Fact time: Global warming

The denial of global warming has become less frequent and common - indeed many conservatives now admit it exists. Some have even admitted that a significant share of it is human caused, but perhaps it is not such a severe problem. Well, Nobel Prize winning economist Joseph Stiglitz lists the 7 facts of global warming in his 2007 bestseller Making Globalization Work (p. 166):

1. the world is warming by about 1 degree Fahrenheit (0.6 degrees Celsius) in the last century;
2. even small changes in temparature have large effects;
3. this rate of warming is unprecedented, even going back millions of years;
4. sea levels are rising-by some four to eight inches (tend to twenty centimeters) in the last century;
5. even small changes in sea level can have large effects-for example, a one-meter rise would inundate low-lying areas around the world, from Florida to Bangladesh;
6. there have been huge increases in greenhouse gases in our atmosphere, to a level that is estimated to be the highest in at least 20 million years, and which has been increasing at the most rapid rate for at least the past 20,000 years; and
7. it is possible that the pace of change in temparature could accelerate, with small increases in the concentration of greenhouse gases leading to even larger changes in climate than in the recent past.

Jindal's nonsense response

Jindal's conservative response to Obama's address was eloquent but fallacious through and through. The main idea was the Americans, not government will solve America's problems. There is just one thing wrong in this line of reasoning: the American government is Americans acting as a group. Not everything can be accomplished individually. I cannot pucharse or build a new highway, a new school and new community center by myself - nor can any other citizen. Some of America's problems can only be solved if Americans act toghether as a team, pooling their resoucres. And what's that called: government! Government is Americans trying to solve America's problems, because only by acting together - i.e. through their government - can Americans repair the nation's ailing physical plant, hire more teachers and invest in social serivces. The American government is the American people acting as a group to accomplish what can be done only so long as they act as a group.

Public supports Obama; tells GOP to adandon laissez-faire dogma

According to recent polls:

• 68% approve of Obama's job preformance
• 64% approve of his stimulus plan
• 71% beleive he's been trying to reach across the aisle
• 63% beleive Republicans opposed the stimulus for political reasons rather than economic reasons
• 80% beleive Republicans should compromise and be more bi-partisan rather than hold onto their dogma so strongly
• 62% beleive the stimulus will help their communities
• 46% beleive the stimulus will help them personally

Sweden, model for America?

Maybe; from a research paper I'm working on:

In recent years the political right in the United States and Europe has used comparisons of affluence that show European countries being considerably poorer than the U.S. to gain support for its agenda. According to this line of argument, Europe has been punished with high unemployment and stagnant growth for the excesses of its welfare states (e.g. Meacham & Thomas, 2009). Sweden, home to the world’s largest welfare state, in particular draws the ire of the political right. The Swedish Trade Institute, a right-wing thank based in Stockholm, estimated the nation’s median gross annual household income at roughly $29,000 in the late 1990s, compared to $39,000 in the U.S. at the time (Andersen, 2002). Other publications have claimed that the average Swede has a standard of living lower than that of the average poor American, using statistics such as ownership rates of electronic appliances, GDP per capita and the average square footage of residences as proxies for standard of living. According to these conservative authors, if Sweden does not become more laissez-faire, it is doomed to falling further behind the United States (Bergström & Gidehag, 2004).

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There are many problems with this argument. First of all, the $29,000 figure seems highly suspect. According to official government statistics, the median household income in the UK is about $40,000, and about $55,000 in Switzerland, when adjusted for cost of living (House of Commons, 2006; Swiss Bureau of Statistics, 2003). It seems doubtful that Sweden is so much poorer than the UK or Switzerland given its relatively high GDP per capita. But let’s, for the sake of argument, accept the idea that Sweden’s median household income is far below that of the U.S. Let’s also, for the time being, ignore that Sweden is only one of five Scandinavian countries. Among the most glaring problems in the “Sweden is poorer than the U.S. because of its welfare state” argument is the definition of prosperity. Proponents of the argument use gross annual household income, which does not include the cash and in-kind benefits Swedes get from their welfare state, such as free tertiary education, housing subsidies, free health care, and free child care. Americans spend thousands of dollars out of pocket each year for these services; as mentioned earlies, millions go bankrupt and others even forego necessary medical treatment. Many other Americans (those who can afford it) spend up to thousands each year on private insurance policies, to gain the economic security taken for granted by even the poorest Swedes. Then there is leisure. Swedes are guaranteed five weeks of vacation per year, while most Americans enjoy two or less (Sackery et al., 2008). An accurate comparison of Swedish and American prosperity must take in-kind welfare state benefits, economic security and leisure into account.

Least, but not last, even if we were to continue assuming that Swedes are poorer than Americans, such does not provide an argument against social democracy. The U.S. has had higher levels gross domestic product per capita than Europe since the early 20th century. Perhaps, our head start explains the difference. Most importantly it is a fallacious argument – the presence of A does not necessary cause B. There are several economic developments that would have to be explained before we can come to the conclusion that social democratic welfare states are growth suppressants. If the welfare state truly retards growth, than why have expansions of the welfare state coincided with strong economic growth in both Sweden and the United States? Between 1965 and 1981 the American welfare state grew from 12.3% to 20.7% of GDP, and real GDP grew from $3.1 trillion to $5.3 trillion (in 2000 dollars). In other words, the 68.3% increase in social welfare expenditure as share of GDP, coincided with a 71% increase in real GDP! The next 15 years, on the other hand, saw growth of the American welfare state virtually stagnate and GDP rising by a more modest 59% (Alber, 1988; Bureau of Economic Analysis, 2009). In the U.S., the top marginal tax rate is also positively correlated (albeit slightly) with economic growth (figure 3), i.e. over the past fifty years of American history higher taxes on the rich have coincided with more economic growth (figure 4). Last but not least, why have Denmark, Finland, Norway and Sweden seen an as much GDP growth between 1997 and 2007 as the United States (figure 5)?[1] Why is worker productivity as high or higher in France, Norway and the Netherlands than in the United States, despite their big welfare states? Because, big government simply does not automatically translate into less growth. As Jeff Madrick (2009) has pointed out:

“In sum, America’s productivity is 15 percent higher than the average of
nation’s in the Organization for Economic and Cooperative Development (OECD)...
But is is lower than in a half dozen nations with much higher taxes and rates of
social spending and roughly half of the OECD countries pay higher or equal wages
to workers in manufacturing, and almost all produce substantially more benefits
than does the United States.” (p. 20).

These data clearly indicate that the conservative argument against the social democratic welfare states is a spurious one. Too often are social democratic welfare states able to match America in regards to productivity and wages, and too often have high taxes and welfare state growth coincided with strong GDP growth in America’s own history. There is simply no conclusive evidence that a social democratic welfare state leads to economic stagnation that eventually hurts everyone. Social democracy, therefore, emerges from the debate with conservatives as a viable alternative to the more laissez-faire Anglo-Saxon model; an alternative American liberals should not be afraid to borrow from.

Figure 3: The top marginal tax rate (pink line with percentages on left y axis) has seems to have little effect on annual nominal GDP growth (blue line with percentages on right y axis).
Figure 4: Slight positive correlation between higher top marginal income tax rate and GDP growth, 1950 - 2005. (Annual GDP growth is on the y-axis and the top marginal tax rate on the x axis). Note that if high taxes levied on the rich were inherently anti-growth, one expect a significant negative correlation over the course of the past 60 years.

Figure 5: GDP growth (1997-2007) in Denmark, Finland, Norway, Sweden and the United States using 2000 as base year with a value of 100 (Ekonomifakta, 2009).
[1] Between 1997 and 2007, Denmark, Finland, Norway, Sweden and the United States saw an increase in real GDP of 22.4%, 42.5%, 28.3%, 37.3% and 32.9%, respectively (Ekonomifakta, 2009).

Senate Idiocy

According to the AP, "Originally, Pelosi and House Democrats wanted a new program dedicated to school construction, but Collins held firm against that." Why? Building schools creates more jobs in the short-run and gives us the benefits of a better educated labor force in the long run. This is an investment that pays dividends in the short and long run. Why would anyone not vote in favor of school constrcution. What is Collins thinking?

Why the minimum wage doesn't kill jobs

From the economists over at AngryBear,

Politicians tasked with convincing democratic majorities that they should oppose minimum wage increases generally fall back on the economic argument that such increases simply lead to job losses. Often they go on to point out that these losses fall disproportionately on the young, the unskilled, or minorities...

Plus it doesn't take a lot of complicated analysis to show that the argument can't just rest on changes on employment at the margin, just a pencil and a calculator. Take a company with 100 workers including Jimmy making federal minimum wage currently at $6.55 per hour. This wage is scheduled to increase to $7.25 per hour on July 24th. Let's say that management in order to partially compensate for this increased cost decided to lay off Jimmy. Should the other workers care enough that they should forgo the pay increase? For that matter should Jimmy even want them to? I suggest the answer to both questions is no.

We have 99 workers now making an extra 70 cents an hour which multiplies out to an extra $69.30 per hour. When we subtract out Jimmy's wage that net drops to $62.75. Which is plenty enough to buy Jimmy a nice lunch on his last day. More to the point it is enough to subsidize Jimmy's unemployment until he gets a new job. A job where he too will be getting $7.25.

Indeed data has shown that unless we raise the minimum wage above $9.50 there won't be any significant joblesses.

Obama says it how it is

I couldn't have given a better description of the failed small-government dogma than the one offered by our President:

"We can't expect relief from the tired old theories that, in eight short years, doubled the national debt, threw our economy into a tailspin, and led us into this mess in the first place...

We can't rely on a losing formula that offers only tax cuts as the answer to all our problems while ignoring our fundamental economic challenges"

The logic of legalizing prostitution

If a city spends $1 million on fighting prostitution, that takes $1 million away from other services like education and health care. That’s the initial “opportunity cost.”

There’s another hidden opportunity cost. Suppose we legalize prostitution and our city no longer spends $1 million on vice units. Instead those funds are now freed up for education, roads and the like. Furthermore, to discourage prostitution we impose a tax on it. This tax will add funds to city coffers, in addition to the money already saved from no longer enforcing anit-prostitution laws, to pay for other programs.

So in addition to saving on no longer funding vice units, we know have a new source of revenue for city coffers, while still effectively discouraging prostitution. In economics that's called a state of Pareto optimality - some are made better off (the citizens who benefit from expanded programs funded by the prostitution tax) and no one is made worse off (as a matter of fact, the prostitutes now work in the regulated, rather than shady underground, economy).

Liberalism's working

It's been 1 week since Democrats assumed unified control of government and liberalism once again ascended to the throne as America's main economic philosophy. Not only are we nearing an $825 billion stimulus package that will lessen the severity of the recession and provide some much needed funds to the public sectors, including schools and roads, which conservatives so much love to starve, Democrats are also re-establishing what seems like a long lost idea: regulation to keep people happy and healthy. Mainstream economics tells us that market cannot function efficiently in sight of imperfect information. For instance, most of us never inspect the factories and resturant ktichens where our food comes from. Thus, the information we as consumers have is imperfect. The remedy? Regulation. And that's exactely what Democrats are now considering in the House:

Democratic lawmakers unveiled legislation on Wednesday to increase government inspections of food and drug manufacturing plants in an effort to keep tainted products off the market. The measure was introduced during a salmonella outbreak traced to peanut butter and follows last year's discovery of contaminated ingredients from China that were used to make the blood-thinner heparin.

Under the bill, food producers and drugmakers would be required to pay fees to the Food and Drug Administration to help boost the frequency of plant inspections. Investigations have found the FDA's inspection staff stretched thin with a growing number of global products to oversee.

Finally, a Congress and a White House that understand economics!

Economic Disturbia

Forget plunging stock markets or forecolsures. Heck, forget the current recession. Here is a truly disturbing economic trend: See Lane Kenworthy's full post, where I obtained the graph, here.

Tax cuts don't cut it

From Mark Thoma, professor of economics at the University of Oregon:

Tax cuts won't build schools, or any other public good.

And right now, with so much of our infrastructure in need of attention, we need public goods. We tried the tax cut approach to stimulating the economy once, we had no choice since Bush and the Republicans would not have passed any other type of stimulus package.

Guess what? It didn't work very well, and we have little to show for it. Had we, say, rebuilt water systems instead, at the very worst we'd have better water. That's not so bad in any case. And it's been interesting, if that's the right word, to watch the same people who delayed fiscal policy for months and months and months as they insisted that we try tax cuts first now tell us that it will take too long to put the spending in place. They don't seem to realized that's because of their insistence on the use of tax cuts rather than spending. If we had started on these projects a year ago instead of enacting the tax cut package to appease the right, timeliness would not be such an issue - we might already be repairing sewage systems, rebuilding roads, and so on. I've even heard some who ought to know better argue that because forecasts say the recession will end soon, we can't possibly get the spending in place soon enough. That is, they argue that by the time the spending hits the economy, the economy will have already recovered (these are often the same people who reassured us that there was no housing bubble, and there was not worry anyway because the recession, if it hit at all, would be very mild and easily absorbed by our dynamic, flexible economy). Never mind that forecasts beyond around six months ahead are not much better than a coin flip, and they know it, some forecast somewhere says that the recession will end before spending is in place, and that's enough for them to take the argument public. What if the forecast is wrong?

It's not completely clear to me that the fact that the recession might end soon undercuts the case for government spending anyway. If the money is spent on large, socially beneficial projects - and lots of infrastructure comes under this heading - then so what if the economy recovers? These are things we very much need, and that won't change just because the economy is doing better. There will be net benefits no matter the state of the economy, but the net benefits will be higher if we pursue these projects when the costs are low. If we are lucky, and the economy recovers very fast, much faster than expected, then there will still be benefits, they just won't be as large.

We need to do these things, and right now, with so many idle resources in the economy, the opportunity cost of employing resources is low. For this reason, this is an opportune time to meet the challenges that we face in repairing the infrastructure and in meeting other needs that are critical to maintaining robust economic growth, and in maintaining our health and welfare.

Read the full post on his excellent blog, The Economist's View here.

Hopeful signs

From the New York Times Editorial Board - Obama's attitude is a hopeful sign for restoring American prosperity:

When he accepted his party’s nomination last year, Barack Obama repudiated the “you’re on your own” ethos that had come to define the government’s relationship to the people. He said government cannot do everything, but he promised one that would do what individuals cannot do for themselves: “protect us from harm and provide every child a decent education; keep our water clean and our toys safe; invest in new schools and new roads and new science and technology.”

Obama's liberalism shows

Combined, the following two quotes from Obama's inaguration speech add up to a pretty good description of modern liberalism (in a very elquent way):

To carry forward that precious gift, that noble idea, passed on from generation to generation: the God-given promise that all are equal, all are free, and all deserve a chance to pursue their full measure of happiness...

The question we ask today is not whether our government is too big or too small, but whether it works - whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified.

Read the full speech here.

Good-bye

After 8 years, two of which he spend on vacation (well, ok, it's not quite the same since Presidents do some work while "on vacation"), George W. Bush is no longer President. He probably did what he genuinely thought was best for the country, but alas his ideas were wrong. Billions were wasted on tax cuts while our infrastructure decayed and nothing was done to shield ordinary Americans from rising health care and college costs. Poverty remains as high as 8 years ago, income inequality is higher - only wages and median household income is lower. From an economic point of view, his administration was a disaster, despite any good intentions he might have had.

Contents of the $825 billion stimulus package

According to the Democratic proposal, the funds will be used as follows (as you read this remember that spending has a bigger stimulus effect than tax cuts) - all figures are in billions:

• Tax Cuts: $275
• Spending: $550
• Medicaid: $87
• Aid to states: $79
• Unemployment benefits & job training: $43
• Local school districts: $41
• Health insruance for newly unemployed: $39
• Overhaul power grid: $32
• Modernize public buildings: $31
• Highway construction: $30
• Health technology: $20
• Food stamps: $20
• Clean water, flood control, environmental protection: $19
• Renovate public housing: $19
• Pell grants: $15.6
• Mass transit: $10
• Science and research $10
• Help insulate low income homes: $6
• Expansion of broadband access: $6
• Higher education: $6
• Preventative health care: $4.1
• Local law enfrocement: $4
• Yet-to-be allocated: $31.3

See this graph in the NYT.

The deficit will be smaller than you think

The Obama administration is considering an $800 billion stimulus package. So $800 billion in additional spending means that the original deficit will be $800 billion larger, right? Wrong. $800 billion n deificit spending will produce a deficit smaller than $800 billion. Here's why, explained by Andy Harless:

Suppose that, at the beginning of the fiscal year, Congress appropriates $100 billion extra for infrastructure projects. At the end of the fiscal year, how much higher will the deficit turn out to be, compared to what it otherwise would have been?The obvious answer, and the one that usually seems to be implicitly assumed by the media and the pundits, is $100 billion. But if you think about it carefully, it should become obvious that the obvious answer is the wrong answer.

The government is going to use most of that money to hire people and to buy things. Many of the people it will hire are people who were previously unemployed. Many are leaving other jobs which will subsequently be filled by people who were unemployed. These previously unemployed people, who may have been collecting benefits, will now be paying taxes. Those taxes will reduce the deficit, as will the reduced benefit payments. Moreover, for the businesses from which the government purchases, their profits will rise, and they will pay additional taxes on those additional profits. And they may expand and hire new people, or retain people that would otherwise have been laid off. And (if you believe in a multiplier effect), all the newly employed people, as well as the owners of the businesses, will spend more money, thus providing more profits and more employment for others, who will also pay taxes and stop collecting benefits. And so on. The ultimate effect of the original expenditure on the budget deficit will be considerably smaller than $100 billion.

Real stimulus: Less tax cutting, more spending

From Paul Krugman, Nobel Laureate in economics,

Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.

Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more. And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?

Mainly, though, Mr. Obama needs to make his plan bigger. To see why, consider a new report from his own economic team.

On Saturday, Christina Romer, the future head of the Council of Economic Advisers, and Jared Bernstein, who will be the vice president’s chief economist, released estimates of what the Obama economic plan would accomplish. Their report is reasonable and intellectually honest, which is a welcome change from the fuzzy math of the last eight years.

But the report also makes it clear that the plan falls well short of what the economy needs. According to Ms. Romer and Mr. Bernstein, the Obama plan would have its maximum impact in the fourth quarter of 2010. Without the plan, they project, the unemployment rate in that quarter would be a disastrous 8.8 percent. Yet even with the plan, unemployment would be 7 percent — roughly as high as it is now.

So how can Mr. Obama do more? By including a lot more public investment in his plan — which will be possible if he takes a longer view.

The Romer-Bernstein report acknowledges that “a dollar of infrastructure spending is more effective in creating jobs than a dollar of tax cuts."

So to sum up: less tax cuts and more public investment. The latter has more bang for the buck and will help facilitate a recovery that will take a couple of years.

Actual unemployment at 13.6%

What counts as unemployed? The most cited figures includes those actively looking for work, but who are unable to find it. That figure is now at 7.2% (the highest level since Jan. '93). But if we count discouraged workers (those who have given up looking since they couldn't find anything, but are nontheless out of work involuntarily) and those who are unable to find full-time jobs, but want them, the figure jumps to 13.6%. It's called U-6 unemployment and is a much better representation of actual woes in the labor market.

The really bad news are congressional Republicans who want to impose a limit on a federal stimulus package. The CBO has estimated that we will lose $2.1 trillion of productivity over the next two years, and yet the GOP is balking at a mere $775 billion. We need to face the fact that less than a trillion perhaps won't do. Furthermore, every month we wait, the situation gets worse and the stimulus needs to get bigger. Is that a Republican strategy (stalling a stimulus plan and making too small) to prove that government can work? I'm not one for conspiracy theories, but how can the GOP resist supporting the Obama stimulus plan, if even Martin Feldstein supports it?

Liberalism is NOT socialism

I've had quite enough of conservative commentators describing anything that redistributes wealth and income as socialist. Here's liberatarian Reason magazine (whose tagline is "Free minds and free markets") on the issue:

If redistributing wealth makes you a socialist, though, you have to apply that
label to the legendary libertarian economist Milton Friedman, who proposed a
"negative income tax" to assure everyone basic sustenance.

Of the conservatives who use the term socalism to refer to modern liberalism the libertarian magazine of record has this to say:

So it's safe to say that over the next four years, the 44th president will come
to think his name is Socialist Obama, as critics on the right abandon analysis
in favor of invective... Accusing Obama of socialism is unwise for three
reasons: 1) It's not true, and 2) it makes the accuser sound like an idiot, and
3) it distracts from Obama's true inclinations, which are worrisome enough.

So, my friends on the right - listen to your own pundits and stop sounding like idiots. For those of you who want a technical explanation see my video:

The disintegration of our health care system on TV

See this report by PBS on what happens when people are not sufficiently insulated from the cost of health care. Yes, Canada may have waiting lines, but in our system more and more people are being excluded from care completely because of its cost. People forgo preventative treatment, don't their meds, don't have surgeries they need and then end up in the ER once the condition becomes unbearable. The disturbing fact is that 49% of Americans have delayed or compeltely forgone neccessary or recommended treatment. In no other country do people have to chose between buying groceries and getting their Rx refilled - we should not be the exception.