It's Still The Economy, Stupid

Saturday, May 03, 2003  

Warren Buffett comes out against tax cuts

Courtesy of

Buffett also opined that the burgeoning budget deficit made current tax-cut proposals untenable. "We are going to spend $2.2 trillion this year; it's just a question of where it comes from," Buffet said. "And, frankly, I don't think enough of it comes from people like me and too much comes from people who work in our shoe factories."

Buffett also spoke about corporate governance and some potentially scary things going on in the derivatives market. It appears like he's in favor of corporate governance reform, stronger regulation of the financial markets to prevent liquidity crises, and no more tax cuts. I wouldn't listen to him, though. I've heard that aside from being just plain old un-American, that Warren Buffett guy just hates a healthy economy.

posted by Matthew | 7:30 PM |

Thursday, May 01, 2003  

Ron K., sitting in for host Markos at the Daily Kos, takes a more detailed look at Bush's job creation track record (or lack thereof):

Intermission Time at the Job-Demolition Derby

Slate's Daniel Gross beat me to the punch with a mid-term review of W's record of creative destruction in nonfarm payroll employment.

In the 22 months since President Bush signed his tax cuts in June 2001, the number of payroll jobs has fallen from 132.11 million to 130.41 million in March 2003. In other words, the biggest tax cut in American history has so far "cost" us 1.7 million jobs and counting.

As US population grows, it takes about 2.2 million new (nonfarm payroll) jobs to keep the employment rate steady-state. To "break even" over his entire term, Bush needs 8.8 million new jobs.

He's down 2 million jobs to date, so he'll need 10.7 million jobs in 18 months to leave job-seekers "better off than you were four years ago" when Election Day rolls around.

Not to worry. First, pass some juicy tax cuts, generating 1.4 million jobs.

Next, ask Greg Mankiw's Council of Economic Advisors for another 9.3 megajobs worth of neat ideas. [more]

posted by MB | 12:11 PM |

One scoop, or two?

U.S. April ISM Manufacturing Index Falls to 45.4
By Carlos Torres
Washington, May 1 (Bloomberg) -- U.S. manufacturing contracted in April the most since October 2001 as new orders and employment declined, evidence that factories were slow to respond to the easing of tensions with Iraq.

The Institute for Supply Management's manufacturing index dropped to 45.4 last month from 46.2 in March. Those are the first back-to-back readings below 50, signaling deteriorating business, since an 18-month span ended in January 2002.

Now, I know that the mighty Alan Greenspan assured Congress, and by extension, the American public, yesterday that an economic recovery was just around the corner.

But Greenspan has been wrong before: To pull a few choice picks out of the old timewarp bag:


Paul Blustein, Washington Post
June 6, 1991

Federal Reserve Board Chairman Alan Greenspan said today that recent evidence suggests the U.S. economy has begun to recover from recession, a prospect that makes unlikely further cuts in interest rates by the central bank to spur growth

Greenspan's remarks, though carefully couched, marked his first assertion that a recovery appears to be underway, in contrast to his earlier view that the recession that has gripped the economy since last summer finally may be reaching its end...

Or perhaps:


John M. Berry, Washington Post Staff Writer
July 17, 1991

The Federal Reserve has set the stage for a continuing election year argument with the Bush administration over interest rates by aiming for slower economic growth and lower inflation in 1992 than the administration is seeking

Federal Reserve Chairman Alan Greenspan said yesterday that he expects a "robust" recovery now that the recession has ended.

Of course, Greenspan's pronouncement of the recession's demise was somewhat premature, and in the months following that assertion, the economy spiraled downward once again. Double-dipping, it was termed then. It still is.

[x-posted at Wampum]

posted by MB | 11:40 AM |

Wednesday, April 30, 2003  

The Washington Post on Tax Cuts

Jonathan Weisman has an article entitled "President Says $550 Billion Reduction Would Create More Jobs". Here's a nice bit of reasoning by the president:

"Some members of Congress support tax relief but say my proposal is too big," Bush said in his Saturday radio address. "Since they already agree that tax relief creates jobs, it doesn't make sense to provide less tax relief and, therefore, create fewer jobs."

If you have the sniffles, an ounce of Nyquil will make you feel somewhat better. The only logical conclusion is to drink the whole bottle. The article continues directly:

But few economists would argue that tax policy is so straightforward. Taken to its extreme, Joel Slemrod, a tax economist at the University of Michigan, said that Bush's argument would support eliminating taxes altogether for the sake of job creation.

"Logically, the statement that more tax cuts are better is certainly wrong," Slemrod said.

Here are the president's numbers:

Advisers calculated in February that the president's full, $726 billion package would create 1.4 million jobs through 2004. The House's trimmed down, $550 billion package would create just over a million jobs, by the White House's calculation. A $350 billion package would create 425,000 fewer jobs, White House spokesman Ari Fleischer told reporters last week.

Doing a little math, these numbers translate respectively into per-job-created costs of $518,000, $550,000, and $609,000 for the smallest tax cut. Note how the numbers assume increasing returns (i.e., lower cost-per-job) to tax cuts? Most things in economics are subject to diminishing returns (it's such a common phenomenon that we call it The Law of Diminishing Returns).

Other highlights from the story:

  • "Although the Council of Economic Advisers projected that the original Bush plan would create 510,000 new jobs this year, the employment level, on average, would only be 192,000 jobs higher than it would be without the proposal."
  • "A White House paper also cautions that virtually all of the jobs "created" by the package by 2004 would be hiring that would have happened anyway in 2005 through 2007."
  • "Beyond 2007, the tax package would actually do more harm than good, warned Joel Prakken of Macroeconomic Advisers LLC, which developed the computer model the White House used" [as a result of ballooning budget deficits and the accompanying increase in the interest rates, and the depressing effects thereof on interest rates].

There's more, read the whole thing. All in all, a pretty damning story for tax cut supporters.

I talked a little bit about "dynamic scoring", the new name for the theory that lowering tax rates increases tax revenue, here. Matt Yglesias has a quip here on a NYT story from April 17th summarizing the results of various economic models' predictions about the effects of the Bush proposal--they are all negative, even the models that incorporate dynamic scoring.


UPDATE: CalPundit has more here, in a post that draws upon some excellent sleuthing by Max Sawicky, whose post is here.

posted by Angry Bear | 3:44 PM |

Brad Delong on Alan Murray's praising of Voinovich ringing false:

Alan Murray praises Senator Voinovich for his "emperor's new clothes" stand: pointing out that deliberately unbalancing the federal budget in the long term is very bad policy--not the kind of thing that anyone can pretend is best for America. One quibble, however: Murray writes that since "the president's hand-picked congressional budget director, Douglas Holtz-Eakin, has cast doubts... with his 'dynamic scoring' report" on the "easy argument that tax cuts will spur growth and offset their cost." What "easy argument"? If you took your economics seriously--had not long since abandoned any claim to be more than a pure political hack--the argument that cutting dividend taxes by this while widening the long-run budget deficit by that would significantly boost economic growth has always been as hard to make as it would be to climb Mt. Everest in your gym shorts. [more]

posted by MB | 3:19 PM |


For those who like to get outraged over CEO pay, take a look at this CNN/Money story. I actually have no problem with high CEO pay, as long as it is tightly linked to the performance of the company. I should probably also add, as long as the compensation committee is independent and not beholden to the CEO. Jack Welch, Lou Gerstner, and Stanley Gault all made huge contributions to their companies, to their employees, and to the economy (the latter two saved their respective companies, IBM and Goodyear, from ruin). When the pay is not linked to performance, as is the case with severance packages and to some degree stock options, then the pay levels are in fact pretty outrageous.

Why do companies offer generous severance packages? One theory is that the compensation committee is controlled by the CEO. Another is that it allows them to give lower pay during the CEO's tenure by reducing the risk the CEO faces. Of course reducing the risk the CEO faces in this fashion reduces the link between CEO pay and company performance, to some extent invalidating the theory behind high pay in the first place.


P.S. I also talked about this issue in a post on dividend taxes at my native blog,

P.P.S. Thanks to Wampum for setting this up and for inviting me to contribute.

posted by Angry Bear | 3:11 PM |

Tuesday, April 29, 2003  

The Angry Bear is joining in the fray at It's Still the Economy, Stupid, in between his home blog and "tenurable activities". It'll be good to see more fur fly as he gives the opposition a few well deserved swats here and there.

posted by MB | 2:07 PM |

To The Point on the disturbing bond market bubble

To the point discusses a catastrophe in the making. The article talks about the bubble in the bond market, interest rates, and why fiscal mismanagement is leading to a potentially enormous economic calamity. That is, the long-term doom that economists and Democrats predict is approaching, and it's going to hit you. Surprise surprise. Here's the conclusion:

Up until now, political decisions have had a large, though by no means overwhelming short-term effect on the GDP. Long-term, the damage is accreting, as prudent fiscal management could moderate our trade deficit with a budget surplus. But what am I smoking?

So when we do have to pay the piper, and people go to the government because they don't have jobs or money or health care, normal people, like you and me, workers, business people, professors laid off by universities with smaller endowments, our economy, and thus our fates, will sit in the hands of a few very powerful conservative men who are inclined to let us know that America was founded by people willing to bootstrap themselves up from poverty.

posted by Matthew | 7:58 AM |

Forget the So-called-liberal-media: It's the Pollyanna Press now

The irony of it all. In a rare occurrence, an Administration release actually offered an honest assessment of a negative economic report:

The Employment Cost Index for total compensation rose 1.3 percent from December 2002 to March 2003, following a 0.7 percent gain from September to December 2002, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Benefit costs increased 2.2 percent and continued to substantially outpace the 1.0 percent gain in wages and salaries for civilian workers in March. The Employment Cost Index (ECI), a component of the National Compensation Survey, measures quarterly changes in compensation costs, which include wages, salaries, and employer costs for employee benefits, for nonfarm private and State and local government workers.

Employer costs for benefits account for nearly 30 percent of compensation costs and include such items as health and other insurance, retirement plans, paid leave, and legally-required benefits like Social Security. For the year ended March 2003, benefit costs increased 6.1 percent, greater than the 4.9 percent gain for the year ended March 2002. Much of the increase in benefit costs stemmed from the continuing rise in the costs for health insurance and the recent upturn in retirement costs, particularly for defined benefit pension plans.

But could the so-called-liberal New York Times report such a frank admission by the BLS? Obviously not:

Workers' Wages, Benefits Up 1.3 Percent
Filed at 8:35 a.m. ET

WASHINGTON (AP) -- U.S. workers' wages and benefits rose by a brisk 1.3 percent in the first three months of 2003, the biggest increase in nearly 13 years, even as businesses struggled with the lackluster economy.

The increase in the employment cost index for the January to March quarter was nearly twice as big as the 0.7 rise posted in the fourth quarter of 2002, the Labor Department reported Tuesday.

Although companies have been keeping work forces lean to deal with the uneven economy, they are providing workers who are still on the payrolls more generous compensation packages. That's goods news for the ranks of the employed but can be a potential strain on some profit-pressed companies.

Spin, spin, spin.

posted by MB | 6:17 AM |

Sunday, April 27, 2003  

An Overly Optimistic Unemployment Rate?

The New York Times has an important story out today about those who have dropped out of the labor force. There's the usual sob stories of the unemployed, but the key passage is here:

Over the last two years, the portion of Americans in the labor force — those who are either working or actively looking for work — has fallen 0.9 percentage points to 66.2 percent, the largest drop in almost 40 years.

More than 74.5 million adults were considered outside of the labor force last month, up more than 4 million since March 2001, the Department of Labor says. They are people who fall outside the government's definitions of either employed or unemployed: they do not hold jobs, but they also have not gone out seeking work within the past month.

This group includes retirees and parents who have been home taking care of their children for years, but the surge of dropouts suggests that the jobless rate — which was 5.8 percent last month, roughly where it has been for the past year — offers an artificially sanguine picture of the labor market, many economists say.

"People use the unemployment rate as some kind of gauge of the health of the economy," said Robert H. Topel, a professor of economics at the University of Chicago. But because of the number of people now outside of the labor force, he said, "the unemployment rate does not give you the same kind of information it did in the 1970's or 1960's."

This answers the question that's been bugging me for a while. Why, if we're in a mild recession with such low unemployment, does it feel so stressful? Why is pay being cut, as this other NYT story shows? What destroyed the leverage of employees?

The answer is unemployment. It's just not showing up in the stats.

posted by Matthew | 8:50 AM |

Brad DeLong's take on the Bush Stimulus (???) Plan:

It's an Industrial Sealant! No, It's a Dessert Topping!

Paul Krugman takes aim at the Bush tax cut. The underlying problem is that the Bush administration had no agreement about what its economic plan was. (a) The political shop seems to have demanded a bold policy that would fight the recession and create jobs. (b) The people who actually control things demanded a tax cut for the rich. (c) The economists (chiefly Glenn Hubbard) sought a program to boost economic growth. This "It needs to be an industrial sealant! No, it needs to be a dessert topping!" policy-development process produced (a) an increase in the deficit that is not front-loaded toward today (when a bigger deficit would be good and boost employment) but back-loaded toward the distant future, and as a result the (b) tax cut for the rich that was proposed took the form of (c) proposing to permanently reduce the double taxation of corporate income.

(c) by itself might have been a good program to boost long-run growth, but not if it is accompanied (as it is) by a large, permanent increase in the government's budget deficit--an increase that is more effective at retarding long-run growth than the rationalization of corporate income taxation could possibly be at boosting it. (a) by itself might have been a good program to boost employment by boosting demand in the short term, but--as Krugman points out--it is extraordinarily ineffective and costly when considered as a program whose main point is to boost employment over the next two years. [more]

posted by MB | 8:37 AM |