Matt Yglesias

America’s Housing Shortfall

“Everyone knows” that massive overbuilding of housing during the boom years is a crucial contributing “structural” factor to current unemployment, but Scott Sumner looks at the actual data and finds little evidence of housing oversupply:

Source: U.S. Census Bureau

Here’s my assumption. Housing construction normally seems to fluctuate between one and two million units. Let’s take 1.5 million as roughly the trend rate which keeps up with population. Yes, it’s true that we exceeded that number every single year from 2002 to 2006, and the total excess production was about 1.87 million units. That’s a lot. But over the next four years there was a shortfall of about 2.6 million units. So why do we seem to have a hugely excessive number of homes, if we are actually 730,000 short?

Now of course some of these units are mislocated relative to demand. And severe regulatory restrictions on density mean that lots of this investment is non-optimal. But there are plenty of people in this country who, given decent aggregate demand conditions, would be forming new households and occupying this housing stock.

The Corporate Recovery

David Leonhardt reflects on America’s corporate recovery:

The gross domestic product here — the total value of all goods and services — has recovered from the recession better than in Britain, Germany, Japan or Russia. [...]

Relative to the situation in most other countries — or in this country for most of the last century — American employers operate with few restraints. Unions have withered, at least in the private sector, and courts have grown friendlier to business. Many companies can now come much closer to setting the terms of their relationship with employees, letting them go when they become a drag on profits and relying on remaining workers or temporary ones when business picks up.

Just consider the main measure of corporate health: profits. In Canada, Japan and most of Europe, corporate profits have still not recovered to precrisis levels. In the United States, profits have more than recovered, rising 12 percent since late 2007.

On some level, though, this still looks to me like aggregate demand. Normally highly profitable firms would attract lots of capital and expand rapidly. People don’t just sit around saying “what a highly profitable store I have here, let me count my money”—they try to franchise and get richer and richer. The exception is that if you expect generally depressed economic conditions then the mere fact that you’re running one highly profitable store may still leave you doubting that a second store would make money. And, after all, with American households debt-constrained and many households suffering reduced income due to unemployment it seems quite reasonable to think that even profitable firms may not have expansion opportunities. You need to raise demand expectations by putting money into people’s hands.

That said, what I think is clear is that a country with an institutionally stronger union movement wouldn’t have let the current situation come to pass. What happened in Germany is basically that faced with a political culture that’s absolutely terrified of stimulus, they worked out a labor-capital bargain that avoided mass unemployment even in the face of very poor GDP performance. It’s possible that a hypothetically stronger labor movement in America would have worked out such a deal, but also possible (and more, I think, in keeping with the American character) that it simply would have demanded more stimulative policy and we’d have both lower unemployment and higher real output. As it stands, though, America’s weak labor movement is concentrated in health care and the public sector so the bulk of its reduced store of ammunition has been focused on those elements of the economy.

Construction Workers and the Recession

It’s both true that the quantity housing construction has declined sharply and also that the unemployment rate has risen sharply, but as Scott Sumner points out for all that people want to keep talking about construction workers you just can’t make the numbers add up on this:

January 2006 — housing starts = 2.303 million, unemployment = 4.7%

April 2008 — housing starts = 1.008 million, unemployment = 4.9%

October 2009 — housing starts = 527,000, unemployment = 10.1%

In a well-managed sectoral shock, what happens is a lot of construction workers lose their jobs and then . . . most of them get new jobs. But when you let aggregate demand collapse, that’s not what happens and instead you end up with 10 percent unemployment. Instead of the construction workers getting new jobs, folks who sell things to construction workers lose their jobs and the cascade tumbles forward.

The Corporate Bureaucracy

Microsoft is a highly profitable firm. And it shows all signs of being able to continue to obtain large profits selling Windows and Office. By contrast, as Karl Smith observes, its “Online Services” effort to compete with Google sucks up large and growing quantities of cash:

Now it is possible that Microsoft will thrive, raise the dividend and deliver real gains to its shareholders. Yet, it is equally possible that Microsoft will lose in the new environment, go out of business or be forced to limit its dividend increases to less than the rate of inflation. In that case shareholders will lose money by having invested in Microsoft.

There is a simple way out of this. Shutdown the Online Services Division. Double or even triple the dividend and payout the profits to shareholders.

What’s your guess on the probability that Microsoft will do this?

But, obviously, Microsoft won’t do this. Successful companies basically never do this. And in particular companies like Microsoft with hugely successful businesses that will predictably decline in the future are especially loathe to just take profits while they can and accept eventual decline. The firms want to live! They want to grow and prosper. They want to reinvest profits in new lines of business. They want to conquer the world. The firm, in other words, is “captured by its corporate bureaucracy” and I agree with Smith that this is an underrated source of loss to the American economy.

I note that mitigating this problem is supposed to be one of the main advantages of fancy financial shenanigans. And there was a brief moment in which shenanigans were being deployed to reorganize conglomerates and unlock shareholder value. But that process seems to have essentially ground to a halt even as the quantity of shenanigans has exploded.

It’s Always a Good Time to Regulate Well!

Ezra Klein and Kevin Drum have an interesting back and forth about Michael Mandel’s idea that regulations should be somehow “counter-cyclical” which, in his formulation, basically amounts to saying they should be laxer during recessions.

The more I think about this, though, the more I think the insights here basically just amount to “it’s always a good idea to have sound public policy.” If you imagine some rule that’s really important to preventing cans of beans from giving people botulism, that rule doesn’t suddenly become less important in a recession. What’s more it’s hard to imagine a 12-month holiday on food safety rules for canned goods leading to a spike of job creation. It would mostly freak people out. Conversely, an unwise regulation like the rule in some parts of DC giving preference to franchised chain restaurants over non-franchised chain restaurants (or consider this) doesn’t actually become worse during a recession.

I think that when there are downturns, public policy questions just become more salient. Good micro policies are, however, always really excellent things to have. Nonetheless, I don’t think anyone really thinks the Italian labor market is holding up better than the American because of superior microeconomic policies.

The Only-in-America Output/Employment Breakdown

Neil Irwin on the Fed’s new “beige book” on the state of the economy:

The economy “continued to expand moderately” at the end of last year, according to a new report from the Federal Reserve that shows a recovery that, although not rapid, is on track. [...] Add it all up, and the picture is an economy very slowly gaining momentum, with some continued pockets of distress but also definite signs of progress as 2011 gets underway. In the all-important labor market, for example, conditions “appear to be firming somewhat,” though not enough to push wages upward.

To put this in some context, I would suggest you read this post from Nick Rowe. But to steal the punchline, though by definition a recession is bad for GDP, in output terms the United States has weathered this recession better than most of our peers:

Only Canada does better. And of course the Canada-like portions of the United States—those with little overbuilding in the housing sector and/or valuable natural resources—are doing better than average. But how about employment:

Total, unmitigated disaster. And as Rowe points out this isn’t because there’s been some cosmic breakdown of the output/employment relationship, the breakdown is exclusive to the United States of America. To make monetary policy under the circumstances, you’d really want to know why this is. In the absence of a good explanation, if I were an FOMC member I’d say “damn the torpedoes, full speed ahead” and interpret this as meaning that the USA currently has the capacity to dramatically (albeit temporarily) increase its rate of real GDP growth. But actually FOMC members may well look at the fact that real output is doing okay, all things considered, and declare mission accomplished.

Unemployment Doubling Everywhere

Here’s a basically unreadable chart that you should click on in order to be able to see a larger version of:

That’s from Mike Konczal and it shows the ratio of U3 unemployment in November of 2010 to U3 unemployment in November of 2007. And the point is that for the vast majority of states unemployment rose by between 50% and 150% during that period, indicative of a widespread collapse of aggregate demand that’s made it suddenly much less appealing to employ people:

The average is 1.93, and the median is 1.87. So roughly a doubling. So to me Nevada having a higher unemployment isn’t nearly as interesting as why Nebraska has a 4.6% unemployment rate when it used to have a 3% unemployment rate – a 50% increase. Why has North Carolina’s unemployment rate doubled from 4.8% to 9.7%? Yes Nevada is an important story, but it’s clearly an outliner in what is a national trend. They didn’t all have housing bubbles.

There’s a particularly severe problem relating to Nevada and especially to Florida which has a much higher population. Even in a higher AD world, there’d be an important question of what kind of targeted assistance could be provided to people in those areas severely afflicted by overbuilding and the construction downturn. But the widespread and fairly consistent nature of the rise in unemployment shows that thus far we’ve made relatively little progress even on the “easy” issue of below-trend economy-wide spending.

Killing Jobs, Killing People

(cc photo by LateNightTaskForce)

Steven Pearlstein has a great column on the right’s obsessive use of the phrase “job killing”:

What’s particularly noteworthy about this fixation with “job killing” is that it stands in such contrast to the complete lack of concern about policies that kill people rather than jobs. Repealing health-care reform, for instance, would inevitably lead to thousands of unnecessary deaths each year because of an inability to get medical care.

Although lack of effective regulation led directly to the deaths of 78 coal miners last year in West Virginia, Republicans continue to insist that any reform of mine safety laws is bad for miners’ employment.

Republicans also continue to oppose food safety legislation that could save the lives of hundreds of Americans killed each year by contaminated food, just as they oppose any regulation that would effectively keep assault weapons out of the hands of convicted criminals and narco-terrorists who kill thousands of innocent victims on both sides of the Rio Grande.

One reason I’m increasingly convinced that liberals need to learn to talk about monetary policy is that this jobs talk is both very powerful and also quite misguided. For any given state of US public policy, there’s going to be some level of “full employment.” That doesn’t mean no unemployment. It means that efforts to stoke further reductions in unemployment through monetary expansion will lead to accelerating inflation. Once you’re at full employment, to achieve further increases in national output you need to make more growth-friendly public policies. And in general, growth-friendly policies are a good thing to adopt, though I personally prefer to think of growth-friendly policies that don’t lead to dead miners.

But suppose the economy is operating below potential. Suppose 9.4 percent of your workforce doesn’t have a job. Suppose a rising number of able-bodied adults aren’t even in the labor force. Suppose many of your part time workers would like full-time work. Well in that case you don’t need to run around being paranoid about how many people would have jobs in the hypothetical scenario where the economy’s running at full-tilt. You just need to step on the gas!

Inequality and the Labor Market

I cooked up this model in my head whereby asymmetric time spans of slack and overheating labor market conditions would exacerbate inequality, but then I thought I might be wrong because normally I try to avoid espousing economic theories I haven’t previously read from someone with a PhD. Fortunately, Tyler Cowen does have a PhD and says this was cut from a draft of something he was working on:

A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. And if all those new orders require keeping the warehouse open late, the company may need to bring in a new night watchman. To paraphrase a common metaphor, a rising tide eventually lifts most boats. When the economy’s expanding, a worker who previously was worthless will at some point become valuable again. But this means that workers at the bottom of the economic ladder will have to wait until the entire economy has mended itself before they have the chance to improve their lot: That can be a painstakingly slow and uncertain process.

But Cowen is a libertarian, so his way of phrasing this is kind of in the mode of “unemployed folks are going to have to gut it out.” But Google revealed a similar point in the 2003 edition of The State of Working America from Lawrence Mishel, Jared Bernstein (now of the vice president’s office), and Heather Boushey (now my colleague at CAP) from the Economic Policy Institute:

Monetary policymakers aim at maximum employment consistent with long-term price stability. In other words, an economy that avoids either an output gap or an overheating scenario. Both kinds of failure are bad, but the failures have different consequences for different types of people. Low-skill individuals and the working class suffer disproportionately form output gaps and benefit disproportionately from full employment. Elites—meaning not just 23 rich bankers and Fred Hiatt, but a much larger minority of the country—faces a different set of incentives.

Understanding the State/Local Budget Crunch

(cc photo by Justin Brockie)

From the California section of N+1′s year in review:

Without any pressure telling them otherwise, Democrats, faced with an ineluctable revenue crisis, are going to go with what has been their signature political move for decades: conceding. The point is, it hardly matters whether you cut the budget with fat Republican enthusiasm, like Chris Christie in New Jersey, or gaunt Democratic humility, as Jerry Brown has promised. What effect this coming evisceration of social services and mass layoff of public servants will have on the makeup of the country is incalculable. That it will only contribute to the deep recession, which supposedly ended several months ago, is axiomatic.

I think the spirit here is right, but the details are wrong. The thing about state governments is that they need to balance their budgets. Consequently, it actually matters a great deal whether you implement cuts with Christie-like enthusiasm or not. Christie has actually been lowering taxes on the richest New Jerseyites, thus increasing the need for cuts. Conversely, while it’s quite true that state budget cuts amidst a recession impair recovery, it’s also true that state tax hikes amidst a recession impair recovery. The only solution to the macroeconomic problem of state/local budget cuts is for congress to appropriate funds.

This is a really big problem! Congress should appropriate funds. What’s more, congress should—but gives no indication of giving any consideration whatsoever to doing so—be looking at some way to reduce the systematic tendency of state and local government to engage in pro-cyclical budgeting. So it’s really two big related problems, and their scope is much wider than the ideological back-and-forth about the optimal size of the state/local public sector.

Pending Commercial Real Estate Doom

There’s an organization with a floor in the same building as CAP/AF called the “Institute for International Finance” and I sometimes wonder what it is they do. According to Gillian Tett they release alarming reports about commercial real estate. She starts with the observation that there’s been a lot of “extend and pretend” in the CRE world and continues:

[L]ook at some numbers compiled by the Institute of International Finance, the Washington-based banking lobby group. The IIF calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since).

Thus far, the banks have “dealt with potential delinquency problems in part by extending loans until 2011-13”, the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, “nearly half of these are at present �underwater’, ie have mortgages in excess of the current value of the property”, it adds.

What’s more, while homeowners have been subjected to major moral suasion campaigns to get them to avoid strategic defaults, commercial property is owned by rich businessmen who’ll be expected to act like rich businessmen and try to maximize profits. The big losers here are likely to be European banks, as well as America’s gigantic “small banks” sector. Of course if we get adequate action to try to push growth back up we may be able to mitigate some of this.

How Rich Is Mark Zuckerberg?

The answer keeps shifting:

Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction. [...] In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net-worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

Once again we’re watching regulatory arbitrage in action as Facebook seeks loopholes around the rule that prevents it from having more than 499 investors without opening its books. But this is also, I think, a reason to believe it would be better to levy a consumption tax with a highly progressive rate structure instead of our current income tax with a modestly progressive rate structure. One can count how much money Mark Zuckerberg is spending in any given year and more or less what he’s spending it on. The ups-and-downs of his notional fortune, by contrast, are pretty unstable and depend in part on things like whether or not Goldman Sachs wants to buy Facebook shares at an inflated value in order to capture a potentially valuable middleman role for itself. This means it would be technically and economically feasible to levy very very high marginal rates on extremely extravagant consumption in a way that’s just unworkable with investment income.

In bonus rich people news, apparently upper class have less empathy than normal people.

Decline is a Choice

I don’t think large real reductions in basic science and R&D are going to benefit America over the long haul, do you?

Alan Leshner, CEO of the American Association for the Advancement of Science, told the AFP news agency that the spending cuts could translate into a five to ten percent cut in research and development in the science sector for fiscal years 2011 and 2012.

“One big fear is that one version of the Republican agenda suggested bringing funding back to 2008 levels and that for science would be catastrophic,” said Leshner. “These kinds of budget cuts work against the ultimate national goals of restoring the US economy and its international prowess.”

Nearly all “competitor countries, including India, China and Korea, are increasing investments in science and engineering research, development, and education,” he added. “US funding looks like it could be heading the opposite direction.”

Don’t buy the “competitor countries” argument too much (though it may be useful for scaring House members), increased Asian spending on these things will have spillover benefits for the USA. But it’s absolutely perverse to respond to a cyclical downturn in economic activity by curtailing useful investments in long-term acquisition of knowledge. That’s how a pothole turns into a “car spinning out of control” scenario.

The Conservative Recovery

The state of the labor market is not good, which has understandably taken a toll on the popularity of Barack Obama. But what’s underappreciated is the extent to which the bad labor market reflects what conservatives say they want to see. As David Leonhardt points out, we’re basically seeing a structural decline in public sector employment:

Now I’m not saying people should be happy with the state of the economy. I’m saying, instead, that conservatives should wake up to the fact that their economy theory is nonsense. On their telling, the state of the economy is bleak due to Obama’s socialistic policies and if we just trimmed back government the private sector would come roaring back. The truth is that under Obama the private sector has been growing and the public sector’s been shrinking. But public sector shrinkage hasn’t spurred private job growth, it’s been a drag on it. Which is exactly how it should be. Your town’s firefighters are also customers for your town’s stores and plumbers. Cutbacks in bus service make it more difficult for people to get to work and participate in the economy. If we’d had more stimulus—specifically more fiscal aid to state and local government—then those public jobs wouldn’t have gone away (lowering unemployment) and the income streams attached to them wouldn’t have gone away either, spurring private employment and further improving the labor market.

There Is No National Sock Shortage

This USA Today story about kids asking santa for basic necessities is actually more tragic than most people recognize:

Santa Claus and his elves are seeing more heartbreaking letters this year as children cite their parents’ economic troubles in their wish lists. U.S. Postal Service workers who handle letters addressed to Santa at the North Pole say more letters ask for basics — coats, socks and shoes — rather than Barbie dolls, video games and computers.

Something important to note here is that this is not only sad, but fundamentally avoidable. The world is not suffering from a shortage of socks. If the government tried to give an iPad to everyone who writes in asking for one, we’d swiftly run out of iPads. The supply is constrained. But we have lots of socks. There’s nothing stopping the government from buying socks and giving them to everyone. What about the money? Doesn’t the money have to come from somewhere? Not really. As Ben Bernanke says “[t]he U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”

Now of course having the Post Office initiate a big sock-purchasing program would be pretty goofy. But the point is that we have in this country right now lots of factories running below capacity. Lots of workers doing no work. Lots of trucks not delivering anything. We’re not short on ability to produce more things, or on ability to transport, and distribute more things. We have citizens who would buy more things if they had more money. The real shortfall we’re facing, in other words, is a shortage of money. This is a good kind of problem to have, since it’s actually really easy to fix: Just print more. But it’s also an extremely frustrating problem to have, since it’s so easy to fix. The shortage of money isn’t the only problem America has. We also have, for example, a shortage of really excellent teachers and it’s hard to know what to do with that. But our money shortage is very solvable.

Deficit-Talk

Atrios: “I really can’t comprehend that with 9.6% unemployment politicians keep talking about the deficit as if it’s the big problem.”

Of course he’s right. The deficit is a problem only in the sense that the short-term deficit is currently too small. But this is one reason I’m surprised so many liberals are being so stinty in their praise of the recent tax deal. We’d just all been spending 12 months arguing that contrary to the conventional wisdom, short-term deficits should be smaller. We also spent a lot of time observing that conservative deficit-talk is fraudulent and all they care about is tax cuts for the rich. Then the Obama administration, after a year of fruitless austerity gambits, finally called their bluff. “Fine, you can have your deficit-increasing tax cut extension, but give me some other deficit-increasing stuff that my economists say has a higher multiplier than your tax cuts for the rich.” Now the deal is done, and for all the panels and commissions and all the money Pete Peterson’s spent the parties are coming together to make the deficit bigger.

Which is as it should be. As Larry Summers explained in his farewell talk:

Even with all the fiscal measures of the last several years, total borrowing in the American economy has failed to grow for the last 2 years. That is the first two year period since the Second World War when total borrowing in the U.S. economy has not increased.

Let me be clear: Even with our deficits, the amount of extra debt is less than the amount of reduced borrowing in the private sector. Increased federal borrowing has offset, but only partially, deleveraging in the private sector.

The answer: More public borrowing. Which is what we’re getting.

The tragedy here, as I’ve said before, is that Pete Peterson is a public-spirited man who’s wound up wasting a great deal of money paying people to talk about the deficit. If instead he’d paid more attention to talking up the work of Peterson Institute of International Economics researcher Joseph Gagnon about the need for more monetary stimulus, then I bet today we’d already have lower deficits and lower unemployment.

Who Exports?

Few things in life tickle my nationalist bone quite like talking about the balance of trade with Germans. One thing you often hear from Germans on this issue is a kind of patronizing line about “oh, are you saying we should make our products worse? If America has a trade balance problem, you guys should make better stuff!”

This whole line of thought seems to me to be largely based around confusing exports with net exports. If you just look at aggregate exports then Germany and the United States are very closely packed. There’s only slightly more German-made stuff being purchased by non-Germans than there is American-made stuff being purchased by non-Americans. And if you look at adjacent countries, the combined GDP of Poland + Czech Republic + Austria + Switzerland + France + Belgium + Netherlands + Luxembourg + Denmark is wildly higher than Mexico + Canada. Indeed, France alone has a bigger economy than Canada and Mexico combined. Or to look at it in the most clear-cut way, the per capita output of the American economy is higher than the per capita output of Germany, whether measured at market exchange rates or with PPP adjustments.

This discussion then tends to loop around into the idea that they have more manufacturing in Germany (which is true) but output of agricultural commodities, software, movies, TV shows, music, etc. all counts as real output and the German economy is only about 27 percent manufacturing anyway.

Long story short, the issue here really and truly is one of German households engaging in a very high rate of savings and not one of Germany firms being somehow extra awesome at making desirable products. German firms are great, the German people make a lot of stuff, and on a per hour basis the German workforce is incredibly productive. And good for them! But they’re not actually not outproducing the United States of America, they’re buying less stuff. Which would be fine if when the world turned around to look at what’s happening with these savings we saw the world’s finest banking system financing highly productive investments all ’round the world. But is that actually what we see? I see German banks financing bum real estate developments in Ireland, Nevada, Spain, Florida, etc. It seems to me that people all around the world—but not least in Germany—would be better-off if German households owned more XBoxes, MacBooks, jamon iberico, and feta cheese and fewer indirect claims on mortgage-backed securities.

The issue of the questionable prudence of the savers is a real one here. If I heard more people saying with a straight face “Matt, the reason our households save so much is our banks are uniquely skilled at channeling savings into profitable investments” I’d feel much happier about the whole thing. Referencing the virtues of mittelstand industrialists doesn’t really grapple with the full scope of the issue.

The News From Iceland

First the good news:

Iceland’s real gross domestic product grew by 1.2 percent in the July-September period from the previous quarter, the first quarterly increase since the same period in 2008.

Then the less good:

That the economy was not yet out of the woods was made clear by data showing that in the third quarter, G.D.P. shrank by 2.1 percent, on an annualized basis, from the year-earlier period. For the first nine months of the year, the decline was 5.5 percent.

Arsaell Valfells, a professor at the University of Iceland, says “We’ve basically gone back to 2003 in terms of the level of standard of living.” Years worth of growth wiped out, in other words.

The scary thing is that, as Paul Krugman observes, Iceland is doing better than comparably situated countries. Massive collapse in the value of your currency takes a gigantic bite out of living standards, but seems to be a superior way of allocating the losses entailed by a crash than any other. Iceland’s hidden advantage here is that the country is tiny (Iceland is to Sweden as Sweden is to the USA) so it can have a crash devaluation without disturbing the global economy as a whole.

Which Payroll Tax to Cut

Greg Mankiw says a temporary reduction in the employer side of the payroll tax may have been the better policy:

An alternative would have been to reduce the employer’s share of the payroll tax, at least to some degree. Given a sticky wage, this policy would have reduced the cost of hiring and, to the extent labor demand curves slope downward, increased employment. It would also have increased business cash-flow and, to the extent that firms are cash-constrained, increased business investment.

Maybe I’m missing something, but I don’t really see this. In terms of a hypothetical future job, the relevant issue here is the real incidence of the payroll tax, which I believe is the same for the employer-side and employee-side taxes. In either case, a given quantity of salary budget now buys you more labor.

The legal incidence, however, is relevant for existing jobs. An employer-side tax cut would increase the profitability of existing firms. An employee-side tax cut, conversely, will increase the real disposable income of currently employed workers. Currently, though, profits are quite high. Firms, however, are shying away from investing their profits in expanded operations between demand is so low. Increasing disposable income of the currently employed should raise demand and give firms some additional incentives to seek expansion opportunities.

It seems to me that the case for an employer-side cut would have been stronger 30 months ago. Heading into the recession some kind of deal that offered employer-side payroll tax cuts to firms that avoided layoffs would have had an important job-preserving impact. It would, in effect, have offered an appealing alternative to layoffs as a means of temporarily reducing labor costs. That would be in many ways similar to the kurzarbeit scheme that seems to have worked well in Germany. Today, though, we’re more or less past the point where mass layoffs are our concern. Instead the issue is that there’s not enough demand to inspire firms to start soaking up the huge excess in labor supply. An employee-side cut seems to me to be the right way to do that.

Morning in America

Just a reminder that though the “morning in America” recovery that led Ronald Reagan to a landslide re-election in 1984 certainly represented a rapid amelioration of conditions, in absolute terms the labor market in ’84 was actually still pretty bad:

Somewhat similarly, inflation was much improved for where it had been in the 1970s, but remained higher than what what’s been considered acceptable for the past twenty years:

This is just to say that though Barack Obama’s forward-looking political prospects are closely linked to the fate of the economy, the challenge of getting the country back to full employment and the highest-possible standard of living is actually a substantially bigger one than the challenge of merely doing “good enough” to win re-election.