It seems that if the government is ever going to spend money on something it’s going to over pay. It just seems that too often rent seeking occurs rather than actually production or services served for each dollar spent. Now I don’t care much for most fiscal stimulus. Current effects have been minimal with little to no fiscal multiplier effect. But I will give one concession concerning spending that should be done now.
Currently a lot of American infrastructure is deteriorating. This includes roads, highways, waterways, bridges, etc. The public works of the nation are not in a good state. And since the government is the sole party responsible for this structure then it is necessary that elected officials complete the duty. Now some people argue that this is good because you are paying for someone to work on the roads and thus giving them an income, from which the recovery can ensue. Such statements are inaccurate and the magnitude to which they claim the government’s infrastructure spending can spur short-term recovery is incredibly ridiculous. However, I have a better reason.
Currently there is a slump, wages are down and infrastructure sucks. This is provides a great opportunity to invest in infrastructure spending as wages will be low. It will comparatively cost less to higher workers. Now, I am not sure to what extent Obama’s minimum wage to federal workers effects all contracts but even so the labor could be cheaper now, especially if the project is done during the spring and summer months when theoretically the manual labor supply is greatest.
I understand the cynical nature behind such a project. I am obviously supportive because labor is so cheap and to some it doesn’t seem to be so egalitarian. But the other choice is a deteriorating infrastructure that could effect overall production in the long term. As well as deficits when there is a boom that will be more costly then one now considering rising costs.
As more people take sides on the minimum wage debate, and as the antibusiness and progressive movements restart from their occupy disaster it may not surprise many that generally low skill and low paying employees in retail and fast food are angry. Wal-Mart and McDonalds are generally seen by protesters and supporters of minimum wage as the enemy. The argument by many of these people is that Wal-Mart and McDonalds have the ability to increase costs so as to satisfy a $15 per hour pay as a minimum, even more they want legislatures to pass laws to make this the minimum wage federally. Now the idea that Wal-Mart could afford it or not is not principled. In both the fast-food and retail industry a variety of companies exist, all of whom generally pay the similar wages. However, not all have high profit margins and not all preform at the same level all the time. So, the question of asking executives at Wal-Mart to forgo some money so that some employees can get paid a little more is not at all applicable under current mechanisms and also such an argument makes wrong assumptions about labor markets and Wal-Mart financing itself.
Now here is where things get interesting. For me minimum is generally a dumb idea. If the economy is not in a boom and wages aren’t increasing at the historic rate then minimum wage causes unemployment (above equilibrium). If the economy is improving the minimum wage does nothing to effect the well being of individuals and in fact may discriminate against individuals that want to sell their labor at a low price, such people could be disabled individuals, minorities, immigrants, etc. Anyways back to what I found interesting, since the arguments for minimum wage have hardly improved. Recently it was discovered that McDonalds recommends to its employees to take advantage of welfare benefits. Similarly Wal-Mart has many employees that use Medicaid heavily. Unlike McDonalds however they didn’t have a service phone line that told people how to live off of welfare.
If one were to analyze what was occurring correctly it would seem that McDonalds was being subsidized by the government. Of course welfare is available to a wide range of people and anyone in a variety of jobs can apply for some welfare in some form. But McDonalds actively promoting it to employees makes it relatively more direct. In fact, I think it acts the same way as a basic wage subsidy program. Many people have suggested wage subsidy programs as an alternative to many forms of welfare and unemployment insurance. Personally, I don’t think its as bad as current programs, however it would require heavy regulation and administration to actually get wages to increase, and in that case it doesn’t help to keep the firm’s profitability at the rate they want and keep the wages high enough so people don’t complain that they don’t have a “living wage”. The results I fear in the long run will be similar to the ones sounded off today about $8/hr wage for flipping burgers at McDonalds, in the end certain market situations will never allow the person living off of McDonalds alone to be able to afford a comfortable life. Now I understand that we have yet to recover from the recession fully and thus wages haven’t grown (at the rate they should). Thus, the application of wage subsidies could be slightly more effective. But as we have seen with McDonalds, the welfare that employees were pushed into getting so that they can “put up with” minimum wage has not solved their frustration.
Its important to know that I am just making some observations and really the issue is not that this shows that wage subsidies are useless. Personally, it will be very expensive to regulate and administer, and the issues with what sector to apply subsidies too is very difficult. For this and other various reasons I usually support basic income.
Now there have been some attempts at resolving the issue of poor living standards of fast food employees, especially with the advent of the McDonalds revelation. Barry Ritholtz suggests some solutions:
The simplest solution is to raise the minimum wage. If full-time employees are living below the poverty level — especially those with children — its no surprise they are going to need public assistance. Raising the minimum wage over a period of time will eliminate much of this corporate welfare. The costs will be slightly higher prices at fast food restaurants and low end retailers.
The next proposal is more severe: Charge back the amount of public assistance any employee receives to the company he or she works for. It would be separate from tax filings, and simply be a direct penalty charged to the firm. I doubt there is much political will for this proposal, but I can see some people — especially on the Left — supporting it.
I kind of like one or two things but then the rest is useless. Minimum wage doesn’t stop it really. Most of these individuals may end up paying for the higher prices later as lower income individuals comprise a large portion of the consumers of fast food restaurants and low end retailers. So, really it doesn’t improve their real income (not to forget the other long term side effects of raising minimum wage, especially in a slow economy). This may decrease the amount of individuals on welfare, but thats assuming none are let go.
The second proposal is a little more ridiculous. Charging McDonalds for an employees welfare benefits is a little like triple taxing them. There are corporate taxes, income taxes, and now penalties for the choices of other individuals. I understand that what McDonalds did was not exactly PR friendly or ethical in some cases but really doing this is supposed to be an economically good option. If minimum wage was supposed to increase prices slightly first in most cases then could you imagine what this will do to prices. Effectively McDonalds for example could be paying far above minimum wage or the market price. And if its above the market price it will act like a minimum wage so many desire. One above the general equilibrium and thus unemployment occurs. In this case it may be far more sever than minimum wage in a slowly growing economy.
If you want to stop the abuse of welfare you cut it or means test it. Or just convert basic income or wage subsidies as a full (and only) program already, the can be more fiscal and market friendly.
The last suggestion though is may favourite for good reasons:
The most radical idea is bit of pure fantasy: Guarantee every person in America a minimum salary. That is a proposal under discussion today in Switzerland. Its hard to even imagine such a concept gaining traction in the U.S. outside of the Great Depression era.
I don’t think its as radical as he may believe it is. I think its just that many politicians don’t believe in policy but rather symbology. So, the GOP will say “what government giving you basic income, what next weed and gay marriage” and the democrats will say “its not enough we need to make the corporations pay, this is our America and everyone has the right to [INSERT SERVICE] and a good living” or something flashy. Basic income for me is knowledge neutral (for the most part), meaning that since its a base it doesn’t interfere with the cycle of consumption and production, both of which are driven by the knowledge created through the pricing mechanism.
PS Another possibility is that welfare gets means tested federally and in most states and McDonalds has to fire employees as really they couldn’t afford them. They could raise prices, but a fall in revenue will cause there to be lay offs. Then maybe McDonalds will invest in automated service and with that there will be a variety of good and bad. Largley good but some economist seem scared of automation. To me bring it on, just make sure the market bares the risks not the government.
The old truth of inflation created by increases in quantity of money still matters. This doesn’t mean that any other forms of inflation don’t occur. Just looking at the inflation rate in Libya during the civil war one can see that certain effects of war has lead prices to increase by 25% within a short period, literally in less than a year. Now of course this change in price is extremely short lived. Like a few wars in the past and large political fiascos prices shoot up. This large change in inflation goes away immediately thus showing that the old Friedman quote, “inflation is everywhere and always a monetary phenomenon.”
In talking about the oil shortages of the 1970s Friedman mentions the failure of using the OPEC issues as the whipping boy instead of just reducing the growth rate of money. Like what occurred in Libya, all price increases related to a rise in oil price is short lasting and a “once-for-all effect”.
Friedman on the OPEC crisis:
“This reduction in output raised the price level. But that was a once for all effect. It did not produce any longer lasting effect on the rate of inflation. In the five years after the 1973 oil shock, inflation in both Germany and Japan declined, in Germany from about 7 percent a year to less than 5 percent, in Japan from over 30 percent to less than 5 percent.”
The same trend occurred in Libya. At the end of 2012 deflation can be seen as evident. This also further disproves theories I held and read about concerning whether Gadhafi had printed money to pay Libyans to join him. There were payouts but in the early stages of the war a defected finance officer in the government implied that Gadhafi had printed money to pay for support and mercenaries. Of course Gadhafi doesn’t need to print money the government used to sit on large investments and cash reserves. Of course with the new government and lack of oil revenues (needs to be privatized) there are debt issues and debt financing may be something that the some members of the legislature have made clear they hate. This makes me afraid that they will resort to printing. Every time governments print to finance themselves in times of trouble bad things happen.
The central bank must then assert to the rest of the government that it is independent and only looking at stabilizing. The current rate of growth of since 2010 is optimal I think, at least until 2015. This is when the new post revolutionary banking reforms take place and they change the way monetary policy is applied. I personally wouldn’t say that a basic M2 or M3 target works, but Libya’s financial industry is very simple. So simple it barely exists. Perfect for a monetarist experiment.
Most people tend to talk about volatility in stock market as if its occurrence is common, but for some reason when it occurs they seem surprised. The matter of fact is that certain downfalls do occur in the stock market. That much is a fact. Just look at 1929, 1980, 1987, 2000, 2001, and 2008. There are downfalls in the US stock market and for that matter most other exchanges. This action of swings is literally the market removing worthless equity and this causes falls in prices. Sometimes its prompt nature is caused by suddenly founded worthlessness. Some people call these bubbles. But really a bubble is like a mythical beast or the Yeti. People’s definitions of what it is and what its origins are very different. Robert Shiller might have what I feel is the most consistent definition of “bubbles”, he notes that they are fads created by a whole systemic push. The media, feeling of confidence and many more factors some of which are psychological, create such exuberance that causes certain securities to rise rapidly and then deflate.
Should we care about stock market crashes to warrant attempting to reach a state of no volatility, a state of nirvana? It is true that a slacking stock market is always part of a recession and to an extent a bursting stock market is always a part of recovery or boom. But is it the cause or merely another symptom.
The fixation of trying to push up stock market prices to spur economic recovery seems to be the first thing politicians and policy makers go to. However, the assumption here is that at the crux of every recession is solely a financial crisis. Really, it’s an institutional crisis; at least in the more sever recessions. The S&P 500 and DJIA have both returned to rather high growth rates. Yes, they haven’t returned to their initial trend but such a position is virtually impossible. This change actually looks alarming if one goes by the inclinations of some economists and pundits who thing that quick movements in securities prices is only the beginning of another downfall. However, such a thing may not occur. Sometimes the actual price of the stock market doesn’t matter as much as someone attempts to make it look like. This is not me being ultra subjective its me looking at history it self. In the 2000 recession the stock market dipped sharply and then returned within a few months with an extremely fast rate. Real GDP in this event slowed down but didn’t contract dramatically. The return didn’t explode the economy into frenzy. Though it should be noted that the proclaimed housing bust of 2007-2008 is linked to this period (the crux of that problem may be in 2005).
The economy doesn’t live by and die by the stock market. The stock market while a highly important institution is only another market within many. I think many people forgot that many times markets like the stock exchange react to facts in other markets. They note (sometimes incorrectly) that housing for example is a good investment and then they downgrade it aggressively when it proves worthless. If one were to analyze prices as pieces of knowledge then the stock market doesn’t necessarily serve as the gas pedal of the economy but rather the news station. However, like most news stations it is susceptible to distortions. But again knowledge in financial markets isn’t always perfect but it is sure hard to beat, historically.
I am not going to take an absolute position that holds that stock markets are good indicators of recovery because the macro economy relies on a variety of institutions and a variety of inputs. To place emphasis is sometimes unproductive; as one goes on to neglect the other parts of the economy.
The crash of 1987 to me is an example I like to note a measure response to a financial crisis. There are a collection of legislative responses to this, as well as a number of other political out lashes though I care less for the emotion of such arguments. What should be noted is the response Greenspan took. The Federal Reserve in response took the role of insuring public confidence and acting as the lender of last resort. This in turn helped keep GDP growing steadily with no contractions. It’s like the crisis never happened. No recession followed (until ’91).
Of course not every crash is the same and not every recession is the same. Many economists struggle in attempting to make every recession fit one model. I too am guilty of such simplification.
Krugman seems to think that if you don’t believe that UI is good or at least that aggregate demand is the important thing in recessions then you are a unscientific right wing talking head:
Enhanced UI actually creates jobs when the economy is depressed. Why? Because the economy suffers from an inadequate overall level of demand, and unemployment benefits put money in the hands of people likely to spend it, increasing demand.
You could, I suppose, muster various arguments against this proposition, or at least the wisdom of increasing UI. You might, for example, be worried about budget deficits. I’d argue against such concerns, but it would at least be a more or less comprehensible conversation.
But if you follow right-wing talk — by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro — you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!
I think the issue Krugman ignores is that his focus on the economy is to an extent narrow sighted. Now its obvious that there are some talking heads that aren’t scientific, who are against certain proposition because of their platform. You definitely see this in the current political process. Hardly do politicians and pundits produce proper arguments against anything, the irrationality of the voter is too high for the politician to consider academic honesty.
The issue I have with Krugman’s claims is that not agreeing that aggregate demand is all that matters does not make me unscientific. Rather I think that Krugman fails to analyze his suggestions to see if they are scientific. He notes that he uses Keynesian models to analyze such things as UI rather than Barro who just thought that UI was “self-evidently absurd”. The model he uses is not perfect however. 2013 was supposed to be the year austerity, or at least whatever Krugman’s measure of austerity is, was supposed to kill us. 2012 and 2013 according to similarly inclined economists supposed to be proof of the negative powers of austerity in Europe and the prowess of government spending to increase aggregate demand. However I am hard pressed to see that austerity deepened the already horrible situation, though that argument does have some room in certain cases. The argument that lacks room is that increased government spending in countries like France can cause a recovery.
In this blog post Krugman shows this graph to prove that a change in G can cause private demand to increase.
However, if one were to analyze each country carefully you would find that chances of a recovery in any is very little. In 2013 France struggled to even gain a positive growth rate and this is even with a government budget that is increasing. As well, Netherlands decreased their government spending and unemployment fell. Belgium might fit the Keynesian matrix but its too early to tell since the government just went on a shopping spree, GDP decreased but unemployment fell. Ireland decreased government spending and finally it looks like growth might occur in 2014. Maybe the issue is not necessarily all aggregate demand but rather also supply. Maybe the issue is a terrible fiscal policy and restrictive/asymmetric regulatory policy. Now France definitely doesn’t shy away from government investments. They have invested in renewables, manufacturing, and other sectors. Like wise have other countries. So, the question around the importance of aggregate demand to a recovery are well founded. I would hate for an economist like Krugman, who is very successful and intelligent, to draw absolute lines between who is a good economist and bad one based on belief in the supremacy of the government in increasing AD. I would like to think macroeconomics is more nuanced then that.
Maybe the eurozone is a bad example at the moment with its rather deflationary outlook. However, this just further shows that Krugman is putting up academic walls that shouldn’t exist. The same goes for those who oppose him on equal black and white grounds. Krugman may very well be addressing those that don’t use proper scientific procedures but from this I can only think that he just finds non-Keynesians unscientific.
Good economics is essential to a post war recovery. With my last two posts I delved into Libya more to show a couple of issues with the state of macro there. First there is the government’s oil addiction and second there is the lack of diversity in the financial sector (and lack of proper policy tools at the central bank). There are many issues but to me these issues are at the heart of the recovery Libya must gain to insure prosperity in other areas. These issues must be resolved so that sound market mechanisms occur and lead to private sector growth. Since Libya suffered a lack of political freedom, lessons Milton Friedman shows of the need for economic freedom.
As we speak two fake governments have laid claim to one half of the country, Barqa. They are not really recognized, not even close. They have weapons and are attempting to monopolize on the policing powers of the state and to do this they gathered weapons, their egos and took over oil fields. Remember that for the actual government the oil fields represent 95% of revenues and most of these oil fields are in Barqa. Why people do such a thing is a history of corruption in various institutions. Almost all Libyans practice bribing government officials. This is not because of their bad character rather its because of their effort to get out of the rut they are in because the government has screwed them over. Whether its businesses that are declared “not aligned to the mission of the Jamahiriya” or their kids not allowed to learn a second language and attend better schools. To navigate such issues many Libyans pool thousands of dollars, saved over years to just get their children to have a better education.
I even personally know of a few families who pooled money so that they wouldn’t be questioned for sending their children to study in other nations. The government’s previous authoritarian economic and personal created corruption and this corruption created inter-governmental institutions that were based on corruption and extortion. This created the two fake governments.
The corrupt institutions and organization can only be replaced once viable and permanent replacements take place. This could be done through the allowance of new organization, business or whatever, to exist to replace previously degrading institutions. It is especially important to remove the new institutions created by the various militant brigades, most of which were created after the war not during the war. These brigades aren’t involved with security but rather control of certain property and the assets in the vicinity. These brigades can dissolve once the private institution of property and commerce removes their unlawful monopoly.
These institutions like I noted matter for proper economics. Returning the power to the consumer is essential. However, I will go further to claim that such changes to the post war institutions and previous Gaddafi institutions will in effect possibly allow for a more open society. With all these militants and corrupt officials that run organization with monopoly power, almost always there is a backwards and authoritarian moral philosophy. One that once removed removes the chances for relapse in Libya.
There are issues with managing diversity of an economy when the government takes the steering wheel. Libya is a case study of this situation. Petroleum is Libya’s drug and the drug dealer, the government, is a user as well. However, the effects of such addiction won’t last. Others produce oil as well and with political instability it becomes difficult to export this oil. Most of the oil fields in Libya are owned by the National Oil Company of Libya (NOC), with a few European and American oil producers mixed in as well.
When Libyan government expenditure grew as a percentage of national GDP real GDP slowed down in growth. Take a look at 2007 to 2011, ignoring the war for the sake of consistency. As government expenditure grew real GDP growth rate decreased. In this period government expenditure minus the war period grew, and so did its size in comparison to the private sector. When the government expenditure grew it could be seen as oil production being an increasingly large part of the economy. This can be deductively reasoned as roughly 90% of government revenues are oil driven and generally the government has produced surpluses over the last decade. What this signals is that the Libyan government in fact doesn’t drive the economy and even more that it in fact harms it with its distortive focus on oil export driven policy.
An entire infrastructure and economy in Libya is being pushed to become more petroleum driven and most of this is because of the nationalization of the industry. Privatizing the industry limits the negative impact on the entire economy by diversifying the established infrastructure, not making the monopoly power of the government take control of what is being produced and consumed. Libya doesn’t need oil to be successful, it needs a strong private industry.
The gains of the post-sanctions Libya are due to increased non-oil trade with the rest of the world. Most of which are imports, which before you say is bad actually should of occurred more often. Whether it is the increased imports of consumable goods and various other services or import and trade of producer goods that helped cultivate new food industries; free trade was the saviour of Libya. If the new government really wants to help Libya they need to keep the gates open. They need to open them wider, get rid of the oil companies, and diversify the infrastructure. How the Libyan government will gather revenues will be difficult. They could with increased trade levy a small tariff across the board, introduce or enforce existing tax laws, and also they could liquidate the assets that are held by the Libyan foreign bank.
Every time people mention Libya they always mention the oil. “Oh you got oil and you have small population.” Sadly that money doesn’t flow through the corruption and if it did its only short term gain (even that is debatable) that goes away quickly. Long term growth and development needs to be driven by a well adjusted market. Libya today is clearly not well adjusted. With a dominating oil industry that is supported by government kickbacks and corruption, that lends itself to other policy that is not neutral with other industries but rather detrimental. Libya has become a place where if you want to get rich become a oil bureaucrat.