The mountain of disincentives

I recommend reading John Cochrane’s post about the job market and his thoughts regarding what a few other prominent economists believe are problems and solutions.

Here he addresses Alan Blinder’s prescription to give tax breaks to companies that expand payrolls (emphasis mine):

Is this really the right way to run a country? When “policy makers” want more employment, they slap on a complex, tax break on top of a mountain of disncentives. Presumably they then will remove this tax break, and pages 536,721 to 621,843 of the tax code describing it, despite the lobbying by large corporations who have figured out how to exploit it for billions of dollars, once the Brookings Institution decides that there is “enough” employment (!), and “policy-makers” no longer need to encourage it?
How are the existing hundreds of bits of social engineering in the tax code working out? Do we really need more of this?  Isn’t it time to return to a tax code that raises money for the government at minimal distortion?

Exactly.

And, great question, how are the existing hundreds of bits of social engineering in the tax code working out? 

Consider one of the most popular bits of social engineering: the mortgage interest deduction. How has that influenced home ownership rates? Does anybody know?

I read a lot of economics and I haven’t heard much about that.

Conventional wisdom is that it encourages home ownership by lowering its cost. But, this assumes home prices didn’t change because of the deduction or that renters don’t realize a similar benefit since their landlords deduct interest on their rental property loans.

Are we to believe that the stock market discounts future cash flows into stock prices, but the housing market doesn’t do the same for home prices?

Let me try are more concrete example. You want to purchase a certain new car and your choice is between two versions of the same model. They are exactly the same, except one thing: gas mileage. Version 1 gets 20 mpg and version 2 gets 30 mpg.

Would you be willing to pay more for version 2? Maybe. How much more? If you drive 10 thousand miles a year, version 2 will save you $500 a year. If you own the car for 5 years, that’s $2,500. You may not be willing to part with the full $2,500 of savings — after all, there’s some risk to that. Gas prices will fluctuate and your driving habits might change, but you would likely pay more.

That’s very similar thinking to how some, not all, home buyers factor in expected tax savings when buying a home.

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Justice Roberts to Blinder: “I don’t care”

If Alan Blinder understood why Tommy Lee Jones’ character said, “I don’t care,” in the scene below from The Fugitive, I doubt wouldn’t have written this op-ed in the Wall Street Journal lamenting what he fears will be the Supreme Court doing its job.

Blinder admits:

I claim no special expertise in constitutional law…

It shows with his closer:

This is another real shame. If we are going to have political decision-making, at least elected politicians should do the deciding. Come to think of it, they already have.

But, it doesn’t take an expert in Constitutional law to know what all of us should have learned by the 10th grade.

We have political decision-making, but what can be decided on by our representatives in Congress is limited by Article I, Section 8 of the Constitution for very good reasons.

The individual mandate may be good, it might cause a disaster or it might do nothing. But, that’s not what the Supreme Court will be judging. Much like Tommy Lee Jones’ character in The Fugitive, it isn’t the Supreme Court’s job to care about that. Jones’s job was not to judge Harrison Ford’s character’s innocence or guilt. His job was to catch him.

The Supreme Court shouldn’t be judging the merits of the individual mandate. Their job is to determine if the Constitution gives government the power to force people to buy insurance.

Now, if the Supreme Court decides against the mandate, there is a very simple way for proponents of an individual mandate to give government the power to enact it: Amend the Constitution using Article V, by getting the legislatures of three-quarters of states to agree to the amendment.

That is another element of the political decision-making process that folks like Blinder are clueless about. If we want to change the power of government, there is a political decision-making process for that. Why do they want to short-circuit that process? Is it ignorance or do they only have respect for the political decision-making processes that they think will yield their desired results?

I was disappointed that the Wall Street Journal was willing to publish an op-ed that should be able to be debunked by any 10th grader.

We’ve cast our safety nets wide

Alex Tabarrok, of Marginal Revolution, pointed to a New York Times piece reporting that the poorest households no longer receive the majority of government benefits.  He quotes from the article:

The government safety net was created to keep Americans from abject poverty, but the poorest households no longer receive a majority of government benefits.

…Dozens of benefits programs provided an average of $6,583 for each man, woman and child in the county in 2009, a 69 percent increase from 2000 after adjusting for inflation.

Alan Blinder, in the Wall Street Journal column featured in a previous post, says that since some folks are set to roll off the 99-week unemployment benefits we have a “serious hole in the safety net.”

We seem to have ever enlarging ideas about what safety nets are, which in turn enlarge our Federal and state government spending budgets, governments’ desire to tax and government bureaucracies.

Most of the safety nets are not necessary.  They’re large transfers of payments, with a cut taken out by the bureaucracies that administer them.

Consider Social Security.  I bet that a large percentage of people who pay in and eventually receive Social Security benefits don’t need it because they’ve done a fine job of living below their means and saving for retirement.

If they had more control of the 12.4% of their wages that were forced into Social Security, they would have done even better.

Bastiat wrote in 1848:

Government is the great fiction through which everybody endeavors to live at the expense of everybody else.

Yep.

Incentives Matter

In the Wall Street Journal today, economist Alan Binder suggests that we should consider extending the already extended 99-week unemployment payouts (extended from a normal of 26 weeks).

If Congress fails to maintain this assistance [i.e. extend the 99-week unemployment payout period], about 1.3 [million] jobless people will lose their benefits at the end of this month. In fact, due to a quirk in the EB formula, some will start losing them even sooner. As the year wears on, that number will rise closer to five million. Isn’t that a serious hole in the safety net?

As I said, extending both the payroll tax cut and the long-term unemployment benefits should be no-brainers under current circumstances.

Yet, Blinder fails to connect the dots in his own column.  Appearing just before those two paragraphs is this one:

In stark contrast with all U.S. experience since the Great Depression, over 42% of today’s unemployed have been jobless for more than 26 weeks. That’s an extraordinarily high number. It means, among other things, that more than 18 million Americans have drawn on the EUC or EB programs since 2008.

Past data and data from other countries show that the unemployed tend to become employed right around the time their unemployment benefits run out.

This is just another version of incentives matter.  Even though most people consider unemployment payouts to be small, many people will do what they can to keep collecting it if they happen to also have a nest egg, severance pay or an off-the-books source of income.  They will also try to hold out for a job that pays them as much as their previous one, even if they have lower paying job options available.  It only pays them to go with the lower paying job when their unemployment benefits run out.

So it’s not surprising, as Blinder points out, that more people have remained unemployed for more than 26 weeks in this recession than in others.  That’s exactly what we’ve encouraged with the unemployment benefits policy.

What is surprising is that an economist like Blinder doesn’t understand that.

Is it worth it? Can we afford it?

Alan Blinder, Princeton Economist, continues to make a mistake regarding government jobs.  Writing about Our National Jobs Emergency in the Wall Street Journal yesterday he repeated the error I wrote about in this post.

Blinder wrote:

Every day brings new proposals to slash government spending. But as I noted on this page last month, those are ways to kill jobs, not create them. As a matter of fact, despite all the cries of “big government” or even “socialism,” public-sector employment has been falling.

Over the past two months, while private businesses were adding a measly 130,000 new jobs to their payrolls, governments at all levels were shedding 87,000 workers. Looking over a longer period, public employment at all levels is down by 522,000 jobs over the last two years. Does that make sense in a jobless recovery?

The answer is yes, it makes perfect sense.  As I noted in my response to him last month:

Public spending should not be accepted based on the idea that it creates jobs.

Justifying expenditures because it creates jobs is not any better when evaluating public spending than it is when evaluating private spending.  When you spend money, is creating jobs a key factor in your decision?  No.  You justify your spending based on the direct benefits you receive.

Whether the economy is in a ‘jobless recovery’ is a red herring and irrelevant to whether or not government should shed jobs.

The answers to the following two questions are what’s relevant:

1) Is the value created from these jobs worth it?  Though a better way to ask this question when you’re spending someone else’s money is, would you pay for these jobs if it was your own money that you were spending?   (If so, why aren’t you?)  Hint: The value should be created as a product of the work performed.

2) Can the government afford these jobs?

Government revenue is down because the economy is hurting and folks are out of work.  When a business experiences revenue declines, shedding jobs to keep the firm viable is a tough, but responsible, response.  Financial insolvency or bankruptcy is not responsible and hurts many more people.  Life is full of hard choices.

When individuals experience declines in income, they shed expenses also.  They typically do not continue to spend by borrowing from credit cards in hopes that their spending will help the economy.  Some do and we all know it doesn’t end well.

Let’s say my income declined and I consider cutting my expenses by eating more home cooked meals.  I don’t consider if my action will further hurt the economy.  Quite frankly, I’m not smart enough to know if it will or not.  Neither is Blinder, though he believes he is.

I am smart enough to make responsible choices for my situation.  I ask the two questions.  Is it worth it?  Can I afford it?

Once folks like Blinder harness government to serve purposes beyond these two questions, it’s hard to go back.  The Blinders of the world will tell us we need government jobs to help the economy in bad times and they will tell us we need government jobs, for whatever reason (e.g. to solve something they believe the market is not addressing), in good times.  For them, there always seems to be good, though dislocated, reason for growing government and no acceptable reasons for decreasing it.

Blinder’s Name Fits

I’m left wondering why the Wall Street Journal publishes Alan Blinder.

Blinder comes across as arrogant and smug, which I don’t think is befitting of op-ed space in WSJ.  Here’s an example:

For months, we have witnessed the spectacle of people arguing that Keynes was wrong. Somehow, additional government spending actually reduces employment—even when the economy has huge amounts of spare capacity and unused labor desperate for work; even when the central bank will prevent interest rates from rising to “crowd out” private spending. Really?

One current catchphrase is “job-killing spending.” Hmmm. How, exactly, does more spending kill jobs when there is idle capacity and no threat of rising interest rates? Stumped? So am I.

The anti-Keynesian revival has been disheartening enough. But now the economic equivalent of the Flat Earth Society is turning its fury on Ben Bernanke and the Federal Reserve.

If you have a case, state it.  No need for the ‘Really?’ and Hmmmm… That’s more befitting for a blog post, not a serious newspaper.

And, the worst part, hes’ wrong.  I eagerly await the economists to debunk his column.  Here’s the first debunking that I’ve seen from Charles Rowley.