Robert Samuelson Fudges More Numbers

Robert Samuelson is expressing skepticism about the success of the stimulus:

There’s the puzzle: monster stimulus, midget recovery.

How to explain the contrasting stories?

If Samuelson, an economics commentator, actually followed his subject, he would be aware that the stimulus was not so big in relation to the gap it needed to cover. Dean Baker has been addressing this issue for years.

The arithmetic on this is straightforward. With the collapse of the bubble, we suddenly had a huge glut of unsold homes. As a result, housing construction plunged from record highs to 50-year lows. The loss in annual construction demand was more than $600 billion. Similarly, the loss of $8 trillion in housing equity sent consumption plunging. People no longer had equity in their homes against which to borrow, and even the people who did would face considerably tougher lending conditions. The drop in annual consumption was on the order of $500 billion.

The collapse of the bubble in nonresidential real estate cost the economy another $150 billion in annual demand, as did the cutbacks in state and local government spending as a result of lost tax revenue. This brings the loss in annual demand as a result of the collapse of the bubble to $1.4 trillion.

Compared with this loss of private sector demand, the stimulus was about $700 billion, excluding some technical tax fixes that are done every year and have nothing to do with stimulus. Roughly $300 billion of this was for 2009 and another $300 billion for 2010, with the rest of the spending spread over later years.

In other words, we were trying offset a loss of $1.4 trillion in annual demand with a stimulus package of $300 billion a year. Surprise! This was not enough.

It's not as if Dean Baker is alone in his opinion. Paul Krugman seems prescient in describing Samuelson's form of analysis:

So why does everyone — or, to be more accurate, everyone except those who have seriously studied the issue — believe that the stimulus was a failure? Because the U.S. economy continued to perform poorly — not disastrously, but poorly — after the stimulus went into effect.

There’s no mystery about why: America was coping with the legacy of a giant housing bubble. Even now, housing has only partly recovered, while consumers are still held back by the huge debts they ran up during the bubble years. And the stimulus was both too small and too short-lived to overcome that dire legacy.

This is not, by the way, a case of making excuses after the fact. Regular readers know that I was more or less tearing my hair out in early 2009, warning that the Recovery Act was inadequate — and that by falling short, the act would end up discrediting the very idea of stimulus. And so it proved.

But, you know, Samuelson found an economist you've probably never heard of before, and the guy has a position at a brand name university and a blog, so why research any more deeply into the subject? Samuelson's primary argument is that we should live in fear of dire consequences that never materialized, and thus that the government should do nothing more to stimulate the economy. Fortunately for him, the Republican Party is on his side so we're apt to see the painfully slow recovery continue to inch along. If another recession hits soon, Samuelson may discover out that the phrase, "an economy in eclipse," has more significance than as a parting shot taken at those who actually understand the subject.

Conventional Wisdom and Structural Unemployment

I saw this argument from Paul Solman, who I can't help but believe should have known better,

Liberal economist and much-respected friend Dean Baker, co-director of the Center for Economic and Policy Research, where he keeps the Beat the Press blog, has appeared on PBS NewsHour often over the years, and recently on these pages in "Don't Blame the Robots." He appeared here again Wednesday, decrying what he called the media's "mindless" budget reporting.

But when he wrote on his blog on Aug. 3 that "[t]he PBS Newshour won the gold medal for journalistic malpractice on Friday (Aug. 2) by having David Brooks and Ruth Marcus tell the country what the Friday jobs report means," he seemed curiously harsh and patently partisan.

I don't think it's either, actually, save in the sense that we're supposed to tiptoe around the fact that a lot of the analysis offered by "serious" news shows revolves around talking heads who know little about the subjects that they are discussing, but get more and more air time by virtue of their past history of being talking heads, and that it's thus "curiously harsh" to note that this phenomenon represents a manifestation of the Peter Principle. Had they invited Jenny McCarthy on to discuss the science behind vaccines, I suspect that Solman would have taken issue both with the invitation and with the implication that she had special expertise. Yet that is exactly what shows like PBS Newshour do when they present as authorities non-economists who pontificate on the economy despite a long, documented history of having paid very little attention to what actual economists have to say.

"Brooks and Marcus got just about everything they said completely wrong," Baker continued. "Starting at the beginning, Brooks noted the slower than projected job growth and told listeners: 'Yes, I think there's a consensus growing both on left and right that we -- the structural problems are becoming super obvious...'"

But, Baker insisted, "It's hard to know what on earth Brooks thinks he is talking about. There is nothing close to a consensus on either the left or right that the economy's problems are structural, as opposed to a simple lack of demand (i.e. people spending money). This is shown clearly by the overwhelming support on the Federal Reserve Board for its policy of quantitative easing."

Solmon notes that Paul Krugman agreed with Baker, then observed that while Brooks and Marcus aren't in fact describing an economic consensus their argument demonstrates how "Washington conventional wisdom... has clearly swung to the view that our high unemployment is 'structural', not something that could be solved simply by boosting demand".

If I took umbrage at those statements, my first response would be to explore whether or not there was a consensus among economists as to whether the economy's problems are structural. I would also wonder why David Brooks, who occasionally takes ill-informed potshots at his New York Times colleague, Paul Krugman, is not aware of Paul Krugman's years of argument on this subject. But instead....

Look, folks, there may indeed be no "consensus growing on left and right" about the predominance of structural unemployment, as David Brooks alleged. Just look at how vigorously Krugman and Baker took the other side. But I rather doubt Krugman's assertion that there is an "actual economic consensus" on the unemployment debate that favors his cyclical explanation to the exclusion of the structural. Unless, of course, Krugman means a consensus among economists he agrees with.

Why assume anything? Why not call other economists and ask?

A confession: Brooks is a friend for whom I have great respect, as I do for Ruth Marcus.

Well, that explains it... just not in a manner I find satisfactory.

Unlike Krugman and Baker, my main job for 36 years now has been to interview not only economists like them, but hirers and hirees, firers and firees. I've done so through both recessions and recoveries alike. I wheedled soundbites out of the drearily downhearted high tech-workers of the late 1970s and spoke to the happily hopeful hires of the late 1990s.

Then, friendship or no, there's really no excuse for the assumption. Solmon did find "A 2011 paper from the San Francisco Fed attributed 60 percent of long-term unemployment to cyclicality and 40 percent to structural factors," which is at best tepid support for Brook's' assertion that the issue is structural, but that two-year-old paper seems to be the best support he could find for Brooks' claimed consensus.

I'll admit, when I looked at the unemployment data, the fact that many workers displaced by the great recession were never again going to earn the sort of wage they had previously enjoyed, and the downward pressure on the middle class, my initial reaction to "This isn't a structural issue" was "Say way?" But in fact what Krugman and Baker are discussing is something else - the notion that there has been a seismic change in the economy such that we have to simply accept a higher unemployment rate than we have historically seen. Baker, Krugman and others have rebutted that "structural change" argument repeatedly and convincingly, to the point that if you're a business and economics reporter and are only just now taking note of it it's safe to say that you've chosen not to pay attention to material you should be covering. But Solmon seems mostly interested in the issue as a left-right political debate, and thus seems to think it's enough to circle back to Brooks as an authority.

Solmon gets partial credit for allowing Dean Baker to refute the "structural" argument, but he loses points for a response in which he changes the subject,

Baker's may be the best possible summation of the cyclicalist argument. Moreover, he may well be right: throw enough money at the economy, and at some point, everyone will be employed.

But if economics teaches us anything, it's that every decision has both benefits and costs. What might be the cost of Baker's Keynesian "Trillion-Dollar Solution"?

Baker, of course, didn't argue that the only way back to full employment was a $trillion stimulus, he simply described a theoretical means by which the economy could be brought to full employment. When you introduce an idea with, "Imagine someone found a $1 trillion bill in the street and decided that, as a public service, she would spend the money over the next 12 months to boost the economy", it's pretty obvious that you're not describing something you believe is likely to occur. Solmon then speculates about how productive newly created jobs would be, an argument that is in no way tied to the present time or economy. Solmon argues,

If the cyclicalists are right, spend a trillion dollars and new jobs will eventually emerge, as they indeed regularly have throughout American (and world) history. If the structuralists are right, however, history is in the process of changing and the government jobs will last only as long as the trillion dollars.

But the discussion was about consensus, right? And Solmon has completely abandoned the pretense that the consensus described by Brooks exists on either the left of the right. Solmon closes by offering a comment from his prior thread, in which a tech graduate describes being heavily recruited, with generous wage offers and stock options,

Those opportunities, however, are out there only for those with a set of specialized skills. If the structure of the U.S. economy is changing to employ those who have such skills and disemploy those who don't, the structuralists have a point.

But again, same as it ever was. When changes in technology and the economy led to the demise of the livery stable and blacksmith's shop, even as blacksmiths and stable hands struggled to find new work, other people were entering the job market with a very different set of skills and with far better job and income prospects. When the domestic garment industry collapsed in favor of offshore production, medical school graduates were doing better than ever. The fact that wages or opportunities in one corner of the economy are reduced even as opportunities exist "for those with a set of specialized skills" is not new - it's history repeating itself.

Detroit the City vs. 'Detroit' the Auto Industry

Robert Samuelson wrote one of the columns on Detroit that I find a bit frustrating, and leave me wondering if Samuelson has ever been to the city. Samuelson finds it to be a "great irony" that Detroit's bankruptcy "seems to suggest the obsolescence of central cities when just the opposite is true", pointing to the success and revival of "Boston, New York, Philadelphia, Seattle, San Francisco and others".

All have stubborn concentrations of poverty, but many have benefited from gentrification and stronger job markets. High energy costs, a backlash against commuting, lower crime and cities’ vibrancy have renewed their appeal.

But here's the thing: Detroit developed as something of a suburban city, the place where you could live the city life while residing in your own home. Detroit is not situated in an area in which developers are constrained by geography, and must redevelop within its limits. Instead, Detroit is sprawling - 139 square miles - with a low population density, roughly 5,100 people per square mile, as compared to New York City's 27,000 or San Francisco's 17,400. Thanks to poorly considered urban planning decisions in the 1960's, the sort of neighborhoods that have helped lead to redevelopment in other cities, loft conversions and the like, were bulldozed to make way for freeways. Mass transit is poor and, even if it weren't, if you were to develop new residential neighborhoods within Detroit, the jobs for people who could afford to live in them would largely lie outside of the city limits.

Samuelson then asserts that the leading reason for Detroit's failure is that "It became a prisoner of its dependence on the auto industry." Here, Samuelson makes the common mistake of confusing the common shorthand term for the domestic auto industry ("Detroit") with the actual city called Detroit. The problem is that the auto plants that used to employ residents of Detroit were for the most part around the city, and the hollowing out of Detroit was well underway before Michigan started losing those plants to non-union states. Workers were easily able to relocate to towns outside of the city limits while keeping their factory jobs. And as much as Samuelson complains,

In the 1950s and ’60s, most Americans — not just people in Michigan — took the dominance of the Big Three for granted. General Motors, Ford and Chrysler commanded about 90 percent of the vehicle market. Who could challenge them? The result was a plausible and self-serving business model: high wages, generous fringe benefits, job security (with supplementary unemployment benefits to cover workers during temporary layoffs). The compact generally bought labor peace between the companies and the United Auto Workers. Given their market power, automakers could pass most costs on to consumers.

But what made short-term sense spelled long-term suicide — for companies, workers, Detroit and Michigan. High costs, shoddy quality and mediocre management made the companies vulnerable to foreign competition from imports and nonunionized plants, generally in the South. Employment eroded. Worse, the auto industry’s model shaped the state’s labor market and policies. By 1978, average hourly earnings in Michigan were 32 percent higher than the national average. Michigan had an anti-business reputation. This frustrated the state in its efforts to diversify its economic base.

Again, Samuelson confused "Detroit", the domestic automobile industry with "Detroit", the city. Samuelson, who seems to be generally opposed to collective bargaining, drops "nonunionized plants, generally in the South" into the mix without mentioning the policy choices that led to the split between "union" and "non-union" states, as if the City of Detroit were somehow responsible for the Taft-Hartley Act. He neglects to mention that many of the southern states that benefited from the relocation of plants from Michigan subsequently experienced plant closings as factories were moved to the developing world. But perhaps most of all he isn't even capturing the reality of what was happening in Detroit and surrounding communities. Take a look at a household income map for Michigan from the year 2000. If you don't know that Detroit is in southeastern Michigan, well, now you do - now take a look at that map and tell me where Detroit is located. You can see that the area surrounding Detroit remained quite wealthy, while Detroit had average wages similar to the most isolated and rural parts of the state. In 2010 Michigan's per capita income was $25,135. The state with the lowest per capita income was Mississippi, at $19,977. Detroit's per capita income was $15,261. Michigan certainly has struggled in the face of a global economy and a loss of traditional manufacturing jobs, but the areas immediately surrounding Detroit remain the richest in the state while Detroit sits, impoverished, in their midst.

Now a second map. This map shows the ethnicity of the residents of the Detroit metropolitan area, "White people are represented by pink, Black people are represented by blue, Hispanic’s represented by orange and Asians by green." How many seconds did it take you to locate Detroit? Knowing that that the northern boundary of Detroit was Eight Mile Road, how many seconds did it take you to figure out where that road is located on the map? Knowing that there's a separately incorporated city within Detroit, the City of Hamtramck, how many seconds did it take you to figure out where Hamtramck is located?

Don't get me wrong - I don't mean to suggest that there is some sort of racial redlining at work, or that the boundaries of Detroit were drawn to include only poor black neighborhoods. The problem is that as Detroit has lost population it has been unable to provide adequate municipal services, while its property taxes are high due to the low value of its real estate. If you're an employer thinking about opening a business in Detroit, you have to consider that your workers are probably going to want to commute in from a suburb where they have better schools and municipal services, and that they're going to pay a city income tax. Unlike the cities that have existing working class populations, and where living in the city can mean a shorter commute - or a commute on public transportation - working in Detroit can mean a longer commute, with a higher tax bill to boot.

Samuelson pontificates,

By reducing debt and pension payments — though hurting creditors and retirees — bankruptcy might break this cycle. But there’s no quick fix. What Detroit teaches is that those who deny economic change often become its victims.

It's difficult to see how reducing Detroit's debt will "break" its cycle - which is much less a cycle and much more of a decades-long downward trajectory. It's even harder to see how reducing pension benefits for the city's retirees, many of whom still live in the city, will benefit the city. By national standards the pension benefits aren't even particularly generous. Samuelson's theories of economics often seem to be driven by austerity theory and thus tend to be counter-factual, but surely even he can recognize that further reducing Detroit's per capita income and giving its people even less money to support local businesses is more of a stumbling block than a road to recovery. The cuts may well be necessary to balance Detroit's books, but if Detroit does not do far more than that to reinvent itself this is likely its first bankruptcy, not its last.

What I would like to see Detroit accomplish is a serious plan to consolidate its all-but-abandoned areas, and to engage in the wholesale removal of abandoned buildings. To do that effectively will require an infusion of state and federal money - many abandoned buildings are simply too large or require too much environmental clean-up for the city to do itself, particularly when it has no money. But I don't see that the void inside of Detroit will be filled with new people, businesses and jobs unless developers are looking at brownfields ready for redevelopment, as opposed to having to spend a small fortune demolishing an abandoned structure, and it's not realistic that developers will want to erect new structures or homes alongside vacant, derelict shells. The reasons that there is development around Detroit, but little development within Detroit, are not state secrets. Detroit is not going to become what Samuelson describes as an "incubator[] for new ideas and industries" as long as most businesses don't preface the idea of building or expanding in Detroit with the phrase, "anywhere but...."

Samuelson's admonition about "Detroit" holds more true for the state as a whole, which makes sense given that the State of Michigan is more aligned with that conception of Detroit than is the city itself. Contrary to Samuelson's suggestion, though, that Michigan workers get paid too much and have benefits that are too good, the fact is that Michigan is best served by trying to attract the sort of jobs and talent that keep wages high in the counties around Detroit. Samuelson observes, "New York has recovered, led in part by a resurgent (and maligned) financial industry", so let's be honest - being grossly overpaid relative to your contribution to society isn't an impediment to urban renewal, or even something to which Samuelson actually objects. (We can note, also, that Beltway pundits are paid extremely well for what amounts to a marginal contribution to society.) It's a matter of finding jobs and industries that fit with the present economy.

Rick Snyder's Missing "C"

Gov. Snyder believes that the state needs to make an effort to attract talented workers to Michigan:

"There are three 'Cs' that are critically important. Collaboration, creation and connection. Collaboration is about working with the private sector to say 'what are your needs today and tomorrow?' The second 'C' is about creating talent, that's the education sector, about giving people the tools to be successful. Finally, connecting those tools."

First and foremost, in terms of attracting and keeping talent, Snyder is missing the most important "C" - compensation. Instead he substitutes determining the needs of the private sector - which I expect translates roughly into, "Getting whatever workers we need for the lowest possible compensation," the opposite of what attracts and retains talented workers. He draws on Econ 101, picturing the job of government as changing the point at which the supply curve (workers) crosses the demand curve (what employers want) - but doesn't really explain what he would do to change the point at which the two lines intersect beyond mentioning a state-run jobs bulletin board. I'm no economist, but here's a nice refresher course on supply, demand and market equilibrium, and the importance of price in eliminating a market shortfall.

Snyder comments on the jobs board, "we have over 60,000 open jobs... and these are good jobs". Not that it's a scientific test, but here's what I just found on that board:

Asparagus Harvester
Todd Greiner Farms Packing, Llc

Job Code Number: 4015674

Job Description: Involves hand-harvesting the asparagus crop while riding a self-propelled personnel carrier. Employer needs 5-7 workers per group. Asparagus harvest will begin around May 1st, and will continue through approximately mid-to-late June. Hours vary between 45-55 hours per week (based on weather and other occurrences beyond employers control). Wages: Piece rate= $0.14 p/lb. for processing and $0.16 p/lb for fresh market. Employer guarantees Michigan minimum wage or $7.40 p/hr. Some licensed housing is available depending on group size. No bonus.

Here's the thing: I didn't go searching through the jobs board for the worst job listed at the worst pay.¹ That job was featured on the front page of the website, the very first job listing under the heading "Featured Jobs".

Other featured jobs include driving a truck for an apple orchard, working as a quality inspector (high school diploma or GED required) with no corresponding job listed through the opportunities section of the company's website, working contracts through a staffing company that sends workers to companies throughout the nation, working as a project manner for a technology company that has a broken job search function on its own website.... I ran a few searches, attempting to filter for the better jobs, but didn't see much that hinted at Michigan's future, let alone a large number of job openings that are unlikely to be filled if the employer is willing to pay the compensation the market demands.

Snyder came out of Gateway computers, so he should have a pretty good sense that even with the best "account management" or "collaboration", no government can save a company from itself. No doubt, Gateway could have used better talent in its later years - but in management, not on the assembly line. Snyder continued to serve on the Gateway board during its final decade of decline, prior to its acquisition by Acer, and briefly served as interim CEO during that period, so he should have a pretty good idea of what a poor job even talented, motivated managers and bean counters can do in terms of anticipating a company's future needs and turning around a declining company. When we talk about running government like a business I'm not sure what business we have in mind, but it's not Gateway.

It's also fair to ask, what can the state actually do in terms of boosting the education sector. Under Synder's tenure the primary "education" focus of the legislature has appeared to be, "How to weaken teacher's unions, reduce their compensation and benefits, and boost for-profit charter schools," which to me doesn't appear to reflect deep concern for the quality of public education. State colleges continue to feel a budget squeeze. If I look at his actions, the governor appears to share the philosophy of the state legislature. How will Michigan's present education policies create talent and, to the extent that it does, why would that talent want to stay in the state? Even if they can find a job on the job search board, many talented graduates going to do what Snyder did - chase the best job, even if it means moving to another state.

Snynder has not fully unveiled his plans, but he did say this:

“We have a number of action items that we’re still putting together and will be rolled out soon. Particularly we’re looking at working within regions at talent connection and making sure that skilled trades are an emphasis.”

That suggests to me that Snyder seeks Michigan's future as involving lower-paid factory jobs. That interpretation seems consistent with the actions of Snyder and the legislature, from its treatment of schools and teachers to the legislative shenanigans behind making Michigan a "right to work" state, but it's the sort of emphasis that seems likely to keep Michigan's most talented graduates looking for jobs in other states, and will keep the best-paying jobs in those other states.
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1. Before you accuse me of cherry picking, I'll note - that job is listed as well, and it also guarantees no more than minimum wage. If you want me to cherry pick, we need to move up to the type of salary John McCain once suggested.

The Return on Investment for Law, Business, and Medical School

My last post resulted from a search in which I was looking for general information about the cost of law, business and medical school, in response to what I found to be a dubious assertion from the AEI.

But it may surprise some readers to learn that the sizable rates of return for doctors appear to be less than for other professional degrees such as in business or law. Dentists and physician specialists have comparable rates of return, but primary care doctors have lower—albeit still impressive—rates of return. This is consistent with the general impression that primary care doctors are “underpaid” relative to specialists. Not surprisingly, there is a shortage of primary care doctors.

Frankly, given that the authors wrote a book on this subject, you would think that they would offer a bit more certitude than "appear to be" - the reason that readers would be surprised by the authors' assertion is that the authors "appear to be" wrong.

Upon re-examining the assertion and accompanying graph, and noting the lack of reference to sources or data beyond reference to the authors' recently published book, there didn't seen to be much of a point in tracking down the data. The authors reference "Hours-adjusted annualized internal rate of return on educational investment over a working lifetime", which I infer to mean that they divided cost of training by hours of training... although with medical school that raises the question of whether you should (or whether they did) include residency training along with medical school itself. The authors also speak of the rise in CEO pay, "rising from less than 60 times average U.S. worker compensation in 1940 to more than 100 times that average by 2004", making me wonder if the projections for the return on investment for law school are also predicated upon data that is now, to put it mildly, extremely dated and bearing little relevance to the present legal job market.

Here's the thing: when you break down the cost of getting a MBA (two years) or JD (three years) against a getting a MD (four years of medical school followed by a residency) to an hourly figure, you are intentionally distorting the cost-benefit analysis by pretending that the programs could be the same length. First, medical school is more expensive than business school or law school. Second, it's a longer program. Let's imagine an investment where you can contribute $X per year, with a rate of return that diminishes slightly with each additional year. You pick a fixed number of years, make your investment, and you're done. Your two year (business school) investment will provide a greater 'rate of return' than your four (or more) year (medical school) investment, but with a smaller contribution per year and a lower number of years of contribution, odds are you'll still look back in twenty or thirty years and think, "Wow, think how much better off I would be had I gone for that four+ year investment plan." A comparison of this type really only works if the cost of tuition is comparable and the length of the program is comparable: Once you have an MBA, you're done - you can't re-enroll for another two years in order to increase the size of your investment.

The authors' conclusions, although not atypical of the quality of AEI scholarship, verge on platitudinous:

It is well-known that much of the difference in healthcare spending between the United States and other nations can be attributed to the higher prices Americans pay for medical care. But the foregoing comparisons suggest that high prices for health labor in the United States might simply reflect higher returns to skilled labor across the board. After all, if we were “overpaying” doctors, we would expect to see a doctor surplus. Yet this is not what we observe. Paying doctors less would not benefit the country as a whole. That is, every dollar saved by consumers also would be one less dollar of income for doctors. Moreover, if doctors were paid much less, more people might get MBAs or law degrees instead. This would surely reduce health spending, but reasonable people might disagree on whether it would improve social welfare.

First the largest contributors to the cost of medical care are, from most costly to least costly, pharmaceutical costs, facilities costs and doctor salaries. If you are going to overlook the first two cost factors and suggest that we're simply looking at an American preference to give higher pay for skilled labor, you're not even trying to build a case. Physician salaries represent roughly 20% of medical costs. If we paid doctors nothing our nation's healthcare system would remain the most costly in the developed world. Medical schools routinely reject qualified applicants. We can easily expand our nation's pool of doctors by expanding medical schools, funding more residencies, and creating an easier path for foreign doctors to qualify to practice in the United States. The constraints we impose do lead to higher salaries for doctors, but through the distortion of the education and labor markets.

In terms of a "doctor surplus", there's in fact an artificial shortage of doctors in the U.S., driven in no small part by the AMA's successful obstruction of the expansion of medical schools, and also from immigration and accreditation policies that make the U.S. market unattractive to doctors in foreign nations who would otherwise be happy to practice in the U.S. Would lower salaries deter people from becoming doctors? Given that among nations in the Organization for Economic Co-operation and Development (OECD), nations other than the U.S. have significantly more doctors per capita, that would not appear to be a valid concern.

The argument that "We don't get any real savings if we pay doctors less, because every dollar saved by a consumer 'would be one less dollar of income for doctors'" - why, then, are AEI's scholars in a constant tizzy about labor unions, taxes on the wealthy, teacher salaries, whether government workers are overpaid, the minimum wage... it all comes out in the wash, right? How about this: We can legislate market distortions and subsidies that increase lawyer salaries to the tune of $1 billion per year and, when people complain, respond, "Paying lawyers less would not benefit the country as a whole, because every dollar saved by consumers also would be one less dollar of income for lawyers." Sound good?

I'll go back to something I said a few weeks ago:

You want the public to subsidize medical schools and residencies, so that you graduate with a lower debt load and, after your initial medical education, have a more comfortable lifestyle? I'm listening - if we give you that, what are you offering in return? How about we reduce compensation for medical care to an amount more in line with the amounts paid by the rest of the world? Do we have a deal?

You know what else that proposal would do? Massively increase the "return on investment" for medical school under the model described above, even though doctor salaries would drop. Go figure.

Fools, Frauds and the Budget Deficit

It's probably not worth paying attention to Robert Samuelson on the budget deficit as he has little to no regard for consistency between his columns, and either has little to no interest in how government spending works or has little to know interest in presenting an honest argument. Nonetheless....

Samuelson is in a tizzy because the 2013 budget deficit is projected to be $642 billion, down from an earlier projection of $845 billion and well below "2012’s deficit of $1.1 trillion". Samuelson imagines that the government has now been overtaken by Dick "deficits don't matter" Cheney-types, and that the government is going to now stop focusing on deficit reduction and budgeting. Samuelson, it would seem, isn't spending much time following events in Washington. He's also continuing his mantra of, "We need to cut 'entitlement spending' so we can afford unlimited war spending", but has little to no regard for whether today's budget policies depress the economy and thus slow economic growth for years and decades to come.

You would think that Samuelson would look at the numbers and think, "We didn't anticipate a 24% drop in the deficit until almost half-way through the year, we're really bad at these projections." Even if you assume he hasn't looked at how projections of healthcare inflation have been incorrect. Or has forgotten his history, such as Alan "the genius" Greenspan fretting that if we didn't cut taxes for the rich, we would pay down the national debt too quickly. Funny, I don't recall the Robert Samuelson of that era criticizing Greenspan, "We can't pay down the nation's debt quickly enough." Did I miss something?) Samuelson then carries on for a while about stimulus spending, conflating any deficit spending with stimulus spending. Seriously?

The funny thing is, I'm prepared to agree with Samuelson. Our nation should have a responsible discussion of deficits and debt, albeit preferably with a significantly stronger factual context than one finds in a typical Samuelson column. We should be discussing priorities and, rather than engaging in demagoguery or attempting to gut Medicare without telling the public what we're doing, attempt to set actual priorities.

It seems to me that people like Samuelson don't like that idea, though, because the nation's priorities may turn out to be different from their own. Let's recall Samuelson's own words when his own priorities for government spending might end up on the chopping block:

But I am certain -- now as then -- that budget consequences should occupy a minor spot in our debates. It's not that the costs are unimportant; it's simply that they're overshadowed by other considerations that are so much more important. We can pay for whatever's necessary.

If a $2 trillion war of choice isn't even worthy of discussion, then the size of any particular budget deficit is even less worthy of discussion. What should matter are future costs and revenues, and the accuracy of our projections. By the same token that Samuelson can shrug,

Nothing of consequence has changed. A few numbers have shifted slightly. That’s all. They moved in a favorable direction. Next time, they might go the other way.

he should be prepared to concede that his emphasis of "We need to cut Social Security and Medicare this second or we'll face catastrophe in a quarter century" is misguided. After all, if being off by roughly 25% within a single year represents an inconsequential shift in the numbers that should be shrugged off, how can you justify setting policy based upon one or two percentage points of projected over twenty-five, fifty, or one hundred years?

Given the reality that our projections tend to be flawed - the future is full of surprises - and the present Congress cannot dictate spending priorities for future sessions of Congress, the proper focus for any given session of Congress is their actual, current, spending. By that measure, the present projections are good news, and the focus needs to be less on "what might happen twenty years from now" and more, "That's a good start, now let's talk about next year". In terms of long-term spending and spending priorities, we should be having the discussion that Samuelson seems intent on avoiding - if we can't afford everything, what do we cut first?

The (Bad) Economics of Legal Practice

I've been kicking around some reactions to a discussion a while back at LGM about the realities of simply "hanging out a shingle" if you're an unemployed lawyer, but a more recent post Paul Campos provides a somber economic context for would-be law firm start-ups:

In 1989, legal services accounted for approximately $157 billion, in 2005 dollars, of US GDP. In 2011 that same figure (again in 2005 dollars) was $156 billion. Over this time GDP increased by 68% in constant dollars, which means that, as a share of the economy, the legal sector shrank by approximately 41% over the past two decades....

The most striking contrast between the situation in law and medicine is, that while economic demand for legal services has, relatively speaking, been contracting radically (note to law school administrators: economic demand = people having enough money to pay for something they’re willing to use that money to pay for), that for medical services has gone through the roof. Between 1980 and 2008, the proportion of American GDP devoted to the health care sector increased by an astounding 77.8%.

The legal industry had a bit of a boom in the late 1980's, followed by a recession in the early 1990's. It may be that 1989 was a peak year, which would make it a weaker point of reference for comparison. But the gist of Campos's statistic is consistent with my own experiences, and what I hear when I talk to (very) small firm and solo lawyers - more lawyers are completing for work, from a pool of clients who are less and less able to pay for those services. In the community where I practiced, in the late 1980's pretty much anybody could come up with a retainer for a lawyer for a divorce or misdemeanor case. By the late 1990's they were borrowing from friends and family or maxing out the cash advances on their credit cards. These days, according to the lawyers I've spoken with, a typical prospective client has no savings and no remaining credit, and their extended family is equally tapped out. And a lot of the clients who can still afford to pay a retainer are bargain hunting.

It's not that you can't do it... and if you're of the mindset that "the time to start a business is during a recession", the legal industry is largely in recession. But in states like Michigan, for small, local firms and solos serving "ordinary people", that recession has been the 20+ year process suggested by Campos's statistic. Getting started in an environment where you have to both get clients who might prefer somebody more experienced or (perhaps and) cheaper, and where even after (and perhaps because) you've proved your skill you'll have a difficult time getting referrals worth taking from other lawyers in the community? How much of an uphill battle are you prepared to wage? And, frankly, love of the law doesn't pay the bills - if you have that much entrepreneurial spirit, why not direct it at something that is likely to return a greater value?

David Brooks Discovers ST:TNG?

David Brooks brings us some observations about data:

• Data struggles with the social.

• Data struggles with context.

• Data creates bigger haystacks (misleading correlations).

• Data favors memes over masterpieces (recognizing, but not predicting, human reactions to novelty).

• Data obscures values (appearing disinterested, but skewed by value choices in construction and interpretation).

As pretty much everybody knows, Star Trek: The Next Generation included an android character, Lt. Commander Data, who was involved in plot lines that illustrate all of Brooks' claims... and more. It's great, though, that Brooks is catching up with the concepts underlying a character from a twenty-year-old science fiction series. Or perhaps he's reinventing the wheel?

Brooks makes one more claim about data:

Big data has trouble with big problems. If you are trying to figure out which e-mail produces the most campaign contributions, you can do a randomized control experiment. But let’s say you are trying to stimulate an economy in a recession. You don’t have an alternate society to use as a control group. For example, we’ve had huge debates over the best economic stimulus, with mountains of data, and as far as I know not a single major player in this debate has been persuaded by data to switch sides.

The fact that you don't have a control group is not a problem with your data. Your data can be very good, and highly predictive of future events without a control group. Or not. For some purposes, having a control group is very useful but the fact that you don't always have a control group does not reveal a problem with the data itself. Moreover, having a control group won't help you decide whether or not to stimulate the economy in a recession, because you can't run your experiment, roll back the clock and start over based upon the outcome.

Brooks appears to be attempting to justify in retrospect his incorrect assertions and assumptions about the economy, and his attacks on economists like Paul Krugman whose positions, in retrospect, have proved far more accurate than those favored by Brooks. But here's the thing: There are only so many ways for a government to stimulate the economy. The debate was not between those who wanted more stimulation of the economy and those who wanted less - those who argued for more recognized pretty early that they had lost the debate, even if the data suggests that they were correct that the stimulus bill that passed was too small. The argument was between stimulating the economy and austerity, and all Brooks needs to do to see some pretty good points of comparison is to compare what happened in the U.S. to what happened in Europe and the U.K. where austerity proved counter-productive.

The argument that "as far as I know not a single major player in this debate has been persuaded by data to switch sides" is also not evidence of a failure of the data. It's evidence of epistemic closure. If your reaction to being presented with facts that contradict the positions you've taken for years, both in terms of the outcome of the U.S. stimulus bill and the U.K./European austerity measures, is "I don't care what the data says," the problem is with you. If you examine the data and find that the manner of its collection, issues of incompleteness, or similar factors leave certain questions unresolved, great. Let's find a way to collect better data to test your theories, independently or as compared to others, in the future. But if you attempt to justify a refusal to look at the data by arguing that it's impossible to draw any conclusions from past economic data without a control group, that you should not be judged by the fact that most or all of your predictions proved to be incorrect, and that people should not trust their lying eyes but should instead consider that austerity might have worked even better than the stimulus bill in a theoretical parallel universe... you may have a future writing science fiction shows, but you have no business writing about economics.

Update: LGM's Scott Lemieux reminds us of Brooks' criticism of Nate Silver, as well as his past reliance upon incorrect data.

Politcs vs. Economics and the "Fiscal Cliff"

Paul Krugman hopes that the President doesn't believe in "invisible bond vigilantes",

But here’s a passage that bothered me:

On Dec. 13, Mr. Boehner went to the White House at the president’s request, joking he was going to the woodshed.

The president told him he could choose one of two doors. The first represented a big deal. If Mr. Boehner chose it, the president said, the country and financial markets would cheer. Door No. 2 represented a spike in interest rates and a global recession.

Oh, dear — does the president still believe that failure to reach a Grand Bargain will cause an attack by the invisible bond vigilantes, and that this is the reason we should fear the fiscal cliff?

Here's the thing: Thanks to the Republican Party's inability to get its act together - it's a lot easy to be unified when your entire approach to policy is obstructionism than when you actually have to make viable policy proposals - we're going over the cliff.

What the President is doing is hanging the responsibility for any economic fallout around the neck of the Republican Party.

Also, let's not forget that we have real (government) bond vigilantes - rating agencies with a history of blessing any piece of garbage they're paid to rent as "AAA", who could potentially try to re-establish their reputations by downgrading treasuries. Will that affect interest rates or the ability of the country to sell its debt? Probably not. Call them, "The bond vigilantes who can't shoot straight."

If the quote is accurate, the rhetoric seems somewhat telling. If we see a global recession, we're not likely to see a spike in interest rates. And as Krugman has argued for a long time, a spike in interest rates is not something we're likely to see in isolation. So really, it sounds like "These are the worst two things that could happen and, should they happen, I'm going to blame you. And should other bad things happen or should the economy continue to struggle, I'm going to take credit for my policies preventing the global recession and interest rate spike that the people already expect to result from going over the 'fiscal cliff'."

Saving the Middle Class By Hurting the Middle Class

A few days ago, Robert Samuelson wrote an odd column addressing the middle class. He points to the two candidates,

Republicans will accuse Barack Obama of destroying the middle class through policies perpetuating high joblessness and feeble economic growth. Democrats will portray Mitt Romney as a tool of the rich who doesn’t understand the middle class.

Samuelson responds,

This is mostly political symbolism. The idea that anyone can “save” the middle class assumes that it’s in danger of disappearing, which it isn’t, and that presidents possess sufficient powers to resurrect it, which they don’t.

Let's take a step back. Samuelson has told us that he expects the Republicans to (continue) accusing the President of "destroying the middle class through policies perpetuating high joblessness and feeble economic growth", and that he believes that claim to be false. He compares that to the anticipated Democratic Party argument that "Mitt Romney [is] a tool of the rich who doesn’t understand the middle class", an assertion that is fairly described as "mostly political symbolism", but which is not an economic argument. That is, Samuelson's attempted parallel between that statement and what he describes as a fabricated economic narrative from the Republicans fails, because they address different issues. He's also comparing a statement of opinion about Romney, one with which he expresses no actual disagreement, with what he claims to be a false statement of fact about the economy. A better comparison would be if Samuelson had said, "Democrats will portray Mitt Romney as a tool of the rich who wants to cut taxes for the rich while implementing policies that make life harder for everybody else." Samuelson could argue that such a position would be an exaggeration - for example, Samuelson might believe that we need only make life more difficult for a huge swath of the population, not for the entire middle class - an argument he makes later in his editorial. But his attempt to analogize a false statement of fact on economics to a statement of opinion on personality does not hold up. Samuelson next tells us why the parties are attempting to connect with the middle class - or at least to create a rift between the middle class and the other party,

Still, the symbolism is potent because most Americans equate the middle class with the kind of society we are and ought to be. It is a society where hard work and personal responsibility are rewarded — where “getting ahead” is expected; where economic security and social stability are enjoyed; and where privilege is minimized.

Samuelson then proceeds to fumble between two competing arguments, the first being that "the middle class is fine, thank you very much" and the second being that the middle class is in serious peril. He does not attempt to reconcile his competing thoughts. In support of his position that the middle class is fine, Samuelson argues:

1. Most Americans think of themselves as middle class - "Only 7 percent of Americans called themselves “lower class,” although the government’s poverty rate is 15 percent.... Despite decades of rising inequality, only 2 percent put themselves in the “upper class.... Nine of 10 Americans locate themselves somewhere in the middle class.”

   The problem with that argument is that it does not rely upon either fact or economics. If I go to a prison and survey the inmates, and 90% of the inmates tell me that they are innocent, would Samuelson truly conclude "Therefore the vast majority of prisoners are innocent," or would he say, "We need a better measure"?

2. Some people with pretty high incomes think of themselves as middle class - "Many Americans with incomes of $200,000, $300,000 or more refuse to count themselves as rich."

   As previously noted, the self-report is not what matters. There are plenty of reasons why people at the lower end of the upper income brackets may say that they're "middle class" instead of "upper middle class" or... would Samuelson say "upper class"? They are likely to live in houses and drive cars not much different from those of their middle class peers, they may be burdened by large amounts of student loan debt, they may have very little in the way of accumulated assets. Also, as many have pointed out, the distance between those in the 95th to 99th percentile of income has expanded to the degree that the concept of what constitutes "wealth" has shifted - If your household income is $300K and you compare yourself to a family earning minimum wage, you might feel rich, but if you compare yourself to the class of people who are unquestionably rich, your lifestlye seems objectively middle class. Definitions and points of comparison matter.

3. A big part of the problem is "confidence" - "The middle class can’t regain its self-confidence and financial health without a strong economic recovery. But the economy can’t recover strongly without a financially healthy middle class, which provides most consumer spending."

   I know that economists like to speak of consumer confidence as a measure of how willing people are to make large expenditures, buy on credit, and the like, but the debt overhang to which Samuelson alludes diminishes the role of confidence. You can be certain that the economy is going to recover, but if your house is upside-down, your income is down and you can't get credit, you won't be spending money. Samuelson nods to that fact, "Not surprisingly, the economic expansion is glacial", but assumes that the government is powerless to assist. I suspect that if you were to point out possible interventions - debt forgiveness, across-the-board mortgage write-downs and the like Samuelson would speak of moral hazard. That type of relief, it appears, should be reserved for the financial industry and the unquestionably rich people who mismanaged them to the point of collapse.

4. Being "middle class" is a state of mind - Samuelson argues, "Personal responsibility and a strong work ethic still matter and suggest a durable middle class. It will survive today’s economic setbacks — and political pandering."

   The problem here is that there are plenty responsible, hard-working individuals who are falling out of the middle class, or who lack the skills, education, or toehold they need to pull themselves up the proverbial economic ladder. Samuelson's point reminds me of one of my pet peeves about Nicholas Kristof and his defense of sweatshops - yes, it's true that people work in sweatshops because the other options available to them are worse, but that doesn't mean the problem is solved. The idea that "[p]ersonal responsibility and a strong work ethic" should be enough to get you into the middle class is, as Samuelson notes, an American ideal. But its truth is diminishing.

A fair response to Samuelson is that the middle class is not a state of mind. If you're not in the economic middle class, your thought to the contrary will not change that fact. Your strong sense of personal responsibility and good work ethic may help you get and hold jobs, and get promotions, but personal virtues and "confidence" do not, of themselves, generate income.

Also, while it is true that if you define "middle class" as a strata of wealth between "poor" and "rich" it will in some sense always exist, that's not the issue we're confronting. The issue is, can we can maintain the ideal that every American who demonstrates the virtues Samuelson describes will have a chance for a bona fide, secure middle class lifestyle, or are we transitioning into a country with a smaller, less financially secure, less stable middle class. Are we going to be a nation in which most people want to be rich but are content to call themselves middle class, or a nation in which people at the lower end of wealth become, statistically speaking, the "middle class" between the ultra-rich and the working poor? Let's not forget, when you look at history, the modern world's experience with a large, robust middle class is the exception.

Samuelson also describes problems faced by the middle class,

1. People are no longer confident that they will achieve or sustain a middle class income: "The financial crisis and Great Recession subverted two core beliefs: that hard work ensures “getting ahead” and that being middle class provides security."

   Perhaps that's the "confidence" to which Samuelson was alluding, as opposed to "consumer confidence", but either way it remains the case that the present problem is not a state of mind. If people are no longer feeling secure, it's because the reality of the past few decades is that they are less secure. They can be less confident about how much they will earn, income growth, being able to afford a conventional "middle class lifestyle", how long they'll be able to keep their jobs, whether they'll be able to save for retirement.... And let's note at this juncture, the big "fixes" Samuelson keeps pushing for the nation's budget, specifically cuts to both Social Security and Medicare, will worsen that insecurity.

2. Unemployment is high and people are losing their homes: "True, they don’t affect everyone (about 5 million unemployed have now been jobless for more than six months; from 2007, completed home foreclosures total 4.5 million, reports Moody’s Analytics). But the demonstration effect is strong.... This psychological pall is compounded by widespread wealth loss."

   I'm reminded of a place I once worked where, during a previous economic downturn, any time an employee inquired about a raise the head honcho would pull a stack of papers out of her desk drawer, "These are unsolicited resumes from people who want your job, and they will work for less than you're already getting." It's not just that people are looking at the population of workers who cannot find jobs - it's that an increased population of workers realize that they're on the razor's edge. Their jobs could be outsourced, domestically or internationally. Their skills may be deemed obsolete. Samuelson should note, one of the reasons for middle class wage stagnation is that the middle class lacks the economic clout to force higher wages, and that's a problem that existed considerably before the start of the 2008-2012 recession.

3. People can't afford to save or invest, and there is a debt overhang in housing: I extrapolate from Samuelson's statement, "Wealth is slowly rebuilt through higher saving and stock prices — and the hope that home values will follow."

   I know that "on paper" many people were (and probably still are) "saving more" because they can't get credit, but even that's far from enough to "rebuild" their wealth. Samuelson alludes to the housing bubble, and the fact that much of the spending of the G.W. Bush era involved people cashing out "'paper wealth and housing wealth' — which went poof" when the housing market collapsed. Samuelson can't bring himself to say it, but he's implicitly arguing that the problem he describes dates back at least to the start of G.W.'s presidency and was masked by the housing bubble. Further, absent significant income growth or a new asset bubble, we're not going to see both significant increases in saving and investment and significant spending that will drive a strong economic recovery. It's not clear how Samuelson proposes that we achieve "higher saving and stock prices" for the benefit of the middle class, and in fact it appears that he's offering no solution beyond "keep waiting and keep hoping".

Samuelson then turns to a class warfare argument - not a war between classes, but a war he hopes to see played out within the middle class:

There is also a larger conflict. Sooner or later, broad-based tax increases will be needed to reduce budget deficits. How large depends on how much federal spending is cut. This creates an unavoidable conflict between workers and retirees, because workers are the biggest taxpayers and retirees are the biggest beneficiaries of federal spending. Which middle class deserves support? Cut Social Security and Medicare and help workers. Raise taxes and help retirees.

And we're back to one of my long-term frustrations with Robert Samuelson. To Samuelson, the only path to national financial stability is to cut programs he doesn't care about so we can afford to spend hundreds of billions of dollars in "pocket change" to support discretionary spending he endorses. Even if he underestimates he cost of government ventures he supports, even if by a factor of ten, twenty or more, they're still worth it. But if he doesn't support the program, don't look at the actual economics, don't examine reforms, certainly don't look at how other nations are providing similar programs at much lower cost - just cut 'em to the bone.

Social Security doesn't matter to Robert Samuelson, as he's a wealthy man. He can get by without it, and so can all of his friends, so it apparently doesn't enter his consciousness that many middle class Americans rely upon those benefits to make ends meet during retirement. It similarly appears to be outside of the scope of his experience that some people work a lifetime in jobs that don't generate enough income to allow them to accumulate significant wealth, or work in jobs that involve activity more strenuous than going to a comfortable office, sitting at a desk and typing on a keyboard. Samuelson is in a position in which he could reduce his work to one day a week and he would still pull in six figures; he does not appear to fully understand that most Americans don't have that luxury.

Samuelson has a similar history of decrying any effort to reform Medicare or rein in its costs, and rejects the idea that we should look at how other developed nations are able to achieve similar, sometimes better, health care outcomes while serving their entire populations, at considerably less expense than the U.S. system. He diminishes or criticizes efforts to limit the growth in healthcare expenditures, even though (or perhaps because) that's how we could make the present system sustainable, while providing no criticism of programs that would arbitrarily cap Medicare spending or replace the present guaranteed benefit program with a voucher program, without regard to whether retirees would be able to afford the care they need.

The only conclusion that can be drawn from Samuelson's refusal to acknowledge basic facts on the economics of Social Security and Medicare is that he is philosophically opposed to the programs, or perhaps supports them if they provide only the most basic of safety nets, and if people can't afford to retire or can't get needed healthcare, well, too bad. His "solution" is purely numbers based, after all who cares about good policy formation, and is built on the false premise that retirees are somehow depriving the "middle class" of a decent lifestyle. Never mind that middle class workers might hope to one day retire, or might not be rich and blessed (as is Samuelson) with gold plated employer-sponsored health insurance during their senior years.

Samuelson also appears to believe that healthcare spending does not impact the economy, never mind that healthcare spending is a huge portion of our nation's economy. He does not explain how Medicare cuts will not result in a reduction in healthcare spending, how the cuts will translate into middle class workers being able to afford to engage in more consumer spending, or how the two might balance out. For that matter, if we're overspending on Medicare and Social Security, Samuelson should be able to identify yet another internal inconsistency in his argument - the subsidy results in an increase in middle class spending (albeit by middle class retirees) over what would otherwise be the baseline and program cuts to help balance the budget will result in a net reduction in middle class spending.

Samuelson offers no explanation for how the cuts he repeatedly endorses will benefit current workers, as he is not proposing FICA tax cuts. Similarly, when Samuelson says "Raise taxes and help retirees" he's talking about income tax - not FICA - and his objection is to the expiration of G.W. Bush's temporary tax cuts (never mind that they did not deliver the promised economic boom) that benefit him. I don't recall Samuelson overtly playing the game of pretending that the only taxes Americans pay are federal income taxes, but when he conflates all tax increases in this manner his approach is not much different. It is very possible to increase taxes in a manner that puts the cost of maintaining Medicare and Social Security directly upon those who will eventually benefit from those programs, but Samuelson's concern appears to be that it will be his economic class, to which the benefits form those programs are literal "pocket change", that will be asked to share the burden.

Samuelson's "solution" is for workers to keep on paying what they're presently paying, but to receive considerably less upon retirement. That's from from cutting "Social Security and Medicare [to] help workers". It's cutting those programs to either reduce the deficit or to fund the continuation or expansion of tax cuts for the wealthy, and so Samuelson can continue to endorse enormously expensive discretionary spending programs or wars on the basis that we can easily afford the added debt.

Samuelson knows he's a rich man. He's simply not honest enough, perhaps with himself and certainly not with others, to admit that the class war he endorses is not within the middle class, but is instead between himself and his wealthy, like-minded peers and the middle class. Samuelson and his peers will feel no pain from the cuts he proposes, and apparently would prefer to keep Social Security and Medicare in somewhat precarious states such that they can hand-wring about the "necessity" of reform, rather than implementing meaningful reforms that would undermine the case for cuts.

Does Romney Lack a Coherent Economic Policy

At least, that's what people say. And it's a reasonable reaction, given that he hasn't disclosed an actual policy for boosting the economy. I agree with those who reject his prior offerings as representing an actual plan, as opposed to stringing together a list of promises and right-wing talking points:

The Romney campaign, of course, claims that it has presented an economic plan—and strictly speaking it is right. Last September, Romney unveiled “Believe in America: Mitt Romney’s Plan for Jobs and Economic Growth,” an economic manifesto that ran to more than a hundred and fifty pages. Even back then, though, Romney’s ragtag collection of proposals—fifty-nine of them, ranging from eliminating the inheritance tax, to capping federal spending at twenty per cent of G.D.P., to opening up America’s energy reserves for development—was widely dismissed as inadequate by his fellow Republicans.

In response to criticisms from his rivals in the G.O.P. primary, Romney subsequently unveiled a revised version of his plan, this one containing a twenty per cent cut in income-tax rates from top to bottom. More recently, in a series of ads, his campaign has said that in his first hundred days he will move to repeal Obamacare, cut taxes, and balance the budget. “By day one hundred,” the ads say, “President Romney’s leadership brings new certainty to our economy, and the promise of new banking and high-tech jobs.”

By no stretch of the imagination could the hastily revised tax proposals or the promises contained in the new ads be described as a credible, fully-costed economic plan.

Romney has apparently reduced his "plan" to five talking points, which he presented to the NAACP:

I know what it will take to put people back to work, to bring more jobs and better wages. My jobs plan is based on 25 years of success in business. It has five key steps.

First, I will take full advantage of our energy resources, and I will approve the Keystone pipeline from Canada. Low cost, plentiful coal, natural gas, oil, and renewables will bring over a million manufacturing jobs back to the United States.

Second, I will open up new markets for American products. We are the most productive major economy in the world, so trade means good jobs for Americans. But trade must be free and fair, so I’ll clamp down on cheaters like China and make sure that they finally play by the rules.

Third, I will reduce government spending. Our high level of debt slows GDP growth and that means fewer jobs. If our goal is jobs, we must, must stop spending over a trillion dollars more than we earn. To do this, I will eliminate expensive non-essential programs like Obamacare, and I will work to reform and save Medicare and Social Security, in part by means-testing their benefits.

Fourth, I will focus on nurturing and developing the skilled workers our economy so desperately needs and the future demands. This is the human capital with which tomorrow’s bright future will be built. Too many homes and too many schools are failing to provide our children with the skills and education that are essential for anything other than a minimum-wage job.

And finally and perhaps most importantly, I will restore economic freedom. This nation’s economy runs on freedom, on opportunity, on entrepreneurs, on dreamers who innovate and build businesses. These entrepreneurs are being crushed by high taxation, burdensome regulation, hostile regulators, excessive healthcare costs, and destructive labor policies. I will work to make America the best place in the world for innovators and entrepreneurs and businesses small and large.

Do these five things – open up energy, expand trade, cut the growth of government, focus on better educating tomorrow’s workers today, and restore economic freedom – and jobs will come back to America, and wages will rise again. The President will say he will do those things, but he will not, he cannot, and his record of the last four years proves it.

Let's call that "The Five Platitudes of Mitt":

1. "Take Full Advantage of Our Energy Resources", apparently a signal to the fossil fuel industry that he'll back away from policies to reduce carbon emissions, and perhaps go back to the heady days of G.W. Bush and his massive subsidies, but there's no connection between "I'll make the energy industry richer than ever" and "bring[ing] over a million manufacturing jobs back to the United States". Mitt needs to connect the policy with the supposed outcome. What jobs does he imagine will come back to the United States if we burn more fossil fuel, and on what basis? What will those jobs pay?

2. "Open Up New Markets": How exactly will Romney identify and "open up" the "new markets"? What American products does he believe will be received by the "new markets" he opens up, and in what quantity? Exactly what does he believe that China is doing that makes it a "cheater" - is he talking about financial gamesmanship resulting in a devalued Renminbi, akin to the games he, himself, plays to avoid taxes - and once he defines the problem exactly what will he do to rectify it?

3. "Reduce Government Spending" - Romney personifies the modern Republican demagogue when it comes to government spending. He identifies no targets for his cuts other than the first serious federal effort to limit the healthcare inflation that seriously threatens our nation's financial stability - a program so "wasteful" that while attempting to reduce that serious economic threat it reduces the deficit.
   
   Romney endorses the Ryan Plan - a nebulous proposal that cuts government spending by hammering the middle class, but then increases the deficit by slashing taxes for people like Romney. Worse, while Ryan is happy to be specific about the tax cuts he's giving to the wealthiest Americans, he refuses to specify the cuts he's proposing to partially offset the economic catastrophe he proposes.

4. "Nurturing and Developing the Skilled Workers our Economy Needs" - What workers? Through what policies? To what effect? It's a "Chicken in Every Pot"-type statement - twaddle.

5. "Restore Economic Freedom" - More twaddle. It's the type of line that might get him a cheer from the most ignorant participants at a Tea Party rally. (I'm curious, also - when he enacted "Romneycare", did he take the position that he was knowingly harming small businesses? No, of course not. He's simply coughing out a focus-group vetted applause line that has nothing to do with any policies he would care or dare to articulate in public.)

He's running for office, and the mainstream media on the whole appears satisfied that in a political campaign, something a candidate purports to be a policy but is in fact nothing more than populism, demagoguery, ridiculous promises and absurd overstatements is sufficient. "How can we press for more - we might hurt the candidate's chances in the election if we made him share genuine policy proposals." But when Romney says things like "I have no hidden agenda", is it not fair to ask him, "So that means you have no actual agenda"? (The question can be rephrased to be more delicate, if you wilt at the thought of being somewhat sarcastic when questioning a political candidate.)

So yes, as John Cassidy pointed out in the article linked above, Romney's promises fall far short of a "credible, fully-costed economic plan". Cassidy accepts the cynical explanation that if Romney were to be specific it would cost him votes. But Cassidy also points out that Romney is not being advised by stupid men:

The academic economists advising Romney—a group that includes Harvard’s Greg Mankiw and Columbia’s Glenn Hubbard—are moderate conservatives: they don’t believe in right-wing fairy stories about tax cuts being self-financing and budget cuts stimulating the economy. If Romney enters office and slashes tax rates without pushing through offsetting spending cuts, the budget deficit will shoot up—just as it did following the Reagan and Bush tax cuts. If he cuts government spending without stimulating demand in other ways, the unemployment rate will rise even further. In addition, the entire situation is greatly complicated by the so-called “fiscal cliff”: the fact that on January 1, 2013, the Bush tax cuts are due to expire and the automatic spending cuts agreed upon by both sides during last year’s debt-ceiling debacle are due to be introduced.

Let's back up for a minute here - way back to the days when Romney was advancing a Mssachusetts-style health insurance mandate for the nation, and speaking positively of federal legislation that would have created such a mandate. What else was he doing at that time? He was endorsing stimulus spending - and stating that as a Republican governor he would happily have taken stimulus money.

Here's a radical idea for you: Perhaps the reason Romney refuses to be specific about his economic policies is that he agrees that President Obama is doing all a president can do - and perhaps more than a Republican president could do - to revive the economy. Perhaps his economic advisors agree with him (the 2009 model) that the stimulus bill was sound economic policy and that, were it not made politically impossible by Romney's own party, another stimulus bill would be a really good idea.

Mankiw wrote an editorial some years back that could be interpreted as a suggestion that we use inflation or tax penalties to boost consumer spending. Perhaps Mankiw is now explicitly among those who argue that low, sustained inflation would be a good approach to dealing with debt overhang issues and pulling the nation out of the recession.

When he has unguarded moments, Romney appears to understand that, assuming he could actually identify targets for cuts, even when times are good you cannot significantly cut government spending without causing serious harm to the economy:

... because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5 percent. That is by definition throwing us into recession or depression. So I’m not going to do that, of course.

Various right-wingers call that a "gaffe", but to the extent that's a fair characterization it would be a Kinsey Gaffe (a politician accidentally telling the truth). It suggests that Romney is the inverse of the old "I'm not a doctor but I play one on TV line" - "I actually understand economics, but I play an idiot on TV". And note, consistent with his endorsement of stimulus spending back in 2009, the same logic he expresses in opposing tax cuts can be applied in favor of stimulus spending.

If Romney knows his "day one" promises are largely a lie - that if implemented they will actively harm the economy - then it shouldn't actually be a surprise that he won't state an actual policy. Because odds are it would end up sounding like, "My solution would be to do what President Obama is doing, but maybe I would have more success with my own party in terms of getting more stimulus spending or convincing them to pass the proposals the President has been pushing for the past year to boost employment. Significant spending cuts on my first day in office? Do I look like an idiot?"

A Blast From The Past: Germany is Doooooomed

Thomas Friedman in 2005, advising Germany and France to "Follow the Leapin' Leprechaun":

Germany and France are trying to protect their welfare capitalism with defense. Ireland is generating its own sustainable model of social capitalism by playing offense. I'll bet on the offense.

Do you think that offer is still good?

Can You Keep Up With the New Economy?

Paul Krugman has done a good job refuting the notion that the rise in unemployment over the course of the latest recession reflects a structural change, and that lends credence to his argument that efforts to stimulate the economy and get people back into the workforce are a viable response to the slow rebound of the employment market. That said, and with due credit to his argument that the comments of self-described "structuralists" like David Brooks echo claims made in the 1930's that history has proved to be wrong, there are some significant differences between "now" and "then".

Krugman has noted that increases in worker productivity reflect a healthy economy, are to be expected, and thus don't support the thesis that we will never again need as many workers. But the increases in worker productivity over the past century have made it considerably more difficult to create work for large numbers of people. Thanks to significant improvement in technology, infrastructure projects that once would have employed hundreds or thousands usually can now be completed by relatively small crews. Also, a century ago, lower-skilled manufacturing jobs could not be outsourced to foreign nations, nor could phone banks, data centers, and other lower- and moderately skilled service jobs be similarly outsourced. Globalization is not the reason for the loss of jobs during the recession, but it may be part of why the return of jobs is so slow, and I think it is pretty clear that it plays a role in shrinking wages for low- and moderately-skilled workers, and for the general flattening of middle class incomes. That is, even if not the cause of the problem, globalization complicates recovery.

Further, as technological change accelerates, workers can find that if they aren't constantly updating their skills their talents can become obsolete. And even if they are updating their skills there's no guarantee that they will have an easy career path, that their skills will continue to be relevant as new technologies come online, or that their jobs won't be outsourced, Many of the workers who are part of the chronically unemployed during the present recession will not return to the workforce, or will never again enjoy the level of income that they enjoyed before losing their jobs. I think it's a valid concern that we'll see the same pattern occur in future recessions and, for that matter, in smaller numbers even during the "good times". I'm not arguing that this is a new phenomenon, but (while hoping I'm proved wrong) that worker obsolescence is occurring and likely to continue to occur on a larger scale than we've seen in the past.

When you look at the big numbers, I agree with Krugman that there is no structural reason why we could not return to a level of unemployment roughly the same as that which we saw before the recession began. But I think that there are structural reasons why middle class wages are stagnating, why it will become more and more difficult for lower-skilled workers to enjoy middle class lifestyles, for reduced mobility between socio-economic classes, and for the increased difficulty workers are likely to face maintaining their skills and wages over the course of a career.

David Brooks and the Hollow Man

As is his wont, David Brooks is telling us that there are two types of people - in this case, stupid people, and people like him. The type of person who doesn't think like Brooks?

Many people on the left are having a one-sided debate about how to deal with a cyclical downturn. The main argument you hear from these cyclicalists is that the economy is operating well below capacity. To get it moving at full speed, the government should borrow and spend more....

Unlike the cyclicalists, we structuralists do not believe that the level of government spending is the main factor in determining how fast an economy grows. If that were true, then Greece, Britain and France would have the best economies on earth.

Dean Baker calls Brooks out on his hollow man argument - his creating an opponent who does not actually exist, in order to more easily swat down an argument that nobody is actually making:

I don't know anyone who looks like cyclicalists that Brooks writes about. It would be good if he could toss out a few names for readers so that we know such people actually exist in the world and are not just Brooks' hallucinations.Since the views Brooks attributes to the cyclicalists are sufficiently bizarre, it is hard to believe that such people exist.

For example, he tells us that the cyclicalists believe:

"the level of government spending is the main factor in determining how fast an economy grows."

I have never come across anyone who had a view anything like this. I do know many economists, who argue that in a downturn more stimulus will lead to more economic growth, but this is nothing like the view that Brooks attributes to the cyclicalists. Does Brooks really think it is the same thing to say that more stimulus leads to more growth in a downturn and saying that government spending is the main factor determining growth in general? This is scary.

But we all know who Brooks is attacking in his column, don't we? Even if he doesn't name the name (or present either an honest or accurate summary of his argument)? In a stunning display of the Dunning-Kruger effect, he's going after Paul Krugman. Whether or not it's official policy that New York Times columnists aren't supposed to disparage each other on the Times' own pages (print or virtual), there's been quite a bit of back-and-forth between Brooks and Krugman, and Brooks seems to be chafing at the fact that he always comes out on the losing end of the argument. By not naming Krugman, Brooks gets another advantage - he can caricature and misrepresent Krugman's arguments and then, as an ostensible defense, claim he was speaking more broadly... you know, about the other unnamed people who aren't actually making this argument.

Meanwhile, Paul Krugman has published a note to (cough) himself, pointing out the absurdity of the structuralist argument that Brooks endorses. Krugman observes,

Anyone who says something like “If deficit spending were the route to prosperity, Greece would be in great shape” should be immediately considered not worth listening to. People in my camp have repeated until we’re blue in the face that the case for fiscal expansion is very specific to circumstance — it’s desirable when you’re in a liquidity trap, and only when you’re in a liquidity trap. I know that some people like to project their own crudity onto others, but what they’re actually demonstrating is their own ignorance.

Brooks identifies three structural problems that he believes are impeding the economic recovery:

1. Productivity Increases: "Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows." The first argument is ridiculous - Brooks thinks this is the first time in history that technology has improved or worker efficiency has increased? Or that it's somehow different from all the other times when exactly the same thing happened? And who are the "superstars" Brooks imagines to be making out like bandits? The rent-seekers he later describes - because it really seems like the biggest gains have been by those who have manipulated the system or who have survived their own incompetence by the grace of government handouts.

2. A Lack of Skilled Workers: "The United States, once the world’s educational leader, is falling back in the pack. Unemployment is high, but companies still have trouble finding skilled workers." Brooks presents no evidence in support of this claim. The actual problem appears to be that companies aren't hiring, and those that are hiring want to get "skilled workers" at bargain rates. I've seen little evidence that jobs offering competitive wages aren't getting plenty of qualified applicants. It's fair to also note that huge numbers of jobs have been lost domestically due to the availability of cheap unskilled overseas labor - it's not that domestic workers can't do those jobs, it's that the jobs are no longer in this country.

3. Rent-Seeking: "Over the decades, companies and other entities have implanted a growing number of special-interest deals into the tax and regulatory codes, making it harder for politically unconnected, new competitors, making the economy less dynamic." Which is, of course, the result of policies endorsed by David Brooks and the Republican Party.

Brooks also complains that "Running up huge deficits without fixing the underlying structure will not restore growth", which is not the argument anybody is actually making. What somebody who actually cares about the problem might observe is that the economy can benefit if the government demonstrates fiscal responsibility when the economy is strong and engages in deficit spending when the economy is weak - and positions itself to stimulate the economy that is up against the zero bound. The overt policy of the Republican Party and of David Brooks is the opposite - engage in absolute fiscal recklessness, running up huge deficits when the economy is strong, and leaving the nation unable to afford to fix the mess created by those policies during recessionary periods.

Stimulus spending would not fix the problem, but it can soften the blow. It's a bit like using raw eggs to seal holes in your radiator when you break down in the middle of the desert - you know it's not idea, you know it's not a permanent fix, but it can get you out of a bad situation much more quickly and with much less harm than is otherwise likely to result. More stimulus spending that prevented layoffs at the state level could have had a significant impact on the unemployment rate, and with more people working and consuming the rest of the economy was more likely to rebound. Although Brooks seems to find these concepts to be elusive, they're actually quite obvious. Dean Baker points to history:

...Brooks gives us the line freshly drawn from the 1935 Washington Post:

"Then there are the structural issues surrounding the decline in human capital. The United States, once the world’s educational leader, is falling back in the pack. Unemployment is high, but companies still have trouble finding skilled workers."

If you think you have seen this one before, that's because you've seen it before, and heard it repeated endlessly in all sorts of contexts. Here's the Washington Post in 1935:

"unemployment may run into the millions, but as the iron, steel, and metal-working industries improve, a scarcity of skilled workmen is developing, states the magazine Steel this week."

There are clear market signals of the sort of mismatch of jobs and skills that Brooks describes. We should see sectors of the economy where there are large numbers of job openings relative to the number of unemployed workers. We should see sectors where the average workweek is increasing rapidly. The logic is that firms who cannot find additional workers make the existing workforce work longer. And most of, we should sectors of the economy where wages are rising rapidly.

People who believe in markets would look for this evidence before making bold assertions about employers being unable to find qualified workers. By contrast, Brooks just makes this assertion with no evidence whatsoever.

Our economy has some structural problems, particularly in terms of health care costs, and many states have only addressed serious problems with their budgeting in the face of economic catastrophe. Structural problems exist and can be addressed. But Brooks' "structural" issues are, for the most part, as vaporous as the "cyclicalists" he imagines oppose him. Where do Brooks and his "structuralists" stand on the Affordable Care Act, the most serious legislation this nation has ever passed to try to address healthcare inflation?

Brooks attempts the Beltway version of "reasonableness", which is to say that our nation should prioritize dismantling the social safety net in the interest of... I guess that would be justifying the next round of tax cuts for the rich. Although Brooks states,

Mitt Romney and Representative Paul Ryan understand the size of the structural problems, but their reform plans are constrained by the Republican Party’s single-minded devotion to tax cuts.

The criticism is less of the focus on tax cuts and more of their unwillingness to actually state the social spending cuts they would make. Brooks' argument is inherently dishonest, first because Romney has run away, screaming, from any suggestion that he be specific with his actual plans, and second because Ryan's "plan" is an economic catastrophe in the making - if the structural problem is that our deficits are too large, Ryan's plan makes things worse. If Brooks is going to pretend that he cares about education and allowing the unwashed masses to get a sufficient education to compete with his elite rent-seekers "superstars" for decent jobs, Ryan should not be his hero. Ryan's beholden to the rent-seekers.

Dean Baker responds,

Finally Brooks concludes by telling us:

"make no mistake, the old economic and welfare state model is unsustainable."

This should prompt a really big, "huh?" Brooks had just been touting the German model. Germany certainly has a much more generous welfare state than the United States, even if it has been rolled back somewhat in the last decade. We could also look to Netherlands and the Nordic countries, all of whom have much more generous welfare states than the United States, yet don't in any obvious way appear to be on an unsustainable growth path. It's not clear what point Brooks thinks he is making.

Krugman comments on the absurdity of trying to fix the long-term economy instead of focusing on the short-term, pulling out Keynes' famous observation, "In the long run we are all dead".

Anything along the lines of “we need long-run solutions, not short-run fixes” may sound sophisticated, but it’s actually just the opposite.

He's right - particularly in our political system. Brooks cannot reasonably claim that our government is so beholden to special interests that it harms the economy and then pretend that those special interests will disappear from the political scene the moment that the budget is balanced. We know exactly what happened the last time we had a budget surplus, don't we? As long as the present Congress cannot bind future sessions of Congress to follow its budgets and policies, the only budget that matters is the next one.

When people claim we need some sort of overarching budgetary plan that extends over decades, and that nothing short of that is sufficiently "serious" to address our nation's economic woes, they're betraying an ignorance of even recent history - the manner in which the G.W. Bush Administration squandered the surplus with an express attitude of "deficits don't matter", and the manner in which events that are outside of our control, whether in the form of a terrorist attack, a war, a global economic meltdown, or something else, can throw a monkey wrench into the most carefully constructed long-term economic plan. They're also displaying abject ignorance of how our political system functions (some might say malfunctions). Yes, long-term plans and projections are helpful, but if you care about fixing things you need to look at what is happening right now, and any actual, observable trends.

I'll note in closing that Brooks' distinction between "cyclicalists" and "structuralists" is a false dichotomy. You won't find a single person conversant with economic issues who cannot identify structural problems in the economy, and (other than, perhaps, Brooks) you won't find a single such person who emphasizes structural problems as the root cause of our economic malaise who doesn't recognize that economies go through cycles.