay end of the labour market. This is one of those areas that the mainstream will never concede that their competitive labour market model is deeply flawed and is totally inadequate when it comes to understanding the dynamics of low-paid jobs.

Please read my blog – Federal minimum wage increase not generous enough – for more discussion on this point.

There was also the 2004 book he co-authored with James J. Heckman – Inequality in America” – which focused on the role of human capital investments in generating unequal income and wealth outcomes. They argued that low-income workers would benefit from more investment in human capital. A major finding was that more resources should be devoted to public schooling which they demonstrated provided a high return per public dollar. The book was fairly orthodox but it is fair to say that it was on the liberal end of the mainstream – that is, a concern for equity, a signal that inequality was a market failure that could be reduced by public spending intervention targetted at the poor.

What about now though?

Krueger has had a recent chance to influence job creation given he was the assistant Treasury secretary for economic policy in the first two years of the Obama administration. His input promoted the “cash for clunkers” policy which seemed a far-fetched way to create work.

Some have also noted that in 2009 as the recession was deepening, Krueger advocated a rise in taxes. It is this New York Times article (January 12, 2009) – A Future Consumption Tax to Fix Today’s Economy – that people refer to.

Krueger was somewhat non-committal which at the time (when I read the article) I noted captured a sense of desperation and an unwillingness to cut to the chase – which would be – wide-scale public sector job creation.

In that article, he is clearly aiming to comment on macroeconomic policy – and it is one of rare public commentaries available from him in that context.

He claimed that “(a)ny casual observer knows the United States faces enormous economic challenges in both the short and long run” which he characterises as:

On the one hand, the economy is contracting, people are cutting back on their spending and the economy faces a possible downward spiral with fear of job loss, causing consumers to spend even less, which in turn would cause more job loss – the so-called paradox of thrift. On the other hand, Americans save very little, critical infrastructure has been neglected, and the president-elect warned of government deficits in the trillion-dollar range for years to come.

Efforts to spur short-run consumption can worsen the long-run problems by increasing the government budget deficit and depleting personal savings.

In that statement, I learned that he would not bring any new macroeconomic thinking to the US Administration. I learned that his macroeconomics is probably in the deficit-dove category and while he has clearly been concerned with under-privilege and the plight of low income workers and has rejected some of the extremes of mainstream microeconomics, he still is in the mainstream macroeconomic cast.

Stifling as it is.

There is no long-run budget problem in the US. There might be a real problem in the distant future – that is, the economy might not be able to sustain real standards of living given the available real resources, possibly environmental constraints, and a growing population wanting access to those resources (which includes the rising middle class in China and India).

But what will be available for sale in US dollars in 2050 will always be able to be purchased by the US Government if it so chooses. The US government will still have the same capacity then to purchase it as it has now – infinite minus 1 cent. If there are idle resources then the government will be able to put them to productive use just as it could right now if it chose.

What the American people have to eventually learn is that the massive waste of labour embodied in the 9 per cent official unemployment is the result of a definite choice by the US Federal Government to leave the workers idle. The US Government can always purchase that labour power and put it to productive work if it chooses.

Given there is a zero private bid in the market for the labour such a purchase (at minimum wages) would not even alter the wage structure (via competition).

Anyway, in 2009 Krueger claimed that he had a solution to “both the short-run and long-run problems”:

Why not pass a 5 percent consumption tax to take effect two years from now? There are many different ways to implement a consumption tax, but for simplicity think about a national sales tax. In the short run, the anticipation of a consumption tax would encourage households to spend money now, rather than after the tax is in place. Along with the rest of the economic recovery package, this would help jump-start spending in the economy and thereby increase production and employment. In the long run, a 5 percent consumption tax would raise approximately $500 billion a year, and fill a considerable hole in the budget outlook. In addition, a consumption tax would encourage more saving in the long run. Many economists consider a consumption tax an efficient way of raising tax revenue, especially in a global economy. The prospect of greater revenue flowing into federal coffers would probably help lower long-term interest rates because the government would need to borrow less down the road, and further bolster the economy.

As a reflection of his macroeconomic judgement this would have been a disastrous policy innovation. It would have started in January of this year just as things have started to go backwards again as the fiscal stimuli around the world have been withdrawn.

It is highly unlikely that consumers would have been tempted to spend up big in 2009-10 in anticipation of a 5 per cent price hike in 2011 because the scale of the unemployment problem, the collapsed housing market and the hang-over of private debt were powerful deflationary forces and dwarfed the threat of a 5 per cent price rise.

Krueger acknowledges that the “main downside” would be to “reduce economic activity” and justifies the policy given that knowledge with this neo-liberal gem (aka as a myth):

But the government must make critical trade-offs, and a consumption tax could be the most efficient means to raise revenue to finance essential government functions. Over time, if the budget picture improved, income taxes or corporate taxes could be reduced and the revenue replaced by the consumption tax.

What critical trade-offs must be made at present in the US (or in most nations)? He is referring to a trade-off – budget reduction versus growth – which is not an applicable trade-off in a fiat monetary economy with 9 per cent unemployment and massive unused productive capital capacity.

This is the conservative myth that the Democrats have fallen into – that public finances have reached a critical juncture and some austerity is required to save the government from going broke.

It is such a ridiculous construction. The opportunity cost of a massive public sector job creation program right now is next to zero given how much idle capacity is available. The “costs” of the program would be the extra food and real resources that would be consumed/used as a result of the program. The budget outlays cannot be considered a meaningful “cost” given that the US government creates the funding from no-where courtesy of its capacity as issuer of the currency.

So in 2009, Krueger wasn’t impressing me as a likely contender for the top CEA job in Washington.

On July 1, 2011 he gave an interesting interview to Bloomberg which emerged as this article – Princeton’s Krueger, Jobs-Credit Advocate, Picked as Obama’s Top Economist.

In that interview he said:

I favor the idea of having a new jobs tax credit … If companies increase their payroll by an employee, they could get a $5,000 tax cut to offset their additional hiring costs … Eventually, companies reach a point where they are so lean they do need to hire more … But they also need to be more confident that demand will be there for their goods and services.

Tax credits amount to wage subsidies which are designed to increase labour demand. Mainstream economists have generally increased the emphasis on wage subsidies to private sector employers relative to public sector job creation in the belief that provision of jobs that closely resemble mainstream employment produce superior employment outcomes.

The presumption is that firms are not hiring because labour is too expensive. The reality is that they are not hiring because there is insufficient demand for the output. Making labour cheaper to produce goods and services that will not sell will not increase employment.

Another major issue with wage subsidies in the private sector is whether additionality can be ensured. Consequently many countries attempt to design programmes that minimise displacement and substitution. They typically fail. Firms might convert jobs into wage subsidy jobs and then churn workers through them to capture maximum subsidies.

For a thorough critique of this approach to job creation read CofFEE’s major 2008 Report – Creating effective local labour markets: a new framework for regional employment policy.

Also, please read my blog – What causes mass unemployment? – for more discussion on the origins of unemployment.

In a note (August 29, 2011) signifying his approval of the appointment, his Princeton colleague Paul Krugman said:

His advocacy of job tax credits comes from an attempt to work within political constraints, not lack of interest in more decisive solutions.

Which just about says it all really.

Conclusion

The US has been enduring an official unemployment rate of over 9 per cent for some two years now with broader measures of labour underutilisation over 16 per cent. That is a catastrophe by any measure but it is only recently that we have heard some noises from the Government about the need for urgent job creation.

The most simple way to achieve that is to introduce direct public sector job creation – in public works, community development and environmental care services. There are millions of productive jobs that could be created which would fill urgent need in the US at present. There is no shortage of productive jobs – just an absence of someone who will pay the wages.

I don’t predict that the new appointment is going to change the policy direction. His macroeconomic statements are not encouraging and he jobs proposal falls seriously short of the mark.

And while on pay …

It is always good to know when pay levels are linked to the performance levels of a major company. Yesterday, Australia’s largest telco, Telstra released it 2011 Annual Report. The company used to be 100 per cent public owned before the neo-liberal privatisation push began. The privatisation has been a disaster for the shareholders who were persuaded to support the sell-off.

As background you might like to read the following blog – The Futures Fund scandal. How did the Government ever get away with persuading us to buy shares in something we all already owned? And then to look us in the eyes as that wealth plunged in value!

Here is the latest share price chart for the company (since 1999) – the privatisation occurred during the 1990s.

Anyway, time moves on and if you read the 2011 Annual Report you would conclude that the company is in great shape – at least if you read the executive pay details before getting any further.

The ABC News reported that:

The total pay of Telstra’s top executives has jumped by more than 70 per cent, despite an 18 per cent fall in the company’s profits.

The best one was that:

The fourth highest-paid executive was Bruce Akhurst of phonebook company Sensis (which is a division of Telstra). He predicted Sensis would make a loss for the next three years, but he still pockets $2.9 million – an increase of 53 per cent.

A commentator said that “it has been a difficult year for Telstra and executives have had to work hard”. That has to be a joke. But it is September not April!

Friday music

After that piece of news I need some music. This is a classic track from Linton Kwesi Johnson – Reggae fi Radni. It is about Dr Walter Rodney, a Guyanese academic historian who was assassinated in Guyana in 1980 after he formed the Working People’s Alliance against the oppressive PNC government.

His lasting legacy was a 1973 book – How Europe Underdeveloped Africa – which is a must read. You can download it from HERE or read it on-line HERE. It is salutary reading.

This is the 1983 studio version from Making History. Here is a Live Version from 2000 with introduction (5th track of 21 minute collection).

Saturday Quiz

The Saturday Quiz will be back sometime tomorrow.

That is enough for today!