February 13, 2008
Robert Reich on what this economy really needs
Believe it or not, this sort of dovetails with my previous post. Here's Robert Reich in the NY Times:
We're sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.
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The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.
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The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.
A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. The current supplement for a worker with two children who earns up to $16,000 a year is about $5,000. That amount declines as earnings increase and is eliminated at about $38,000. It should be increased to, say, $8,000 at the low end and phased out at an income of $46,000.
Median household income is about $48,000. What would be the ramifications of making almost half of all households receive the earned income tax credit? The EITC is a great program, and probably could be expanded in the sense of giving a larger amount to the lower income earners. It's the closest thing we have to Milton Friedman's negative income tax. It is a potentially powerful anti-poverty program.
But I'm less sanguine about making the EITC a middle class entitlement, which is exactly what would happen if we were to follow Reich's advice. I'm not sure a middle class entitlement is what Friedman had in mind.
Reich is right about one thing though.
Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities. This will require, at the least, good preschools, fewer students per classroom and better pay for teachers in such schools, in order to attract the teaching talent these students need.
Except that he forgets to mention that it also requires a change in the way we fund schools at the state and local level. The federal government is impotent to do anything about that, and that's probably a good thing. Though it is tempting to think that the federal government could swoop in with a grand fix, I fear that they would make things worse. Our recent record on federal government intervention in K-12 education is not exactly stellar.
Posted by William Polley at 12:58 AM | Comments (1) | TrackBack
August 13, 2007
Fed wins battle, war not over
Compared to Friday the news is that there isn't much news on the liquidity front. The Fed today injected only $2 billion. That effectively takes out nearly all of what they put in on Friday. There still is an extra $12 billion or so from a 14 day repo that took place last Thursday. But the upshot of all of this is that according to CNBC the fed funds rate is trading at or just a little higher than the target.
In other words, nothing too out of the ordinary, and the Fed might just be content to let the funds rate sit a little bit higher today. It's as if they are telling the market not to count their chickens before they are hatched when it comes to that rate cut the street has been calling for. Everybody and their brother is talking about moral hazard, and rightfully so. It is still my opinion that a rate cut is not desirable and would only be used if something like what happened on Friday turned into something close to a true global meltdown.
But it didn't. Mr. Bernanke won this one. He stared down the analysts calling for a rate cut and didn't blink. He did exactly what was required of him and the Fed. Simply put, the funds rate started trading above the target on Friday. So the Fed injected the liquidity to get it back down to the target. Full stop. Nice job.
As I watched CNBC this morning, I also began to get a fuller sense, as did anyone else who was listening carefully, of what was really happening. I heard one of the analysts say that the leverage in the hedge funds had dropped dramatically and that a significant amount of cash had been injected into those funds. That, of course, is exactly what needed to be done, and when you step back and think about it, everything that happened on Friday starts to make sense. A lot of people were in some pretty risky positions and got out of those positions and onto firmer ground. Of course, on Thursday and Friday, without knowing what was really going on it looked like more of a panic. If it is true that the leverage has decreased, then there should be less of a chance of something like that happening again, or worse.
Are the hedge funds and the other big financial firms hunkered down to weather any more fallout from subprime delinquencies? We can hope so. And if it is so, it is largely because of the Fed's injection of liquidity on Friday that made that process take place in a more orderly fashion. When the final story is written, that action may look pretty heroic. But like all good heroes, the Fed would say they were just doing what needed to be done.
Of course, hearing that July retail sales were up more than expected also helped everyone get off to a good start today. But I want to call your attention to some other news, which I think will be the most under-reported story of today.
China's inflation rate now stands at 5.6% with food prices rising around 15%. Why mention that in the context of what the Fed is doing? Because just as the Fed has to be on guard for deflationary pressures being transmitted internationally, they need to be on guard from inflationary risks overseas. Higher prices from China are already showing up on our shores. The Fed needs to make sure that we don't end up importing inflation from China.
Of course that was far from our minds on Friday, and rightfully so. However, with that danger passed, at least for now, we need to keep an eye on the other risks out there.
Posted by William Polley at 10:23 AM | Comments (1) | TrackBack
March 07, 2007
Hans Rosling at TED
Russ Roberts saw this and wrote, "This is so cool." You really need to take 20 minutes of your day and watch this Google video of Hans Rosling giving a presentation on economic development at the recent TED conference.
Back in January, I linked to Rosling's site, http://www.gapminder.org. I'm about to start lecturing on growth in my intermediate macro course, and I intend to use the wonderful interactive tools on the site.
UPDATE: The video is also available from the TED blog along with other videos from the conference.
Posted by William Polley at 02:53 PM | Comments (0) | TrackBack
February 08, 2007
Addressing economic inequality with preschool
David Leonhardt dishes up his Economix column for the NY Times and writes of preschool programs in Oklahoma. Here's a choice quote:
...Long before children turn 5, there are already enormous gaps in their abilities. One study found that 3-year-olds with professional parents know about 1,100 words on average, while 3-year-olds whose parents are on welfare know only 525. Much of the gap is caused by environment rather than genes, according to a wide body of research.
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James J. Heckman, a Nobel Prize-winning economist at the University of Chicago, even argues that spending on preschool ultimately pays for itself. Early childhood education is so important that it makes workers more productive and reduces crime....
Click the link above to go to the study. Now, while I don't want to mandate enrollment in preschool, I do like the idea of providing incentives for low-income families to send their children to preschool if they choose. Compared to a lot of government spending, this would be money well-spent, and I would gladly have my taxes increased by a small amount in order to provide those incentives. I would structure it as a voucher system so that people could choose the preschool program that best fits their needs and/or beliefs. In any case, I would not want to set up a system of public preschools. This is a market in which competition is working, and could work on a larger scale as well. We have a lively market for preschools in Macomb--some church sponsored, one university sponsored, and some private-nonreligious. Pick the one that suits you. We are fortunate in that regard. Not all communities have as many affordable options.
But it would be nice if more communities did.
Posted by William Polley at 12:07 AM | Comments (2) | TrackBack