## Ten Economics Paragraphs Worth Reading: December 16, 2009

Serious People (and Fox News) are rallying around the idea that if Obama really wants to create jobs, he should cut the minimum wage.... [R]educing wages would at best do nothing for employment; more likely it would actually be contractionary.... The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?... [T]he textbook argument... lower wages lead to a lower overall price level. This increases the real money supply, and therefore liquidity. As people try to make use of their excess liquidity, interest rates go down, leading to an overall rise in demand.... [Y]ou could achieve the same effect, much more easily, simply by having the Fed increase the money supply. But what if we’re in a liquidity trap, with short-run interest rates at zero? Then the Fed can’t achieve anything by increasing the money supply; but by the same token, wage cuts do nothing to increase demand. Wait, it gets worse. A falling price level raises the real value of debt. To the extent that debtors are more likely to cut spending in such a case than creditors are to increase it — which seems likely — the effect of the wage cuts will actually be a fall in demand. And... to the extent that people expect further declines in wages and prices, this raises real interest rates, which is even more contractionary. So proposing wage cuts as a solution to unemployment is a totally counterproductive idea. Not that I expect any of this discussion to make any impact on those proposing it.

Congress is trying to figure out what to do. It has only two basic options on the table: Extend the 2009 rules (a 45 percent rate and a $3.5 million exemption) for another year or two and figure it all out when it addresses the rest of the expiring Bush tax cuts in 2010. Or find on a permanent fix. The House has agreed to extend the current rules permanently. The Senate, tied in knots over the health bill, is likely to go for a temporary fix, but no-one knows when. Sometime soon, this will all sort itself out. But Congress is playing a game of hide-the-pea here. Most of the attention has been on the size of the exclusion. Should all estates valued at$3.5 million be excluded from tax? Should the exemption be increased to $5 million? (And, btw, with a bit of estate planning, a couple can easily double their exemption). Don’t get me wrong, the exemption matters, but the rate is far more important. To see why, just ask yourself the question: Would I rather have a higher exemption or a lower rate? Then do some simple math... 3) OECD: The OECD today invited Chile to become its second member in Latin America after Mexico: The OECD today invited Chile to become its second member in Latin America after Mexico. Chile will formally accept this invitation when an Accession Agreement is signed in the presence of Secretary-General Angel Gurría and President Michelle Bachelet on 11 January 2010 in Santiago. The invitation to Chile to become the Organisation’s 31st member comes at a time when the OECD is expanding its relations with the region. In addition to acknowledging Chile’s efforts to develop its market-based economy, it confirms the OECD’s determination to explore new frontiers to help governments address world economic challenges while championing the highest standards in public policy. “For the OECD, the accession of Chile is a great contribution in our drive to expand our global reach and to transform the Organisation into a more plural and inclusive institution that will play an increasingly important role in the global economic architecture,” OECD Secretary-General Angel Gurría said at a ceremony at OECD headquarters in Paris... I think his defining decision, this year at least, has been to conclude that 10% unemployment is acceptable—that having averted a Depression-style 25% unemployment scenario, his countercyclical work is complete. And that the risk of sustained high unemployment is outweighed by the risk of continued efforts to boost the economy (either by asking for more fiscal stimulus or targeting nominal GDP or generally committing the central bank to some level of inflation).... He does not think that pushing the unemployment rate down to, say, 7% would overextend the economy and touch off a big increase in wages and prices. He simply seems to think that leaving his primary job half done is acceptable. That's a pretty momentous choice, affecting millions of people directly and billions indirectly. It will shape American politics and economics for the next decade, at least. So sure, I'd say he deserves the person of the year award. But reappointment? That's another story entirely. Dick Fuld began with$301 million in stock, received $62 million in cash bonuses, and sold$471 million in stock before losing his supposed $1 billion.... [L]et’s say you’re a bank CEO with a lot of wealth tied up in stock. Satan comes along and offers you the following deal: if you undertake a strategy with a lot of risk, every year you will get a cash bonus, every year your stock price will go up, every year you will be able to sell some (but not all) of your stock at this higher price, and every year you will get more restricted stock awards–until at some point everything collapses and the stock becomes bankrupt. Would you take that deal? Of course you would. Yes, it means that your losses in the final crash will be bigger than with a more conservative strategy. But it means that you would make a lot more money in the meantime.... Now, there are things in life besides money, and Dick Fuld has no doubt suffered tremendously in the past year. And at this point, maybe he would gladly give up that$533 million he took out to see a healthy Lehman Brothers. So yes, there are other reasons why CEOs do not want to see their banks blow up. But holding a lot of restricted stock is not necessarily one of them...

Some critics charge that the new policies pursued by President Obama and the 111th Congress generated the huge federal budget deficits that the nation now faces. In fact, the tax cuts enacted under President George W. Bush, the wars in Afghanistan and Iraq, and the economic downturn together explain virtually the entire deficit over the next ten years (see Figure 1). The deficit for fiscal 2009 was $1.4 trillion and, at an estimated 10 percent of Gross Domestic Product (GDP), was the largest deficit relative to the size of the economy since the end of World War II. Under current policies, deficits will likely exceed$1 trillion in 2010 and 2011 and remain near that figure thereafter. The events and policies that have pushed deficits to astronomical levels in the near term, however, were largely outside the new Administration’s control. If not for the tax cuts enacted during the Presidency of George W. Bush that Congress did not pay for, the cost of the wars in Iraq and Afghanistan that began during that period, and the effects of the worst economic slump since the Great Depression (including the cost of steps necessary to combat it), we would not be facing these huge deficits in the near term. While President Obama inherited a bad fiscal legacy, that does not diminish his responsibility to propose policies to address our fiscal imbalance and put the weight of his office behind them. Although policymakers should not tighten fiscal policy in the near term while the economy remains fragile, they and the nation at large must come to grips with the nation’s deficit problem. But we should all recognize how we got where we are today...

Greg Woock is the chief executive of Pinger, a fast-growing Silicon Valley company that makes iPhone applications. So Mr. Woock spends a fair amount of time interviewing job applicants. In almost every interview, he told me recently, the applicant asks about Pinger’s health insurance plan. Now think about that for a minute. In the cradle of American innovation, workers are making career choices based on co-payments, pre-existing conditions and other minutiae of health insurance. They are not necessarily making decisions based on what would be best for their careers and, in turn, for the American economy — that is, “where their skills match and where they can grow the most,” as another Silicon Valley entrepreneur, Cyriac Roeding, says. Health insurance, Mr. Roeding adds, “is distorting the decision-making.” It is impossible to know how much economic damage these distortions are causing, but they clearly aren’t good. Economic research suggests that more than 1.5 million workers who would otherwise have switched jobs fail to do so every year because of fears about health insurance.... Given the consequences of the innovation deficit — slower growth, fewer jobs, lower living standards — you would want to look for every possible solution, wouldn’t you? You’d want to allow more talented immigrants to become citizens, so that the next Sergey Brin, Liz Claiborne or Andy Grove, immigrant entrepreneurs all, didn’t end up starting their companies elsewhere. You would want to clean up the tangled corporate tax code. You would want to finance more basic research. And you would want to make people feel confident that they could take risks — start a new company or join a young one — without worrying about whether they would still receive adequate medical care...

In present Russian society, there is a disturbing tendency to mythologize the late Soviet period. The myths include the belief that the Soviet Union, despite its problems, was a dynamically developing world superpower, until usurpers initiated disastrous reforms.... The collapse can be traced to two factors in the Soviet economy: grain and oil. In 1928 and 1929, Russia debated whether to choose “the Chinese model” of agriculture, but Stalin chose forced collectivization and extraction of food from the countryside... a sharp decrease in long-term agricultural productivity.... [G]rain procurement did not increase at all from the 1960s on. Russia--the biggest exporter of grain during the prewar period--became the world’s largest importer. As the Soviet Union grappled with serious problems with agriculture, rich oil deposits were discovered in western Siberia in the 1970s. There was intense debate within the Soviet leadership on how to exploit the oil and production.... [T]he timeline of the Soviet downfall begins not in August 1991, but on September 13, 1985. Sheik Imani, the Saudi Arabian minister of oil, declared that his country would radically change its oil policy, ceasing to protect oil prices. Over the next six months, production in Saudi Arabia increased fourfold in real terms.... Short on hard currency, the Soviet Union had to choose between ending subsidies to Warsaw Pact countries, radically cutting food imports, or drastically reducing military production. None of these were seriously discussed by the Soviet leadership. They chose to close their eyes and hope the problem would magically disappear.... Maligned foreign minister Eduard Shevardnadze was ordered to secure funding at any cost. The Soviet leadership then realized the full gravity of the situation: the Soviet economy hinged on oil production...

9) STUPIDEST THING I HAVE READ TODAY: Armenian-American Person of Color Mark Krikorian Calls for a Boycott of the Census:

It's not surprising that such an effort would come from NALEO, the National Association of Latino Elected and Appointed Officials, because the more illegal aliens who get counted, the more seats the group's members get in Congress, state legislatures, county councils, etc., and the more taxpayer money non-profit groups will be able to siphon off to serve their ostensible constitutents. But it's also not surprising that NALEO would overlook the obvious implications that illegal aliens should return to their ancestral communities — its membership and staff are overwhelmingly left-wing Democrats (2008 ACU score for the chairman of the Congressional Hispanic Caucus Nydia Velazquez: 0; ACU score for Luis Gutierrez, sponsor of the Democrat amnesty bill: 0; Co-chairman of the Congressional Progressive Caucus: Raul Grijalva). If illegal aliens won't go back to their home towns to be counted, at least they can strike a blow against Caesar and boycott the census!

5) FROM THE ARCHIVES: The Lost[?] Promise of International Capital Flows (January 12, 2004):

Those of us card-carrying neoliberals who pushed for large-scale opening of capital flows in the early 1990s had a particular vision of the future in our minds' eyes--a vision of the future did not come to pass. We looked at how extraordinarily strongly the world's system of relative prices was tilted against the poor: how cheap were the products that they exported, and how expensive were the capital goods made in the post-industrial core that they needed to import in order to industrialize and develop. "Why not free up capital flows and so encourage large-scale lending from the rich to the poor?" we asked. Such large-scale lending might cut a generation off the time it would take economies where people were poor to converge to the industrial structures and living standards of countries where people were rich. Certainly such large-scale borrowing and lending had played a key role in the economic development of the late-nineteenth century temperate periphery--Canada, the western United States, Australia, New Zealand, Chile, Argentina, Uruguay, and South Africa--more than a century ago. But the future we saw did not come to pass. Instead of capital flowing from rich to poor, it flowed from poor to rich--and overwhelmingly in recent years into the United States of America, whose rate of capital inflow is now the largest of any country, anytime, anywhere. Central banks that sought to keep the values of their home currencies down so that their workers could gain valuable experience in exporting manufactures to the post-industrial core, first-world investors who feared sending their money down the income and productivity gap after the crises of Mexico '95, East Asia '97, and Russia '98, techno-enthusiasts chasing the returns of the American technology boom, the third-world rich who thought a large Deutsche Bank account would be a good thing to have in case something went wrong and they suddenly had to flee the country in the rubber boat (or the Learjet)--all of these fueled the flow of money into the United States, which was thus enabled to invest much more than it managed to save. The U.S. economy became, and remains, a giant vacuum cleaner, soaking up all the world's spare investible cash...