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Tuesday, June 25, 2013

How's the View From Your Ivory Tower?

One fine day a couple of weeks ago, there was an op-ed that appeared in the Wall Street Journal written by Alan Blinder, one of my least favorite economists ever. In his traditional style, he manages to be agonizingly condescending and smug while reciting relatively pedestrian facts and theories. He has two suggestions in his editorial: have state governments stop shedding public sector jobs and offer companies who increase their year-over-year payroll to repatriate foreign profits of an equal amount at a "superlow" rate of 10% instead of the statutory 35%.

This absolutely kills me. Nothing is worse than a lifelong Ivy League economist with absolutely no real-world experience looking de haut en bas to the unenlightened masses. His official Princeton summary has him obtaining his doctorate in economics from MIT in 1971 and then teaching at Princeton ever since. That's a 42 year stint in academia without a shred of public sector or private sector experience (I consider academic work neither). This man can only fumble around for second and third hand accounts of how the real world works and yet the tone of his writing is always that of absolute certainty.

Perhaps if he could just fund a startup of his own and see it to fruition, maybe his views on job creation would change. Instead of serving up trite offerings such as halting government layoffs and miniscule, one time tax breaks, he might actually come away with a different perspective, much like George McGovern did. When McGovern ran against Nixon in '72, nobody could accuse him of being a dyed in the wool conservative. That guy was as far to the left as left could get in the realm of American politics.

And he lost in the biggest electoral landslide in post-war American history. After his career in politics ended, he became an entrepreneur, bought a hotel in Connecticut. It promptly went bankrupt 2 years later. 2 years after bankruptcy, he had written an op-ed in the Wall Street Journal complaining of the various rules and regulations that made life a living hell for a business owner. Keep in mind, he bought the hotel in 88, an era where, according to mainstream Democratic talking points, there was unchecked deregulation and the most pro-business environment since the Gilded Age. And yet, from McGovern's own hand:
I also wish that during the years I was in public office, I had had this firsthand experience about the difficulties business people face every day. That knowledge would have made me a better U.S. senator and a more understanding presidential contender. 
Strong words. People do not often have changes of heart in their old age, but one thing that forever remains foremost on a person's mind is their money, and the way that they lose it.

Washington DC is broken. You've heard that line everywhere. You've seen those words run the gamut from the Wall Street Journal's editorial page to The New Republic. From Heritage to MoveOn.org. But the reasons that they give are bogus. It's not about money, or sinister special interests, or the way our government is structured. It's the way our socioeconomic system is structured.

PSYCH. It's not just a ridiculous TV show on USA. It refers to 5 of the most elite universities in the US: Princeton, Stanford, Yale, Columbia, and Harvard. Undergrad and grad schools combined, 15 out of 43 Presidents, roughly 35%, have hailed from those 5 schools. To make it in politics, you need at least 1 of 3 things to be somebody. A famous name, the right education, or money. Everything else is secondary to those 3 things.

Because of it, DC has become so incredibly incestuous. The elected officials have the name and the money. Their staffers have the education. And that's all they have. Name, money, and education. No real world experience necessary. No firsthand experience of how businesses and government actually operates. This has become a real problem because our laws have no actual bearing in anything real.

Our modern day thousands-of-pages long laws? Made by law school graduates from Georgetown, public policy graduates from Harvard's Kennedy School, and econ grads from Princeton, Yale, and Columbia. All of them strung out on a diet of Ritalin (or some other amphetamine variant), Red Bull, and takeout pizza. Highly credentialed twentysomethings who were good at taking tests and writing papers are crafting our country's most far reaching bills to be argued in a Congress full of idiotic and complacent legacies of the rich and powerful and their various hangers on (people like Alan Blinder).

This is the real reason why things suck in DC. It's pageantry and a mating ritual between those who have power, those who want it, and those who want to keep it at all costs, regardless of their complicity in the deterioration of the general state of affairs.

This is the Ivory Tower of the political and intellectual class. Test takers, obsessives, neurotics, the paranoid, and the complacent rich. It must be a breathtaking view up there, although I think the lack of oxygen is definitely causing problems in cognitive function.

7 comments:

  1. So...uhh...why is he wrong? Im paywalled out of it, but I don't see any reason why I should agree with some coder over an accomplished macroeconomist from MIT, especially when the field we're talking about is macroeconomics...

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    1. The "stop firing state workers" to improve employment ignores the reality, which is that state and local government workers are extremely expensive. And that expense must be borne by the state, its taxpayers, and bondholders.

      We've already seen jittery movements in the municipal bond markets these past couple of days and state governments, by sheer necessity, have had to cut payrolls to avoid drowning in a sea of red ink. If you want to juice employment numbers, it'd be more cost effective for the government to pay companies to hire on people as minimum wage workers than to keep on dead weight in your friendly neighborhood state/local government office.

      The repatriated foreign profits tax break is just an additional useless provision in the tax code. The "superlow" tax rate of 10% isn't that great when you consider that interest rates are still very low. And the corporations that have massive cash piles stashed overseas can borrow at extremely low rates.

      When President Bush pushed for, and received, a temporary tax break on foreign net income for corporations, interest rates were much higher than they were low and Bush's "superlow" rate was half as much: 5%, without any strings attached on payroll increases. The net result was that corporations brought back about 700 billion dollars.

      There is no similar incentive for corporations to do so in this current environment, especially when the tax break is conditional upon payroll growth which, depending on the firm, may not make good business sense.

      Blinder's two proposals simply don't make good sense. Not for businesses. Not for state and local governments. All they do is serve his prodigious ego and fulfills his quota for a monthly op-ed in the WSJ.

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  2. I agree with you that on the second part, however given the right reaction function from the Federal Reserve a halt on shrinking government could have a profound effect on unemployment and output. If the government had kept the same amount of employess as in 2008 unemployment would be 6.5% right now (and thats not even considering possible multiplier effects), which the federal government could have easily paid for via bond issuance.

    And no, I don't agree with your assumption that all government workers are just dead weight. A shrinking government workforce makes no sense given population growth, even less sense given the macroeconomic environment.

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  3. I have drastically less confidence than you when it notion that more government employees create more output. Keeping on these employees does very little for the "bottom line" of the products and services that we expect government to accomplish.

    Whenever a mature company is facing dire financial straits, the first thing they do is hire management consultants from firms like McKinsey, Bain, and BCG. Their usual recommendation? Fire a bunch of people, consolidate responsibilities among those who remain, and the vast majority of the time, the balance sheet rapidly improves.

    Look at what happened during the Great Recession. Governments and firms shed millions of jobs. We still have less total workers now than we did 5 years ago going by the BLS' report on labor force participation rates but real GDP is still about 6% higher than what it was during that same time period. Worker productivity soared and reached a peak about a year ago, around the same time when the economy finally started adding jobs at a non-abysmal clip.

    What we've found is that there was a huge amount of dead weight in the entire workforce. But keeping dead weight on a government payroll is a double whammy. One hit goes to the economy, which is bestowing a disproportionate amount of purchasing power to a person who's useless. The other comes from the taxes and debt raised to pay that person's salary.

    I don't think government employment needs to grow in tandem with population. Thanks to computers and machines, productivity per worker across every sector of the economy has skyrocketed. But the core functions of the government are more or less the same. As technology advances, it requires less and less people to administer the public needs of the country.

    I strongly believe that a large percentage of government jobs are really just welfare programs and create no real value.

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  4. First, it doesn't really matter what government employees are producing. We got out of the Great Depression by hiring a bunch of soldiers to destroy capital, which is the least productive use of resources possible. What matters is the level of AD.

    Second, the government is not a business. The revenue governments collect is drawn from the total level of spending in the economy. So if we hold monetary policy constant government cuts depress AD and reduce its revenue. This is whats happening in Europe right now. The ECB is not offsetting the cuts in fiscal policy from southern governments and the result is governments not being able to hit their deficit reduction targets. Unlike business governments cant rely on spending from outside sources, so if everyone cuts back income is reduced. Spending = Income. Think like an economist.

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    1. We got out of the Great Depression because of WWII? That's one of the greatest economic fallacies of all time. The country was converted into a wartime economy where civilians were subject to severe rationing of food, fuel, and basic consumer goods. Very few homes were built during the war and even fewer cars. Almost all industrial output was built towards war.

      The war effort radically changed the expectations of the American people when it came to the economy. Privation was expected and considered patriotic. The economy was already mostly recovered by 1938. If anything, strictly considering the home front, we plunged into another depression when we entered WWII.

      Our soldiers destroyed capital that belonged to other countries overseas. We didn't destroy our own capital. That's why American living standards were so high by comparison to other countries at the end of the war, because every other developed nation had seen their industrial bases obliterated.

      The standard Keynesian refrain is doing something is better than doing nothing. But that's nonsense. If you have a factory capable of churning out 10 tanks or 100 cars, you choose the 100 cars any day of the week. But if it was a choice between 10 tanks (during peacetime when we already have a surplus of tanks and couldn't possibly need more) and doing nothing, it's better to have the factory "lay fallow".

      There is a reason why the command economy of the Soviet Union failed so utterly. Stimulating the demand side by ordering people to produce goods and services that they don't want does nothing but ignore the price signals coming from the market and erodes the capital base as resources, time, and effort are consumed for more consumption now rather than investment and innovation later.

      The economy is a reflection of attitudes and our capital base. Forcing a change in attitude (which is what the government and the Fed is currently trying to do) produces short term results and erodes the capital base, which is why it never works long term.

      Given that most households don't have a significant capital base to draw upon during downturns, it makes sense for the government to step in and prevent families from starving to death or being consigned to pre-modern living standards, but it shouldn't do more than that. Doing more just blows asset bubbles and lays the groundwork for the next recession.

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  5. Where did you get this heterodox nonsense from?

    If you took a poll of economists 9/10 would tell you WWII got us out of the Great Depression. The only ones who wouldn't would be the heterodox morons at shitty programs.

    In aggregate, spending is spending. You can use monetary policy to boost it (QE3 was launched 1 year ago, which explains the uptick in the jobs market and NGDP/NGDI growth) and/or you can use fiscal policy to boost it. War spending is obviously unoptimal, given that its costless to just print money until output and employment recover, but given the right reaction function fiscal policy is a sound way to end a depression and restore growth to trend. The fact that war spending got us out of the great depression just goes to show that it doesn't even have to be socially productive.

    You said:

    "The standard Keynesian refrain is doing something is better than doing nothing. But that's nonsense. If you have a factory capable of churning out 10 tanks or 100 cars, you choose the 100 cars any day of the week. But if it was a choice between 10 tanks (during peacetime when we already have a surplus of tanks and couldn't possibly need more) and doing nothing, it's better to have the factory "lay fallow"."

    Obviously this is a bad trade-off. Theres a reason why we use monetary policy to respond to recessions now and only even think of using fiscal policy when the ZLB binds (I don't think it does but thats a seperate issue). Launching a war is a terrible idea for fighting depressions because of the obvious welfare considerations and because the capital destroyed by the war might exceed that destroyed by hysteresis, but that doesn't mean it can't work. Thats a seperate argument.

    You said:

    "The economy is a reflection of attitudes and our capital base. Forcing a change in attitude (which is what the government and the Fed is currently trying to do) produces short term results and erodes the capital base, which is why it never works long term."

    I'd love to see the literature on this. Evidence please. And yes, I can give you evidence that protracted periods of high unemployment and low output does move the LRAS curve inwards. See:

    Laurence M. Ball (2009), "Hysteresis in Unemployment: Old and New Evidence" (Cambridge, MA: NBER Working Paper No. 14818, March)

    You said:

    "Given that most households don't have a significant capital base to draw upon during downturns, it makes sense for the government to step in and prevent families from starving to death or being consigned to pre-modern living standards, but it shouldn't do more than that. Doing more just blows asset bubbles and lays the groundwork for the next recession."

    The EMH says bubbles don't exist, and even if they do I don't see why we should care about them.


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