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

Employment Policy

Robert Waldmann

Larry Summers, who is very very good at provoking debate, said
“It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.”

Paul Krugman responds here

True. But we are not, in fact, expanding the total amount of work — and Congress doesn’t seem willing to spend enough on stimulus to change that unfortunate fact. So shouldn’t we be considering other measures, if only as a stopgap?”

Please click the link and read Krugman’s op-ed if you haven’t already. It is excellent but limited to 700 words. Unlimited reflections on the topic after the jump.

I’m going to start with my proposal. I think that there should be a combination of subsidies for new hires funded by revenues from cap and trade (I’m a member of the Pigou club) and an increase in the progressivity of the tax system (not just because I always want to increase the progressivity of the tax system).

Second, Krugman suggests that US unemployment is not just high, but much higher than it need be given the large recession and small stimulus. Note that the evidence he presents is the change in employment and unemployment in the US and Germany. One might suspect that this amounts to the US unemployment rate rising to a level similar to the German unemployment rate – that in effect Krugman is proposing that we don’t accept unemployment that suddenly rises to around 10% in a recession but rather insist on such levels all the time.

One would be wrong (I admit I was such a one, I haven’t been following German unemployment). The OECD standardized US unemployment rate surpassed the Euro area unemployment rate in August 2009 (warning pdf) (figures for September are in the mail the August figures were released October 12). The OECD standardized US unemployment rate 9.7% was significantly higher than the German rate 7.7% in August. The decline in German GDP was, if anything, slightly larger. I find this stunning.

So how did they do it and should we do what they did?

First all Euro area countries have strong restrictions on layoffs. At least two Italy and Spain have decided not to apply the restrictions to many newly hired workers starting, in the case of Spain, almost 30 years ago. The Spanish increase in unemployment is even huger than the US increase.

It was already clear in 1980 that employment protection protected employment in recessions. It is also notable that, before their reforms relaxing restrictions, Italy and Spain managed decades with no employment growth. I very much like employment protection legislation as it changes the balance of power between workers and employers. I don’t like zero employment growth for decades. In any case, it isn’t going to happen there (in the USA).

The effect of employment protection legislation is a confounding factor not relevant to the US policy debate and a major part of the explanation of the especially bad experiences of the US, Spain and Ireland.

Second job sharing. Germans have been doing this for decades. The idea is that there is a fixed number of hours of work demanded and it is better if everyone works part time than if some are unemployed. This reasoning is like a red flag to a bull to almost all economists certainly including Larry Summers (and including Paul Krugman in the past). Krugman considers it a third best approach imposed by political limitations. I’d note that the simplest way to do this would be to make the payroll tax progressive so that less has to be paid by firms and workers if there are more workers each of whom is paid less . Also a progressive payroll tax implies increased revenues in the future even if marginal rates are a function of real wages (so inflation doesn’t cause bracket creep).

In one of my favorite papers of all time MacDonald and Solow argue that employment will be increased by a progressive payroll tax for fixed revenues (zero in their model). They consider a unionized firm (the paper is very old) but evidence on wages suggests that similar things happen without formal unions. The point is that it doesn’t really matter why a firm is spending the same money to pay 3 people a lot or 4 people a little. Whether the 3 are paid a lot because they work longer hours or because they have higher hourly wages, hiring them is still 3 jobs for the price of 4.

I don’t see any value added from applying the benefit only in cases in which one can document the splitting of a set of tasks to share jobs. This would be complicated and I don’t think there is anything especially desirable about that.

Note a historical example, the Clinton tax increase of 1993. Not all taxes were increased as the bill also expanded the Earned Income Tax Credit. Taxes were higher on average and much more progressive. The tax changes were followed not only by a huge increase in employment but also a downward shift of the Phillips curve. Theory and evidence correspond in this case. Also the proposal is wildly popular according to dozens of polls.

OK aside from that Krugman mentions hiring subsidies. Now most such subsidies would go to employers who would have hired without a subsidy. One would expect much of that money to go to the workers who would have been hired anyway (how much depends on assumptions about labor markets and/or bargaining). So ? It’s an excuse to pump more money into the economy which would be good policy.

Also such subsidies have been shown to affect employment. In particular a deadline to get the subsidy (only paid if one hires before oh say November 2 2010 just to pick a date) would have a large effect on the speed of the increase in employment. Following Greg Mankiw, I’d add it on to cap and trade as part of where the revenues go. As noted by Mankiw, this is also an excuse to start subsidizing before CO2 permits are actually sold as it takes time to set up a cap and trade system.

So I propose the Greg Mankiw/soak the rich plan to help US employment.

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Clean Coal and Cap and Trade

Robert Waldmann

Joe Strawman argues that the solution to global warming is clean coal technology and in particular sequestering C02 from exhaust from coal fired power plants. Therefore cap and trade is a bad policy, because technology will solve anything soon.

In fact, if “clean coal” is not a contradiction in terms, the case for cap and trade (or a carbon tax) starting right now, is vastly strengthened as I argue after the jump.

A small tax on carbon or cap and trade with caps so high that rights to emit carbon are cheap will have a large quick effect on C02 emissions. Electric power companies have coal fired plants and natural gas fired plants, because natural gas fired plants are cheaper and coal is cheaper. The plants working all the time are coal fired. The natural gas fired plants work only during hours of peak demand.

A modest tax on carbon or fairly cheap carbon emission rights will cause power companies to switch this order of use so natural gas fired plants work all the time and coal fired plants work only during hours of peak demand.

The question is whether this will reduce C02 emissions or just delay them a few years. Natural gas supplies are limited. I guess that a few years of burning natural gas for electricity with reduce them to the point that the price will rise to whatever level required to make burning natural gas for electricity not competitive (even given cap and trade). My belief is that, since natural gas is very useful for home heating and making plastic and fertilizer, it won’t be used to make electricity for very long.

However, if clean coal technology is possible, delaying coal burning is almost as good as preventing it forever. Clean coal technology is definitely not installed now. If, indeed, it will be installed in a few years, it is critically important to discourage the burning of coal now — to encourage the use of stop gap measures to put off the burning until coal can be burned cleanly.

Thus if one believes that clean coal technology is feasible and just around the corner then one should rationally be more enthusiastic about cap and trade than if one doesn’t.

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Wise Words from Carbon Sense Coalition

by reader Sammy

Waxman-Markey: Intense Pain, No Environmental Gain

I know you guys won’t like the source…. but try to deal with the issue.

From this Editorial:

If the pending Waxman-Markey energy and climate bill (HR 2454) becomes law, utility bills will soar. Farm and business energy costs will skyrocket — and be passed on to consumers, or defrayed by layoffs. Everything Americans grow, make, buy and do will be far pricier. And bureaucrats will control our lives.

Compared to no cap-and-tax regime, Waxman-Markey would cost the United States a cumulative $9.6 trillion in real GDP losses by 2035, concludes a study by the Heritage Foundation’s Center for Data Analysis. The bill would also cause an additional 1.1 million job losses each year, raise electricity rates 90% after adjusting for inflation, provoke a 74% hike in inflation-adjusted gasoline prices, and add $1,500 to the average family’s annual energy bill, says Heritage.

The Cong ressional Budget Office says the poorest one-fifth of families could see annual energy costs rise $700 — while high-income families could see costs rise $2,200. Harvard economist Martin Feldstein estimates that the average person could pay an extra $1,500 per20year for energy. And those are just direct energy costs.

Written largely by professional environmentalists, the numbingly complex 942-page bill would require an 83% reduction in U.S. carbon dioxide emissions by 2050 — a level last seen in 1908……

There are disputes over the costs of cap and trade (of course), as modelling is extremely complex and fraught with assumptions.

Republican opponents have used the cost figure of $3,100 per household per year based on an MIT study which found a generic cap and trade program would raise an average of $366 billion per year in auction revenues for the federal government 2015-2030, divided by 117 million households. This assumes that the increase in permit costs will be passed to consumers, which seems reasonable to me, YMMV.

Recently,the EPA produced a study for Congress that pegged annual costs at $98-$140 per household. Heritage challenges this analysis here.

The major difference in the two studies, as well as the dissent of one of the authors of the MIT study, is that the smaller cost estimates assume that since the permit costs get paid to the Federal Government they are “returned” to each household, presumably in the form of public services. Ha ha ha ha.

But the bigger question is why?

Even worse, the draconian rules would have no detectable benefits, even assuming CO2 does cause climate change. Using global warming alarmists’ own computer models, research climatologist Chip Knappenberger calculated that the painful 83% reductions would result in global temperatures rising a mere 0.1 degrees F less by 2050 than doing nothing. That’s because Chinese and Indian emissions would quickly dwarf America’s job-killing reductions.

by reader Sammy

Update 3:00 PM: Rdan here- This was prematurely released by mistake, in that the most recent post is somewhat different. My apologies to Sammy and readers.

Additional sources National Black Chamber of Commerce, Carbon Tax versus cap and trade, state by state differences demonstrating national averages as mis-leading and the complexity of carbon foorprints per capita by state, and Scientific American on some objections to cap and trade models.

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