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The White House's capitulation on deficits

obamaondeficits1.jpg

President Obama's statement naming Jack Lew to head the Office of Management and Budget said a lot about the sorry state of the administration's message right now. “The experience and good judgment Jack has acquired throughout his impressive career in the public and private sector will be an extraordinary asset to this administration’s efforts to cut down the deficit and put our nation back on a fiscally responsible path," Obama said.

It's a statement that could've been delivered a by a hardcore conservative: You'll like Jack Lew, because he cuts deficits and hasn't spent his whole life in government. As it happens, I think people actually will like Jack Lew, though that'll be because his experience doing this job before will help him do this job again. Lew will be a good public servant because of his long record of public service. Not his time at Citibank or the law firm of Van Ness, Feldman and Curtis.

But it's the total capitulation on deficits that signals the administration's problems going into November, and beyond. We appear to be locked in a slow and very jobless recovery. The Keynesian philosophy that the administration ascribes to has a solution to this, or at least an amelioration: Deficit spending in order to create jobs and get money moving through the economy so demand returns and the private sector begins to expand again. But the initial stimulus, though it did an enormous amount of good, was too small given the recession that followed, and the administration was never able to convince Washington or the Republicans or the public of its basic argument, which is that we needed to pair short-term deficit spending with longer-term deficit reductions.

And so here they are. They have an actual problem where the solutions point towards deficit spending, but have accepted the idea, at least in their rhetoric, that their political problem is that deficits are too high. But jawboning debt and promising that your new appointment will help you "cut down the deficit" doesn't leave much room to go the other way.

The reality, of course, is that there isn't much room to go the other way, and they don't have the votes to spend more on stimulus now and certainly won't have them after November -- a fact that's even more true now that budget reconciliation has been taken off the table. This isn't strategy, but reality. But that just means that for the foreseeable future, the administration will not be able to do anything about the central short-term problem facing both them and the country.

Photo credit: Pete Souza/White House.

By Ezra Klein  |  July 16, 2010; 10:30 AM ET
Categories:  Budget  
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Comments

It is a sad state of affairs that we are headed down this road, given the weakness in the economy. But the sad truth is that Democrats are having a hard time even getting 60 votes in the Senate for extending unemployment benefits during a time when sometimes hundreds of people are applying for a single job opening. There certainly aren't the votes for some massive $200 billion public works program like some of us might prefer. And like Ezra has said -- it's simple: Republicans have decided that anything Obama does should be filibustered (even if it was originally a Republican idea, like the deficit commission) so that he can be denied a victory. And especially so that the economy remains weak and pessimism remains high going into November. It's pretty blatant ("I hope he fails", "waterloo", etc.) and it's sad that it's not being more widely reported.

Posted by: vvf2 | July 16, 2010 10:49 AM | Report abuse

This is further proof that Ezra Klein, Matt Yglesias, and Paul Krugman are just wrong. Very smart people in the Democratic party is acknowledging that deficit reduction really is important. The capital markets that receive trillions of dollars of long term investments need to be comforted by moves to reduce the overextention of the United States financial position.

Obama, Biden, Geithner and others have accepted what the blogger community refuses to accept.

Posted by: lancediverson | July 16, 2010 10:58 AM | Report abuse

*ery smart people in the Democratic party is acknowledging that deficit reduction really is important*

This sounds an awful lot like the run-up to the Iraq war, where the conventional wisdom groupthink within the beltway made it "obvious" that people should do very, very stupid things. What we're seeing is that the beltway has more or less gone crazy, just as it did in late 2002.

*the capital markets that receive trillions of dollars of long term investments need to be comforted by moves to reduce the overextention of the United States financial position.*

Capital markets -- those that deal with bonds -- don't seem to think that the US will have any problems making payments on its debt.

Posted by: constans | July 16, 2010 11:04 AM | Report abuse

Bond markets, not capital markets, obviously.

Posted by: constans | July 16, 2010 11:09 AM | Report abuse

There is nothing "just wrong" about the need for stimulus spending-virtually all the dollars spent in unemployment relief go straight into the local economies where the payments are distributed so extending unemployment is an effective stimulus method. The issue here is the total loss of control of the political debate and the complete lack of framing of the issue by the White House political team. Canada,Brazil, China and several other nations avoided this mistake and have recovered where we have not because their stimulus plans were of larger relative size.

Posted by: bouvier7 | July 16, 2010 11:15 AM | Report abuse

Is honesty the best public policy? Should the White House level with the American people that it blew its best chance of success when it went with insufficient stimulus? Might that be the only way to get more stimulus (perhaps paired with long-term deficit reduction) and rescue the economy?

To be sure, the White House will run the midterms on the record they have (health care, FinReg, etc.), and not on its failings (poor job creation, watered down health reform).

What upsets me though is that the White House is left trying to spin the stimulus as a "win" although (a) it wasn't big enough and (b) the American people don't believe it because they don't see it. The White House is not leveling with the American people that by comprises of its own making, "the administration will not be able to do anything about the central short-term problem facing both them and the country." It's not dishonesty per se, it's politics. But, because the White House has chosen politics over candor, I get jittery wondering if they truly "get it" and if they have a plan.

The political calculus is (as it always is)survival: Run out the clock. Don't say you screwed up, throw a bone to the other side (i.e. Lew), and hopefully wake up the morning after election day with as small a dent in the majority as possible.

But, looking past election day and certainly looking at the economy's mid- to long-term prospects (as well as the White House's own survival past 2012), isn't an "honest" approach the key? Won't the White House have to level at some point? Or, are they going to have to "run out the clock" on the next Congress as well?

Posted by: pbasso_khan | July 16, 2010 11:16 AM | Report abuse

"But the initial stimulus, though it did an enormous amount of good, was too small given the recession that followed, and the administration was never able to convince Washington or the Republicans or the public of its basic argument, which is that we needed to pair short-term deficit spending with longer-term deficit reductions."

This would require admitting that their original stimulus target was not a technically derived "goldilocks" number (not too big, not too small, but just right) but rather the best they thought they could do and still get bipartisan support (which they didn't).

It would require admitting that they were wrong and Krugman, et al were correct, assuming that the President actually believes in Keynesian economics.

At this point, I wish we had done the $1.4 trillion back in 2009 just to prove (as much as it is possible in economics to prove anything) if Keynesian economics actually works or not.

What this episode also illustrates is that even if it could work in theory, the possibility of it ever working in real life is pretty small. Given the state of the country in January 2009, the largest Democratic majorities in Congress in a generation and the policy coordination with other G20 countries, this was about the most perfect set of circumstances for Keynesian policies to be implemented, and they still didn't do what the Keynesian economists thought was needed.

Posted by: jnc4p | July 16, 2010 11:17 AM | Report abuse

I am just saying that the president and his team have a lot of economic information to work with (probably more than bloggers). They also communicate more with financial leaders within governments and outside government throughout the world than political bloggers. Because of this, our administration appears to be concerned with deficits and the perception of overextention in the federal government's finances.

It is reasonable for me to think that they have good reason to believe what they are saying. After all, I think their natural inclination was to support more stimulus, but sometimes data overwhelms one's natural inclinations. I have been forced to change my mind many times when information proves my previous position incorret.

Posted by: lancediverson | July 16, 2010 11:18 AM | Report abuse

I believe that if this is far and away the most critical issue in most people's minds (job creation) and the most important political issue facing the White House, that some honesty would be a refreshing departure from the usual Washington approach. Just restoring some confidence will boost the recovery by itself. So why not admit the paucity of the stimulus and see how the country reacts?

Posted by: bouvier7 | July 16, 2010 11:20 AM | Report abuse

This is where the White House's strategic decision to pretend that half a loaf on the stimulus was actually a win is going to bite them in the ass.

I understand the idea that success breeds success, and they thought they needed to "win" on the stimulus so they could do their other priorities. As someone who thinks the health care bill and fin reg bill is an incredible achievement, I think they were vindicated on their "nothing wins like winning" strategy.

But the cost of that is what they face now--and which could cost us the next 5 decades of leadership to which Republican economic failures properly entitled Democrats.

They can't do the most effective thing to help the economy, because they screwed up the political argument in their first year. Instead of promising it would keep unemployment down, they should have been putting forth the argument that it would NOT be enough and we had to do more and it's the Republican's fault that we weren't.

All those things are true, and they should have gambled on the truth instead of things they could not control--the recession basically fixing itself.

Posted by: theorajones1 | July 16, 2010 11:29 AM | Report abuse

*I am just saying that the president and his team have a lot of economic information to work with (probably more than bloggers). They also communicate more with financial leaders within governments and outside government throughout the world than political bloggers.*

How COW! This was the EXACT same stuff we were told in late 2002 about invading Iraq. yes, from all accounts, it SEEMED like a bad idea, but people were saying, "obviously congress and the white house know stuff that we don't!" When, in fact, it was just a bunch of groupthink convincing people that what was not important actually was important. Deficit anxiety is mostly a media creation and an expression of anxiety from the public that serves as a symbol of "we are worried about the economy" because unemployment is high.

Posted by: constans | July 16, 2010 11:30 AM | Report abuse

What constans said. The beltway consensus that deficit reduction is the most important thing to do even while in or recovering from a recession just shows how totally out of touch the villagers are.

Either you think 9+% unemployment is not a crisis deserving of forceful government action or you think its the new normal and those lazy unemployed should just take the nonexistent lower paying jobs and stop whining about how the wall st plutocrats that melted down the financial markets and tanked the economy are still billionaires while they go to food banks.

Posted by: srw3 | July 16, 2010 11:48 AM | Report abuse

I'm confused about why people are saying the half-a-loaf stimulus is attributable to Barack Obama. Have we all forgotten about World's Worst Democrat Ben Nelson?

The Republicans deserve some blame here, but honestly I think the stimulus is a special case. I think the party has acted in incredibly bad faith through this term, but "give a bunch of money out for the express purpose of spending money" is exactly the kind of thing you'd expect the Republican Party to filibuster. They were bound to oppose it. Ben Nelson didn't need to. It's not often one guy does so much damage to the country but hey, congratulations Senator.

In any case, all that 2008-era hope is gone now, right? A Congress where the 60th vote is some random conservative Republican far to the right of Scott Brown is not going to appropriate a single dollar for unemployment or economic growth. If anything, the news from here to 2012 will be "Congress passes a new set of crazy spending cuts, Barack Obama vetoes it, they call him a Communist and try to overturn the veto." We as a country are in for some bad, bad years.

Posted by: NS12345 | July 16, 2010 11:50 AM | Report abuse

I agree with constans on this one. One would like to think the White House knows what's it's doing, but unlike "classified" "top secret" intelligence that was supposed to justify the Iraq war, the bond market data is available to the administration and the public (i.e. including the "ditsy" bloggers") alike. Lance, I don't think this is a case that "data overwhelms one's natural inclinations." Rather, I think it's "political fears" that overwhelmed the White House's natural inclinations. They opted for an $800 billion stimulus not because it was a "magic number," but because a trillion-dollar figure sounded big and scary. Similarly, they're opting for deficit reduction --- not based on data --- but, as Ezra says, because they've lost the political narrative. There's no "classified" intelligence on this one. And no looney, leftist conspiracy theory either. It's pure politics.

Posted by: pbasso_khan | July 16, 2010 11:50 AM | Report abuse

"But that just means that for the foreseeable future, the administration will not be able to do anything about the central short-term problem facing both them and the country."

Is it not this the definition of 'lame duck' presidency?

Posted by: umesh409 | July 16, 2010 12:17 PM | Report abuse

Constans,
"Capital markets -- those that deal with bonds -- don't seem to think that the US will have any problems making payments on its debt."

Not in 2010 or 2011, but if you actually talk to traders most of them are skeptical 10 years out. But this skepticism isn't an issue - they're trading based near-term volatility and deflation, not long term solvency. They don't intend to actually be holding the bonds when the music stops.

Very few people thought non-agency MBS bonds were great deals in 2006, but they thought near-term there were still gains had, and from the perspective of the time there weren't any great alternative trades. Unfortunately, once it was clear the game was over, everyone ran for the exits and the same time and prices collapsed/yields soared. I can guarantee you it will be the same if and when one of the rating agencies cuts America's credit rating. Long-term yields will suddenly soar, and worse the curve will invert so all of our short-term funding will need to be rolled over at extreme yields.

"How COW! This was the EXACT same stuff we were told in late 2002 about invading Iraq. yes, from all accounts, it SEEMED like a bad idea, but people were saying, "obviously congress and the white house know stuff that we don't!""

Skepticism of the wisdom and competence of politicians is always healthy.

"Deficit anxiety is mostly a media creation and an expression of anxiety from the public that serves as a symbol of "we are worried about the economy" because unemployment is high."

The key here is that medium-term deficits could create a lot more unemployment than the financial crisis did if the trigger a sovereign debt panic here. Like global warming, you want to avoid the risk of a massive catastrophe by taking precautionary steps early.

Posted by: justin84 | July 16, 2010 12:40 PM | Report abuse

So the last stimulus was on the order of $800 billion and let's assume it created 3 million jobs as advertised.

Two questions for proponents of more stimulus:

To make up half of the job shortfall since 2007, we would need 4 million new jobs at a price tag of about $1.1 trillion. This only gets unemployment down to about 7%. Other than unemployment benefits and state budgets (and there might be some good if states are purged of excess but lets ignore that for now), what is there left to spend on? That's what, $300 billion at best? I thought tax cuts didn't provide much in terms of stimulus according to the Keynesians. Are there new shovel ready projects?

The other question is what happens when that $1.1 trillion in spending is over? Don't all 4 million of the jobs the spending was supporting rapidly disappear? Or do multipliers only work in once direction? And if they only work in one direction, how will cutting the deficit now hurt the economy?

Posted by: justin84 | July 16, 2010 1:10 PM | Report abuse

"So the last stimulus was on the order of $800 billion and let's assume it created 3 million jobs as advertised."

A stimulus that was pure spending would have a much bigger impact--something like half the last stimulus was tax cuts.

And yes, there are plenty of shovel-ready jobs. In New York City alone, we could speed up building the 2nd Avenue Subway, we could do the 7 train subway extension, we could do a high speed tunnel from the airport, we could do the cross-harbor rail tunnel, we could tear down the Sheridan and get trucks to and from Hunt's Point (source of 90% of food in NYC) better, we could replace the existing combined storm and waste sewer systems (built in the 1800's) with non-combined systems which means no poisonous fecal runoff during storms, we could speed up work on the replacement water tunnel...that's off the top of my head, and it's ONE crummy city. We're a big country. There's a lot more projects.

It turns out that after 30 years of systematically under-investing in all public infrastructure, there's a hell of a lot of work to be done. This is the time to do it, when money's cheap. If only we hadn't squandered the Clinton surpluses, we'd be in amazing shape.

Posted by: theorajones1 | July 16, 2010 1:31 PM | Report abuse

"To make up half of the job shortfall since 2007, we would need 4 million new jobs at a price tag of about $1.1 trillion. This only gets unemployment down to about 7%."

"Only" 7% would be a tremendous improvement, and would be a huge boost to the economy in the private sector.

Posted by: Patrick_M | July 16, 2010 2:00 PM | Report abuse

"A stimulus that was pure spending would have a much bigger impact--something like half the last stimulus was tax cuts."

Okay. What happens when the hundreds of billions of dollars of federal spending go away? Say you've created 6 million jobs with your $1.1 trillion. That $1.1 trillion is now gone. Aren't nearly all of those 6 million jobs now imperiled?

"And yes, there are plenty of shovel-ready jobs. In New York City alone, we could speed up building the 2nd Avenue Subway, we could do the 7 train subway extension, we could do a high speed tunnel from the airport, we could do the cross-harbor rail tunnel, we could tear down the Sheridan and get trucks to and from Hunt's Point (source of 90% of food in NYC) better, we could replace the existing combined storm and waste sewer systems (built in the 1800's) with non-combined systems which means no poisonous fecal runoff during storms, we could speed up work on the replacement water tunnel...that's off the top of my head, and it's ONE crummy city. We're a big country. There's a lot more projects."

And all of the unemployed middle managers, computer programmers and real estate agents - many in their 40s and 50s and 60s - are perfectly prepared for these type of jobs. How does this help them get the next job? Employment in heavy civil engineering projects is only down about 200,000, and it never broke more than 1,000,000 at the peak.

You're a 43 year old software engineer, unemployed for a year, and then you have a year's experience in Obama's WPA. What now? You're unemployed again, except now your resume is worse. Heck, if you extend unemployment benefits, I can tell you that many white collar workers will actively refuse public works jobs.

And is it just that easy to implement these projects? I would love to speed up construction projects - where I live, 50% of the time you drive through a construction zone you don't see anyone actually working. Somehow project implementation seems difficult in real life. I don't think you can hire about bunch of unemployed people from Wall Street and expect a lot of progress on the 2nd avenue subway project.

I'd be wililng to bet a lot that in a second round of stimulus, you'll be frustrated at all of the potential projects the federal government failed to fund. I am in near tears every time I go to recovery.gov and look the stimulus projects in my area. What makes you think round two is going to be so much better than the first?

I'm okay with infrastructure investment, and I think over the next several years you can ramp up to 200,000 or 300,000 positions necessary for critical infrastructure projects which will take years to complete, but it's not going to make a noticable dent in unemployment statistics.

Posted by: justin84 | July 16, 2010 2:05 PM | Report abuse

"Say you've created 6 million jobs with your $1.1 trillion. That $1.1 trillion is now gone. Aren't nearly all of those 6 million jobs now imperiled?"

If the first tier of stimulus in directed as relief to the states (using Ezra's formula of allocating the money based upon the rate of unemployment, and tying the funds to preserving and restoring jobs that would otherwise be lost), then a successful stimulus to the economy should result in higher revenues to the states that would allow them to maintain the jobs after the stimulus funds are expended.

Likewise jobs in infrastucture and other investments (like energy and technology) that stimulate the economy should mean that after the stimulus project is finished, a more vibrant private sector economy will provide new employment opportunities that do not currently exist.

Posted by: Patrick_M | July 16, 2010 2:12 PM | Report abuse

The capital markets that receive trillions of dollars of long term investments need to be comforted by moves to reduce the overextention of the United States financial position.

so that's why interest rates are so high

Posted by: bdballard | July 16, 2010 2:51 PM | Report abuse

Justin, you raise some interesting points --- I'm also saddened by the stark contrast between funds awarded and funds received. It might be easy for me to say, but the gap bespeaks a lack of urgency. You may also have a point that an unemployed Wall Street exec. isn't about to throw on a pair of overalls and start digging up the 2nd Avenue subway.

That said, "Obama's WPA" was never intended to directly create white collar jobs. The sectors that have suffered the most in this downturn --- and that are most readily assisted --- are blue collar. Still, rebuilding infrastructure is obviously more than just spreading concrete. We desparately need scientists and engineers of all stripes (including pirates of Silicon Valley) for major upgrades to our electrical, phone, and Internet grids. And, sufficient aid to states could help us save teachers, fire fighters, police, and EMTs. Both federal and state governments are also way behind the curve on info-technology. You should see the computers that the federal courts are using in some courthouses.

A CCC-like program for our national parks would also help stave off youth unemployment (high school and college kids desparately looking for cash). Sure, it's not a prestigious internship on Wall Street, but it's outdoors, it's public service, and it's cash to spend.

You also asked, "The other question is what happens when that $1.1 trillion in spending is over? Don't all 4 million of the jobs the spending was supporting rapidly disappear?"

I think that's rather shortsighted. To be sure, that's what's happening with the census workers. But, (a) their stints were relatively shorter than a large-scale infrastructure project or public sector job would be, and (b) they WERE employed and thus had income to spend. Which is really the larger point --- the real benefit of stimulus isn't just to create the illusion of employment; it's to get people paid and spending with the hope that by getting paid/spending, consumer demand and all that good stuff keeps the economy churning. With the money coming in, maybe people buy a car, a house, clothes, etc. And hopefully, with the economy jump-started, it begins to sustain itself again.

Last point you raise, "how will cutting the deficit now hurt the economy?" I think the answer is, it depends on what we're cutting. A plan to further reign in health care spending needs to happen irrespective of additional stimulus. But, if the idea is to cut spending because it makes us feel better about ourselves, we're just removing more cash from an already sputtering economy. I think what Ezra's been advocating would be ideal: Pass a stimulus plan with a long-term deficit reduction plan.

Posted by: pbasso_khan | July 16, 2010 2:54 PM | Report abuse

bdballard, interest rates are at historic lows. The Fed. can't reduce interest rates any lower, bond rates are low, and credit is cheap. What are you referring to?

Posted by: pbasso_khan | July 16, 2010 3:02 PM | Report abuse

bdballard, interest rates are at historic lows. The Fed. can't reduce interest rates any lower, bond rates are low, and credit is cheap. What are you referring to?

Posted by: pbasso_khan | July 16, 2010 3:04 PM | Report abuse

"Only" 7% would be a tremendous improvement, and would be a huge boost to the economy in the private sector."

Patrick, the 7% includes all of the boost through alleged multiplier effects to the private sector. What happens after the 12-18 months is over and the stimulus money is all spent, and now government spending is set to fall by $1.1 trillion. How many permanent positions are you going to create heading into that?

Posted by: justin84 | July 16, 2010 3:13 PM | Report abuse

We need more stimulus, but we need to reduce the debt, so why not start slashing more inefficient government programs?

We have plenty of subsidies to large corporations that really don't need the money. That would be a good place to start.

Posted by: SnowleopardNZ | July 16, 2010 3:52 PM | Report abuse

"Patrick, the 7% includes all of the boost through alleged multiplier effects to the private sector. What happens after the 12-18 months is over and the stimulus money is all spent, and now government spending is set to fall by $1.1 trillion. How many permanent positions are you going to create heading into that?"

I already discussed this in a previous comment, and I think that you know that the whole idea of the stimulus is to jump start expansion of the private economy so that when the stimulus-funded jobs come to an end the unemployed will be competing in a labor market with far better opportunities than they are facing today.

However, the entire subject is merely academic, because (unfortunately) the idea of further significant stimulus is apparently off the political table for the foreseeable future.

Posted by: Patrick_M | July 16, 2010 5:40 PM | Report abuse

"I'm also saddened by the stark contrast between funds awarded and funds received. It might be easy for me to say, but the gap bespeaks a lack of urgency."

How can we expect any greater urgency if 700k job losses per month did not provide it in the first place? A lot of waste also gets created in the mix.

http://mccain.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=41c9dff7-2318-4777-ab6a-73a0841cefe0

"You may also have a point that an unemployed Wall Street exec. isn't about to throw on a pair of overalls and start digging up the 2nd Avenue subway....That said, "Obama's WPA" was never intended to directly create white collar jobs. The sectors that have suffered the most in this downturn --- and that are most readily assisted --- are blue collar. "

It's not just Wall Street execs. Very few people with college degrees who have white collar experience will do so, unless they are litterally starving. But between unemployment benefits, friends and relatives, unemployed white collar workers rarely lack options. I have friends who graduated from law school in '09 and '10, have no jobs and aren't even willing to look in other states - they will never ever ever work in construction.

Meanwhile, 1.7 million of the 8 million jobs lost were in professional and managerial work, about 10% of the total in that category at the 2007 peak. Finance is down 700,000 or so, and IT down 300,000. So about 1/3 of those 8 million jobs lost are in highly compensated white collar sectors despite those sectors represnting about 1/5 of total employment at the peak. The two sectors that haven't been really hurt in the downturn are healthcare and government, although government workers are on the short list of most people's "worthy of stimulus list".

"A CCC-like program for our national parks would also help stave off youth unemployment (high school and college kids desparately looking for cash)."

We could also cut the minimum wage for teenage crowd to $4/hr. Surely service sector jobs will staff up a little if they could nearly double their capability for the same price.

"And, sufficient aid to states could help us save teachers, fire fighters, police, and EMTs."

Well it could certainly save their salaries and benefits. Jobs can be saved right now if employees would just give on compensation, but the public employees unions prefer to give the shaft to the younger and lower paid members. The top 90% of membership get 3% raises, the bottom 10% 100% cuts. Their jobs are used like human shields in wartime. It's sickening.

Take Illinois allowing consecutive 7% annual raises for state workers, despite IL having one of the worst budget shortfalls. Had IL cut wages 5-10% instead, you'd probably have far fewer layoffs without federal assistance. States should/need to use this opportunity to rein in excessive spending.

Posted by: justin84 | July 16, 2010 6:26 PM | Report abuse

"We could also cut the minimum wage for teenage crowd to $4/hr. Surely service sector jobs will staff up a little if they could nearly double their capability for the same price."

The "teenage crowd" include legal adults who have to support themselves on the minimum wage. Doing so on a gross income of $160 per week is impossible.

Furthermore, if you reduce the minimum wage to $4, it is unlikely that MacDonalds will "staff up." They already employ the requisite number of persons needed to prepare the food they serve to their customers (as I have said many times this week, demand drives jobs). The lower paid workers will have less to spend, thereby reducing demand in the economy and exacerbating the bad economy.

You will improve the corporation's profits at the expense of the workforce. Maybe that's the idea?

Posted by: Patrick_M | July 16, 2010 7:17 PM | Report abuse

"The "teenage crowd" include legal adults who have to support themselves on the minimum wage. Doing so on a gross income of $160 per week is impossible."

Beats a gross income of $0 per week, and unemployment is what, 26% right now for teenagers? Getting by on $0/wk is surely even harder than $160. In either case there will be public support, for that matter.

"Furthermore, if you reduce the minimum wage to $4, it is unlikely that MacDonalds will "staff up." They already employ the requisite number of persons needed to prepare the food they serve to their customers (as I have said many times this week, demand drives jobs)."

We should then raise the minimum wage to $20/hr, as presumably McD's is unable to fire anyone or else they'd be unable to serve food and meet demand. This would be a huge raise for many people at the expense of business owners who are hoarding it and put money in the economy.

But in all seriousness, I look at charts like this I'm floored. In terms of Industrial Production we recovered about half of the loss of the Great Depression in 3 months in 1933 when we went off the gold standard and the resulting inflation sharply reduced real wages.

I think the economy has changed structurally since the 1930s, in ways that make both Keynesian and Monetarist solutions less effective to the extent they are, but wages absolutely matter.

Demand for products and demand for labor is like a chicken and egg story. Don't get me wrong, I think the Fed should try monetary stimulus first - but outside of that possibility, cutting wages gets the ball rolling on the labor side of the equation. Ultimately, prices and wages have to adjust or else unemployment stays high for a very long time.

http://www.themoneyillusion.com/?p=4220

Also, why are jobs down over the past year when demand is up 3.4%? It can't be just demand.

"You will improve the corporation's profits at the expense of the workforce. Maybe that's the idea?"

The better profits are, the better it is for jobs. More specifically, I believe that demand for labor is a function of its wage, regardless of a firms demand. More employment means more production and more wealth, and some momentum in the right direction.

Again, the Fed could reduce real wages across the board in a jiffy if it really wanted to - but it doesn't look like we live in that world.

Posted by: justin84 | July 16, 2010 9:18 PM | Report abuse

"Beats a gross income of $0 per week, and unemployment is what, 26% right now for teenagers? Getting by on $0/wk is surely even harder than $160. In either case there will be public support, for that matter."

As you are aware, I argued that lowering the minimum wage was unlikely to lead to any significant increase in hiring. It would simply be a windfall for employers, and cutting the wages of existing jobs will not expand the economy.

"We should then raise the minimum wage to $20/hr, as presumably McD's is unable to fire anyone or else they'd be unable to serve food and meet demand. This would be a huge raise for many people at the expense of business owners who are hoarding it and put money in the economy."

As you are aware, I did not argue that the minimum wage should be increased. I argued that lowering it would not lead to a meaningful decrease in unemployment, and that lower wages will not spur economic activity and stimulate growth.

"Also, why are jobs down over the past year when demand is up 3.4%? It can't be just demand."

Demand is modestly better, which is why jobs are also modestly better (they are not "down"). As is frequently discussed, justin84, employment lags behind growth in GDP when coming out of a recession. Robust employment recovery requires a robust growth in demand.

"More specifically, I believe that demand for labor is a function of its wage, regardless of a firms demand."

Oh. As an employer, I can tell you that I will keep as many people on my staff as I need to fill orders. Whether I could pay them all 6 figure salaries, or whether they all worked for $4 an hour, I would need the same number of workers, and I would not employ more than I need, even if they were all unpaid volunteers.

America presently has an over-supply of workers, and that means that employers have a huge advantage and can offer lower compensation than would be the case if we were at full employment. So that downward mechanism on wages is already in play.

But the MINIMUM wage reflects a social agreement of the lowest boundary at which we consider the hourly wage for another human being's labor to be immoral exploitation. If you really think it would helpful to tell a 19 year old kid who is struggling to make his way in the world that starting tomorrow you will cut his hourly wage from $7.25 to $4.00, I suggest further thought about the matter.

Your solution will certainly increase poverty, but not the number of jobs.

Posted by: Patrick_M | July 16, 2010 10:09 PM | Report abuse

Sounds pretty bleak, Ezra. Is there any hope?

Posted by: newsjunkie10 | July 17, 2010 4:43 AM | Report abuse

"As you are aware, I argued that lowering the minimum wage was unlikely to lead to any significant increase in hiring."

Before anything happened to demand, the increase in the minimum wage from $5.15 to $5.85 appears to have destroyed hundreds of thousands of jobs for those between ages 16-19 (6.2 million context to 5.8 million context - from mid 2006 to mid 2007). Then we hiked this amount in two further steps to $7.25, right as firms became worried about cost and competition from more experienced workers increased as the recession hit.

Employment for ages 16-19 fell 31% since the peak during the last expansion. Employment for factory workers in general didn't even fall that much. Did demand fall 31% - or even 10% - on average in the sectors that employ teenagers? Did 31% of teenagers suddenly become unproductive? Is teenage productivity up 25% or 30% over the past 24 months? Employment for ages 16-17 is down over 45% since the peak. But economy wide demand is the same as two years ago, and real consumer demand is at a record high.

The most plausible explanation is that a 40% hike in real wages combined with increased competition from more experienced workers drove the vast majority of that decline.

And it's not just teenagers. This is almost surely happening to all low skill workers - teenagers are just the best examples of low skill workers with reliable statistics.

"As you are aware, I did not argue that the minimum wage should be increased."

But why not? You think demand is the determinant of employment. Firms meet demand with the same level of labor regardless of cost. Doesn't matter whether workers are free or paid six figures as you say.

Since poorer individuals spend more of their income, you should support a $20/hr minimum wage is it wouldn't cut employment and lead to more spending and higher demand, per the Keynesian analysis.

"Oh. As an employer, I can tell you that I will keep as many people on my staff as I need to fill orders. Whether I could pay them all 6 figure salaries, or whether they all worked for $4 an hour, I would need the same number of workers, and I would not employ more than I need, even if they were all unpaid volunteers."

If a decrease in input prices relative to output prices doesn't lead to an increase in output and employment, then that's horrible news for the stimulus. In that event, the short run aggregate supply curve is vertical and it is impossible for either fiscal or monetary stimulus to increase output or employment. Higher demand just increases prices and nothing else.

I don't think any economist - even liberals such as Paul Krugman - would accept this model of labor supply and demand.

By the way, in my experience most businesses always have extra work to do - it just doesn't always make financial sense to hire another person to do it.

Posted by: justin84 | July 18, 2010 12:38 AM | Report abuse

"Demand is modestly better, which is why jobs are also modestly better (they are not "down")."

Well, over the past year employment is lower and real GDP is up about 3.4%. I'll give you that real final sales aren't growing as fast, but real consumer spending is growing at about 2.5%/yr or so. Real consumer spending is at a record high.

"As is frequently discussed, justin84, employment lags behind growth in GDP when coming out of a recession."

This was only true for the past 20 years. Employment growth coincided with GDP growth prior to the 1990s. My view is that a large proportion firms use workers to build organizational capital, in the investment sense, rather than for production, in the labor sense. This helps explain why employment growth is coincident with business investment growth, and why productivity can meet all demand growth for a year + after a recession ends. Clearly more work needs to be done here, but it is intuitively plausible and suggests investment-friendly policies help drive employment growth. Needing to grow demand for 1 or 2 years before seeing significant job creation is disappointing to me. There has to be a better way.

"America presently has an over-supply of workers, and that means that employers have a huge advantage and can offer lower compensation than would be the case if we were at full employment."

Well sure. And how do you get rid of excess supply or excessive inventories?

"So that downward mechanism on wages is already in play."

Yes. This is good in that ultimately price adjustments clear markets. But, as Keynes noted, money wages are sticky. The adjustment process can take a long time. The quicker wages adjust (such as in 1920-1922 when wages and prices were more flexible), the quicker you return to full employment and output.

I think there is also a significant structural adjustment going on, in that old patterns of spending and employment are slowly giving way to new ones and that will take time regardless, but flexible prices always help.

"But the MINIMUM wage reflects a social agreement of the lowest boundary at which we consider the hourly wage for another human being's labor to be immoral exploitation."

So $6.90/hr was morally permissible during the first half of 2009, but now $7.24 is? Why is $7.25 morally permissible but not $7.24? Is that extra $20 pre-tax per year, assuming 2,000 hours, really the difference between immoral exploitation and righteousness?

And if raising the minimum wage from $5.15 to $7.25 puts anyone out of work, shouldn't the moral outage be directed against those who would prefer many to receive a 40% pay raise, but the most vulnerable few to receive a 100% pay cut? How is it moral to make the lowest paid work illegal?

By the way, how is anyone exploited via a voluntary agreement in which both parties understand the terms and under which no fraud took place? How is it moral to force another person to provide for another?

Posted by: justin84 | July 18, 2010 1:02 AM | Report abuse

"If you really think it would helpful to tell a 19 year old kid who is struggling to make his way in the world that starting tomorrow you will cut his hourly wage from $7.25 to $4.00, I suggest further thought about the matter."

No, I think it is helpful to the 19 year old kid who has never been able to get a job that he can finally find work at $4/hr than be stuck at $0/hr.

In any case, it isn't necessarily going to be $4/hr. Maybe $6.25/hr is the right level for our hypothetical 19 year old. Either is currently a no-go today.

In any case, thing ignores the support of family and friends, and in this day and age the government.

I've been on record many times here supporting a guaranteed minimum income for all adults, which would certainly minimize any risk of destitution.

If the GMI is $12,000/yr with a 28% flat income tax, not only would $8,000/yr in labor income mean a net $17,760/yr after federal taxes, a GMI would increase the reservation wage and thus I'd expect few people to work for $4/hr.

Some would, and they'd clearly be better off for it. I'd rather give people a floor, and then let individuals decide for themselves what they are willing to work for beyond that floor.

$12,000/yr isn't much, but it's a floor and $24,000/yr for a married couple, putting a family of four out of poverty out of the gate. If anything it might be too generous, but I'm okay with a small decrease in labor supply as a response.

At any rate, the point isn't to screw over the poor. Wages almost certainly matter. Did you look at the chart of the Great Depression? Did you see how going off the gold standard crushed real wages, but at the same time industrial production (and presumably manufacturing employment) soared.

I believe greater wage and price flexibility will help a great deal in reducing unemployment. Since the Fed is on hold, that reduces the levers available to pull.

I'm not out to hurt the 19 year old kid making $7.25 - I'm out to help the 19 year old kid making $0.00 and in any case put an income floor under them both - not one which can be taken away by getting a job, nor one which Congress arbitrarily decides goes away after 26 or 99 weeks.

Also, look at Ezra's link on the lump of labor from his reconciliation post.

Posted by: justin84 | July 18, 2010 1:27 AM | Report abuse

"Since poorer individuals spend more of their income, you should support a $20/hr minimum wage is it wouldn't cut employment and lead to more spending and higher demand, per the Keynesian analysis."

justin84, thanks for telling me what I "should" support. I tend not to tell others how they "should" think or what they "should" support.

I do think think that Keynesian theory of counter-cyclical government stimulus spending is correct. I do not think that there is ANY logical connection between that theory about government stimulus and an artifical inflation of the minimum wage being paid by private employers.

The idea of the minimum wage is not related to any theory of how we best provide for counter-cyclical economic growth, the idea is that once we dispense with even the most extreme scenarios of economic conditions, the minimum wage remains the baseline for how little can we (as a society) can tolerate employers being able to enjoy the labor of other persons, tied to poverty level income.

Your minimum wage suggestion makes the most poor and disadvantaged workers more poor and disadvantaged. That is all it does.

"By the way, in my experience most businesses always have extra work to do - it just doesn't always make financial sense to hire another person to do it."

Yes, there is a mindset that there is "extra" work to be done, and every business ownwer imagines all the many positions that he or she would create with unlimited revenue, but unless there are orders -demand- a business owner cannot - will not - and should not - add employees.

If you own or operate a business, you understand that rising demand mandates that you add additional staff, and falling demand requires cutbacks. If you look at business from the outside, somehow the common sense logic of business operators is fuzzed over in ephemeral theories.

"I don't think any economist - even liberals such as Paul Krugman - would accept this model of labor supply and demand."

Oh. I don't care what Milton Friedman or Paul Krugman "accept." As a business owner I can tell you what happens in a real world business economy: rising demand produces rising employment. In an environment without rising demand, hiring won't happen.

The reality is: "it's the demand, stupid." That's what drives hiring, B2B orders, and economic expansion. Businesses will hire as their oders require. Demand is the horse, the rest of the economy is the cart.

Posted by: Patrick_M | July 18, 2010 1:40 AM | Report abuse

"$12,000/yr isn't much, but it's a floor and $24,000/yr for a married couple, putting a family of four out of poverty out of the gate. If anything it might be too generous, but I'm okay with a small decrease in labor supply as a response."


justin84, if you think a family of four successfuly subsists in modern America on a gross income of $24k "out of the gate," you really need to land your abstract space ship and look at the baseline budgets of even the poorest households for rent, utilities, food, transportation, clothing and other basic expenses.

Increasing poverty by halving the minimum wage for any worker is both inhumane and dumb as a strategy for growth.

Posted by: Patrick_M | July 18, 2010 2:05 AM | Report abuse

"I do think think that Keynesian theory of counter-cyclical government stimulus spending is correct. I do not think that there is ANY logical connection between that theory about government stimulus and an artifical inflation of the minimum wage being paid by private employers."

Fiscal stimulus is intended to reduce input costs relative to outputs. Governments cannot create purchasing power - they only take existing purchasing power and reroute it. The goal is to increase the price level for output. This is what is shown by the AD/AS model. Fiscal stimulus has the AD curve shift right, and both employment and output rise because AS is upward sloping, and it is upward sloping because if output prices rise and input prices are constant, firms create more output. If relative prices don't matter for output, then fiscal stimulus won't be able to increase GDP or employment. This is mainstream economics.

"justin84, if you think a family of four successfuly subsists in modern America on a gross income of $24k "out of the gate," you really need to land your abstract space ship and look at the baseline budgets of even the poorest households for rent, utilities, food, transportation, clothing and other basic expenses."

Patrick, it would hardly be a challenge. I see two bedroom apartments in my area for as low as $550/month. You'd have $17,400 left over for all other purchases.

This level of comfort was impossible as recently as 1929, at the height of the roaring 20s. America didn't physically produce enough income so that every adult could be allocated $12,000/yr, even with 100% taxation and assuming no negative effects from taxation. Somehow the country managed to survive, despite the fact that smaller amounts of income were distributed unequally.

China in 2010 physically couldn't do it either - the Chinese economy simply isn't large enough for it to be possible.

$24,000 exceeds the federal poverty level - which 40 million people live under today - and it doesn't require having a job. The point of the $24,000 isn't so that people can sit around all day, although that risk exists. Two $4/hr jobs and a 28% flat tax get this family to $36,000/yr. No, this wouldn't be living in upper middle class, but given that billions of people around the world live for less than $2/day, setting a base for Americans at over $16/day for a family of four might even be considered obscene.

Unfortunately, the real resources available to fund anything much larger don't exist. It's actually possible $12,000 is too much - the labor force disincentives might shrink real output and reduce the purchasing power of that $12,000. I think $12,000 is doable but it may not be.

We can continue with sticky wages putting people out of work, with 40 million+ in poverty, and people losing unemployment benefits and being completely and totally screwed. I fail to see how setting a $24,000/yr income floor for families is worse than the status quo.

Posted by: justin84 | July 18, 2010 9:15 PM | Report abuse

justin84:

"$24,000 exceeds the federal poverty level..."

Wrong. The 2009-2010 Federal poverty line for a family of four is $27,570.

"Patrick, it would hardly be a challenge. I see two bedroom apartments in my area for as low as $550/month. You'd have $17,400 left over for all other purchases."

Hardly be a challenge? Clearly you have never raised a family. Utilities, groceries, transportation, insurance, doctors, dentists, prescription medications, clothing & shoes, school supplies, etc. etc.

"...but given that billions of people around the world live for less than $2/day, setting a base for Americans at over $16/day for a family of four might even be considered obscene..."

The best thing about your minimum wage suggestions, and the reason I won't expend any more time discussing them, is that no serious politician would even consider such a suggestion.

Posted by: Patrick_M | July 18, 2010 9:48 PM | Report abuse

"Wrong. The 2009-2010 Federal poverty line for a family of four is $27,570."

Let's check the data.

http://aspe.hhs.gov/poverty/09poverty.shtml

Your figure is for Alaska. Hawaii is a bit higher too, at $25,360. For the other 306 million Americans, it is $22,050. But Alaska has the permanent fund, which paid out $1,305 to each individual in 2009, so Alaskans are above the poverty level. There are about 1.3 million people living in Hawaii, so for ~99.6% of citizens $24,000 DOES place them above the federal poverty level. I'll admit I was 0.4% wrong here

If Hawaii wants to start its own minor grant to make up the difference, that's fine - or, perhaps its enough of an offset that people get to live in Hawaii that slightly lower real income doesn't matter. In any case, $24,000 is ~109% of the federal poverty level for a family of four for Americans who aren't living on a tropical island (or expensive city in the CONUS).

Posted by: justin84 | July 19, 2010 10:04 AM | Report abuse

The point isn't to assume that no one is ever working either. Focus more on the fact that it's very easy to get from $24,000 to a more comfortable level just with a little bit of work. If both husband and wife can find jobs which pay $12/hr, they net $58,560/yr assuming the 28% flat tax and 4,000 hours of work. That's solidly middle class - what do they take home today? At $12/hr, they will be paid ~$11.15/hr because of the employer portion of FICA, and net $10.30 after their portion of FICA. That's $41,200/yr, assuming no federal income tax liability. That's a LOT of extra money to fund things like consumption, saving for rainy days and saving for retirement.

Consider that people in families of four today can have someone working full-time at the minimum wage and still be in poverty ($7.25 x 52 x 40 = $15,080 less FICA plus EITC probably doesn't get them to $22,050), whereas under this proposal a family making $15,080 in labor income nets $34,857.60 after a 28% federal flat tax. Also consider that sometimes the primary breadwinner becomes a 99er and loses their benefits under the existing system because Republicans are posturing about the deficit.

This proposal puts a family of four at 109% of the FPL, a single person at 111% of the FPL, and for single women with children it provides a known source of income to fathers which can be tapped for child support. It is automatic, dependable and doesn't require the approving nod of the politiicans periodically. If both parents are laid off, a guaranteed $2,000/mo with no 99 week cutoffs (or 26 week cutoffs) isn't that bad of a deal.

"Hardly be a challenge? Clearly you have never raised a family. Utilities, groceries, transportation, insurance, doctors, dentists, prescription medications, clothing & shoes, school supplies, etc. etc."

Remember that I also have been on record here in support of spending several percent of GDP on public healthcare providers, so healthcare expenses (one of the largest expenses you list) are irrelevant to the analysis. The system would be adopted as a package or not at all. I get it that shoes and school supplies cost money - but $24,000/yr as a guaranteed mininum income for a family is a fair deal. In any case, the economy in all probability cannot support anything more.

"The best thing about your minimum wage suggestions, and the reason I won't expend any more time discussing them, is that no serious politician would even consider such a suggestion."

Well no, because politicans can point to the guy making $7.25/hr and the guy who went from $6.55/hr to $0.00/hr isn't visible. Classic seen vs. unseen effects, and the seen effect makes the pols look good. Pols can say something nebulous like "demand" killed the guy's job.

In any case, politicians also don't support things like UI extensions which you prefer and so we're both living in fantasy land.

Posted by: justin84 | July 19, 2010 10:34 AM | Report abuse

"In any case, politicians also don't support things like UI extensions which you prefer and so we're both living in fantasy land."

The Democrats expect to have 60 votes in the Senate to extend UI this week after Byrd's replacement is sworn in tomorrow.

On the other hand, I have not heard a single member of Congress propose that the minimum wage be lowered to $4.

So the population of "fantasy land" is one.

Posted by: Patrick_M | July 19, 2010 1:14 PM | Report abuse

"The Democrats expect to have 60 votes in the Senate to extend UI this week after Byrd's replacement is sworn in tomorrow."

Provided there are no Republican or ConservaDem defections. We shall see. Can't be exactly comforting to be amongst the 2.5 million who were cut off...

Posted by: justin84 | July 19, 2010 5:26 PM | Report abuse

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