Capital Commerce

Former White House economist Larry Lindsey offers his version of fiscal stimulus: a payroll tax cut now, a carbon tax later. This makes him eligible for both my pro-growth Schumpeter Club and Greg Mankiw's Pigou Club. Of course, the reasons that Obama won't go for this idea are that a) it has nothing to do with pushing through his pre-existing economic agenda and b) won't create new constituencies for Big Government largess. Here's Lindsey:

Permanent tax cuts offer a much better option. The incoming chairman of the Council of Economic Advisers, Christina Romer, has estimated that the macroeconomic benefits of tax cuts can be two to three times larger than common estimates of the benefits related to spending increases.

The relative advantage of tax cuts over spending is even clearer when the recession is centered on the household balance sheet ... in particular, a permanent halving of the current 12.4 percent Social Security payroll tax on the first $106,800 of wages, split evenly between workers and employers. The direct revenue effect of that would be a bit under $400 billion per year, roughly in line with the present quantitative needs of the economy.It also meets our three tests of effective stimulus. First, the funds would flow directly to households through higher take-home pay and indirectly through a reduction in the cost of employment.  ... Second, the funds would be extremely timely, with the benefits hitting the economy with the first paycheck after the plan was implemented. Third, by lowering the taxation of labor, the plan would help produce a higher-employment recovery than would otherwise be the case.

Since the tax cut should be permanent to have maximum effect, the biggest challenge would be how to make up for the lost revenue once the macroeconomic need for fiscal stimulus had passed. In the short run, effective fiscal stimulus requires that government revenue drop, thereby enriching the private sector, and with the Treasury making the Social Security trust fund whole by way of intergovernmental bookkeeping. Longer term, however, spending cuts or a new source of revenue would be needed.Given the agenda of the incoming administration, the best source of such funds would be a greenhouse emissions tax

Continue reading »

The Congressional Budget Office released a study last week on employment in the manufacturing sector of the economy this decade. It's down, but blame the machines as much as Asia. I put the good bits in bold:

Although the decline in manufacturing employment in recent years is not a departure from long-standing trends—the sector’s share of total employment has been falling steadily for more than half a century—the recession of 2001 hit manufacturing particularly hard. ... The steep decline in manufacturing employment since 2000 is associated with two interrelated developments: rapid gains in productivity (output per hour) in U.S. manufacturing and increased competition from foreign producers. Productivity in manufacturing has risen by about one-third since 2000, and growth in that productivity has consistently exceeded that of the overall nonfarm business sector. 

Competition from overseas helped spur U.S. firms to boost productivity, but that competition has also dampened demand for goods produced in the United States, despite domestic manufacturers’ efforts to reduce costs through productivity enhancements. Those same developments have also had some beneficial effects for many U.S. residents, including the ability to buy manufactured goods at relatively low prices.

This decline in manufacturing employment represents a reallocation of jobs among industries rather than a decline in total employment in the United States. Until recently, other sectors of the economy have more than compensated in terms of overall employment, as evidenced by the relatively low 4.7 percent unemployment rate that existed during early 2007 and the roughly 7.5 million net new jobs created in the U.S. between early 2004 and the end of 2007.

Continue reading »

Here is what I learned from today's commentary by Larry Summers in the WaPo:

1) Be afraid. Be very afraid.  Summers says unemployment could hit 10 percent, higher than most Wall Street estimates. Even worse, I think, is his prediction that the economy could fall "$1 trillion short of its full capacity." Now if the economy were to grow at 3 percent over the next 12 months -- including the current quarter -- it would grow by roughly $350 billion. To fall short by a trillion bucks, the economy must actually shrink by $650 billion, or around 5.5 percent, over 12 months. Basically, that would be a mini-depression and certainly as bad a 12-month stretch as any economic period since the Great Depression. Thanks for the pep talk. Hey, who wants to buy a McMansion or a flat screen?

2) "Stimulus" is out. In a 761-word piece, Summers doesn't use the word "stimulus" even once. Maybe that's because the plan isn't about stimulating anything other than the quick passage of the Obama economic agenda. Oh, and the plan is not about "public works" but "public investment." Remeber that.

3) The Obama plan kind of pays for itself. Since without the plan, Summers argues, the economy will lose $1 trillion in output, then spending $700 billion to $1 trillion over two years to mitigate that loss really is kind of a bargain. Like plumbers and mechanics say, "It costs money, it costs money because it saves you money."

4) There will be tax cuts. Summers does mention tax cuts in the 761-word piece. He said there will be "tax cuts." Two words.  "Tax" and "cuts." Thanks for the clarification.

Continue reading »

Another piece of good news. This from IHS Global Insight on today's consumer spending numbers:

1) Consumer spending rebounded in November, as collapsing gasoline and fuel prices - and deep holiday discounts - boosted real spending power for the second consecutive month and motivated consumers to dispense a little more mad money.

2) This positive gain in November suggests that consumer spending in the fourth quarter will not be the total disaster that many had feared. While auto sales are expected to remain depressed near 10 million units this quarter, real spending on merchandise and other non-durable goods should be up. All told, we now expect consumer spending to decline by about 2.5% to 3.0% in the fourth quarter.

Continue reading »