Consider the stimulus package. Although it’s difficult to separate the consequences of fiscal and monetary policy, most knowledgeable observers conclude that the stimulus has had a positive effect. Real GDP is now increasing at an annual rate of 2.4%, and although the recovery is still fragile it’s unlikely we’ll fall back into a full-fledged recession.

“Difficult to separate”?? The reason it’s difficult is that you need a model of how the economy works to do that. Blinder and Zandi tried that last week. If you have a different model, you get a very different answer. John Taylor, at least, does not agree with how that study was done.  We simply don’t know if it had a positive effect.  I make the probability of “zero or negative” effect less than 50%, but the range of my estimates is very broad, imprecise, uncertain.  I think I qualify as a “knowledgeable observer” when I say “I don’t know that the stimulus has had a positive effect.”

Reich again:

In fairness, no one knew how sick the economy was in February 2009 when Congress approved the initial stimulus. Yet by late spring 2009 the White House knew the extent of the damage and should have pushed much harder for significantly more spending. Almost a third of the initial stimulus, moreover, came in the form of temporary tax cuts, which already had been proven relatively ineffective at spurring demand after President Bush tried them in 2008. And many states were engaging in reverse stimulus policies, slashing spending and increasing taxes. The administration knew its stimulus was not nearly up to the job.

Anyone reading my Twitter feed last night should know this is the paragraph where I popped a gasket. Where to begin?

1. There was at the time and remains to this day a great deal of uncertainty about “how sick the economy was in February 2009.”  The Administration said repeatedly in February 2009 that they were comfortable with the size of the stimulus package; Brad DeLong was saying in June they thought the stimulus should have been 2.5 times the size it was.  But the Administration had bought their own estimate of potential GDP and the size of the gap they had to close.  (See also this from Michael Kiley.)
2. On July 12, 2009, Geithner was quoted on CNN saying “I think all economists believe, and this was inherent in the design of the program, that the biggest thrust or force would start to take effect in the second half of this year. And we’re going to start to see that happen. But I don’t think that’s a judgment we need to make now, can’t really make it now prudently, responsibly.”  It did not know “its stimulus was not nearly up to the job.”  It thought in summer that indeed it WAS up to the job.  
3. There is no one model, or even one measure of potential GDP.  Truth is, we’re all over the place.  At no point does Reich show any understanding of that which he asserts so glibly.  I am utterly astounded by how thoughtlessly he asserts these things.  
4. As to those ineffective tax cuts, The Administration’s CEA reported that they estimate those silly tax cuts contributed 1.7% of GDP gap closing and 1.4 million jobs “saved or created.” Even Romer’s own academic paper shows an effect of tax changes on GDP.  (Relatedly, I have yet to watch Robert Barro’s AEI speech, but the slides look worth reading.)

Geithner, meanwhile, plays this little trick:

The new data show that this recession was even deeper than previously estimated. The plunge in economic activity started an entire year before President Obama took office and was accelerating at the end of 2008, when G.D.P. fell at an annual rate of roughly 7 percent.

There was none of this concern about re-estimated GDP in 2009 when setting the size of the stimulus. We knew the start of the recession was December 2007 on December 1, 2008, six weeks before the Romer-Bernstein memo.  The GDP figure at end of 2008 was $75 billion less than had been estimated.  Given your administration’s estimate of a multiplier of 1.56, that implies your stimulus package was short by about $48 billion.  Most of the downward revision was in 2009, meaning your policies were even less effective than previously thought.

Panicked by the collapse in demand and financing and fearing a prolonged slump, the private sector cut payrolls and investment savagely. The rate of job loss worsened with time: by early last year, 750,000 jobs vanished every month. The economic collapse drove tax revenue down, pushing the annual deficit up to $1.3 trillion by last January.

So the passage of stimulus in February 2009 did not stop the panic. Glad to have that on record. As to the # jobs vanishing, this 750,000 is a measure of the peak, true for two months (ok, we’ll give you three, though February 2009 was actually 726,000. Close enough for government work.) As to “the economic collapse drove tax revenues down”, the state of the economy is removed from the cyclically adjusted budget deficit by CBO, and that was 7.5% in 2009, 6.5% in 2010.  Their estimate shows that even if we were at full employment, the budget deficit would still be $1,018 billion.

Do they even bother to read their own government reports? 

1. The inventory buildout appears to be ending.  After contributing 2.8% and 2.6% to growth the last two quarters, the rate of increase in inventories — which has buoyed manufacturers — slowed to a contribution of 1.1% this time.  The number I follow more closely on final sales of GDP actually rose a bit, from 1.1% last quarter to 1.3% this quarter.  The contribution of investment in GDP in the 2nd quarter was more from equipment purchases and a surprising gain in housing off of the homebuyer’s tax credit.  But that may have ended already:
   

   Ryland says that the big question from last quarter’s conference call was what impact the expiration of the tax credit will have on the new home market. Says they found out the answer to that question in Q2, as sales slowed significantly. … Says they knew there would be a slowdown in May once the event passed, but they didn’t expect it to be as severe or prolonged as it’s been…

2. There was a large surge in imports that dragged on the GDP estimate, along with a subsiding of the impulse from exports.  This may be due to petroleum products being drawn more foreign producers, but the data is not split out well enough for us to know this yet.  What worries me more is the decline in exports: That source of growth is beginning to slide now and create a potential negative impulse for a second downturn in the economy.  At any rate, absorption of goods and services in the US was up quite a bit, but many of those were bought from overseas.
3. I was more surprised by the reported savings rate of 6.2% than any other number. An economy that is showing vigorous growth and high optimism would have a rate moving lower.  But of course sentiment is down to pre-2010 levels, and consumers appear to have decided to continue the repair of their balance sheets instead.  This makes business investment all the more important to growth, if you can get that without the small businessman who has checked out on the recovery.  Even larger firms are turning sour in July.

All of this will turn up the heat on Congress, which is now hearing in a new report that letting the Bush tax cuts expire would cause GDP to fall 1.1% in 2011.  (If you are going to say the Obama stimulus added to GDP, you sorta need to say as well that a tax increase cuts GDP, don’t you?)  There appears to be no impulse left on the demand side that would lead the next leg of the recovery; uncertainty seems also to be holding back supply.  Ed calls this “a political disaster for Democrats,” but one major way out of the problem — use monetary policy — seems on hold despite one Fed president’s call for more leniency.  A different one is asking the Congress and Obama Administration for less “random refereeing“, but that is the source of its power.

You will be able to hear more about the report on the King Banaian Show, starting at 9am CT Saturday on KYCR, AM 1570 in the Twin Cities.

(Crossposted at SCSU Scholars.)

UPDATES (31 July) Thanks Ed for the promotion, and to Glenn Reynolds for linkage. See this from Christina Romer’s post yesterday as well:

The data revisions, together with recent estimates, also provide some important new information about longer-run trends. Revisions to both personal income and consumer spending have led to estimates of the personal saving rate in 2008 and 2009 that are substantially higher than previously reported. The average saving rate in 2009, for example, is now 5.9%, 1.7 percentage points higher than previously reported. In 2010:Q2, the saving rate is 6.2%. This higher saving rate is consistent with estimates reported in the Economic Report of the President of likely consumer behavior in the wake of the financial crisis. The higher level also suggests that there is room for further consumer spending growth as consumers become more confident, without returning to the very low saving rates of the past decade.

Country A wants to send goods to Country C.  Country C does not get along with Country B, and Country A wants to go through Country B to get the goods to Country C.  Country B says “sure, as long as we can check to make sure they aren’t the kind of things Country C uses to attack us.”  Country A says “no, we just have nice stuff, and we’re taking it to C.  No need for us to interact.  OK?”  ”Um, no, we have the right to be sure that anything going to C can’t be used to send explosives towards our citizens.”  Country A sends ships anyway.  Country B says it wants to look at the stuff on the ships and sends some of its military to inspect.  Many of the military do not carry guns.  As B’s guys try to get on Country A’s ship, the people on the ship start beating them with sticks, chains and what-have-you.  A melee breaks out and some people die.

Who has to apologize to who?  Leave it to Turkey, oops, I mean Country A, to decide they don’t.

ANKARA (Hurriyet)–Turkish Foreign Minister Ahmet Davutoglu had harsh words for his Israeli counterpart Tuesday, the latest salvo in the quarrel over the flotilla crisis that has brought the one-time allies to the brink of cutting ties, the Turkish Hurriyet Daily reported.

“What [Avigdor] Lieberman says has no value for us,” Davutoglu said in televised remarks Tuesday, referring to the Israeli foreign minister’s call for Turkey to apologize. The Turkish foreign minister harshly criticized Lieberman and said he did not view his Israeli counterpart as a proper go-between “owing to his rhetoric and attitude.”

In an interview with Hurriyet on Sunday, Davutoglu said relations with Israel “would be cut off if Israel does not apologize and compensate the victims of the Gaza-bound Mavi Marmara ship.”

But on Tuesday he said he “was compelled to make that statement because it was said that our demands would not be met while that turmoil was happening in Israel.”

The whole world seems to have gone mad.  Lieberman is the guy with the bad attitude? As Claire Berlinski observed a few weeks ago, this is an attempt to build a public relations campaign. How is it the West doesn’t see right through this?

I find it ironic that Turks demand compensation for a disputed peace flotilla but still deny Armenians recognition of the genocide and any compensation for its victims.  A friend of mine who read this before I posted it thought we should change Turkey’s name to Gall. But that’s never been the issue. Gall only works when we’re gullible.

…public policy designd to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. Most economically advanced countries provide benefits to laid-off workers as a way to tide them over until they find a new job. In the United States, these benefits typically replace only a small fraction of worker’s income and expire after 26 weeks. In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European economies.

Second,

Do unemployment benefits reduce the incentive to seek work? Yes: workers receiving unemployment benefits aren’t quite as desperate as workers without benefits, and are likely to be slightly more choosy about accepting new jobs. The operative word here is “slightly”: recent economic research suggests that the effect of unemployment benefits on worker behavior is much weaker than was previously believed. Still, it’s a real effect when the economy is doing well.

But it’s an effect that is completely irrelevant to our current situation. When the economy is booming, and lack of sufficient willing workers is limiting growth, generous unemployment benefits may keep employment lower than it would have been otherwise.

“Slightly” does not appear in the first quote. Yet they were written by the same person: Paul Krugman from, first, his principles textbook and, second, his op-ed this morning.

The paper he cites (and also cited by Ezra Klein last Friday) is a recent research note from Federal Reserve Bank of San Francisco economists Rob Valetta and Katherine Kuang.  They separate the duration of unemployment of those who were involuntarily separated from their jobs (thus eligible for UI) and those who either quit or left their jobs (and ineligible.)  The job losers have an average duration of 1.6 weeks longer.  This is assumed to be entirely due to the difference in UI eligibility.  Valetta and Kuang estimate that the effect on the December 2009 unemployment rate is to add 0.4%, which they call “quite small.”  (Worth noting that the fall to 9.5% in June from 10% back then is called “headed in the right direction” by President Obama.  But that’s to be explained by Obama’s speechwriters, not Valetta and Kuang.)

A hint to non-academic economic readers:  When you see someone say “recent economic research says that …” you can bet they are trying to slide by what the bulk of research before that said.  That is, they may be cherrypicking.  Valetta and Kuang cite a recent study in the prestigious Journal of Political Economy by Raj Chetty,  (Ungated copy here.)  He cites that the original evidence on unemployment is that “a 10% increase in unemployment benefits raises average unemployment durations by 4-8% in the U.S.” Chetty doesn’t dispute that point but rather shows that the effect is more one of families being cash-constrained, that liquidity drives the job search rather than the substitution of subsidized leisure for search and labor. His argument is for a higher unemployment insurance benefit, not an extension of weeks.  That is, Chetty doesn’t necessarily change the 4-8% estimate (which would be consistent with the Valetta and Kuang estimates, by the way) but the reasoning behind it.

So I do not understand why Krugman the textbook writer would argue unemployment benefits is a significant explanation for Eurosclerosis while Krugman the op-ed writer would encourage us to adopt those European policies.  Nothing changed in the results.  They applied for the U.S. in good times and bad (or, at least, they haven’t shown a significantly different result in periods of slack demand, contra Krugman’s assertion.) One of those passages is misleading the reader.  Which is it?

So the ministers got together and pledged 750 billion Euros to keep the Euro from falling. That seems a bit like propping up snowflakes with snowflakes.

Peter Boone and Simon Johnson call this “an alliance of convenience between troubled governments in the south of Europe and the north European banks (and implicitly, north American banks) who enabled their debt habit.” Tyler Cowen points to the implications of large shadow economies, where the shadows are filled by those escaping oppressive taxation.

Exit question: When the EU says it will defend the euro “whatever it takes,” should it be any surprise that speculators will want to test that stand? Haven’t you created a one-way bet?

UPDATE: Oh, wait. It turns out the money that doesn’t come from the IMF has to come through national parliaments. Kevin Drum provides details and asks

I wonder if there are going to be any recalcitrant parliaments out there? And I wonder if any of the dozen or so fights it’s going to take to get approval for this fund will just end up making Europe look even more feckless than it already does? Remember what happened when Congress initially voted against TARP?

Think of the increasing bureaucratization of life, most of which is due to government. If I want to cut off a tree branch that is more than four inches in diameter–even in my own yard–I must get the city government’s permission and pay for that permission. In the city of Monterey, California, someone who wants to install a new dishwasher must get government permission to do so. I’m sure that few people bother because the requirement is so hard to enforce, but it’s a requirement. Under a law passed in 2008 the Consumer Product Safety Commission warned that children’s books published before 1985 are not safe and cannot be sold unless the seller does expensive testing to make sure they don’t contain lead. This is so even though, as Walter Olson has written, “no one seems to have been able to produce a single instance in which an American child has been made ill by the lead in old book illustrations.”

Credentialism is also reducing our freedom, and one interesting recent illustration was in President Obama’s speech to U.S. schools at the start of the 2009-10 school year. What received the publicity at the time was the controversy about whether it was proper for a U.S. president to address the students and for the U.S. Department of Education to put together exercises for the teachers to conduct after the speech on how the students could help Obama achieve his goals. What went unnoted was Obama’s statement that students should finish high school because otherwise they will not be able to pursue the careers of their choice. Obama gave seven examples of such careers: lawyer, doctor, nurse, teacher, architect, police officer, and military. Why is that remarkable? The reason people need a high school diploma to enter the first five of those seven occupations is that governments require them to. And the reason people need a diploma to be police officers or to advance in the military is not only that the employer requires it but that in both cases, the employer is the government. You don’t need a high-school diploma to write software because the government hasn’t gotten around to regulating that occupation–yet.

J.E. Dyer makes the good point that arguments against Obama and Congress increasing the scope of government by Republicans are temporary ones: not now, not when we are in a deep recession. But

…that theoretical distinction is like saying it’s better for an adult human to weigh 500 pounds than to weigh 600 pounds. Sure, 500 pounds is better than 600 pounds – but neither is desirable or advisable. Both are problems that will lead inevitably to diminished quality of life and an early demise.

In an interview with Reason in December 1974 Milton Friedman made the point, however, that the natural order of things isn’t liberty. (I’ve used some of this interview in a broader context here.) “There was an essentially free society in 5th-century Greece. Was it able to survive? It disappeared. Every other time when there’s been a free society, it has tended to disappear.” I haven’t found the full article for you online yet, but there’s a set of quotes from it here. This one seems to fit:

The two chief enemies of the free society or free enterprise are intellectuals on the one hand and businessmen on the other, for opposite reasons. Every intellectual believes in freedom for himself, but he’s opposed to freedom for others.…He thinks…there ought to be a central planning board that will establish social priorities.…The businessmen are just the opposite—every businessman is in favor of freedom for everybody else, but when it comes to himself that’s a different question. He’s always the special case. He ought to get special privileges from the government, a tariff, this, that, and the other thing…

I think the odds are that a free society is on the way out but that doesn’t mean that we shouldn’t fight for it, or that sulking in our tents explaining to one another how nice it would be if we could only wipe the slate clean and get our way is an effective means of fighting for a free society.

Companies that hire unemployed workers will get a temporary payroll tax holiday under a bill that easily won final congressional approval Wednesday.

The bipartisan 68-29 vote in the Senate sends the legislation to the White House, where President Barack Obama has promised to sign it into law.

It will be the first of several election-year jobs bills promised by Democrats to be enacted into law, though there’s plenty of skepticism that the measure will do much to actually create jobs. Optimistic estimates predict the tax break could generate perhaps 250,000 jobs through the end of the year, but that would be just a tiny fraction of the 8.4 million jobs lost since the start of the recession.

So if you reduce taxes on payrolls you increase hiring, the Democrats are figuring out. If you increase taxes on proprietors who hire those workers, what happens then?

The bill contains the usual money for the road construction industry that everyone thinks will help stimulate jobs. We’ve been through this before.

The bill which passed Wednesday contains about $18 billion in tax breaks and a $20 billion infusion of cash into highway and transit programs. Among other things, it exempts businesses that hire the unemployed from paying the 6.2 percent Social Security payroll tax through December and gives employers an additional $1,000 credit if new workers stay on the job a full year. Taxpayers will have to reimburse Social Security for the lost revenue.

Italics mine, reminding you that we already have Social Security dipping into its reserves to pay benefits. So notice this, please: the money that pays for part of this $18 billion in tax breaks is in essence an off-budget decrease. There’s a promise that later on, some tax money (presumably from some revenues other than Social Security contributions, unless they raise the SS tax rate) will be put back in the trust fund to be paid later. I assume the $1000 credit has to go on-budget.

How effective will this be? CBO has already commented on this in a letter to Sen. Casey:

CBO estimated that reducing payroll taxes for firms that increased their payrolls would raise output (gross domestic product, or GDP) by a total of $0.40 to $1.30 between 2010 and 2015 for each dollar of budgetary cost. CBO also estimated that the policy would add 8 to 18 cumulative years of full-time-equivalent employment in 2010 and 2011 per million dollars of total budgetary cost. Thus, the cost of increasing employment by one full-time person for one year in 2010 and 2011 would probably be between $56,000 and $125,000. Although such a policy would have economic benefits in the short run, it would also add to already large projected budget deficits. Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been.

I don’t know if they assumed the Social Security reduction was part of budgetary cost or not. But that 8-18 job-years number per million dollars spent is the one that should catch your eye. As the bill looks to spend $18 billion, the net gain from the tax cut is 144,000 to 324,000 jobs in the short run. In a normally growing economy, that is growth of about ten weeks. The $20 billion in highway spending would add more, but that is temporary. But the drag of the additional deficit and the attendant additional debt service, says CBO, will pull down future GDP and family incomes.

The Administration will of course sign this bill. Larger bills are caught in the House’s wrangling over health care and over concerns of how to pay for them. Remember, if they push too much additional debt too soon they might have to vote to increase the debt limit before the election. That last part should be a good thing. Perhaps at last the Democrats in the Congress have found a debt level that embarrasses even them. At least temporarily.

Obama, touring a small business in Arlington, Va., said that the 36,000 jobs lost last month was “actually better than expected” considering the massive snowstorms that devastated the East Coast.

But the president said the steady number also “shows that the measures we’re taking to turn our economy around are having some impact.”

From the Hill. I’m sure he only had time to read the executive summary, but if you read the actual report it includes this:

Major winter storms affected parts of the country during the February reference periods for the establishment and household surveys.

In the establishment survey, the reference period was the pay period including February 12th. In order for severe weather conditions to reduce the estimate of payroll employment, employees have to be off work for an entire pay period and not be paid for the time missed. About half of all workers in the payroll survey have a 2-week, semi-monthly, or monthly pay period. Workers who received pay for any part of the reference pay period, even one hour, are counted in the February payroll employment figures. While some persons may have been off payrolls during the survey reference period, some industries, such as those dealing with cleanup and repair activities, may have added workers.

In the household survey, the reference period was the calendar week of February 7-13. People who miss work for weather-related events are counted as employed whether or not they are paid for the time off.

That says to me that BLS does not think the storm greatly altered the employment data.

Where you would see a real effect of the storm would be on hours worked, but the data has a half-hour decline for construction and not much else. The headline number for private sector hours worked declined by 0.1 hours, with a similar small drop in weekly earnings, even though hourly wages were up three cents.

There are no data on hours worked in the government sector in that report. But Diana Furchtott-Gott of the Hudson Institute notes that those government workers who were unable to work did not lose pay and weren’t laid off. So they can’t be in this number.

36,000 jobs lost is a bit better than the consensus of 50k, but 14,000 is certainly smaller than the margin of error or the size of the monthly revision. The January number was revised to -26,000 from -20,000, for example.

Obama also promised a zero unemployment rate:

Despite the relatively good news, Obama repeated his pledge that he “will not rest” until every American who wants a job has one.

Good luck with that.

Today, U.S. Representative Michele Bachmann (MN-06) took part in a press conference as a cosponsor of the Accurate Accounting of Fannie and Freddie Mac Act. The bill is aimed at instituting a proper and complete accounting for the Government-Sponsored Enterprises Fannie Mae and Freddie Mac.

The Congressional Budget Office estimates that Fannie and Freddie added $291 billion to the federal deficit in 2009 and will cost an additional $389 billion to run over the next ten years. However, Fannie and Freddie are currently considered “off budget” meaning the actual cost to run these agencies is not considered by the Office of Management and Budget. By moving the activities of Fannie and Freddie Mac “on budget”, their financial obligations would then be included in the federal government’s budget and debt projections and provide a more accurate picture of our nation’s precarious finances.

“The Accurate Accounting of Fannie Mae and Freddie Mac Act is a much needed remedy for a Washington that needs to come to terms with their spending addiction. One thing we know about Fannie and Freddie is that they cost the already overburdened and financially strapped taxpayer a pretty penny.

“Why should Fannie and Freddie be able to run up these numbers without the President having to reflect this risk in his budget? It just doesn’t make sense, and we owe it to the taxpayers to be transparent and forthcoming on the commitments we’re making with their credit card.”

The Obama Administration has been in the news this month with claims that Fannie and Freddie are not going to be that expensive. After projecting Treasury investments of $230 billion to prop up the two companies, the budget a few weeks ago said the investment would be $188 billion. Of that, about $97 billion is to be returned in dividends from the two firms by 2020. This does not count, alas, the $175 billion inserted into the firms by the Federal Reserve, nor the $1,250 billion of their debt — mortgage-backed securities — that the Fed has purchased. San Francisco Fed President Janet Yellen said yesterday that these purchases “were vital in preventing a complete financial breakdown,” which might tell us Fan/Fred are still in some rough shape. I don’t know that the legislation would count Fed contributions to Fan/Fred.

Not to mention the fact that Fannie and Freddie are now paying off private debt holders of its MBS that are 120 days or more delinquent. It gets bad debt off the books of the two companies, but investors receiving this money are now getting money they cannot reinvest at the rates they used to get. Realizing the losses on those MBS will add to the cost of the bailout of these two firms — it’s worth remembering that the AIG bailout cost US taxpayers a relatively modest $9 billion.

Chief author of the legislation is Rep. Scott Garrett of New Jersey.

For many, price controls may seem like a tempting solution to holding down health care costs. However, past attempts at price controls teach us a very different lesson—this is one government policy guaranteed to do more harm than good. In fact, throughout history, price controls have been a notorious flop, bringing on economic stagnation and decline, rationing, hoarding, black marketing and organized crime, assaults on civil liberties, and even inflation, not to mention untold waste, graft, and human suffering.

In fact, from Babylon’s King Hammurabi to presidents Richard Nixon and Jimmy Carter, the thirty-eight-century history of price controls is a recurring economics lesson for any modern Luddite seeking a quick fix to health care costs. For instance, after he and previous emperors had debased the currency, creating rampant inflation, the Roman emperor Diocletian set maximum prices on more than one thousand products and services. Goods disappeared in legal markets, and reluctantly consumers and producers turned toward black markets despite a penalty of death for participating in these markets. After much suffering and bloodletting of the unfortunate caught violating the law, the law was revoked and Diocletian abdicated.

Thus wrote Simon Rottenberg and David Theroux in 1994 when we last debated price controls in health care. Some of the stories they tell come from overseas with regards to health care:

• price controls on drugs in Germany in 1993 led to one in five firms cutting hours for their workers within a year, and 30-50% of firms experiencing sharp declines in drugs ordered. Families were upset about the unwillingness of doctors to prescribe medicines they requested;
• U.S. doctors were routinely advertising in Canadian newspapers, offering services that were cheaper in Canada … but unavailable.

Price controls always lead to non-price rationing. If any of my students are reading, they will know my slogan — all scarce goods get rationed somehow. If you aren’t using price to ration, you can’t say it isn’t rationed, you just have to define the mechanism that does the rationing. The Fraser Institute’s Waiting Your Turn annual survey is a measure of an alternative rationing mechanism called a queue, or first-come-first-served.

The Obama Administration’s proposal leads to rationing of health insurance (or as Arnold Kling calls it, health insulation) that probably will not be on a queuing system. It creates a shortage, as any effective price control does. To provide the health insurance to others you will have government subsidies paid for by additional taxes. The growth-damaging effects of those additional taxes will not be recognized.

And as prices are reduced and people continue to be promised health care at near-zero marginal cost, insurance companies will slowly suffocate. Who will save us?

The $400/$800 Making Work Pay tax credit took effect in July 2009. Workers who have taxes withheld from their paychecks will see a decrease in the federal income taxes withheld from each paycheck by about $30 per paycheck every two weeks or $60 for couples.

…The credit will phase out by two percent of any income over $150,000 for couples and $75,000 for others. Couples earning more than $190,000 and individuals earning more than $95,000 will not benefit from the credit.

Unlike the 2008 economic stimulus tax rebate checks that were mailed to taxpayers in a lump sum, the government is hoping that offering the $400 Make Work Pay tax credit as a reduction in payroll deductions will encourage taxpayers to spend the credit rather than save the money or use it to pay down debt.

We are encouraging younger people to spend rather than save. And perhaps how this works is by giving the money back in $30 dribs and drabs that they don’t notice. Wasn’t this how we got into trouble in the first place? Why does government think it should encourage consuming new goods rather than paying off debt?

Karl noted a few weeks ago that the government is ending this credit as well, since it was expected to spend $116.2 billion over ten years, quite an expensive program. Perhaps one reason for cutting it was that voters like my son didn’t even know they were getting it. When I told my son how he had gotten this credit already, all I got was the cryptic ‘K’.

Most of what Thomas Friedman thinks we know is based on multiple regression analysis trying to hold other factors constant other than human carbon emissions and making a variety of assumptions about the interactions between those factors along with the factors we cannot measure. That is hard to explain to a sixth grader. It can be done But it’s not knowledge. It’s an attempt to gain knowledge.

It is very similar to writing a report for a sixth grader on how the stimulus turned out. We have fewer jobs than we had before. That’s what we know. But even I, a skeptic, wouldn’t call that knowledge about whether the “stimulus” package worked or not. But I wouldn’t use the CBO estimate either. The CBO estimate is a repeat of the forecast it made before the legislation passed. We don’t know how many jobs were created or destroyed by the legislation.

Most of what we write about the effects of stimulus are just that, “an attempt to gain knowledge.” A bureaucrat writes down some numbers. Reporters and bloggers find flaws. Econometric models estimate the effects, but those models were used to propose the policy put in place. It’s not likely those models would go back and say the proposed plan didn’t work: Econometric models aren’t built to do that: If the model has as a premise that future government spending will create jobs, it isn’t going to tell you that past government spending did not. Meanwhile, those in political opposition will look to find contradictions when none really exist. (GDP growth can lead employment growth.) And people get angrier and cynical.

There is nothing wrong with saying we don’t know. It might have worked; it might not have. What we know is there are between three and four million fewer jobs than a year ago, and the deficit is larger. We want to know more. We are trying to know more. And if the volume of studies since 2000 of the Great Depression are any indication, we’ll still want to know more a century from now.

When Ronald Reagan took office on January 20, 1981, our nation was facing a terrible economic crisis, similar to what we are experiencing today. This video contains excerpts of Reagan’s first inaugural address. His prescription to solve the economic crisis was vastly different than the policies being pursued by the Obama administration.

Emphasis mine. But the speech describes a far different world than the one Obama is in. Reagan said:

These United States are confronted with an economic affliction of great proportions. We suffer from the longest and one of the worst sustained inflations in our national history. It distorts our economic decisions, penalizes thrift, and crushes the struggling young and the fixed-income elderly alike. It threatens to shatter the lives of millions of our people. Idle industries have cast workers into unemployment, human misery and personal indignity.

Those who do work are denied a fair return for their labor by a tax system which penalizes successful achievement and keeps us from maintaining full productivity. But great as our tax burden is, it has not kept pace with public spending. For decades we have piled deficit upon deficit, mortgaging our future and our children’s future for the temporary convenience of the present. To continue this long trend is to guarantee tremendous social, cultural, political, and economic upheavals.

You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time. Why then should we think that collectively, as a nation, we are not bound by that same limitation?

Who among us would think that story is similar to today? Inflation has not been an issue this past decade — if anything, we faced deflationary pressures in the recession and may yet face more. Tax rates in 1980, particularly on high-income earners, were much higher than they are now — in fact, twice as high at the top end. Productivity growth was substantially higher in the late 1980s and 1990s than in the 1970s, and so far has accelerated through this recession.

I certainly have said enough to readers to understand that I think Obama fiscal policy has made several missteps. But a simple hearkening to the days of the Gipper is a poor substitute to thinking through new policies.

This isn’t new. We have people constantly holding up conservatives against the Reagan yardstick and finding out nobody measures up. The recent kicking of Paul Ryan is but one example. But none of them would know what Reagan would have said about this current situation or how he would have voted. Rep. Ryan has explained his votes; you can draw your own conclusions, but suffice to say purity is a rare thing.

As are parallels between 1981 and 2008-09.

From 2005 to 2007, before the recession and financial crisis, the federal government ran budget deficits, but they averaged less than 2 percent of gross domestic product. Because this borrowing was moderate in magnitude and the economy was growing at about its normal rate, the federal debt held by the public fell from 36.8 percent of gross domestic product at the end of the 2004 fiscal year to 36.2 percent three years later.

That is, despite substantial wartime spending during this period, budget deficits were small enough to keep the debt-to-G.D.P. ratio under control.

The troubling feature of Mr. Obama’s budget is that it fails to return the federal government to manageable budget deficits, even as the wars wind down and the economy recovers from the recession. According to the administration’s own numbers, the budget deficit under the president’s proposed policies will never fall below 3.6 percent of G.D.P. By 2020, the end of the planning horizon, it will be 4.2 percent and rising.

As a result, the government’s debts will grow faster than the economy. The administration projects that the debt-to-G.D.P. ratio will rise in each of the next 10 years. By 2020, the government’s debts will equal 77.2 percent of G.D.P.

And that’s using the more favorable growth and spending assumptions in the Administration’s budget. If you use CBO, the story gets worse. This is why the figures Menzie Chinn shows only take us so far: One can easily imagine a case where cyclical adjustment in a recession causes a temporary rise in the debt-to-GDP ratio without a concern about sustainability, if in the long run we stabilize and eventually reduce that ratio. That is, we can all have debt-to-GDP ratios rising at one time, but some countries might not be able to turn that around because they either can’t get control of their deficits or because their economies slow down dramatically or, like Greece, people just don’t want to lend to them anymore without charging them a high interest rate.

Debt market participants are forward looking. What they concern themselves with is that the debt they are buying are not part of a Ponzi scheme. To make a long story short (the long, mathematical story is here if you’re curious), your country must be expected to run budget surpluses some time in the future to pay off the current debt. There’s discounting involved of course, but most important is the difference between your country’s real interest rate and the rate of growth of real GDP. (One of the remarkable lessons of the theory is that you can’t inflate your way out of the problem, as long as we assume nominal interest rates fully adjust to higher money growth rates being used to pay off the debt. Read around the math of that last link for more.)

What matters most then are either policies that bring down the primary deficit, those that maintain our credit such that real interest rates are reduced, and those that increase the growth rate of GDP. At present the primary deficit — the deficit less interest payments on the debt — doesn’t stabilize. It’s not necessarily the bomb that Ed is talking about; this debt is a very slow rotting of the nation’s economic health, taking a couple of decades to become apparent. It’s worth remembering in this story that while the government may show you the debt “held by the public”, the bonds in the trust funds are being held in trust for the public. Interest on those bonds in the trust funds are meant to pay for future benefits for Social Security, Medicare, railroad pensions, etc. At present all we have is the past good credit of the US and a promise by the Obama Administration to get serious … by forming a committee to tell us how to get serious.

“Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding,” he wrote.

“We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.”

Mr. Bernanke, however, did provide new details of a major concern: how, as the recovery proceeds, to gradually shrink the balance sheet, which along with a vast array of assets also includes $1.1 trillion that banks are holding with the Fed.

Mr. Bernanke suggested that a new policy tool — the interest rate on excess reserves, which the Fed began paying in October 2008 — would be a vital part of the Fed’s strategy.

Increasing that interest rate, he said, will have the effect of pushing up other short-term interest rates, including the benchmark fed funds rate — the rate at which banks lend to each other overnight.

The text is here. In it Bernanke also suggests a new instrument for removing excess reserves from the system, a term deposit banks could make to the Fed that would compete with Treasuries as a store of liquidity for them.

The Federal Reserve would likely auction large blocks of such deposits, thus converting a portion of depository institutions’ reserve balances into deposits that could not be used to meet their very short-term liquidity needs and could not be counted as reserves. A proposal describing a term deposit facility was recently published in the Federal Register, and we are currently analyzing the public comments that have been received. … we expect to be able to conduct test transactions this spring and to have the facility available if necessary shortly thereafter. Reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so.

Both new instruments provide a means by which the Fed can increase its balance sheet without impacting the money supply, by inducing banks not to use their excess reserves for deposit expansion. I was familiar with both these instruments in Macedonia, where excess reserves were close to 30% of the money supply. The problem there was that it created flabby banks unwilling to lend, since easy government revenue was close at hand. The Fed does not directly spend taxpayer dollars, but its remission of excess earnings from its portfolio to the Treasury would be shifted to banks, and that indirectly expands the government’s need for additional debt to cover its spending. That’s not likely to go over well.

The biggest signal was not a date but a statement that the Federal funds rate would no longer be a policy instrument for the Fed, at least for awhile:

As a result of the very large volume of reserves in the banking system, the level of activity and liquidity in the federal funds market has declined considerably, raising the possibility that the federal funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets. Accordingly, the Federal Reserve is considering the utility, during the transition to a more normal policy configuration, of communicating the stance of policy in terms of another operating target, such as an alternative short-term interest rate. In particular, it is possible that the Federal Reserve could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance, while simultaneously monitoring a range of market rates. No decision has been made on this issue; we will be guided in part by the evolution of the federal funds market as policy accommodation is withdrawn. The Federal Reserve anticipates that it will eventually return to an operating framework with much lower reserve balances than at present and with the federal funds rate as the operating target for policy.

The last time the Fed abandoned the Fed funds target was October 1979, when then-Chair Paul Volcker thought it more prudent to stop inflation by using a target on reserves. That lasted perhaps three years, maybe less (see Alton Gilbert for more.) That period led to rather high volatility in interest rates may have contributed to the double-dip recessions in 1980-82.

It would be fair criticism of the above to say we really haven’t used the Fed funds target for awhile and that this is just recognition of reality. But the FOMC statement still focused on it, and the Fed had not enunciated until yesterday what we might look at for an alternative target. Now we have. This will make reading the next FOMC statement on March 16 very interesting indeed.

UPDATE: John Taylor doesn’t like the term deposits from the Fed to the banks.

In my view, Fed borrowing instruments should be avoided as much as possible because they delay essential adjustments in reserves and create precedents which make it easier to deviate from the monetary framework in the future. Similarly, the instrument of paying interest on reserves to achieve the short term interest rate target should be used only during a well defined transition period.

He argues instead for a rule that ties Fed fund rate increases to a decrease in reserves. It would make Fed policy more predictable.

[P]olicy makers could treat this exit rule as an exit guideline rather than a mechanical formula to be followed literally, much as a policy rule for the interest rate is treated as a guideline rather than mechanical formula. They would vote on how much to reduce reserves at each meeting along with the interest rate vote. Note that the exit rule would we working in tandem with a policy rule for the interest rate, such as the Taylor rule.

With all that’s going on in Europe, this might be sliding under the radar. It shouldn’t.

Germany and France will on Thursday promise their support for debt-laden Greece in a vow of eurozone solidarity but they are unlikely to come up with a detailed rescue plan.

President Nicolas Sarkozy and Chancellor Angela Merkel are expected to give a show of political support to Athens at a summit of EU leaders in Brussels, one of the most momentous in the bloc’s recent history, in the hope that it will calm debt market turmoil.

But officials in Paris said there was “reticence” in Berlin about signing up to a bail-out package with further “assurances that the Greek government would undertake the measures necessary” to cut its budget deficit by 4 percentage points a year by 2012.

At the time this is posted, we have only word that they have an agreement to take “co-ordinated measures”"if needed to safeguard stability of the euro zone as a whole”, but no details.

If this was a developing country, there’d be no doubt what would happen — Greece would be given IMF assistance in return for a plan from the Greek government to restrain government spending — but this is the Eurozone, and you cannot really do that. And finding a lender of last resort is much harder. Germany, towards whom everyone is looking, seems more constrained these days. STRATFOR reports:

Most investors assumed that all eurozone economies had the blessing — and if need be, the pocketbook — of the Bundesrepublik. It isn’t difficult to see why. Germany had written large checks for Europe repeatedly in recent memory, including directly intervening in currency markets to prop up its neighbors’ currencies before the euro’s adoption ended the need to coordinate exchange rates. Moreover, an economic union without Germany at its core would have been a pointless exercise.

…The 2008-2009 global recession tightened credit and made investors much more sensitive to national macroeconomic indicators, first in emerging markets of Europe and then in the eurozone. Some investors decided actually to read the EU treaty, where they learned that there is in fact no German bailout at the end of the rainbow, and that Article 104 of the Maastricht Treaty (and Article 21 of the Statute establishing the European Central Bank) actually forbids one explicitly. They further discovered that Greece now boasts a budget deficit and national debt that compares unfavorably with other defaulted states of the past such as Argentina.

…As the EU’s largest economy and main architect of the European Central Bank, Germany is where the proverbial buck stops. Germany has a choice to make.

The first option, letting the chips fall where they may, must be tempting to Berlin. After being treated as Europe’s slush fund for 60 years, the Germans must be itching simply to let Greece and others fail. Should the markets truly believe that Germany is not going to ride to the rescue, the spread on Greek debt would expand massively. Remember that despite all the problems in recent weeks, Greek debt currently trades at a spread that is only one-eighth the gap of what it was pre-Maastricht — meaning there is a lot of room for things to get worse. With Greece now facing a budget deficit of at least 9.1 percent in 2010 — and given Greek proclivity to fudge statistics the real figure is probably much worse — any sharp increase in debt servicing costs could push Athens over the brink.

From the perspective of German finances, letting Greece fail would be the financially prudent thing to do. The shock of a Greek default undoubtedly would motivate other European states to get their acts together, budget for steeper borrowing costs and ultimately take their futures into their own hands. But Greece would not be the only default. The rest of Club Med is not all that far behind Greece, and budget deficits have exploded across the European Union.

And that really is the issue: The French and German governments now face the constraints of Maastricht and the ECB charter, which were written to prevent one of those PIIGS from profligacy but never were meant to handle a systemic shock hitting all five at once. A guarantee or pledge of unity for Greece will mean a pledge to all. And the problem then is whether speculators will test the pledge. If they use actual funds they will cause a constitutional crisis in the EU; if they do not, they risk having these countries make an exit from the Eurozone, something nobody is prepared for (even the biggest skeptics.)

Megan McArdle says it’s a design flaw, and she’s right to say “none of the choices are good.” The markets have so far seemed to put considerable weight on the likelihood of a bailout — the scene to the left from Athens indicates that a government austerity plan, if enacted, would be very unpopular. Large cash infusions may be the only way to get the public to swallow the bitter medicine. But markets do not seem aware of the constitutional restrictions placed on a bailout package from EU member states or from the IMF.

Thus it is unsurprising that there will be little more than a statement today from the EU members, with details to be worked out later. But time is of the essence, for as we learned in 2008, when the end comes it can be swift and a less-than-united front could cause far greater harm in Europe than what happened here.

Washington still does not get it. It pays lip service to the fact that small business generates half of private sector GDP and creates over two-thirds of private sector net new jobs, but when it comes time to provide help, small business gets $30 billion IF banks decide to accept the TARP funds to support loans and IF the owners can subsequently get a loan from a bank. But for most firms, this dinky amount is of little help. More so, this new aid misses the main problem since only five percent of small business owners cite “financing” as their top business problem but 31 percent cite “poor sales.”

This from the National Federation of Independent Businesses. Add to it the overhanging burden of health care reform and a minimum wage increase and small business owners are quite nervous … about getting more stimulus.

The National Bureau of Economic Research is expected to declare a recession bottom in the second half of 2009. Manufacturing turned in the third quarter, employment managed a positive month in the fourth, both determinants of the turning point. The NFIB indicators do not appear to agree however. At the end of the 1982 recession (Q4, 1982), the Index value was 98, the percent of owners viewing that period as a good time to expand was nine percent and the net percent expecting better business conditions was 47 percent. The January Index value is 89.3, the percent of owners viewing the current period as a good time to expand is five percent and only a net one percent expect better business conditions in the first half, not really strong signs of a turn in the economy. The decline in the unemployment rate reflects a reduced number of individuals looking for a job and is more consistent with the NFIB forecast which did not anticipate a continued rise in the unemployment rate above 10 percent. The loss of a lock on 60 Senate votes for the Democrats may be encouraging to some owners, but the President and Congressional leaders still sound like they plan to press on with their agenda, not good news for small business owners.

Bruce Yandle does it shorter:

Imagine yourself as owner of a small business with 20 employees. You are trying to decide if you should build up inventories again, hire one or two people, and lease another pickup truck. Would you make your decision on the basis of the fourth quarter GDP numbers? Would you base your plans on the explosion of existing home sales that followed the first-home-buyer stimulus? Most likely not. I’ll bet you would wait so that you could get a better fix on the real economy.

Perhaps we need six months of political silence.

When I teach cost-benefit analysis one of the factors we discuss is the value of the option of waiting. Waiting for more information, waiting for a reduction in finance uncertainty, waiting for a reduction in policy uncertainty. Yet we have financial reform hanging up in the Senate — bipartisanship or ram it through? Policy makers occasionally say they are moving forward with health care, then they want a summit. If you ran a business and I was your silent partner, my silence would be tough to maintain if you started an expansion right now. And there’s no sign of a pickup in the hiring rate…

It is interesting that the NFIB is arguing that credit conditions are not a big problem for small businesses. Yesterday William Dudley, president of the New York Fed, said in a speech in Australia that “many smaller and medium-sized banks remain under significant pressure” because they could not diversify away from commercial real estate like their bigger cousins. “Loan losses in commercial real estate and consumer and mortgage loans seem likely to continue to pressure smaller banks for some time to come. This in turn means that credit availability to households and small businesses will still be curtailed.” This is going to be an issue to watch going forward — the Fed may be pushing out too much credit thinking there’s a shortage of funds where one does not exist. The Obama administration’s emphasis on community bank lending is also gearing up with more credit, towards dubious ends if you believe that NFIB report.

I say “get religion” because this is not the Ann Lenczewski I kind of admired last year, when she had this to say in an interview with Steve Perry:

PIM: You’re talking about loopholes and exemptions that principally benefit upper-bracket people. Could you give me a couple of examples?

Lenczewski: There are like 25 things that I’m repealing, and they do different things. Some of them aren’t just helping wealthy folks. Some of them aren’t working at all, no matter who they’re intended to help–for example, the long-term health care credit. That’s intended to get people to buy long-term health care, and what it’s really doing is costing the state a ton of money. It’s a net loser, it’s completely not working. I heard a Harvard study at the National Tax Association showing that states doing this are just nuts, because they’re net losers.

So I’m repealing some things that don’t work, and then I’m repealing some things that are discretionary ways of saying, we’ll give you tax credits for certain activities but not for others. It’s sort of government playing king. .And then there’s a whole bunch of things for people who are high income-earners. We’re not getting rid of them entirely; we’re still going to keep them for people of limited means, but we’re going to turn them into a credit.

Emphasis added. She is now willing to sponsor legislation that spurs “angel investment” … but the angels only visit those “in high tech, manufacturing, or green businesses with fewer than 100 employees and less than $2 million in gross receipts.” She’s now putting “certified historic projects” for rehabilitation … certified by whom? Who will “government playing king” take money from when she says she will “conform” REIT income to federal taxation? And what kinds of jobs are being created by using state monies for Mall of America? I’m saddened by this because I thought she had seen the light given the Perry interview. I am sure she prefers a higher tax rate than I do, but we both prefer (or preferred) a flatter tax base.

Gary Gross (whose link to Lenczewski’s release inspired this post) properly chastises this effort:

David Strom was right when he told KSTP’s Tom Hauser that tax credits was a new way for government to pick winners and losers. I’ve said before that government’s record at identifying the next Microsoft, the next Fedex or the next Dell has been terrible. Still, the DFL insists that it knows best.

Link added. Don Boudreaux also points out the folly of this new wave of industrial policy at the national level, arguing that the government’s choice of winners depends on how many jobs it creates or saves rather than how much output is made.

Perhaps that is because a widget doesn’t vote, but a worker does. I bet Franken and Lenczewski know that.

And worse, when you have a government picking winners and able to solicit donations from the contestants, you have a powerful incentive for corruption. Or at least, a little humor.

Inventories were responsible for $105.7 billion of the $182 billion change in GDP in quarter 4. This is just another way of saying pay attention to final sales of domestic product instead, which was up 2.2%. Up, yes. Up more than the previous quarter, yes. But again it needs to reach a more sustainable level.

As to Prof. Taylor’s earlier point, worth noting that personal income less transfer payments has fallen by 4.1%. As many people are now learning, those transfers don’t last forever, and spending on their basis may be more tentative than spending from income one thinks is more permanent. Seems we learned about this once. Between transfers and inventories, we are seeing a good deal of this statistical recovery based on temporary phenomena.

Opposition to the Fed chair seems to have increased since the election of Scott Brown on Tuesday. The Huffington Post reports this afternoon that

The election in Massachusetts has senators who previously considered themselves safe watching their backs, and they don’t relish the prospect of a vote in favor of a man who failed to foresee the financial crisis and is closely associated with Wall Street.

A recent poll found that 47 percent of Americans think Bernanke cares more about Wall Street than Main Street, while only 20 percent think he works for Main Street. Independents, who swung heavily for Brown in Massachusetts, are even more opposed to Bernanke than Democrats or Republicans. Fifty percent of independents think he cares first about Wall Street; 15 percent think he prioritizes the needs of Main Street. That’s a difficult vote in the face of an angry public.

If Bernanke is confirmed, he’ll have to rely on the same coalition that moved the bailout through Congress, when the leadership of both parties joined forces to oppose the rank and file.

We get this rather unprincipled announcement from Sen. Boxer:

“I have a lot of respect for Federal Reserve Chairman Ben Bernanke. When the financial crisis hit in late 2008, he took some important steps to prevent what many economists believe could have been an even greater economic catastrophe,” said Boxer.

“However, it is time for a change — it is time for Main Street to have a champion at the Fed. Dr. Bernanke played a lead role in crafting the Bush administration’s economic policies, which led to the current economic crisis. Our next Federal Reserve Chairman must represent a clean break from the failed policies of the past.”

No, Senator, it is not the job of the Federal Reserve to be a champion for Main Street, Wall Street, or anyone else. The Federal Reserve is an independent institution, a feature that Congress chose wisely almost a century ago.

First, central bank independence has been shown to be essential for controlling inflation. Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation. When the Federal Reserve judges it time to begin tightening monetary conditions, it must be allowed to do so without interference. Second, lender of last resort decisions should not be politicized.

Finally, calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.

The Fed, as Robert Samuelson points out, has had officials testify before Congress 32 times. Its actions are not a secret, and attempts to find out who got direct loans from the Fed are more meant to intimidate than illuminate. The assault on its independence has helped push down stock prices and could set off a currency crisis in a G-7 currency, which is extraordinary. At a time where financial crisis still looms large in the rear view mirror, it is highly irresponsible to engage in scapegoating.

Greg Mankiw notes Bernanke’s InTrade contract has fallen from 0.95 to 0.7 and adds “This uncertainty cannot be good for financial markets.” Indeed. And if that’s in trouble, what happens to the debt ceiling vote?

The importance of the study, John writes, is that by use of IRS records Auten and Gee can track the same individuals over time:

By tracking the same people over time it can answers questions like: how has income changed for people that were in a particular income quintile in 1996 by 2005 (adjusting for inflation)? This is a different question than comparing people in a particular income quintile in 1996 with the set of people in the same income quintile in 2005. Some of the same people will be in the same income quintile, but some will move up or down.

John suggests you look at Table 4 (scrolling the table link), which is also the basis for most of the presentations slides. It is a little too hard for me to format, but this should do:

Percent Change in:

1996 Income Mean Median
Quintile Income Income

Lowest 186.8 77.2

Second 60.4 36.9

Middle 40.0 24.4

Fourth 31.7 17.9

Highest 25.8 8.6

Tap 10% 26.6 0.3

Top 5% 27.8 -10.6

Top 1% 10.1 -30.9

All Income Groups 37.1 22.7

Their main conclusions (quoting from the introduction):

1. There was considerable income mobility of individuals in the U.S. economy over the 1996-2005 period. More than half of taxpayers (57.5 percent by one measure and 55 percent by another measure) moved to a different income quintile over this period. About half (56 percent by one measure and 42 percent by another) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.
2. Median incomes of taxpayers in the sample increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Furthermore, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. In contrast, the real median incomes of taxpayers who were in the highest income groups in 1996 declined by 2005.
3. The composition of the very top income groups changed dramatically over time. Less than half (39 percent or 42 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Less than one-fourth of the individuals in the top 1/100th percent in 1996 remained in that group in 2005.
4. The degree of relative income mobility among income groups over the 1996-2005 period was very similar to that over the prior decade (1987-1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility neither increased nor decreased over the past 20 years.
5. Upward and downward mobility is affected by many factors. Based on a regression analysis, we find that initial position in the income distribution and changes in marital status are among the more important factors associated with changing positions in the income distribution.

I’ll add in my defense that wealth distribution and income distribution are different, and I took Dane’s challenge to be about the former. Still, the Auten and Gee study is quite important insofar as it uses individual tax return data to trace the path of a person in 1996 to where their income goes over a decade.

I found this fact quite interesting: For the top 1/100th of 1% of the income distribution — the 11,700 wealthiest tax filers in 1996 — their 1996 income was $11.6 million and their 2005 income was $4.1 million. Not suffering at all, but still a fall in median income of near 65%.

(P.S. I’ll continue posting on this topic for a few more weeks at my blog; please stop in.)

I guess I had thought it was pretty well known that legislators trade votes and seek favors. Rentseeking has been around for centuries. Ever since James Madison wrote of factions in Federalist #10, we have known that we cannot remove the causes of special interests without removing liberty itself, so we have to control its effects.

Madison wrote, “When a majority is included in a faction, the form of popular government, on the other hand, enables it to sacrifice to its ruling passion or interest both the public good and the rights of other citizens.” This is the situation in which we find ourselves today. The majority in the Senate prefers to gain control of the health industry, as it would any other if it found a pretense. This is the tyranny of the majority. So why did Madison think this would be nevertheless a good form of government? This is why he preferred a republic to a democracy, because a republic could better infuse the minority position into the legislative process:

In the next place, as each representative will be chosen by a greater number of citizens in the large than in the small republic, it will be more difficult for unworthy candidates to practice with success the vicious arts by which elections are too often carried; and the suffrages of the people being more free, will be more likely to centre in men who possess the most attractive merit and the most diffusive and established characters.

It must be confessed that in this, as in most other cases, there is a mean, on both sides of which inconveniences will be found to lie. By enlarging too much the number of electors, you render the representatives too little acquainted with all their local circumstances and lesser interests; as by reducing it too much, you render him unduly attached to these, and too little fit to comprehend and pursue great and national objects. The federal Constitution forms a happy combination in this respect; the great and aggregate interests being referred to the national, the local and particular to the State legislatures.

That last bit, “State legislatures”, of course refers to the fact that Senators at that time were to be appointed by the state legislatures and not by popular, direct election. It seems highly unlikely that, if they were so elected today, that Sen. Ben Nelson would have an opportunity to be vote #60. But that’s not how we pick them today, even though I believe it means senators do not have enough “acquaintance with all their local circumstances.” A couple of paragraphs later,

It will not be denied that the representation of the Union will be most likely to possess these requisite endowments. Does it consist in the greater security afforded by a greater variety of parties, against the event of any one party being able to outnumber and oppress the rest? In an equal degree does the increased variety of parties comprised within the Union, increase this security. Does it, in fine, consist in the greater obstacles opposed to the concert and accomplishment of the secret wishes of an unjust and interested majority? Here, again, the extent of the Union gives it the most palpable advantage.

Madison clearly understood the ability of legislative leaders to vote-trade, as Harry Reid and Ben Nelson and the rest of the Democrats have now done. I don’t think we should be surprised by it. Colbert King tells us to simply get over it: “My friends, dry your eyes, suck it up, and get on with it.” And truly, Mr. King is right that the temptation to trade votes and to place pork in legislation is a temptation to which their has been bipartisan surrender and failure. This shock that Sen. Nelson has engaged in vote trading is a bit disingenuous. Challenge the constitutionality of the language of Nelson’s bribe, or that of the binding of future Senates not to change the actions of the Independent Medicare Advisory Board. And sure you can point out who got which thirty pieces of silver. But let’s not pretend this doesn’t happen. It is the nature of government to logroll and always has been. (More on this in this post at my blog.) James Joyner concurs:

This doesn’t mean we shouldn’t shine a light on these abuses. By all means, we should. But let’s not pretend that they’re a recent invention.

But it would be a good outcome if his most brazen legislative language — how often do we explicitly name the state who gets the goodies? how often do we get a Senate Majority Leader so unashamed that he accuses those who don’t get pork as having failed? at least Dodd had enough shame to drag a stick behind his tracks as he snuck off with $100 million for U Con — reminded our populace of how voting out one set of pork-consumers doesn’t mean you get clean government. Sometimes you get hungrier pork-consumers.

Boettke and Rogers, in a wonderful (and wonderfully thin) volume The Beginners Guide to Liberty (whole thing at that link), remind us of a story:

There is an old tale that many economists use to set up the discussion of how well the market works in comparison to government policy. A Roman Emperor is asked to judge a contest between two singers. After hearing the first contestant sing, the Emperor awards the prize to the second singer under the assumption that surely the second cannot be worse than the first.

The point of the story is that even when markets fail — and the authors acknowledge that they do — governments can fail too. When government failed in the second Bush Administration, people chose a different government. Perhaps next time they’ll realize that when markets fail, the answer is to use markets to solve the failure.

I had wondered about this last night and spent a few minutes today re-reading Donald Kettl’s Leadership at the Fed. While the Fed maintains a political independence, he argues, it’s up to each chairman or chairwoman to build support to keep it.

Throughout the Fed’s history, its power over the economy has depended more on the political leadership of its chairman than on any other factor. Both the friends and enemies of the Fed focus on its unrivaled legal independence, but that independence is only a precondition for power, not power itself. The Fed’s power depends on the support it can build, not on its legal status. Without political support, its credibility is low, its effectiveness is sharply limited, and its legal independence is fragile. Indeed, as the Fed’s history shows, its much-vaunted legal independence is most important because it provides the flexibility for building support. And this central job — of building support, of developing credibility, of dealing with the complex and conflicting political environment in which the Fed finds itself — has been the central job of the chairman. (193)

Chairman Bernanke, when he was an academic and when he was a governor of the Fed, was a strong advocate of increasing transparency, including his support of inflation targeting (see Bernanke and Mishkin [1997] and Bernanke [2003], e.g.) But he’s had to learn that transparency doesn’t always mean that one’s actions are understood. And transparency doesn’t always mean you build support for your actions. Harry Reid is perhaps too transparent on health care these days, for example. If I was a Democratic adviser, I’d tell the man to button his lip.

Has Bernanke built support by his statements? Judging by his poll numbers you’d have to say no. (Support was about 50-50 in October 2008 when the Lehman/Merrill/AIG hit the fan.) A Gallup poll of Greenspan in 2005 found only 20% of Americans had a “great deal” of faith in his ability to manage the economy — and that’s when the economy was not in recession. It was at 29% in April 2001. Barry Ritholz has a Bernanke approval graph. It is worth noting, as Kettl does, that after the wrenching recession of 1981-82, 46% of Americans felt Paul Volcker had made “a major contribution” to lower inflation and 64% were willing to have the Fed tighten money again if inflation reappeared. If we had another banking panic, would Bernanke have that kind of support?

Support means, though, support from the Congress and the executive branch. The Senate Banking Committee votes on his re-confirmation next week and it looks like he’ll pass, though with several dissents. The same most likely when the full Senate votes, probably in January. The magic number on the Senate floor will be 19, though. That’s the number of senators who didn’t vote for Volcker’s reappointment in 1983. No Fed chair has ever had 20 noes.

Steve Chapman runs the cost-benefit for us:

The task force’s rationale was that the benefits of routine breast cancer screening to women in that age group are insufficient to justify the harms it causes them. Yes, it can be expected to save one life for every 1,904 women age 40 to 49 who get mammographies, but it also yields false positives, which require additional procedures.

Even when the positives are not false, they often lead to unnecessary treatment — surgery, radiation and chemotherapy — for tumors that pose little risk. The panel noted that mammograms often serve only to detect “a slower-growing cancer that would have eventually become clinically apparent but would never have caused death.”

In the open market, mammograms are about $100. (Source.) So one might ask how to solve the question: If a mammogram saves a life one time in 1,904 procedures, it would be rational for you to spend $100 on one if you valued your life at $190,400. Given that most statistical value of a life calculations are measured in millions (Dept. of Transportation example, article in Regulation) this means that the rational person under the age of 50 will pay for the procedure herself, if someone else does not pay for it. The vote on the Mikulski amendment was only to decide who pays for them, not that they won’t get done. Unless somehow we conclude that health reform is going to force mammograms into back alleys, we’re only fighting over income distribution here.

A note for my conservative friends then: First, there’s always rationing. Second, there can be such a thing as too many mammograms, just as there could be too many prostate tests. There may be, in fact, more mammograms now than would happen in the free market, or there may be less. We don’t know, we don’t live in a free market for mammograms. Where there are free markets, like LASIK, prices seem to come down. Perhaps the price of a mammogram would drop significantly if only we told the government don’t pay for them, let us decide for ourselves.

Let’s drop the “they’re rationing!” bogeyman. When government says it wants to control costs ask “whose costs are those?” If it wants to control its costs say “fine, let us keep our money and let us bear the costs. We might make a better decision than you do anyway.”

(h/t for Chapman link: Russ Roberts)

They’re good numbers no matter how you slice them. Perhaps lost in the middle of the report is the fact that job loss figures for September and October were trimmed by 124,000 and 79,000. That is, the job loss from September on was not as bad as we thought. Temporary workers gained another 52,000 jobs in the month, the fourth consecutive gain. Only 7,000 jobs gained in the public sector, so let’s not say it’s just make-work Porkulus. The number I’ve waited on for saying the recession is over is the hours index, and that turned positive for the first time this month. As Justin Fox correctly points out, the data could get revised again, but if they didn’t and if December and January go the way of November, I’m going to put the end of the national recession at October until NBER rules.

Of course we realize that it takes about a +150,000 jobs reading to get the unemployment rate to flip over. We had 291,000 workers leave the labor force last month, which is helping to pull that unemployment rate down. If the job market improves those workers will come back. And contradicting that possibility is that the broad U-6 figure gave back 0.3% to 17.2%.

I’m still not all smiles: here is where I still have a concern. The rate at which the country is creating jobs on a gross level has been falling through this recession (see the JOLTS survey; see my article on the churn of Minnesota from 2007) so that gross job gains currently run around 4 million a month. Most of the slowdown in job loss has come from slowing job separations. In this market, you don’t quit your job unless you have your next. That stasis, that lack of dynamism, that failure of creative destruction — all plant the seeds of potentially slow growth. You can get only so much productivity by cutting labor costs and shedding workers. Eventually you need a new line, a new way of working, and to do so you have to add some workers. When we get the gross month hires number going in the right direction, is when you will start to see a more robust recovery.

One may wonder, as Ed does, whether the retail sales figures contradict the good news. But let’s look at the details. If you are a discounter not named Target, you’re doing pretty well. Target is trying to shift downscale, and may still be comparing sales to both a higher market profile and worse credit card portfolio. Their profits are not hurting. Some upscale firms are doing fine with good plans — Aeropostale, The Buckle — or with deep discount outlets. If you’re upscale you are having problems (it’s The Rack that keeps Nordstrom’s above water.) After 20+ months of recession, it seems likely people are still going to be skittish about going shopping. The extra money in weekly pay, Spencer notes, should help holiday shopping. You’re just not going to give that to Missy to go to Hot Topic at the mall just yet. We’ll need not just people getting more overtime to make that turn around. We’ll need both those without work beginning to see more openings, and those in good-for-now jobs seeing the possibility of advancement and change. That part will take awhile.

Keith Hennessey is right that we need another month or two to blow the all-clear signal for this recession and put it to bed. But a recovery has to start somewhere, and it may have started today.

Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country’s currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

The revaluation and exchange limits triggered panic and anger, particularly among market traders with substantial hoards of old North Korean won — much of which has apparently become worthless, according to news agency reports from South Korea and China and from groups with contacts in North Korea.

The currency move appeared to be part of a continuing government crackdown on private markets, which have become an essential part of the food-supply system in the chronically hungry North.

In recent years, some market traders have stashed away substantial amounts of cash, while establishing themselves in profitable businesses that the government struggles to control.

But under the rules of the new currency system, the wealth of these traders has largely disappeared, unless it is held in euros, dollars or Chinese yuan.

The revaluation replaces 1,000-won notes with 10-won notes but strictly limits the amount of old currency that can be exchanged, news reports said.

According to two Web-based groups with sources in the North, that limit was set Monday at 100,000 won, which at current black-market rates amounts to $40. All North Korean currency that individuals possess in excess of that amount becomes worthless under the revaluation.

Back in 1991, Mikhail Gorbachev confiscated old ruble notes in much the same way. Rather than make them worthless he forced citizens to deposit excess cash rubles into state-owned banks with the accounts frozen for five years. Hyperinflation in 1992-93 did the same work that Kim Jong-Il is doing to his citizens.

For many in poor countries like North Korea, banks are shunned because of a lack of transparency and poor service. People prefer to hold cash. It is not just speculators but average citizens who put their cash in safes, shoeboxes, mattresses, etc. To do this as winter sets in virtually assures that some small farmers, who will have converted crops to cash so they can buy food later, will now go hungry.

The confiscation of won will most likely stall inflation in North Korea. As the Soviet economy wound down additional rubles were printed to pay bills that could no longer be covered by a crumbling state industrial sector. It is less than a year from the confiscation to the end of the USSR. Not to predict that North Korea is going out of business soon, but this is certainly a sign of serious stress within the North Korean economy and political structure. To see what happened next, consider this account from Yuri Maltsev:

Everyone in the higher reaches of power had known for some time that a coup against Gorbachev [in the summer of 1991] would be a snap. One evening in Moscow, I discussed the possibility with a friend of mine, a general in the Soviet Army. He told me that an actual coup would be the easy part. “We could take power in ten minutes,” he said. “But then what? We have no sausages, no bread — nothing to offer the people.” The Moscow junta hoped its power grab would be bolstered by Gorbachev’s low popularity. But as much as the people hated their ruler, they hated the coup leaders more. The coup government achieved only a short moment of glory. Once in power, it faced a people seething with anger at the crimes of totalitarianism and the poverty of socialism. The coup leaders also faced a hard winter, a very bad harvest, and the prospect of mass starvation. They lost their nerve, and Boris Yeltsin thwarted their efforts.

Does North Korea have a Yeltsin? I have no idea, but I’m going to be watching.

Surely a broader accounting of economic activity will enhance economic policy and decision-making. We commend the work of Professor Joseph Stiglitz and the Commission on the Measurement of Economic Performance and Social Progress for recognising that while facts and figures are important – indeed critical to thoughtful decision-making – we have placed too great an emphasis on outdated modes of distilling economic value. The longer we defer the proper accounting for externalities such as global warming pollution, the greater the strain we place on our already fragile economies.

This concept of green GDP has been around for a long time. Minnesota had some group write a report on how to restate the state’s economic growth with environmental factors. But it isn’t just environmental — if it was, you could have a reasonable discussion of a “net-of-resources domestic product” that would include some depletion charge for nonrenewables that would have a basis in real national accounting. But once you start this process you get a “genuine progress index” where “genuine” is determined by some elitists who decide whose income matters, which goods matter more, etc. Once one starts down the road you often don’t like the result. The Chinese government tried green GDP in 2004, but killed the idea a few years later when the “deductions” decided to count against measurable growth of goods and services gave an answer decidedly against the political judgment.

GDP is a score, not a judgment. And it should be that way, so that we don’t have to worry about whether we get the east German judge.

(P.S. the title of this post refers to the new film, Not Evil Just Wrong, which we need to show somewhere in St. Cloud soon.)

h/t: SCSU emeritus Professor Pat Mattson.

On the heels of its ballyhooed “Cash for Clunkers” program for cars, the federal government is expected to finalize details in the coming weeks of another tax-supported shopping extravaganza, known as “Cash for Appliances.”

Supported by $300 million from the economic stimulus, the program will offer rebates to consumers who buy energy-efficient refrigerators, dishwashers, air conditioners and other appliances to replace their older models.

And like the $3 billion cars program that gave consumers money for swapping their clunkers for more fuel-efficient rides, the appliance initiative seems destined to inspire shoppers, drive up sales for a while and profoundly divide economists over how much lasting good this chunk of government spending will do for the economy.

“The premise seems to be that for Americans to be richer, they need to throw out their old appliances faster — I don’t see it that way,” said James D. Hamilton, an economics professor at the University of California at San Diego, who has blogged about the clunkers rebates. “I don’t like the idea of just spending money for its own sake.”

The government admits in this article that more than half of the cars purchased in C4C was money expended on trade-ins that would have happened without the program. For $3 billion it got 330,000 cars purchased that would not otherwise have been, according the Obama Administration’s Council of Economic Advisers. The other 360,000 vouchers cashed were either cars delayed from June, those that would have been bought in July and August, or those pulled forward a few months. This was just a transfer from all taxpayers to those lucky enough to have their car purchases happening around the time of the program. The same will be true for appliances. Many sales will be for homes purchased under the government’s homebuyer tax credit: A major determinant of appliance sales is home sales. Those people already induced into buying an existing house with appliances they would have replaced are going to get another gift.

Details on the program are here. One more effect will be that those who planned to buy these items now are being incentivized to wait for the rebate program to kick in. That plus continued decline of consumer credit may make holiday season shopping a little less merry.

The federal government made $98 billion in improper payments in fiscal 2009, and President Obama will issue an executive order in coming days to combat the problem, his budget director announced Tuesday.

The 2009 total for improper payments — from outright fraud to misdirected reimbursements due to factors such as an illegible doctor’s signature — was a 37.5 percent increase over the $72 billion in 2008, according to figures provided by Peter Orszag, director of the White House Office of Management and Budget.

Sheldon Richman says sarcastically “Yes, a well-worded executive order should do the trick.” $24 billion of the improper payments came from Medicare according to this report; another report over the weekend suggested Medicare lost $47 billion. But the Feds are now saying they are going to count as improper incomplete or illegible documentation, which the Bush administration did not. This then permits them to “multiply by 10 the number of agents and prosecutors targeting fraud in Miami, Los Angeles and other strategic cities where tens of billions of dollars are believed to be lost each year.” These will be claimed as savings … which will be spent on expanded coverage.

Got that? Define a scribble as fraud, hire more government workers, get doctors to reduce scribbling, and claim savings of $9.7 billion. (The extra $1.3 billion is payroll for those new prosecutors and agents making our health care experience better.)

No word on how many agents and prosecutors will be used to find phantom districts receiving $6.4 billion in stimulus cash. Perhaps we should get another executive order wherein Obama calls for the elimination of phantom districts. Imagine the savings!

I disagreed by instinct. As I told a student after I got to campus who asked about the decision, I said you had to put your head in Belichick’s place without regard to what eventually happened. You have to argue ex ante rather than ex post.

Your team has given up two fourth quarter touchdowns in possessions of 2:04 and 3:32. You are playing against arguably the greatest QB ever (arguably, acknowledging that the greatest QB ever could be your own QB.) You are on the road. You have a play that has worked quite well, and you ran it successfully earlier in the game. (Game log) And it’s not the first time Belichick had done it this season, Michael Lombardi reminds us. He went 4th-and-1 from his 24 up 19-10 in the third quarter against Atlanta (successful, game log.) So this isn’t gut instinct: Belichick has thought the math through.

I was going to write out the math of this in terms of expected values, but Brian Burke has already done this.

With 2:00 left and the Colts with only one timeout, a successful conversion wins the game for all practical purposes. A 4th and 2 conversion would be successful 60% of the time. Historically, in a situation with 2:00 left and needing a TD to either win or tie, teams get the TD 53% of the time from that field position. The total WP (win probability — the likelihood you would win the game) for the 4th down conversion attempt would therefore be:

(0.60 * 1) + (0.40 * (1-0.53)) = 0.79 WP

A punt from the 28 typically nets 38 yards, starting the Colts at their own 34. Teams historically get the TD 30% of the time in that situation. So the punt gives the Pats about a 0.70 WP.

Statistically, the better decision would be to go for it, and by a good amount. However, these numbers are baselines for the league as a whole. You’d have to expect the Colts had a better than a 30% chance of scoring from their 34, and an accordingly higher chance to score from the Pats’ 28. But any adjustment in their likelihood of scoring from either field position increases the advantage of going for it.

Not to say that Belichick had those numbers firmly in his head and thought of it in terms of WP, but he’s shown evidence that he’s willing to go for fourth downs in his own territory, that the gain in punting would have been to reduce the likelihood of the average NFL team to score the winning TD to 30% from 53%. He certainly knew he would be skewered if his team failed to convert … which he had to think was a 40% probability. He was confident enough to accept that fate in return for giving his team its best shot at winning the game. In terms of the rest of the season, would you rather have your team lose and the blame placed on your coach for a “bonehead move”, or lose and have your defense questioned for its inability to hold a lead?

I know counterfactuals and math are hard to fit on a bumper sticker. But one would hope that in an 800-plus word essay on economics (even if in Politico), some economic content could be included.

Thus Menzie Chinn concludes a defense of the “jobs saved or created” story complete with regression analysis (and not just ANY regression, mind you, but one with “error correcting mechanisms”. Prof. Chinn is right that the proper measure is some ceteris paribus calculation. He quotes Greg Mankiw’s analysis during the Bush Administration as some kind of shield. But Mankiw says “The job market is not what we would like it to be right now, but it would have been worse without the Administration’s actions.” Were those the words to come from Christina Romer’s or Jared Bernstein’s mouth, I’d have no debate. But I think it is more than semantics to go from “Simulations of a conventional macroeconomic model show that, without the tax cuts, the level of real GDP” would be x% lower and unemployment y% higher, than to say you’ve created or saved 640,329 jobs.

Official data here, where it helpfully adds “as reported by recipients”, perhaps to shift the guilt.

The problem is the administration has oversold its control of the economy, and used statements of certainty with numbers — six significant digits on that page, why? what is the basis of that level of precision if not hubris? — where one reasonably should have reached for uncertainty. Bernstein, who originated the report that said with stimulus the unemployment rate would not be 8% with the stimulus bill, now says that without the stimulus the unemployment rate would be “at least 11 percent and going higher”. Hey, we all miss a forecast now and then, but if you miss one by 3% by your own admission, don’t you have to be a little more modest about your predictions going forward?

Prof. Chinn’s estimate includes a guess that Q4 output rises at the same rate as Q3. That’s without cash-for-clunkers, and with data showing federal tax receipts 18% below year-ago levels. GDP growth of 3.5% for Q4 is not what the WSJ panel expects — they forecast 2.1% growth for Q4 and nearer 3% for 2010.

Their average for payroll employment is a gain of about 565,000 jobs between now and November 2010. The low-end estimate of the original package estimated by the CBO and the Obama economic team was for a gain of 2.1 million jobs from 2009 to 2010. You can say all you wish that you’ve “created or saved” 1.2 million jobs next year, but you’re missing the point.

No, the story that caught my eye over the weekend was Gordon Brown, the British PM, arguing for a tax on “day-to-day financial transactions” and getting it thrown back in his face by just about everyone there. Even Tim Geithner. But the very best reply came from Jim Flaherty, the Canadian finance minister:

We are not in the business of raising taxes, we are in the business of lowering taxes in Canada. It is not an idea we would look at.

Mr. Flaherty notes that his country has not had the financial experience of London or New York. He has regulated banks much more. Now I would argue regulation is a form of taxation, but still, if Mr. Flaherty says his government is “in the business of lowering taxes”, roll me in maple syrup and call me Canadian.

Alas, while the “Tobin tax” idea might be scotched by everyone but the British, they still want to tax banks for their own cowardice in letting one fail. Bernie Sanders has introduced a bill that says, if you’re identifying all these banks as too whatever to fail, how about you just break them up? Forget the sand in the gears — Mr. Sanders wants to throw a spanner.

Note to Congress: If you make labor more costly relative to capital, you can expect capital to substitute for labor more.

UPDATE: Ed Morrissey asks via email whether this has any portent for unemployment? I think it does. The investment in equipment and software may be either of a deepening or broadening variety. If you are dumping many workers you can also cut your capital budget. But if that category turns around while you are still cutting workers — the ADP projection for private sector payrolls is a loss of 203,000 jobs, above the consensus forecast of -175,000 overall jobs — that would suggest capital deepening. I think this is what’s driving increased productivity. This also means each new worker now comes with a higher “capital budget requirement”, and between that and the payroll taxes contemplated under Pelosicare you probably have a greater drag on employment than otherwise contemplated.

While these data are for the third and tomorrow’s report is for the first month of Q4, I am inclined to think we will see both a number closer to 200k for jobs lost. That might make the unemployment rate 10%.

I say let’s make a deal: Your parent wants $2.8-5.6 billion more money in stimulus dollars? The third time you’ve come to the trough? Stop the damn ads and we’ll talk.

Under this authority, jokingly referred to as “Death Panels for Banks,” the Federal Deposit Insurance Corp. would oversee the dismantling of large financial firms much as it does now when it intervenes in commercial banks that are at risk of insolvency.

Decisions about which institutions are so large that they pose a system-wide risk and must be monitored would be made by a Council of Regulators, comprised of leaders from the Fed, the Treasury Department, the FDIC, and other bank-oversight agencies.

…Some independent analysts also have warned that handing the Fed new, expansive powers as the systemic risk regulator could distract it from its principal role of setting monetary policy to sustain growth and contain inflation.

“I didn’t want the Fed to have that role because I think monetary policy is too important,” said Vincent Reinhart, a former top Fed economist who’s also wary of the emerging legislation. “If all you do is a college of regulators, that’s just inviting a debating society.”

I agree with this — in fact, did last month — but it has been clear for awhile that the Fed didn’t want this role. In fact, the college of regulators is a Bernanke idea from a few weeks ago. You might argue Bernanke was just seeing the handwriting on the wall, but I doubt many in the Fed disagree with Vincent Reinhart’s appraisal.

Reinhart and Fed governor Dan Tarullo have both argued in the last week that the problem is too-big-to-fail and that the issue is how to deal with non-bank financial giants like Lehman and AIG, for which regulators had to improvise. (See the McKinley and Gegenheimer timeline FMI.) If these companies are going to be placed under some government protection in a too-big-to-fail environment, I have to disagree with Ed that they don’t get some kind of regulation. You may own a skyscraper as your private property, but when you tear it down you’re responsible for any damage done to nearby buildings. If a private non-bank fails and in the process takes down healthy financial institutions that were counterparties, you may have a reason for using the law to limit collateral damage. (That doesn’t mean you always get it right, as John Carney points out in the AIG case.)

So what can be done, if we’re not going to use the Fed or FDIC? Before you say “we have to do something“, consider the benefits of large banks, says Charles Calomiris. Diversification, economies of scope and extended reach to developing markets are some of these benefits. Are we at risk of losing those gains as we try to solve too big to fail?

UPDATE: John Taylor summarizes the testimony around Frank’s FDIC proposal.

Fixing prices does not lower costs. … “Costs” are borne by providers, who get reimbursed by either consumers (in a rational market) or by third parties (American health care) for their goods and/or services. In a competitive market, providers have to set their prices at an attractive level in order to get business without missing out on profit opportunities, but their prices have to cover their costs — or they go out of business.

Prices provide many services to a market economy. One is information on the value of something. When you offer more for a pair of World Series tickets you are informing everyone who owns them what the opportunity cost of their use is. Those who don’t sell are in essence saying “these tickets are worth more to me than what I can sell them for on the street/on StubHub/etc.”

Costs, though, are much more subjective than prices. As I’ve blogged before, costs are always costs to someone. Actions have costs, not things. Heyne, Boettke and Prychytko put it best: “All costs are costs of action or decisions, all are attached to particular person, and all lie in the future.” So when someone asks “what does health care cost”, you have to ask “cost to whom?” To use an extreme example, suppose government says to anyone holding an M.D. “You are now required to work one day every week — we’ll pick the day — at a public free clinic, and we will pay you $0 for your day.” To the taxpayer and to the government’s budget, that costs nothing. But to the doctor this is tremendously expensive. She loses the income she would have earned had she been permitted to go to her clinic or hospital instead. Maybe this is more or less than what would have been paid if the patients who attended the “free” clinic, but for sure it is not free. It’s only a question of who bears the burden.

This is the simple explanation, by the way, of why the Congress tried unsuccessfully to pass the Medicare fix for doctors. No costs would be changed by the act: The decision was whether or not to shift those costs from doctors to future taxpayers.

Likewise, the use of the public option is to, in short, provide pressure on the insurance companies to negotiate lower reimbursement rates for doctors or else lose customers to the government insurance plan. But at best this only changes the distribution of health spending between doctors, patients and insurance firms. What increases the supply of health care is a reduction in the opportunity cost of providing health care.

A misunderstanding of costs applies as well to patients. Alan Krueger wrote last February about the cost of patients’ time waiting for health care. Question: Will the wait for health care rise or fall under Baucuscare? Does anyone know? Does anyone care? Not Congress, because it’s not their costs.

This is also why the question “is the bill deficit neutral” hides the cost question. All this asks is whether the cost arises through the tax system and through government expenditures. Many costs can be hidden in mandates and “cost controls” that in fact increase costs, just not on the government’s budget. Theirs are not the only costs that matter.

Eric Falkenstein suggests the clinic’s future is dark by analogy to Henry Manne’s story of the parking lots.

The story describes what happens to a college town when parking lot owners decide to get together and squelch competition. Specifically, this was targeted towards those Saturdays when football games generated an abnormal number of cars, and many people and businesses sold space on their private driveways. The parking lot owners noted horror stories about 15-year olds parking cars, or the inability to fully insure the cars! They had a meeting where they said parking cars ‘wasn’t a business, it was a profession’, and set up a slush fund for political action. The ‘unfair and dangerous competition’ was made illegal, by basically mandating fixed costs that made it uneconomic for small providers of parking spaces to operate. The new law allowed the parking lot owners to increases prices under the pretext of quality, yet the result was more congestion because the parking lot owners were not equipped, or incented, to deal with the new volume efficiently. Quality was merely redefined to mean fully licensed and bonded parking lots. Creative people got around the prohibitions by offering people $5 ‘car washes’ on their driveways that lasted several hours, which then provoked new regulation. Each new regulation created a new problem, which then motivated more regulation.

The parable supports the principle that ‘quality oriented’ guild monopolies conspire with legislators under the banner of ‘the public interest’. They then can raise their prices by outlawing all sorts of competition. The unanticipated inefficiencies created simply raise the cry for more regulation. The net result is worse for everyone except a few parking lot owners and the legislators they support.

The analogy to health care is then made, with a prediction:

The US health care system involves a myriad of regulations, rights, and tort liabilities, that conspire to make this market highly perverse. Any current health care provider is already playing the game, thus, doctors in the US average a salary of $150k/year, almost double that in other developed countries. Unions are growing in health care, with the common result of inflexible rules, high salaries, and an inability to fire workers. As with our education monopoly, expect the health care professionals to make out best in any solution (Michelle Obama, after all, was a $317k/year ‘diversity outreach coordinator’ for the University of Chicago Hospitals once her husband became a senator–we need more of those!).

The current modifications are just like the parking lot parable: more patches for problems created by prior patches. One law government obeys is the The Second Law of Thermodynamics, so the new system will certainly be more complex. Spending more money will not make it better, just create new inalienable rights and patronage jobs paid for via the magic of deficit spending.

One thing I learned in observing the tea party movement was that people are generally suspicious of laws they can’t read and understand. Perhaps it’s because we instinctively know that within complex laws come favors and sinecures for the connected (of whom we are not a part.) It is impossible to provide all the favors needed to satisfy the selectorate (definition) if you don’t have laws that are dense. It is in the interest of this entrenched lobby in health care to conceal those gains, and Sen. Baucus and Rep. Waxman and the other legislators are simply serving those whose support they require.

State finance officials reported Monday that the stimulus created or saved 11,800 jobs through the end of September. The state has spent $1.6 billion, or about a third of the $4.7 billion it stands to get from the American Recovery and Reinvestment Act.

Minnesota’s unemployment rate stood at 8 percent in August, with more than 120,000 jobs lost this year.

Reading the actual press release from the Minnesota Dept. of Finance includes some interesting detail:

MMB’s estimate of jobs is the result of 17 state agencies that have filed more than 200 reports detailing spending and jobs data on all ARRA grants awarded to date. The data submitted on Saturday, October 10 is preliminary and will be reviewed to ensure accuracy and consistency prior to being finalized on October 30.

Preliminary data suggest broad impact from stimulus funding. The biggest effect is from state fiscal stabilization funds, where an estimated 5,900 education jobs and another 1,200 public safety jobs were preserved. Since some schools are drawing most of the funds early in the year, annual numbers may be lower. Initial reports submitted by the Minnesota Department of Transportation show nearly 900 transportation jobs created or saved.

So are these all public sector jobs? Looking at the current employment statistics indicates that while employment fell 4.3% in the 12 months to August 2009, private employment fell 5.1%. Total government employment rose 0.2% over the period. Note that the figures above will include a few private sector jobs, particularly in transportation. But most of these jobs are public sector.

The AP report indicates that rather than 66,000 jobs in Minnesota ‘saved or created’ we’re likely to see only 35,000 (if one extrapolates the current figure to the total amount of dollars to be spent.) This comes out to more than $135,000 per job. The remaining jobs may come from “awards made to cities and counties or tax incentives provided to individuals” and “higher Medicaid matching funds” according to the Dept. of Finance. But wouldn’t that mean that the tax cuts were quite stimulative, and wouldn’t that be an argument for using tax cuts — which is always “shovel ready” — instead of this spending? But that would not lead to an increase in public sector employment, and that appears to be a goal of the stimulus.

And all the numbers being reported should be taken with a grain of salt:

“These jobs figures are the result of a federal reporting process that is completely new and untested,” said Commissioner [Tom] Hanson. “Although there have been plenty of challenges, reporting government activity so broadly and so quickly is an important result of the Recovery Act. All citizens are better served by this commitment to increased transparency.” (emphasis added)

And what do they decry but “privilege”?

Once we start using the word “privilege” where what we really mean is “wealth,” we start applying this term to those who came by their wealth without special privilege–the Bill Gateses of the world, sure, but also the more-common successful businessmen or professionals who are earning a few million dollars a year down to a few hundred thousand dollars a year and who don’t show up on any “richest people” lists. The vast majority of people who get rich in even a semifree economy such as ours do so by producing goods and services that others value. But because the word “privilege” carries a negative connotation, when we call someone “privileged,” we are communicating, even if unintentionally, that this person came by his money dishonestly. And if you think that this is not a major issue, consider what President Obama’s first budget book, an official U.S. government publication, said about the highest-income people in the United States: “While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not.”

There you have it. After decades of using the word “privilege” instead of “wealth,” we have the ultimate result: a government that is officially hostile to high-income people, whom it accuses, in a completely unsupported claim, of not “playing by the rules.”

Hayek in The Road to Serfdom noted that in a country with freedom for all to acquired private property, the Left’s calling the holding of property a privilege “is depriving the word privilege of all meaning.” (p. 82) We now see for what reason they deprive it.