Posts Tagged ‘economics’


Re: Can the Federal Government Really Create Jobs?

   Posted by: Robert    in News

Over on Time Magazine, Barbara Kiviat asks the question, “Can the Federal Government Really Create Jobs?”  The answer she comes to is a bit surprising, in that it’s as close as I can imagine anyone from a major news outlet other than Fox News will come to saying that Obama is on a fool’s errand with his latest push to create new jobs.  In an article which is compellingly lucid, Ms. Kiviat concludes that “there are few obvious steps for a government looking to create jobs.”  Along the way, she things which are interesting, and which are certainly worth a closer look.

If we want firms to go out and hire, why not give them an economic incentive to do so? This could be done by flat-out paying companies to hire, or by reducing their share of payroll taxes (the money that gets withheld from workers’ paychecks to pay for Social Security and Medicare). Either way, adding a new worker becomes cheaper.

A position such as this one fits extremely well with what we know of the remarkable benefits of reducing taxes on businesses.  As we have seen repeatedly throughout history, lower taxes lead to a healthier and more productive economy.  There is, however, a noteworthy difference between lowering taxes and “paying companies to hire.”

Lowering taxes provides a sustainable benefit to businesses which they can rely on and pass along to employees in the form of greater hiring, higher wages, or to consumers in the form of lower prices.  “Paying companies to hire,” however, provides no such sustainable benefit.  Giving an incentive to hiring may cause a sudden rise in hiring, but it also keeps the tax burden high (indeed, probably higher, to pay for the payments) and encourages companies to hire people for terms which are effectively temporary, only permanent enough to qualify the company for the benefit.  Companies may profit, at the expense of greater noise in the job market and few new long term jobs.

Of course, what is certain is that the Texas approach of raising unemployment taxes is nowhere close to the right answer.  For companies which are already having trouble making payroll, adding additional costs will only further push businesses past the red line and generate further layoffs.  For companies that are uncertain whether or not to hire employees, the greater tax places a definite thumb on the “no” side of the scale as the penalty for overestimating their labor needs increases.

The conundrum: demand in the U.S. is overwhelmingly consumer-driven and people need to have jobs to feel like it’s once again safe to spend money. It’s a classic chicken-or-egg problem. Direct hiring by the government could, theoretically, sidestep the impasse. The question then becomes whether such a program creates more economic benefit than it does economic inefficiency by having the government dictate job creation. Consider that one criticism of the WPA was that it prevented people from moving to jobs where they would have been more economically productive — and actually slowed down the post-Depression recovery.

Much has been made throughout the recession of this so-called “chicken-or-egg” problem being a disaster of contrary incentives resulting in a death spiral to total economic collapse.  At every step along the way, that “conundrum” has been a justification for invasive government action: The only economic rules the federal government needs to follow are the ones that it doesn’t feel like ignoring.  By spending when nobody in their right mind would spend, by hiring when nobody in their right mind would hire, the government is in a unique position to prime the economy.  Or so the argument goes.

But like all good paradoxes, there are two sides to this story.  While the stock market downturn may have been a disaster for people who recently retired or who intended to retire in the near future, it was a boon to a younger generation of investors who are just beginning their economic journey.  In the age old adage of “buy low, sell high,” what better time could there be to buy than at the bottom of a recession?  What better time could there be for hiring than when labor rates are low?

In a free market, one person’s problem is another person’s opportunity.  As prices fall and investment becomes more attractive, new investors enter and prices eventually level off.  As the private sector creates value, that value fuels future growth in the economy.  From future growth comes future jobs, and long term recovery.

The government, by contrast, cannot participate in that process.  They produce no goods and they provide few services. Every dollar the government spends paying its employees came from taxing the private sector; taxing companies which could have given that person a productive, value creating job.  The idea of government hiring to create jobs is a broken window fallacy: Instead of having an employee who makes suits, you merely have an employee.  Nobody is better off.

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Stimulating Seniors

   Posted by: Robert    in Politics

Once again it appears that Obama is preparing to redistribute taxpayer’s money to a favored constituency, budget deficit or not.  The next stop on the Obama Money Train, it appears, are senior centers and nursing homes around America where he will come riding in with a pile of $250 checks, totaling to $13 or $14 billion worth of increased debt depending on who happens to be counting.  The move is already being applauded (of course) by seniors groups and the AARP, and has the support of top Democrats in Congress.  If the Associated Press is to be believed, it looks like there’s even Republican support, though they’re at least (pretending to be) looking at the increase in deficit spending with concern.

The money handout comes, supposedly, as a result of the formula used for calculating annual cost of living adjustments (COLA) for Social Security dictating that there would be no increase in payouts this coming year. COLA is based explicitly on inflation and is intended to make sure that the purchasing power of payments to beneficiaries will not diminish over time.  Falling gas prices and a stale economy have actually caused a slight bit of deflation over the course of the past year.  To offset the lack of an official increase from COLA, Obama apparently wants to give away $250 to “senior citizens, veterans, retired railroad workers and people with disabilities.”

Looking over the list of recipients reveals an interesting collection of intended payees.  Senior citizens are obvious recipients as they are the primary beneficiaries of Social Security.  People with disabilities also make sense, because many of them are eligible for Social Security as well.  The payment to veterans is a little surprising; I wouldn’t have thought that they are on Social Security any differently than the rest of us, though many do get government pensions.  And then there are the retired railroad workers; where did that come from?  Plus, looking over another article, it looks like maybe all retired government folk (and railroad workers) might actually receive the benefit, whether they qualify for Social Security or not.

I wonder how many other favored constituencies might be added to the list before it’s all over.

Of course, the correct number to add is something on the order of negative four.  COLA is meant to maintain a level of purchasing power for Social Security beneficiaries, not to be a perpetually increasing rate of wealth redistribution from the young to the old.  We should be thankful, in fact, for the stagnation, as it increases seniors’ purchasing power without driving the program closer to its already impending bankruptcy.

As for the notion mentioned in the article that seniors deserve more because the cost of drugs has gone up, why is the payout not $250 to everyone who buys prescription drugs?  If that was really the concern, tying the money to drug purchases is the only logical way to address it directly.  Of course, the cost of drugs is being handled a different way: Medicare D is seeing an increase, which will serve to offset the (supposedly) skyrocketing cost of prescription drugs.

It is probably to anyone’s political turmoil to vote against this latest round of absurdity.  Nevertheless, seniors are going to get exactly what they deserve under the law.  There is nothing unfair about honoring a standing agreement.  It is, however, quite unfair to the younger generations to siphon their money and change the rules at a time when wallets are already tight and nearly one in ten members of the working population is not actually working at all.

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The Case Against Insuring Illegals

   Posted by: Robert    in Politics

In skimming their website for something else, I stumbled across a Newsweek article making the case for health insurance for illegals.  The main thrust of the article is that there is an economic advantage to insuring people who are in the country illegally.  The advantage is based on the notion that illegal immigrants are, for their age and occupation, generally healthier than a similar American.  Because of the way insurance works, a healthy individual paying into the system reduces costs for everyone else because they contribute more money than they demand.  Unfortunately for Newsweek, even assuming that the average illegal is healthier than the comparable American, there are at least two fundamental flaws in the article’s argument providing them with insurance.

The first and most glaring flaw is that the article appears to simply assume that illegals are going to pay for their insurance like the rest of us.  Given that these people are “undocumented,” that they do not pay taxes, and that they do not appear on official company payrolls, this appears to be an assumption that deserves close scrutiny.  Furthermore, if the attraction of hiring illegals is the fact that they can be paid below minimum wage for long hours and given few benefits, these people are certainly not all that wealthy.  Most probably couldn’t afford insurance if they wanted to.  Thus, in order to be covered by universal health care, their premiums would need to be subsidized by raising the premiums (or taxes) on none other than the people whose costs they are supposedly bringing down.  Insuring illegals is a losing proposition the instant one of them goes to the doctor.

The second flaw is somewhat more subtle, but it amounts to the author assuming that the number of sick illegals entering the country will not increase.  That assumption will undoubtedly be false.  The reason illegals are so healthy now is because they need to be in order to not only cross the border but to then also work the long hours of physical labor required for them to succeed.  Insurance for illegals adds a new form of success: Without having done any work or paying a dime, an illegal would be cured of all that ails him.

It is a good sign that even the left understands the need to talk about economics.  They would be better served if their arguments were correct.  The economics are undoubtedly against the left on this issue.  Illegals should not be spending our tax dollars in our hospitals while American citizens are standing in line; they should be where they belong — at home.

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Re: How Did Economists Get It So Wrong?

   Posted by: Robert    in Politics

In a New York Times op-ed, Paul Krugman offers his answer to the question of where economists erred in their treatment of the economic crisis.  (The article is lengthy and probably not all that interesting, but it does have a flow that keeps it going.)  While I may not be as educated in economics as Mr. Krugman, there were a number of points in the article that struck me as strange, lacking in context, or simply wrong.

For all the length and discussion, his basic answer to the topic question is that economists got it wrong by abandoning Keynesian economics.  Readers will find it unsurprising that his proposed solution going forward is to start thinking, again, more like Keynes.  In short, he believes that investors and economists came to rely too much on a view of financial markets which holds that they always get the right answer given the information available at the time, that “bubbles” are impossible, and that people in general can be counted on to act rationally.  Reality, he claims, is a lot more messy, and often needs to have the government involved to swim against the free market tide to bring stability to an otherwise unstable system and to head off the inherently bad problems of recession and unemployment.

The largest problem that I see with Mr. Krugman’s argument is that it ignores entirely one of the greatest destabilizing forces currently active in the market: The government itself.  Instead, Mr. Krugman appears to operate from the view that the current market is a largely untamed free market wilderness.  This position is not uncommon among liberals or other advocates of a centrally planned economy, who tend to label any market that does not behave as they desire as “free” (even such heavily regulated markets as health care) and in need of regulation.  In reality, it is hard to think of a market that hasn’t got a federal regulatory agency dedicated to it and which isn’t subject to countless regulations, not to mention the threat of lawsuit, even during “deregulation” periods.

Government meddling is certainly one factor which can, and likely does, cause “bubbles” to form in the economy.  A “bubble,” it has always appeared to me, is little more than a market response to incorrect or incomplete information which paints a rosier picture of the market than actually exists.  A bubble “bursting,” then, would simply be the market correcting itself once new information comes to light which points out investors’ exuberance.  In the late 1990s, the “tech bubble” grew from investor confusion as internet companies grew and appeared to succeed despite having no obvious business plan, strategy, revenue stream, or even product.  It burst when reality set in and people started to realize that traditional business rules applied to the web after all.  We know that the “housing bubble” was caused at least in part by the Fed driving interest rates (and, thus, mortgage rates) down and by the government pressuring lenders to make loans to people who had no financial business buying a house.  Here, too, something eventually had to give, especially once new government “mark to market”kicked in and eliminated any sense we might have had about how much anything might be worth.

Following any of the bubble bursts is a period which, as a matter of definition, we get to call a “recession.”  Whether or not this is bad would seem to mostly depend on whether or not recession values are more reflective of reality than the bubble values which preceded them.  If it is bad to live in the fantasy world of a bubble, it should be better to live in a post-bubble world where the value of things more closely reflects what the value ought to be.  Yet, Obama’s first reaction to the housing bubble collapse — of which Mr. Krugman seems to implicitly approve — was to exert government force to drive housing prices back up to their bubble levels, effectively locking in the bubble forever.

Of course, evidence so far suggests that even Obama’s Reality Distortion Field is not strong enough to pull that one off.  Despite the TARP money, the credit markets are still tight.  Despite the stimulus, unemployment continues to rise.  Despite bailing out GM and Chrysler, both companies still went bankrupt.  Despite every Keynesian action Obama has taken, he has utterly failed to produce a single long-term positive result for the economy as a whole.

So, how did economists get it wrong?  Well, Mr. Krugman certainly does have a point that it makes little sense to consider the correctness of housing prices by comparison to what other houses cost.  It also seems likely that they did put too much emphasis on the free market, neglecting to carefully analyze what effect government regulations were producing.  Whatever the conflicts within the economics community, we would seem to do ourselves no favors by pretending that central planning is any sort of economic panacea.

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Healthcare costs so much because it costs too little

   Posted by: Robert    in News, Politics

According to the Associated Press, Senate Finance Committee Chairman Max Baucus has managed to find a way to make even less sense than Obama on the subject of healthcare.  Assuming that the AP article is an accurate reflection of what Senator Baucus actually said, he has just added another huge contradiction to the healthcare debate.

From the article:

A key Senate chairman says he hopes to convince President Barack Obama that taxing some employer-provided health benefits will help control escalating health care costs  … Baucus says the tax-free benefit packages Americans now enjoy are a big factor in the high costs of the country’s health care system, because they provide workers free or low-cost access to too many health care services.

So, according to Senator Baucus, a “big factor” which makes healthcare more expensive are “tax-free benefit packages … [that] provide workers with free or low cost access to … health care services.”  Put another way, healthcare costs so much because people don’t  have to spend a lot of money to get it.  Yet a third way, healthcare is expensive because it’s not.

Senator Baucus’s solution, which I guess is pretty obvious if you can swallow the contradiction above, is to tax private healthcare benefits.  The line of reasoning is certainly sound: Make healthcare more affordable by increasing the price.  Of course, with President Obama wrangling with care providers to knock costs lower, the only way to jack up the price is to do so artificially, with a tax.

Of course, it is possible that I misrepresented the Senator, and honesty demands that I address his “too many” straw man.  While some people certainly do behave this way, I know of very few people who seek out medical services that they do not actually need.  Indeed, part of the reason America’s emergency rooms are so full is the fact that most people don’t seek out medical services until they’ve long past needed them.  Even if you assume that people are overconsuming healthcare, are they doing so to the tune of offsetting nearly 46 million people who are not insured at all, and for whom President Obama wants to guarantee “free or low-cost” coverage?  And even if the answer is somehow, astonishingly, yes, exactly how is the government going to determine when a person has used “too many … services”?  And why wouldn’t private insurers do the same thing if they could?

The string of illogic given to us by Senator Baucus is only reconcilable with the proposition that he wants to end private insurance without saying so.  If President Obama goes back on his campaign rhetoric mocking McCain for supposedly having similar ambitions, it will be proof even stronger that his goals are the same.

Perhaps we should have given honest debate a health insurance plan ages ago.

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Bank Note Recalls and the Time Value of Money

   Posted by: Robert    in News

As I was on the road to an appointment this morning, I happened to flip on the local talk radio station in my car.  The show that was on at the time was doing some sort of a call-in segment which included what at first sounded like a rather confused sounding businessman arguing with the radio show host.  As the argument went, the businessman was saying that the bank had foreclosed on his business mortgage even though he was making all of his payments, with the radio show host insisting that banks just don’t do that.  Since banks really don’t just do that, I figured that the guy had something else going on that he wasn’t telling anyone, and it wasn’t too disappointing when the host hung up on the guy.  When a second guy called in saying the same thing happened to him, the radio show host sat there confused, and I got to wondering what might make this make sense.  I think the answer lies in the time value of money.

To begin with, there was certainly nothing incorrect about the radio show host insisting that banks don’t foreclose mortgages against people who are making their payments even if they have the right to.  The way lending programs work, banks give you a lot of money right now, and profit when you pay it back with interest later.  To a bank, foreclosure is generally an outcome best avoided and most will go to considerable lengths to avoid foreclosing on a property.  The reason, quite simply, is that banks have very little desire to own real estate; it’s expensive to maintain, not easy to convert into another type of asset, laden with taxes, and bothersome to sell.  As a result, banks sell them for prices well below market rate in order to get them off the books quickly.  In the end, the owner is out the property and the bank suffers a substantial loss on the loan.  Since everyone loses in foreclosure, it seems as though it would be most irrational for banks to foreclose on companies which are making their payments.

However, what might make the move make sense is the time value of money.  A central axiom of finance is that a dollar today is worth more than a dollar tomorrow.  From the bank’s point of view, a mortgage is a series of promises that they will receive a dollar today, a dollar tomorrow, a dollar the day after that, and so on until the mortgage is paid off.  This is normally good for steady cash flow, but not so good for getting money right now.  With the economy still in crisis mode, banks have a strong desire to have cash available to them immediately, and one way to do that and to reduce their liabilities at the same time is to demand final payment on mortgages, foreclosing where necessary.

To understand why a bank would close out mortgages of well paying borrowers, it is only necessary to consider where else the banks might get money from.  Borrowers who aren’t making payments are probably in a financial position where they can’t afford to make payments, which means they certainly aren’t in a position to repay the mortgage in full.  Borrowers who are making payments and who have enough capital will likely find a way to repay or refinance the mortgage rather than suffer major damage to their credit rating, so the bank will get their money.  Borrowers who are making payments but do not have enough capital to cover the mortgage, borrowers like the call-in businessmen, get caught in foreclosure.  Banks could be gambling for money between the second and third class of borrower.

While I have no particular insight to know if my conclusion is correct, it does at least seem plausible that banks are making a money play to get some cash on hand today rather than waiting for it to trickle in on schedule later.  Banks do have a need for immediate cash and there is a class of borrower which can supply money after sufficient arm twisting.  It certainly appears to be a horrible business practice, but at least it might make sense.