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In his 2011 State of the Union address, President Obama dreamily depicted a future, just 25 years hence, where almost all Americans would have easy access to high-speed rail. “This could allow you to go places in half the time it takes to travel by car. For some trips, it will be faster than flying –- without the pat-down.”
I think we’ll see a space elevator before America gets a nation-spanning bullet train system. The New York Times finds that “despite the administration spending nearly $11 billion since 2009 to develop faster passenger trains, the projects have gone mostly nowhere and the United States still lags far behind Europe and China.” Reporter Ron Nixon cites experts who fault the Obama administration for spreading that dough around rather than focusing on key projects like improving Acela Express service in the Northeast Corridor, “the most likely place for high-speed rail.”
Acela averages just 80 mph between Washington and New York, although the trains are capable of going twice as fast. Old infrastructure and rail-sharing slows it down. According to the piece, “a plan to bring it up to the speed of Japanese bullet-trains, which can top 220 m.p.h., will take $150 billion and 26 years, if it ever happens.”
Of course, the US is a lot different than many nations with high-speed rail, nations which have “higher population densities, higher gas prices, higher rates of public-transportation use and lower rates of car ownership.” Not that bulleteers doubt a high-speed future will happen:
But Andy Kunz, executive director of the U.S. High-Speed Rail Association, thinks the United States will eventually have a high-speed rail system that connects the country. “It’s going to take some years after gas prices rise and highways fill up with traffic,” he said. “It’s going to happen because we won’t have a choice.”
Wait, we have no choice but to build high-speed rail because the highways are going to “fill up with traffic”? Let me bring your attention to this chart from Paul Kedrosky:
It depends on where you are as to whether traffic’s declining, but national statistics have shown that per capita travel in vehicles is roughly where it was in the late 1990s. And vehicle miles traveled, the number of miles that cars are moving is roughly where it was in the early 2000s. And this is after a 90-year increase in the amount of automobile traffic, from, you know, the 1910s to the early 21st century.
So people have sort of this expectation that traffic will continue to increase because it has increased in the past for such a long period of time. And this is built into traffic forecasts. It’s built into the way people view the world. But beginning in the early 2000s, in particular after 9/11, with a number of societal changes, including things like increased gas prices, changing demographics, changing employment, the amount of travel that people were engaging in individually has leveled off and has declined on a per capita level.
Now, a lot of technologies have a lifecycle. They have an S curve associated with them. So they start off, they grow slowly even, there’s a period of very rapid growth. Then it levels off. And then something new happens and the S curve begins to decline. And so we sort of see that in a number of things that we no longer use as much we used to. U.S. mail volume increased for decades upon decades until the 1990s. And it started to level off in the 1990s with the rise of email and the Internet, and then, in the early 2000s has fallen off a cliff.
So is that going to happen with travel? And so this is the scenario that I’m painting. And so it’s a future scenario. I don’t want to say that I predicted that this would happen, but this is one thing that might happen that nobody is taking any account of right now.
And here is a good piece by Tim Worstall on the impact of potential impact of driverless cars on high-speed rail. Technology will change how America’s gets around. But more likely it will be 21st century technology, not that of the 1970s.
The US economy has added 200,000 jobs or more for six straight months. That hasn’t happened since 1997. Job gains during the streak have averaged 244,000 monthly. Back in 1997, gains for the entire year averaged 283,000 monthly (the equivalent of 345,000 with today’s larger population.) Improving jobless claims numbers could be hinting at acceleration. RDQ Economics:
Initial jobless claims were below forecasts falling 14,000 to 289,000 in the week ending August 2nd. The four-week average of claims declined 4,000 to 293,500, the lowest level since February 2006. … Unemployment claims are signaling a potential pickup in net job creation (from an already fairly strong pace) and a further drop in the unemployment rate. The four-week average of claims has dropped for five straight weeks, to its lowest level since February 2006, and the insured unemployment rate has been at 1.9% for four consecutive weeks, which is within 0.1 percentage point of the cycle low for the last expansion (which occurred in 2006-07 when the unemployment rate was around 4½% and the short-term unemployment rate was between 3½% and 4% (currently at 6.2% and 4.2%, respectively).
Most jobs added in this recovery have been full-time jobs. But the level of part-time work remains above prerecession levels even as the labor market overall has slowly recovered. As the Atlanta Fed’s Ellyn Terry points out, “Today, there are about 12 percent more people working part-time than before the recession and about 2 percent fewer people working full-time hours.”
But why? Again, Terry:
Weak business conditions and the increase in the relative cost of full-time employees have been about equally important drivers of the increase in the use of part-time employees thus far. Thinking about the future, firms mostly cite an expected rise in the relative cost of full-time workers as the reason for shifting toward more part-time employees. So while there are some clear structural forces at work, a large amount of uncertainty around the future cost of health care and the future pace of economic growth also exists. The extent to which these factors will ultimately affect the share working part-time remains to be seen.
My fellow The Week columnist John Aziz responds to my piece advocating the death of the corporate income tax with this: “Hey, conservatives: I’ll trade you the corporate tax for a tax on pollution.”
Now Aziz more or less agree with my point that corporate taxes are bad for economic growth. But he finds my call to eliminate them to be fanciful:
Abolishing the corporate tax is an evergreen conservative talking point, a piece of red meat to be thrown periodically to the base, like arguing that life begins at conception or demanding a repeal of ObamaCare. The thing is, no matter how much energy is expended (and sometimes not even from conservatives), ditching the corporate tax altogether has not yet been achieved. Conservative, liberal, and centrist politicians have all kept it intact, albeit while lowering it substantially from almost 50 percent after World War II to a little under 20 percent today. … cutting the corporate tax to zero right now would blow a big hole in the government’s finances — currently 10 percent of the tax base, or the not-so-paltry sum of $280 billion.
He misunderstands my plan. I would pay for any revenue loss by raising taxes on investment income. Not only does this eliminate budgetary concerns, but makes the plan more egalitarian than simply axing the tax. Note that many liberals have called for equalizing labor and capital income tax rates. So my plan actually isn’t a piece of red meat and thus far more likely to happen.
And here is Aziz’s counter:
But there’s no reason why that cannot be made up by other taxes on things that we actually want to disincentivize. Like, rather importantly, pollution. Corporations should be taxed to some degree for the negative side effects they create, like pollution and environmental degradation. But it’s not like all corporations are polluting at the same rate. Most firms create far less pollution than the owner of coal-fired power stations, for example. If pollution is the problem, tax the polluters directly for their pollution and environmental degradation. Tax carbon emissions by the ton. That will also have the benefit of further incentivizing the development of clean energy, which is recognized as the best antidote to climate change. Don’t tax every corporation at the same rate — lower the tax rates for those polluting at a much lower rate.
Economists love this idea. But given the intense political standoff over climate change, I would argue this is far less likely to happen than my idea. How about instead of replacing the corporate tax, have the carbon tax replace all manner of energy subsidies and regulation. Back in 2011, several AEI scholars illustrated one way a carbon tax might work:
Subsidies for ethanol and other alternative fuels would be abolished (basic research on renewable energy would be funded on the same stringent terms as other basic research). As discussed above, business and household energy tax credits would be abolished. Regulations designed to lower greenhouse gas emissions would be repealed.
Instead, a tax on greenhouse gas emissions (“carbon tax”) would be imposed. The tax would be similar to Revenue Option 35 in the Congressional Budget Office’s March 2011 Budget Options book, but would be implemented as a tax rather than as a cap‐and‐trade program. The tax would take effect in 2013 and be phased in at a uniform pace over five years, so that the 2017 tax equaled the level prescribed for that year in the CBO option, slightly more than $26 per metric ton of CO2equivalent. As prescribed in the CBO option, the tax would thereafter increase at a 5.6 percent annual rate through 2050.
Also, Northwestern University’s Monica Prasad argues that Demark’s experience with carbon taxes is instructive in avoiding pitfalls:
Unless steps are taken to lock the tax revenue away from policymakers and invest in substitutes, a carbon tax could lead to more revenue rather than to less pollution. … If we want to reduce carbon emissions, then we should follow Denmark’s example: tax the industrial emission of carbon and return the revenue to industry through subsidies for research and investment in alternative energy sources.” Indeed, approximately 40% of Danish carbon tax revenue is used for environmental subsidies, while the other 60% is returned to industry.
This post has been updated. See below.
The center-left has a Grand Unified Theory of Why the US Economy Stinks. Otherwise known as “secular stagnation”or “middle-out economics,” it holds that income inequality hurts economic growth by reducing middle-class spending power. Its chief promoter is Larry Summers, former Obama White House economist and Clinton administration Treasury Secretary.
Apparently, Standard & Poor’s is now also a believer. In a new report, “How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide,” S&P’s US Chief Economist Beth Ann Bovino digs through the data and concludes thusly:
Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world’s biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population.
Now this is kind of a big deal, since S&P isn’t some progressive think tank doing the bidding of Hillary 2016. It’s a still influential bond-rating firm. And that shows, argues The New York Times’s Neil Irwin, “how a debate that has been largely confined to the academic world and left-of-center political circles is becoming more mainstream.”
But as this debate grows in importance and visibility, making sure it is data driven and research rich is critical. And there are problems with this report.
1.) S&P accepts the idea that since the 1% appear to be grabbing an ever-greater share of income gains in recent decades, rising income inequality is slowing economic growth because they rich have a higher marginal propensity to save than those lower down the income distribution. But as Paul Ashworth of Capital Economics noted in a recent report, if rising inequality were actually holding back the economy, you would expect to see the household savings rate rising over the past few decades and consumption accounting for a smaller share of overall GDP. Rather, the household savings rate has been rising for three decades, and “even allowing for the drop back over the past few years, consumption now accounts for a larger share of GDP. That suggests rising income inequality has not been a dominant macro force.”
Econ blog Ashok Rao puts it this way:
While richer people most certainly do have a lower propensity to consume, the magnitude of this effect is clearly dwarfed by forces like the Asian saving glut and potentially overvalued dollar. Luxury markets are booming: and it may not be to a good liberal’s taste, but demand for chauffeurs and butlers creates employment just like that for apparel and electronics. Indeed, to the extent richer people consume at the margin on non-tradable services, the leakage is also lower.
2.) S&P suggests rising inequality and the “imbalances” it creates can lead to “a boom/bust cycle such as the one that culminated in the Great Recession.” This comes very close to blaming inequality for downturn. I would refer Bovino to “Does Inequality Lead to a Financial Crisis?” by Michael Bordo and Christopher Meissner. The economists examined data from a panel of 14 countries for over 120 years, finding “strong evidence linking credit booms to banking crises, but no evidence that rising income concentration was a significant determinant of credit booms.” And here, again, is Ashworth:
It is true that households further down the income distribution increased their debt burdens during the housing boom years. But that debt was taken on principally to buy over-valued real estate rather than to fund everyday non-discretionary spending because incomes weren’t keeping up with inflation. The upshot is that we don’t think rising income inequality is holding back the economic recovery, at least not to any significant degree
(See here for a market monetarist explanation for the Great Recession.)
3.) S&P blames rising income inequality for reducing social mobility. Bovini: “Aside from the extreme economic swings, such income imbalances tend to dampen social mobility and produce a less-educated workforce that can’t compete in a changing global economy.
I would refer Bovini to a study from the Equality of Opportunity Project, which found US mobility has changed little in nearly half a century. Indeed, the EOP study also found that family structure, education, and geographic segregation are bigger issues than 1%-99%-style inequality, which has zero correlation with climbing the opportunity ladder. As the study put it: “upper tail inequality is uncorrelated with upward mobility … .”
4.) There is plenty of research showing no correlation between rising inequality and slower economic growth in advanced economies. Scott Winship:
Recent work by Harvard’s Christopher Jencks (with Dan Andrews and Andrew Leigh) shows that, over the course of the 20th century, within the United States and across developed countries, there was no relationship between changes in inequality and economic growth. In fact, between 1960 and 2000, rising inequality coincided with higher growth across these countries. In forthcoming work, University of Arizona sociologist Lane Kenworthy also finds that, since 1979, higher growth in the share of income held by the top 1% of earners has been associated with stronger economic growth across several countries.
5.) S&P’s discussion of potential solutions to the inequality “problem” almost entirely concern those pushed by the left: higher minimum wage, raising taxes on capital income such as through the Buffett rule, limiting executive pay, more public investment. More spending, more redistribution. As an alternative I would suggest wage subsidies to boost low-end incomes and reward work, helping startups by reducing crony capitalist regulation, lower or ending corporate taxation to boost take-home pay for middle-class America.
Again, here is social scientist Lane Kenworthy: “Faster economic growth would be a good thing (particularly if with it came a shift towards greener growth). But there is little evidence that the American economy will grow more rapidly if the US manages to reduce income inequality. … Income inequality is too high in the US. It would be good to reduce it. But it is a mistake, in my view, to put inequality reduction at the top of the agenda.”
Might income inequality be a headwind in the future? Sure. And it does make stagnant mobility more punitive. But does it explain what’s wrong with the US economy right now? I am doubtful.
Update: I should have mentioned in the original post that Bovino does spend considerable time on education as a way of reducing inequality. Certainly AEI has done lots of work on K-12 and higher ed reform. But three problems with the report on this front: First, Bovino suggests — in addition to simpler financial aid forms and more college outreach to low-income students — spending more money on college financial aid.
With evidence indicating that a well-educated U.S. workforce is not just good for today’s workers and their children but also for the economy’s potential long-term growth rate and government balance sheets, what do we need to do to get there? This will likely require some investment in the human capital of the U.S. workforce, today and tomorrow. But studies have indicated that the benefits greatly outweigh the costs. Researchers estimate that, depending on the exact program, $1,000 in college aid results in a 3- to 6-percentage-point increase in college enrollment, with the total cost in aid averaging $20,000 to $30,000 to send one student to college. Given a college graduate is expected to earn about $30,000 more per year than a high school graduate over the course of their life, the benefits outweigh the costs.
How about, instead, pushing structural reforms that would reduce costs and provide greater value? As Andrew Kelly writes in Room To Grow”:
Generous federal loan programs, particularly those available to parents, encourage enrollment at any college and at any price, providing little incentive for colleges to keep their tuition low or make sure their students are successful. Meanwhile, though advances
in technology could increase access and reduce the cost of education, federal rules governing access to student aid programs create high barriers to entry that keep low-cost competitors out of the market
Second, Bovino advocates “investment” in universal preschool, citing Brookings Institute research support . Yet another Brookings scholar, Grover Whitehurst, finds “the best available evidence raises serious doubts that a large public investment in the expansion of pre-k for four-year-olds will have the long-term effects that advocates tout.”
Third, Bovino cites evidences on education inequality that the Manhattan Institute’s Scott Winship finds to be empirically lacking:
Much of the report is dedicated to describing inequality of educational outcomes between rich and poor children—inequalities it says will lead to diminished economic growth and declining economic mobility. Like many before it, S&P cites the research of Staford University sociologist Sean Reardon, who analyzed a number of questionably comparable studies with test scores measured at different ages. Reardon’s now-famous chart connects the data points from these studies with neatly-smoothed trend lines to argue that the test score gap between rich and poor children is growing.
Set aside the obvious point that the parental income gap between children is correlated with countless other inequalities—in parental skills and values, family structures, social networks, neighborhood resources—and that any of those gaps could be driving the pattern Reardon shows. In a recurring pattern, S&P fails to note important research that directly addresses and overturns the Reardon result. University of Chicago professor Eric Nielsen carefully addresses the measurement issues in treating test scores as indicators of achievement and finds that the achievement gap between rich and poor children has narrowed over time.
Winship concludes thusly:
Overall, the S&P report on inequality lacks empirical backbone. S&P chief economist Beth Ann Bovinostated, “One of the reasons that could explain this pace of very slow growth is higher income inequality. And that also might also explain what happened that led up to the great recession.” Yes, but so could many other factors. Like many inequality spot-lighters before, S&P raises a number of important economic challenges, but with barely a thread of a connection to income inequality established. Worst of all, the inequality spot-lighters appear to have cocooned themselves to the point where they are unaware of the holes in their arguments or the countervailing evidence.
There are three kinds of pipe. There is what you have, which is garbage and you can see where that’s gotten you. Then there’s bronze, which is very good unless something goes wrong. And something always goes wrong. And then there’s copper, which is the only pipe I use. It costs money. It costs money because it saves money.
That scene came to my mind while reading the new Government Accountability Office report that tries to value the perceived Too Big To Fail status of America’s megabanks in the Dodd-Frank era. GAO found that these leviathan lenders were no longer able to borrow especially cheaply because of the belief Washington would bail out their creditors during a crisis. As the agency’s financial markets director said during a Senate hearing, “Most models we estimated suggest that large bank holding companies had higher bond funding costs than smaller bank holding companies in 2013.”
Except actual humans working on Wall Street aren’t so sure Dodd-Frank has ended TBTF. As the GAO also reports, “While views among investment firms we interviewed and credit rating agencies varied, many believe the Dodd-Frank Act has reduced but not eliminated the possibility of a government rescue of one of the largest bank holding companies.”
What’s more, these models seem to suggest that like Cosmo Castorini’s beloved bronze pipe, the current Dodd-Frank resolution system works great unless something goes wrong. And given that the US has suffered 14 major banking crises over the past 180 years, something is sure likely to go wrong again. New York Times reporter Gretchen Morgenson writes:
The trouble with this mishmash is that big bankers and even policy makers will cite these figures as proof that the problem of too-big-to-fail institutions has been resolved. … Not exactly. As the report noted, the value of the implied guarantee varies, skyrocketing with economic stress (such as in 2008) and settling back down in periods of calm. In other words, were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-cost taxpayer bailouts remains very much with us.”
Or as the Bank of England’s Andrew Haldane has put it, “The history of big bank failure is a history of the state blinking before private creditors.” So the biggest banks get even bigger and more likely to get bailed out out in a pinch. So what to do? Here is a bit of the testimony of Stanford economist Anat Admati:
There is no reason for banks to live so dangerously. Importantly, aside from possibly losing subsidies associated with borrowing, the overall funding costs of banks would not increase if they use more equity and less debt. Since subsidies come from public funds, reducing them does not represent a social cost. Encouraging and subsidizing banks to fund themselves with as much debt as is currently allowed (up to 95% for the large bank holding companies) as perverse as encouraging and subsidizing reckless speed for trucks or rewarding the captains of large oil tankers to go ever closer to the coast. More equity would force banks to stand more on their own when they take risk, rather than shift some of the risk and cost of bearing it to others. Shareholders who benefit from the upside, and not creditors or taxpayers, should be the ones to bear the downside.
But how much equity capital? Something in the range of 20% to 30% would be a solid start for Admati. One plan in Congress would force megabanks to comply with a 15% leverage ratio, meaning they could borrow only 85% of the money they lend. Such capital requirements would have been high enough to get the big banks through both the Great Depression and Recession. Beyond that, there is nothing in the GAO report to suggest that financial reform shouldn’t be at the core of an anti-cronyist, pro-growth economic agenda.
What happens to the unemployed in the worst labor market in living memory when their long-term jobless benefits end? Some people, including many Republican lawmakers, had a theory: ending benefits would give the unemployed a nudge. With no more government checks coming, these folks would start looking harder — much harder — for a job or perhaps accept a job they wouldn’t have earlier. This is the logic behind Congress declining this year to renew the federal program funding extended jobless benefits.
Two pieces of evidence suggest this “bootstraps” theory might be wrong. First, a new paper from the Boston Fed paper looking at the Not-So-Great Recovery finds that, yes, the unemployed tended to remain so until their UI benefits were exhausted. But their next move wasn’t into a job. Rather, they became “more likely to drop out of the labor force; transitions to a job appear to be unaffected by UI benefit extensions, ” writes Katharine Bradbury in “Labor Market Transitions and the Availability of Unemployment Insurance.”
Second, economist Justin Wolfers looks at what happened in North Carolina after the state in July last year lost its eligibility for the federal Emergency Unemployment Compensation program. While employment grew over the next six months, it actually grew a bit slower than in neighboring South Carolina, which has a similar economy. After also comparing North Carolina to Georgia and Tennessee, Wolfers concludes, “The bottom line is that North Carolina looks quite similar to its peers, and certainly not better.” Nor has South Carolina performed better than North Carolina this year after the feds cut long-term UI benefits.
One more thing: a new NBER paper, “Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit” by Joanne Hsu, David Matsa, and Brian Melzer looks at how jobless benefits affected the mortgage market and find “that Federal expansions of UI helped to avert about 1.4 million foreclosures and $70 billion of housing-related deadweight losses between 2008 and 2012.”
Certainly these analyses aren’t the end of the story. But are they really counter-intuitive in an improving-but-still-weak job market? The US employment rate of 59.0% is still well below its prerecession level. And there are still 3.2 million long-term unemployed vs. 1.3 million in December 2007. It is important to keep people in the labor force looking for work or otherwise risk many of these people, as AEI economist Michael Strain points out, ending up on government assistance until they reach retirement age. (Strain’s “Jobs Agenda for the Right” is still worth a look, as is his chapter in “Room to Grow.”)
It also important to understand how the safety net supported American incomes during the recession and its aftermath. As the Manhattan Institute’s Scott Winship wrote last year, ” … while the middle class—and especially the poor—saw declines in market income after 2007, the safety net appears to have performed just as we would hope, mitigating the losses experienced by households. By 2011, the safety net had returned middle-class and poor households’ incomes to the highest levels ever seen.” And jobless benefits were a key part of that safety net.
It seems they took a risk. Tax Foundation economist William McBride does a reality check on inequality alarmist Thomas Piketty’s Scrooge McDuck theory about wealth becoming ever-more concentrated and inherited:
In his book, Capital in the 21st Century, Thomas Piketty portrays the rich as heirs with privileged access to high rates of return, stating “it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor.” He points to the Forbes wealth rankings for support. In fact, the Forbes 400—an annual ranking of the richest Americans—indicates wealth is much more fleeting than Piketty suggests and is characterized more by entrepreneurship than by inheritance.
Some of his McBride’s findings:
– Of the Forbes 400 from 1987, 327 people have dropped off the list. Of the remaining 73 people, those with the highest annual rates of return are generally self-made entrepreneurs and investors—not heirs—with an average annual real rate of return of 5.6 percent over the last 26 years.
– The rate of return for the Forbes 400 as a whole, 2.4 percent, is roughly equal to Piketty’s estimated returns for the entire population.
– Wealth today is largely generated by entrepreneurial skill, with the number of entrepreneurs on the Forbes 400 list rising from 40 percent in 1982 to 69 percent in 2011.
– The role of inheritance has diminished over the last generation; the share of the Forbes 400 that grew up wealthy has fallen from 60 percent in 1982 to 32 percent today.
Back in 2008, economist Alan Blinder called the idea of a “cash for clunkers” federal rebate plan “the best stimulus idea you’ve never heard of.”
But more and more analysis of the program suggests “cash for clunkers” will be a stimulus idea we’ll never hear of again. “Cash for Corollas: When Stimulus Reduces Spending by Mark Hoekstra, Steven Puller, and Jeremy West finds the programs merely pulled forward car sales from the subsequent seven to nine months and thus “had no impact on the number of vehicles sold.” This counters the Obama White House claim that “a substantial proportion of the CARS sales were pulled forward from a far more distant future, and thus represented an important increment to aggregate demand at just the time when such demand was sorely needed.”
Second, thanks to fuel efficiency restrictions imposed on qualifying new vehicles, “‘Cash for Clunkers’ – a bill President Obama signed when the jobless rate was 9.5% — actually reduced the amount of money spent on new cars by two to four billion dollars” and “actually lowered total new vehicle spending over less than a year by inducing people to buy more fuel efficient but less expensive cars.”
Consistent with the existing literature, we show that while the program significantly increased the number of vehicles sold during the two months of the program, this entire increase represented a shift from sales that would have occurred in the following seven to nine months. Thus, over a nine to eleven month period, the program had no impact on the number of vehicles sold.
Strikingly, however, we show that over a nine to eleven month period, including the two months of the program, Cash for Clunkers actually reduced the amount of money spent on new cars by two to four billion dollars. We attribute this to the fuel efficiency restrictions imposed on new vehicles that could be purchased with the subsidy, which induced households to buy smaller and less expensive vehicles. In short, by lowering the relative price of smaller, more fuel efficient vehicles, the program induced households to purchase vehicles that cost between $4,000 and $6,000 less than the vehicles they otherwise would have purchased.
Thus, while the stimulus program did increase revenues to the auto industry during thetwo-month program, the environmental component of the bill actually lowered total new vehicle spending over less than a year by inducing people to buy more fuel efficient but less expensive cars. More generally, our findings highlight the difficulty of designing policies to achieve multiple goals, and suggest that in this particular case, environmental objectives undermined and even reversed the stimulus impact of the program.
While the GOP thinks the Fed has terribly mismanaged monetary policy in recent years, it might have a soft spot for the European Central Bank. Republicans, including Paul Ryan and Kevin Brady, have in the past advocated changing the Fed’s dual jobs-inflation mandate to a sole focus on inflation. Unlike the Fed, the ECB just has a mandate to maintain price stability. Also unlike the Fed, the ECB hasn’t engaged in massive bond-buys to boost demand.
It hasn’t, however, worked out so well for the euro zone where the jobless rate is 11.6%. From today’s Wall Street Journal:
The European Central Bank picked a difficult time to go on a diet. Faced with a weak economy and inflation rates edging toward zero, the ECB’s balance sheet—its holdings of securities and loans—has been shrinking fast, by over €1 trillion since 2012. That runs contrary to trends at the U.S. Federal Reserve, the Bank of England and the Bank of Japan, all of which are still increasing or at least not reducing their balance sheets. Those economies are now seeing more vigorous expansions and closer-to-target inflation than the euro zone.
And a WSJ article from last week, “Euro Zone Struggles To Stave Off Deflation“,
With each passing month, the euro zone edges closer to deflation. But at the same time, there are signs the single currency region’s economies are starting to revive. The question now is whether economic growth will finally start to lift prices. Or whether the region’s deflationary trend suggests the recovery will be fleeting at best. Euro-zone inflation increased at an annual rate of just 0.4% in July, having risen by 0.5% the month before. In July 2013 the rate was 1.6%.
Well, the FT’s Wolfgang Münchau gets it:
The Bundesbank’s call for higher wages is a sign of desperation and a signal the German central bank is not willing to address the underlying problem: a fall in aggregate demand, brought on by a financial crisis, excessive austerity and repeated monetary policy mistakes.
The eurozone does not need wage or price fixing. It needs further monetary expansion. The ECB should have started large-scale asset purchases a year ago. It certainly should do so now. The EU should allow governments to overshoot their fiscal targets this year, and suspend the fiscal compact, which would result in further fiscal pain from 2016.
Eurozone policy makers have again landed themselves in a situation where they need to do the opposite of what they have been promising. Stagnation and falling inflation are the price the eurozone is paying for muddling through the crisis.
The difference between the US and EZ recoveries is startling. While the former is weak, the latter is comatose. A key explanation, I and other market monetarists have argued, is the more active Fed. Now some conservative-libertarians will blame the EZ’s worse performance on the region’s high taxes and regulation. Big government. But it is hard to argue that point while also bemoaning big-government Obamanomics: Obamacare, Dodd-Frank, the EPA, the exploding national debt, tax hikes. As economist David Beckworth recently wrote, “Yes, the Fed’s QE programs were flawed. They were very ad-hoc and designed in a way that would prevent them from restoring full employment. But again, the alternative may have been far worse.” Again, the euro zone is that counterfactual. No thanks.