Relevant and even prescient commentary on news, politics and the economy.

A New Sound in the Echo Chamber

I’m happy to report that Andrew Samwick, Dartmouth professor and proprietor of Vox Baby, has agreed to periodically post here at Angry Bear. Prof. Samwick’s research focuses on finance, pensions, and Social Security, and his knowlege and interests range beyond those topics.

Also, as some readers may already know from visiting his blog, or divined from the title of this post, he’s also a Republican (be polite!). I respect his opinion and trust his numbers, even when I disagree with his conclusions. I think we’ll all benefit from encountering differing views, reasoning, and conclusions from time to time. Ideally, this will turn out to be a more erudite and interactive version of Point-Counterpoint (AB, you ignorant #$%$!).

So without further ado, I present the first installment of our new “View From The Right” feature, on the timely subject of raising the minimum wage. (Here’s a quick response: we need a minimum wage in spite of, and in addition to, the EITC in large part because the former is viewed by the public as money earned whereas the latter is seen as a handout. This is related to but different from the point below about the EITC showing up as an expense on the federal budget.)

AB

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Minimum Wage Hikes

by Andrew Samwick

Congress is considering a hike in the minimum wage from $5.15 to $7.25 over three years, but only if it is tied to other legislation that reduces taxes:

WASHINGTON (AP) — Republican leaders are willing to allow the first minimum wage increase in a decade but only if it’s coupled with a cut in inheritance taxes on multimillion-dollar estates, congressional aides said Friday.

A package GOP leaders planned to bring to a vote Friday or Saturday in the House also would renew several popular tax breaks, including a research and development credit for businesses, and deductions for college tuition and state sales taxes, said a spokesman for House Majority Leader John Boehner, R-Ohio.

Greg Mankiw, Angry Bear, and Dean Baker all have worthwhile posts on the issue. I’ll take them in reverse order.

Dean argues that when the minimum wage is reported at two different points in time, it should be adjusted for inflation.

This means that when an article tells readers that a bill in Congress will raise the minimum wage to $7.15 an hour in 2007, from 5.15 an hour at present, it would be helpful to tell readers that this is equal to approximately $5.32 in 1997 dollars, the year the last minimum wage hike took full effect. This means that minimum wage workers would get about a 3.0 percent increase in real wages from 1997 to 2007, if this bill was approved.

I’ll agree and go one step further: if someone can convince me that we should have a minimum wage law, then the further argument that it should be indexed to inflation would be an easy one for me to accept. That’s a big if, though, to which I’ll return in a moment.

PGL of Angry Bear is upset about the coupling of tax breaks for higher income households with the vote on the minimum wage:

Secondly, these “tax cuts’ are nothing more than tax shifts. Someone at some point will have to pay down all these deferred tax liabilities.

The Democratic response is to call for “an up or down vote” (as much as I hate to quote Bill Frist) on the minimum wage proposal. There is absolutely no excuse for the continued fiscal irresponsibility of this Republican led Federal government – regardless of one’s view on the minimum wage controversy.

I’ll agree with him in spirit but not entirely. I am repeatedly disappointed with the failure to balance the on-budget account over the business cycle. Spending (in my view) needs to be cut dramatically, and if there is no political will to do so, then revenues certainly should not be cut.

But there is another element here that’s worth considering. Greg Mankiw notes, and I fully agree, that even if the minimum wage doesn’t substantially reduce low-wage employment, it is a poorly targeted policy to alleviate poverty:

What the facts show is that the minimum wage is poorly targeted as an anti-poverty program. Moreover, while the evidence is controversial, some studies find significant long-term adverse effects. As a result, most economists prefer more efficient and better targeted anti-poverty tools, such as the EITC, which has grown significantly over the past few decades.

If you want to make sure that household heads are above poverty, then make a program directly for them and them alone. That’s the EITC. Compared to the minimum wage, the EITC allows us to condition on total hours worked and family status in redistributing income. By all means, argue for its expansion if you want to help low-income heads of household. (And, if you are Dean Baker, include its impact in your comparisons of after-tax income over time.)

Basically, I won’t support an increase in the minimum wage until I hear the explanation of why we need a minimum wage if we have an EITC.

One interesting note that I heard while in Washington a few years ago was that Congress used to prefer the minimum wage hike to the EITC because the minimum wage didn’t specifically cost the government any revenue in its budget forecasts but the EITC did. The story continues that one change that was implemented in the way the minimum wage legislation was discussed is that it would likely be coupled with tax reductions that softened its impact on small businesses. At the time, I thought this was enlightened policy making–there was now no budgetary reason to favor the minimum wage hike over something like the EITC.

It’s disappointing here to see that the tax reductions being proposed here really don’t have anything to do with small business per se, so the word “enlightened” certainly doesn’t apply. If this minimum wage hike goes through, it should be coupled with tax reductions for small businesses, and those tax reductions should be “paid for” in the budget by reductions in spending elsewhere in the budget.

Andrew Samwick

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We Used to Call It Underemployment

It’s sad when one has to keep turning to Wikipedia:

In one usage, underemployment describes the employment workers with high skill levels in low-wage jobs that do not require such abilities. For example, someone with a college degree may be tending bar or driving a cab or being a cashier. Alternatively, a skilled machinist may be working at a fast-food outlet. This may result from the existence of unemployment, which makes workers with bills to pay (and responsibilities) take almost any jobs available, even if they do not use their full talents.

Which is what I thought about as I read this story. Andrew Samwick reads this story and writes:

It’s hard to know if the unemployment rate is really “missing” them in measuring the strength of the labor market.

Dr. Samwick has been suggesting that at least some of the decline in the labor force participation rate is due to voluntary forces, while I have been emphasizing the alleged continued weakness in labor markets due to poor aggregate demand management.

Ezra Klein first noted:

It’s always hard to discern if the anecdotes and quotes chosen for these articles accurately reflect the trends

Alas, he continues:

The basic outline is that many workers from blue or gray collar jobs who lost their positions in layoffs and bankruptcies are finding it nearly impossible to find subsequent positions offering the same level of dignity and challenge.

Of course, Jonah Goldberg is quick to agree. I guess it would not occur to Mr. Goldberg that we should be expecting more from our labor market. After all, expecting more would be to suggest that George W. Bush’s economic policies are not as wonderful as Mr. Goldberg and his cronies are paid to portray.

Update: Today must be my day for finding rightwing commentary that almost makes sense so check out what Megan McArdle offers over Instapundit.

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Tamny’s Defense of Labor Mobility Needs an Occam’s Razor

Wikipedia has a nice discussion of Occam’s razor. John Tamny would have had a decent op-ed if he had applied it. Since I’m usually quite critical of Tamny’s writings, let me start with where we agree:

Workers are in the end capital, and along the lines of the pin factory Adam Smith described in the Wealth of Nations, an increase in the number of skilled workers will increase output, and make all of us wealthier in the end. Notably, some in favor of increasing H1-B caps engage in zero-sum thinking of a different kind. Their view is that if we refuse skilled foreign workers, we’ll fall behind countries such as China and India, which already possess high numbers of scientists and engineers. The flaw here is in the assumption that the U.S. economy is a closed one, and that innovations in other countries will make us less well off at home. If this were true, California and New York, not to mention Europe and the rest of the world, would have been impoverished for the fact that Microsoft was founded in Seattle. More realistically, Microsoft’s innovations made workers around the world more productive. Economic advances, be they scientific or technological, are almost by definition worldwide advances to the extent that countries keep their markets open and free. If a cure for cancer is found in India, we’ll all be better off. Country origin, in a free global market, is irrelevant.

Agreed! But here is where I’d apply Occam’s razor:

The H1-B program thus should not be expanded with nationalistic concerns in mind, but for the simple fact that the U.S. remains the single best place for entrepreneurs to achieve their goals. The U.S. is a magnet for capital, perhaps because of the enlightened thinking of the average American.

Whether this statement is true or not – it is also irrelevant to the case Tamny is making. Consider, for example, the life science sector where R&D is being done not just in the United States, but also in Canada, Europe, and Japan. I have no reason to believe American scientists are better at this type of R&D than scientists in other nations. And quite frankly, I don’t care. If a Canadian or Japanese scientist finds a cure of the common cold, I can buy that cure in the global market place. And if a scientist needs government funding for stem cell research, he’s more likely to find that funding abroad than in George Bush’s America.

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Karl Rove’s Love Boat Ride for the Press

Karl Rove decries the “corrosive role” the press plays in politics. When I read this, I was at a lost for sensible discussion not knowing whether the laugh out loud or to scream beyond control. So let’s give the microphone to TPM Reader DK:

It’s not necessary to parse the substance of Rove’s fatuous comments. We all know how preposterous any of this is coming from Rove. And it’s certainly not the first time the GOP has attacked the media as a way of working the refs, which is exactly the purpose of those particular remarks. But I am struck by Rove’s remarks as another example, among many in recent months, that most of the reliable campaign themes the Republicans have employed in the last two decades are no longer viable. National security policy is in a shambles, the federal budget is a wreck, and the GOP’s reputation for bringing mature and competent managers to government may take a generation to rebuild. Thematically, only social issues still resonate. That leaves the GOP with two main tactical weapons: demonizing opponents personally and shooting the messenger. Over the next four months, we will see blistering negative attacks on Democrats of a ferocity and corrosiveness that will make Swift Boats look like the Love Boat. And we will see a continuation of what started in the spring, an unprecedented attack on journalists and journalism, using not only the rhetorical flourishes favored by Rove, but the powers of the state via investigations, subpoenas, and the invocation of state secrets.

Read the rest if you are concerned as DK and I am about the future of our democracy.

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Real GDP: Focusing on Average Growth Rather than the Noise

David Altig reviews the various reactions to BEA’s advance estimate suggesting 2006QII growth was only 2.5% on an annualized basis with this wisdom:

Wait a minute. Aren’t we going just a little bit overboard here? After all, we are talking about 2-1/2 percent growth hot on the heels of 5 percent plus.

I have complained about how the Bush cheerleaders often tout one quarter’s bit of noise as proof that their free lunch supply-side silliness is serious economics. So fair is fair. But why focus on a period of only 0.5 years as opposed to the last 5.5 years? Real GDP for 2006QII was about 15.15% higher than it was at the end of 2000 so growth has averaged only 2.6% per year since the beginning of this century. Contrast that to the average 3.5% per year growth experienced during the second half of last century.

Just remember to focus on the average growth rate rather than the noise the next time some goofball like this fellow tries to convince you that this is the most amazing growth ever experienced in human history:

the economy hit a 4.6 percent annual growth rate in the second quarter of 2006

That’s right – those National Review nuts don’t even know the difference between nominal GDP growth and real GDP growth.

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Dynamic Analysis: Tax Cuts and Crowding-Out

Given how late am I to the party in terms of discussing A Dynamic Analysis of Permanent Extension of the President’s Tax Relief, I’m thankful that David Altig summarized the economist blog discussion on this dynamic scoring debate. David, however, dumped on my favorite summary, which was provided by Brad DeLong:

What proportion of students will be able to follow the syllogism?

• Tax relief is good for growth only if the tax reductions are financed by spending restraint.

• The Bush tax reductions have been financed not by spending restraint but by borrowing.

Therefore:

• The Bush tax reductions have been bad for growth.

So what is David’s rebuttal?

I hope the answer is none, because one of the premises is irrelevant. The question is not have the tax cuts been financed by spending cuts, but rather will they be financed by spending cuts. Brad’s expectation may be reasonable given the politics of the situation, but you obviously cannot draw conclusions by assuming a condition that has yet to be determined.

Actually, David may have a point – and in fact, his point is critical to the premise that tax cuts might encourage a small bit of extra growth once one actually digests the incredible bait and switch in this Treasury document.

For example, this document vacillates between the two contradictory explanations for the Bush tax cuts as it says on the one hand we needed the tax cuts to spur more consumption (= less savings) in order to generate an increase in Keynesian aggregate demand to rescue us from that recession, while on the other hand, it claims the tax cuts increased national savings. OK, Lawrence Lindsey played Keynesian in 2001, while Glenn Hubbard played classical economists – and the political hacks in the White House refused to recognize that the President’s two economic advisors were contradicting each other.

But let’s concede that this document says over and over that the key is future reductions in government spending as it admits that if these tax cuts are really tax shifts that will necessitate future tax increases, then they will lead to less growth in the long-run. Page 10 even utters the word foreign to the free-lunch GOP camp – CROWDING-OUT. I only wished this document would have conceded the obvious fact that the sum of consumption and government purchases as shares of national income in 2005 was higher than it was in 2000.

But let’s go back to page 5 for the ultimate bait and switch. As it notes its assumption of a constant long-run debt to GDP ratio (I guess the authors have not noticed the increase in this ratio since George W. Bush took office), it talks about maintaining the tax rates projected for 2011 to 2016 under current law. Excuse me – but current law has most of the Bush tax cuts expiring by 2010. So, the document assumes we return to Clinton style tax policy. And then it says making the Bush tax cuts permanent is pro-growth without telling us where we will get all those massive reductions in government spending in the future?

David says this is a teachable moment. He’s right. We should teach our students to read such documents very carefully.

Update: Brad replies to David:

It’s possible that there are huge spending cuts relative to GDP in our future. It’s not terribly likely. If I were Macroblog, I would say, instead, that the Bush tax cuts are good for growth because in response to the tax-cut magic the Growth Fairy will appear, wave her wand, and instantaneously boost labor productivity by 5%. That seems more likely than Macroblog’s scenario. There is a serious issue here: When one does policy evaluation of the proposals of an administration, does one evaluate the effects of the policies that the administration has proposed? Or does one evaluate the effects of the policies that the administration has proposed plus policies that the administration has not proposed, shows no inclination to propose, but that one wishes it would propose?

Didn’t we go through this a generation ago? Pro-growth proponents of Reagan’s 1981 tax cut – you know, the one founded on “work, save and invest” – may have hoped that Congress would slash spending. It did not happen with the result being that national savings fell. What makes anyone think this round will be any different?

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GOP Ties Minimum Wage Hike to Tax Cuts

AP reports:

WASHINGTON (AP) – Republican leaders are willing to allow the first minimum wage increase in a decade but only if it’s coupled with a cut in future inheritance taxes on multimillion-dollar estates, congressional aides said Friday. A package GOP leaders planned to bring to a vote Friday or Saturday in the House also would renew several popular tax breaks, including a research and development credit for businesses, and deductions for college tuition and state sales taxes, said a spokesman for House Majority Leader John Boehner. The wage would increase from $5.15 to $7.25 per hour, phased in over the next three years, said Kevin Madden, the aide to Boehner, an Ohio Republican. The maneuver is aimed at defusing the wage hike as a campaign issue for Democrats while using its popularity to spur enactment of the Republican Party’s long-sought goal of permanently cutting taxes on millionaires’ estates.

Let’s be clear about two things. First, all this proposal would do as far as the minimum wage would be to restore it to something barely above 1997 levels in real terms (see Dean Baker) and far below the 1968 level. Secondly, these “tax cuts’ are nothing more than tax shifts. Someone at some point will have to pay down all these deferred tax liabilities.

The Democratic response is to call for “an up or down vote” (as much as I hate to quote Bill Frist) on the minimum wage proposal. There is absolutely no excuse for the continued fiscal irresponsibility of this Republican led Federal government – regardless of one’s view on the minimum wage controversy.

Judd of Think Progress objects to what he calls the Poison Pill of this proposal:

Actually, the provision that Rep. McKeon plans on attaching to the minimum wage bill is an ideologically driven proposal to enact Association Health Plans (AHPs). The proposal would “allow selective groups of small business to be exempt from state regulation – reducing their insurance premiums while raising them for those not in AHPs.” Here’s the impact:

More uninsured. “A study by Mercer Consulting found that AHPs would increase the number of uninsured Americans by more than 1 million. ”

Higher costs. “Only about one in five small employers would have lower premiums, while more than four out of five would actually see premiums go up.”

Rep. McKeon and his allies are counting on the fact that progressive members will find the Association Health Plan proposal so repugnant that they won’t vote for the bill raising the minimum wage.

As usual, one needs to read the fine print with proposal from this group of Republicans.

Update: Faiz trumps this Bear with a picture of Paris Hilton and one fine commentary! Darn – that Think Progress crowd is tough to beat.

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Weak GDP Growth

The Bureau of Economic Analysis released its advance estimate for the second quarter of 2006 reporting that real GDP grew by only 2.5% on an annualized basis. The slowdown in domestic demand growth was across all sectors with consumption rising by 2.5%, business investment rising by 2.7%, residential investment declining, and government purchases rising by less than 1%. And I’m listening to CNN, they are saying this is good news as it takes the pressure off the Federal Reserve to further raise interest rates. Let’s hope growth for the rest of the year is stronger.

Footnote: In a comment to this post, AB reader K Harris reminds us that Michael Darda had made a qualitative statement that investment demand growth would remain strong. She asks what was his Q2 forecast? Michael?

Update: Thomas Nugent really wanted to run a Laffer curve op-ed today chastising Democrats for ignoring “JFK economics”. Did he ignore today’s BEA news or just misread the report?

the economy hit a 4.6 percent annual growth rate in the second quarter of 2006

Could someone tell Mr. Nugent that nominal GDP growth is not the same as real GDP growth?!

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Funding Russian Roads – Oil Revenues or Privatized Toll System?

About a year ago, Jeremy Bransten noted:

Russia’s roads – with a few notable exceptions – are abysmal. Levitin put the reason down to a combination of corruption and inefficient spending … For the future, the state also plans to build a network of new toll roads to ease congestion and ensure revenue for their upkeep. Moscow region governor Boris Gromov tells RFE/RL plans are under way for a toll road linking Moscow to St. Petersburg. “The first stage will run from the Moscow Ring Road to Sheremetyevo-1 and Sheremetyevo-2 [airports] and then this toll road will continue to St. Petersburg,” Gromov says.

The recent news is that:

MOSCOW’S new-found prosperity has brought with it a familiar problem: traffic jams. Now Europe’s largest city, which is clogged by 3 million cars, is to get a new ring road to ease congestion with one of post-Soviet Russia’s biggest infrastructure projects. Construction of the 276-mile (444km) motorway is expected to begin next year. It will cost about $10 billion (£5.4 billion). Authorities hope that the road will divert freight traffic away from the city, which is expected to absorb another 100,000 cars this year as increasingly affluent residents take to the roads. The project is part of a campaign to use some of Russia’s oil wealth to improve its notoriously poor road network. Russian authorities are also planning to build a toll road from Moscow to the country’s second city, St Petersburg. But even before winning final approval, the ring road is stirring controversy, not least among hundreds of dacha owners along the proposed route, about 20-30 miles outside Moscow. Residents of Ramensky district say that at least 500 dachas will have to be razed to make way for the road.

Dacha is Russian for a house in the countryside. It’s interesting that the construction of roads raises the same property right concerns in Russia that often delay road construction in the U.S. Now the fact that oil wealth might be paying for the new roads is interesting given the controversies surrounding the management of Yukos Oil and how the Russian government seized some of its key assets and sold them to the state oil group Rosneft. Which makes the news from the Moscow Times interesting:

The company report puts the cost at 262.9 billion rubles ($9.7 billion). The region is expected to provide from 25 percent to 50 percent of investment in cash or land for the construction. Private companies are expected to invest the rest in exchange for the right to collect toll fees.

Privatization of formerly owned state assets is not something that has worked all that well under the crony capitalism of Russia.

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Monetary Policy: Darda Discovers that the LM Curve is Not Vertical

Whenever I read Michael Darda, I have to wonder what his point is:

Standing in stark contrast, however, are several important market and economic indicators that suggest the Fed remains accommodative: near record commodity prices, relatively low real short-term interest rates, rising monetary velocity, tight credit spreads, and robust growth in business loans.

Actually, real interest rates had risen from less than 1.7% last June to over 2.5% this June as measured by the 10-year TIPS rate. While Darda decides to stage some Marx v. Schumpeter debate, the resident Keynesian at the National Review would only have to turn to the old fashion IS-LM model to explain his parade of facts. Consider a mix of expansionary fiscal policy (outward shift of the IS curve) and tight monetary policy. Wouldn’t one expect the increase in interest rates to increase GDP relative to the money supply (aka velocity) to increase?

But then we get this:

I continue to expect the industrial economy (which expanded 6.6 percent at an annual rate during the second quarter) and non-residential investment spending to continue to advance at a robust pace.

I hope investment remains high, but this mix of expansionary fiscal policy with an offsetting monetary policy is not encouraging more investment – regardless of all the National Review spin to the contrary.

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