Knowing and Making

Barbara Kiviat at Time writes about the jobs bill Harry Reid is trying to pass: The bill would temporarily exempt employers from paying Social Security payroll taxes for new hires, and give a $1,000 tax credit for new workers kept at least a year. This type of move isn't really about creating jobs, but about accelerating those that would have been created anyway. (I've yet to find a businessperson yet who has said he or she would create a job out of thin air just to grab a tax break.) Not right. The point of tax breaks is to move the margin. Indeed, nobody will create a whole job just to get a $1000 tax break (let's say $3000 including the payroll taxes). But the case that matters is where the employer's gain from employing someone would have been $29,000 and the cost $30,000. A net loss, meaning no job. The subsidy changes the equation; the cost goes down to $27,000 - and suddenly it's worthwhile for the hire to take place. What's more, the government wil...

Sometimes I think you should stop reading my blog and just read Steve Randy Waldman's Interfluidity instead. His last two articles, like nearly everything else he writes, are full of brilliant insights. In " Information is stimulus ", he answers Paul Krugman's (and my) question about asymmetry clearly and convincingly, making a thoroughly true case for certainty as a source of economic strength. In " Vanilla afterthoughts ", he neatly clarifies the argument for vanilla financial products while providing an entirely new insight into its public choice consequences. I have noticed several times that he seems to be thinking more or less what I want to think, but is about three steps further ahead. Maybe that's because he used to be a Java programmer before taking up economics. Whereas I...used to be a Java programmer before taking up economics. Hoping to see Steve writing a bit more in future, as he's been quiet this summer.

Menzie Chinn attempts a valiant defence of fiscal stimulus against innumerate accusations from Richard Posner and others. Posner, to be fair, has corrected his arithmetic now and restated a few of his points in a more nuanced way. However Chinn is now having to fight a battle against his own anonymous commenters, who say things like: So explain to me still, how an 89B (regardless of interest expense) is a good investment if we only get a 39B return. It seems even if we got a multiplier of 2, we'd still only be at 80B and that is still a negative return. It seems like we're just delaying the pain. This comment misunderstands the nature of stimulus and imposes a meaningless standard on the "return" on government spending. Here is what has actually happened: The government borrows $89 billion. Savers have handed over an asset ($89 billion in cash) in return for another asset ($89 billion of government bonds). The government gains an asset ($89 billion cash) and create...

Many of you will have noticed Paul Krugman's continuing demands for a bigger fiscal stimulus - he thinks it should be around double the size proposed by the administration. If nothing else, we have to give him credit for being consistent, right? Well...maybe not. You see, I came across an old article where he was, as usual, insisting that the stimulus should be doubled...but only to $600 billion! A double-take. Could it ever be true that the administration was proposing only a $300 billion stimulus? Yes it could - in fact in the early days of the election campaign Obama's proposal was for a stimulus of $60 billion . No wonder Paul originally supported Hillary. I thought it would be interesting to run a comparison of Paul Krugman's desired stimulus versus the stimulus proposed (and eventually passed) by the Obama administration. Here it is (click on the graph for a larger version). The red line is the administration's efforts and the blue is what Paul wants: The red lin...

Robert Peston's article today about Chinalco highlights an important point which few economics commentators have discussed. For the last nine months oil prices have been falling substantially. The developed economics spend so much money on oil that this makes a huge difference to the money available in our pockets. As a fair estimate we can say that world oil consumption is about 80 million barrels a day. Taking the lowest figures it's reasonable to say that last summer, the world was spending $12 billion a day on oil. Now, with a barrel of oil at $44 the figure is less than $4 billion. This $4 billion every day is now sitting in our pockets - exactly as if it came to us from a VAT or payroll tax cut. This is equivalent to a $3 trillion per annum fiscal stimulus paid for not by our own government but by oil exporters. How nice of them. (Caveats: some oil is provided on long-term contracts rather than spot price, so the movements won't have such impact; and the oil exportin...

It's been accepted by most analysts for years that the global car industry has substantial overcapacity and that factory closures, or even closures of whole companies, are needed. Now BMW is cutting 850 jobs at its Mini plant - even though Mini sales are up this year. So is this a good thing? Probably not - at least not right now - because it causes a reduction in aggregate demand, and that means reduced GDP growth, or a deeper recession. But that's true of capacity reductions at any time. So why would it have been good before and not good now? What is the difference? The first thing to understand is why a cut would have been desirable. Let's imagine that, in more normal times, a car company (Chrysler for example) shuts down. The immediate beneficiaries of a company closing would be the other car companies. With less competition they could sustain higher prices; some people who would have bought Chryslers will now buy other cars, boosting both revenue and profits at the re...

I wrote this item at the beginning of January when the steel industry first started pleading for a "Buy American" clause (thanks to Greg Mankiw for the alert). As you'll see, I predicted that Paul Krugman might make an argument for a form of protectionism. I felt slightly guilty about ascribing an opinion to someone in advance. Today he has posted his actual view on the topic - have a look and see how close I was.

On this blog, as well as on several others, there's a strand of opinion supporting fiscal stimulus aimed at investment rather than consumption. Of course investment, depending on the multiplier, leads to a certain amount of consumption anyway. But the argument is that direct government spending should be weighted towards investment, either because there is a deficiency of investment in this phase of most recessions; because there has been underinvestment in the last few years which needs to be made up; or because it's a more "responsible" way to spend public money. A typical goal in designing an investment program is to create demand for things that can be provided by currently-unemployed people. This encourages unused resources (people) to be brought into use, so the stimulus gets an economic free lunch instead of diverting resources that are already economically productive. The challenge is that people are unemployed typically because their skills are less useful in...

Hal Varian in the WSJ (via Mark Thoma and Marginal Revolution) has touched on a topic I have been thinking about for a while: how is the fiscal stimulus best spent? On consumption or investment? There are essentially two tools available for the stimulus: tax cuts and government spending. And there are five main sources of demand in the economy: private consumption, private investment [optionally divided into business and residential investment], government consumption, government investment and exports. I am not going to address all ten combinations, but focus on private investment - should we promote it, and if so, which are the best tools to do so? I am a priori neutral between tax cuts and spending; tax cuts are good because they let people allocate spending by efficient private choice; spending can be good if it achieves public goods that are not best purchased in the marketplace. My intuition, like Hal's, is that private investment is important. But is there a clear argument...