Tuesday, July 20, 2010

Blinder's Blindnesses

Alan Blinder, the well-known professor of economics at Princeton, wrote an opinion piece in the Wall Street Journal today. He claims that the fiscal hawks who fear that the stimulus hasn't worked are wrong, and that their refusal to give in on the unemployment benefits issue is misguided--what he labeled "pretty anti-Keynesian thinking."

Well yes, Professor, that's on purpose.

[Thanks to for the image of Brueghel's Blind-Leading-The-Blind]

Blinder later specifies that he is referring to Keynes's recommendations to increase federal spending, and to the idea of reducing taxes so as to increase consumers' discretionary income and hence consumption.

But Blinder himself differs from Keynes (taking permission for his inconsistency from Ralph Waldo Emerson) in that he does not endorse tax reduction. Blinder's own Keynes-bis prescription is, on the contrary, to raise taxes by allowing the Bush tax cuts to lapse (because "we can't afford them"), and to "combine more stimulus in the short run with more budgetary restraint for the long run."

This means, I assume, that the government should allow the tax cuts to lapse and use the increased tax revenue to prolong unemployment benefits (basically a redistribution of income). Then Congress should increase federal stimulus deficit spending and worry about the consequences later (believing, I guess, that wishful thinking today will restrain tomorrow's budget in spite of itself).

Thus, he declares, "Obama's Fiscal Priorities Are Right."

I see several problems with his reasoning.

Problem 1. The spender-Congress's plan, to date, is to increase federal spending through more stimulus AND to raise future spending in the long run when the new health care laws kick in and when the coming baby-boom Social Security/Medicare/Medicaid entitlements explode. This is the opposite of Blinder's long-run recommendations.

Problem 2. By increasing both taxes and unemployment benefits Blinder thinks he is simply redistributing wealth, i.e. taking from Peter to pay Paul, justified by the arguments that (i) taking from the rich is not printing money or incurring more debt; (ii) giving $1 in unemployment benefits, or giving $1 in middle-class tax cuts, or giving a $1 cut to a wealthy taxpayer is "identical" in its impact on the budget; and (iii) more consumption will cure the recession.

This is unproven on three fronts.

a. Let's say we grant that an unemployed person is likely to spend the $1, and let's even grant that a middle-class wage earner will most likely spend it. How can Blinder maintain that a wealthy person, with his armada of lawyers, will still declare the same amount of taxable income if the taxes were to increase substantially? The Laffer curve seems to suggest that wealthy taxpayers will find a way to avoid paying taxes as the tax rate climbs to a more punitive level.

b. It may be true that unemployment benefits financed by the confiscated earnings of the wealthy might force GDP income to shift out of capital investment and land in consumption. But is this a proven recession-buster? It might just have the opposite effect, especially if it's on a large scale.

c. I think Zandi's quantitative model may need a little peer review, and preferably not by a Princeton economist. Today's Wall Street Journal mentions two NBER studies that indicate:

- "... a one week increase in potential [unemployment] benefit duration increases the average duration of the unemployment spells of UI recipients by 0.16 to 0.20 weeks" - 1990 study by Lawrence Katz

- "It is well known that unemployment benefits raise unemployment durations" - Raj Chetty of UC Berkeley

- Another study in March of 2010 by Michael Feroli (J. P. Morgan Chase) concludes that "lengthened availability of jobless benefits has raised the unemployment rate by 1.5% points."

3. Blinder says, "[W]e know one thing for sure: As the unemployment rate rises, the disincentives that worry conservatives become less important because there are fewer jobs to find...." Less important? That is nonsensical. He is saying that the chances of finding a job are reduced, but does this mean we have a better excuse to discourage people from accepting work?

I think the contrary. If people are under financial pressure, people will consider working in a different field than they're used to, or at somewhat lower pay, even if only temporarily. This is a GOOD thing, because the bubble economy created imbalances in the workforce that need to be rebalanced. However, if you throw them more benefits, the disincentives will operate to prevent people from hunting for, and accepting, alternative work, and skilled-labor job offers will continue to go unfilled--yes, that's right, skilled workers are hard to find, even today.

Lastly, I would respectfully ask Professor Blinder to drop the moralizing. It's namby-pamby and weak. He says, "In the 1930s, FDR taught us that heedless self-interest is both bad morals and bad economics." P-u-l-lease. He's beginning to sound like a climatologist: "Let's just do the right thing, whether we can prove it's actually beneficial or not."

Not my kind of morals, economics, or science.

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