Anyone who reads my posts knows a couple things about where I get much of my information.  The first is economics Professor Mark Thoma’s blogsite economist’s view.  It’s a fascinating aggregation of many blogs and it always, always elicits a robust outpouring of commentators, such as Beezer.  The second is that Beezer regularly reads another blogsite called Baseline Scenario.  This is a site written primarily by three authors, the two main ones being Simon Johnson, another economist and former chief economist of the International Monetary Fund (IMF) and James Kwak, a successful software entrepreneur, a former consultant at McKinsey and now a Yale Law School student.  Johnson is also a professor at MIT’s Sloan School of Management.

Johnson and Kwak also co-authored the book ’13 Bankers’ that dealt primarily with the bank system’s role in the current recession.

That said as a long preface, what follows is two posts, one by Thoma at economist’s view, and the other by Kwak at Baseline Scenario.  Thoma writes about the small town he grew up in and Kwak writes about a recent experience he had at Yale Law School–two very different posts. 

But somehow they are related, in Beezer’s view.   The issue is putting an understanding to why they are related.  We’ll leave it up to whomever reads both, as we’ve done, to find what the connection really is, if any.

First, Thoma’s post.

As many of you know I grew up in a small town, it was just a bit under 4,000 people at that time, the same town that my mom was born in. I recently went back there for a high school class reunion (35^th). While I was there, something struck me that I’ve been meaning to write about.

In the town I grew up in, pretty much everyone knows who the best doctor is, the best dentist, the best painter, the best carpenter, and so on. There were sometimes disagreements about exactly who was best, e.g. who had the best restaurant, but we all knew who to choose if you needed something done, something to eat, your house cleaned, lawn mowed, legal work, child care, whatever. The people who didn’t weren’t very good at these kinds of jobs didn’t survive for very long. I can think of three lawyers off the top of my head, and if I needed one, I’d know who to choose, or certainly who to ask (growing up, my next door neighbor was the county clerk, and she could be very helpful in navigating anything related to the courthouse — she saved me once when I was in court for going 95 mph and the judge thought a night in jail would be a good lesson — thanks to her I escaped jail, but I did get the message — losing my license for a month helped with that).

I thought about this again yesterday as I was trying to change dentists. I’ve lost confidence in the one I have, but have no idea who to choose. I asked a few people, and they had recommendations, people mostly say the like who they have, but it was nothing like the kind of comprehensive knowledge I had where I grew up. Same for choosing a painter, a car mechanic, or most anything else. I never really know if I can trust them when the initial choice is made.

In an environment like I grew up in, there is little need for many types of regulation, it is largely redundant. If I still lived there and needed a room added onto my house, I have a friend I grew up with who does that type of work and I would trust him to do it right. Period. And if it wasn’t right, he would make it good. These are people you see frequently around town, or hear about from others, people you grew up with from kindergarten through high school (even college since many of us ended up at Chico). Sure, the doctors and dentists and the like came from outside, but my grandmother was a nurse, one of my mom’s good friend worked for a dentist in town, people played golf with the doctors, dentists, etc. at the local 9-hole course, socialized with them at the Tennis Club — you knew what you needed to know. If someone got sick at your restaurant, it was over for the owner. Word would spread quickly and everyone would know. If you had a good story and a good reputation — being good in grade school and being known as honorable has its rewards — you might survive. The town, person by person, would make it’s call. That call wasn’t always correct, small town rumors, cliquishness and the like are known menaces, but for the most part the town took care of itself. So while it wasn’t always perfect — there are parts of the town I don’t miss at all — it managed well enough.

What I’m wondering is whether this can, at least in part, explain differences in attitudes toward regulation between more conservative rural areas and larger cities that are generally much more liberal. In a larger city, you are much more vulnerable to predatory type behavior, unfair treatment, much more likely to be dealing with strangers you have never seen before and will never see again. That uncertainty, and the experience of being taken advantage of if you aren’t continuously on guard, and sometimes even if you are — maybe a contractor did a lousy job and refuses to fix the flaws or refund money — might lead you to declare “there ought to be a law!,” or that “someone needs to stop this!” You would be much more inclined to think that regulation was needed.

That’s not to say that things are perfect in small towns, they’re not of course, or that exploitation of the weaker by the stronger isn’t present. It is. Farm labor comes to mind. And there is still a role for safety and other types of regulation. But there does seem to be a much stronger sense that people can take care of themselves without the need for a bunch of rules and regulations, and without the need for police looking over your shoulder to make sure that you comply.

And that’s just the town. If you add in all the farmers who live in the vicinity — the reason for the town to exist at all — farmers who are their own bosses and think they ought to be able to do as they please with the land that has often been handed down for generations, it’s easy to see how a “leave us alone to take care of ourselves” attitude comes about.

Just a thought.”

And now Kwak’s post:

“For a class, I read an old (1986) paper by Kahneman, Knetsch, and Thaler on fairness. It’s based on surveys posing various hypothetical situations where businesses can take some action. For example, most people thought that it was OK for a grocer to pass on a wholesale price increase to consumers (Question 7) but not to raise prices because there is a general shortage and the grocer has the only shipment of a certain item (Question 12). In short, people have an intrinsic sense of fairness the authors summarize this way: “The cardinal rule of fairness is surely that one person should not achieve a gain by simply imposing an equivalent loss on another.”

Today in class, the professor posed the first question from the paper:

“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.”

In 1986, 82 percent of respondents thought this was unfair. In class, it was about 50-50.

As the professor said, this is probably because there are a lot of business school students in this class. Business school students are classic Econ 101 robots. They know enough to know that if there is a demand shift, not only is it OK to raise prices, but you should raise prices in order to clear the market. In this case, supply is fixed in the short term, so raising the price won’t increase supply; the Econ 101 argument is that raising the price allocates the shovels to people who will derive more utility from them (because they will pay more), thereby increasing social welfare.

But this rests on a huge assumption: that willingness to pay is the same as utility. Unfortunately, however, this assumption fails in the real world; poor people simply can’t pay as much for snow shovels as rich people, and as a result a price increase will allocate shovels to rich people, not to those who need them the most.* But people who believe Econ 101 only remember the demand and supply curves they saw on the first day of class, so they think firms should raise prices.

I suspect that belief in Econ 101 is not only stronger among business school students (and the businessmen they become) than among ordinary people, but is also stronger today than it was in 1986. The free market ideology teaches not only that businesses can maximize profits by any legal means, but that they have a moral imperative to maximize profits by any legal means, including generating profits by imposing equivalent losses on their counterparties. (Essentially all proprietary trading fulfills this condition.) And three decades of this ideology have probably changed people’s responses to these types of questions.

More fundamentally, the 1986 paper shows that Econ 101 is diametrically opposed to human beings’ intuitive sense of fairness. Yet public policy largely follows the dictates of Econ 101. Is that a good thing?”

Beezer here.  Somewhere there is a nexus here that helps explain the deep conflicts we now see in our political atmosphere.  Small towns as described by Thoma would necessarily be very wary of government regulation because the small town intimacy takes care of what might otherwise require regulation.  They’d be conservative about ‘big government’ in other words.  Forgetting, of course, that small agrarian towns wouldn’t exist today without Agriculture subsidies.

And econ 101 posits that price is the only factor needed to ‘clear a market’ effectively.  Forget that the real world might want to ‘clear’ the market a little less efficiently in order to protect a large portion of its citizens–to protect the commonweal.

In another example of how badly Congress is out of touch and mis-informed, Social Security is on the table for cuts by the budget chickenhawks.

Are they going to cut our bloated and wasteful military budget?  Hardly.  Are they going to clean up our convoluted and unfair tax system?  Not very likely.  Are they going to end lopsided and misguided corn subsidies?  Slim and none are the chances there.  How about the employer tax breaks on health care?  Yeah, right.  Or the home interest deduction?  Of course not.

Nope, they’re going to cut SS benefits, or withold them altogether until you’re older. 

From Felix Salmon over at the Washington Post:

“ Lurking beneath this conversation is an unquestioned assumption: We live longer, so we should work longer. That’s pretty intuitive to members of Congress, who seem to like their jobs and don’t seem to like the idea of retiring. It’s also pretty intuitive to blogger/columnists, who spend their time in air-conditioned rooms opining about pension programs. But most people don’t work in Congress or in the media. They work on their feet. They strain their backs. They’re bored silly at the end of the day. By the time they’re in their 60s, they want to retire.

You see that reflected in Social Security. Age 66 is when you get full benefits. But most people begin taking Social Security at age 62. They get less, but they can retire earlier. To them, the trade-off is worth it. And remember, the country is much richer than it was in 1935. Adjusting for inflation, our gross domestic product in 1935 was $865 billion. In 2009, it was more than $12 trillion. We have more than enough money to buy ourselves some leisure time at the end of our lives. At least if that’s one of our priorities.”

So how expensive would it be to ‘fix’ SS and maintain the current age benchmarks?  Again, from Salmon.

“As Stephen C. Goss, the system’s chief actuary, has written, Social Security projects an imbalance “because birth rates dropped from three to two children per woman.” That means there are relatively fewer young people paying for the old people. “Importantly,” Goss continues, “this shortfall is basically stable after 2035.” In other words, we only have to fix Social Security once.

The size of that fix is significant, but not astonishing. Over the next 75 years, the shortfall will be equal to about 0.7 percent of gross domestic product. How much is 0.7 percent of GDP? To put that in perspective, the Center on Budget and Policy Priorities calculates that it’s about as much as George W. Bush’s tax cuts for the rich will cost over the same period. Saying we can afford those cuts — which is the consensus Republican position — but not Social Security’s outlay is nonsensical. Coming up with 0.7 percent of GDP isn’t a crisis. It’s a question of priorities.”

Keeping tax breaks/cuts for the wealthy is a priority?  It is for Republicans, apparently.  But it sure isn’t for most Americans.  Again from Salmon.

“An August survey from Greenberg Quinlan Rosner Research tested reactions to a variety of Social Security fixes. One of the options was raising the retirement age to 70. Two-thirds of respondents opposed it. Another option was eliminating the cap on payroll taxes so that well-off workers pay the tax on their full income, just as middle-income workers do now. A solid 61 percent supported it.”

Beezer again.  Democrats should make hay about this.  SS not only provides some badly needed retirement income, it also provides disability insurance and survivor’s benefits.  And with private employers withdrawing from defined benefit plans, SS is a major chunk of retirement funds for more and more workers.

The real difference between Democrats and Republicans isn’t about how much the government spends, it’s about where the government spends.  Democrat priorities are aimed at labor and the middle class.  Republicans cater to the wealthy class.   Democrats should remind voters of this most important distinction.

Once again, thanks to economist’s view for highlighting Salmon’s column.

Again, from Angry Bear, a great blog written by well informed, no nonsense people who really can examine the statistics.  They come from varying professions, but they’re all top notch professionals.  The blog is considered a good one for discerning trends when considering investments.  It’s not really a political blog.

Anyway, this post is about the Social Security statistics.  The main point is that there are projections made far into the future (as with Medicare too, see previous post) and much of the news doesn’t make note of this fact.  What is reported tends to be exaggerated due to the long range projections that are re-done in every new report.

You get some big numbers, which makes for headlines, but little else.

From the blog.

“The first step towards curing this schizophrenia is in recognizing that it is mostly induced. The economists who fuel the studies that drive the apparent need for Social Security ‘reform’ are fully aware of the uncertainties but choose to ignore them because the longer time frames allow them to use scarier numbers to urge more drastic solutions. But we don’t have to be bound by that, instead we can sit down, examine the models and determine pragmatically when they begin to diverge enough to call for different initial policy choices. If I had to pick a number it would be fifteen years out……

But in any event it is pretty crucial to get analysts and reporters to grasp that these models are not static and that successive Report years don’t necessarily get us closer to a full understanding, instead the inherent uncertainty of future economic developments will always swamp refinements of the methodology. While we can expect the Office of the Chief Actuary to do their best, we have to keep in mind that every pronouncement about the future outlook of Social Security needs to have a whole set of “if and only if”‘s attached to it and the best we can do is to lob solutions somewhere near the center of the spread.”

Beezer here.  So it’s like a hurricane forecast where there’s that ‘cone of uncertainty.’  The reality will probably, and you must stress probably, be within that cone.  Unless it isn’t.   Which leads me to a comment made at the same blog.

“Taking the more or less constant predictions over the past ten years you end up with a likely need to raise the payroll tax an amount near twenty cents per week per year to take care of the longer life expectancy of the people paying the tax.  Could be a little less, or it could be a little more, or it could be sooner, or it coud be later.  Doesn’t amount to a hill of beans…  unless you get an accountant to massage the numbers, report the aggregate (add up 100 million taxayers and 75 years or an infinite number of years in “present value” and you can get some pretty impressive meaningless numbers), and get the reporters and columnists who cover the issue to run around screaming the sky is falling, the sky is falling…  
 
Some people I know well have proposed an answer to this:  Agree to raise, or lower, the payroll tax by one tenth of one percent whenever the Trustees report that it looks today like ten years from now the Tust Fund will fall short of a full year’s reserves… or exceed three full years reserves.  
 
The current 75 year projection suggests that that will happen about 17 times over the next 75 years.  That amounts to eighty cents per week, in today’s terms, in any given year, or an average of twenty cents per week per year.”  

Beezer again.  Bottom line take away.  Once you get some sanity applied, it’s obvious SS isn’t going broke. 

From the blog Angry Bear comes this bit of tidy news.  And a chart, too.  You won’t find this in the general media because it doesn’t fit the dominant theme that Medicare is going broke, or will break us before that.

So what does the chart above mean?  From the Angry Bear:

“For years we have been regaled with scary, scary numbers about how Medicare’s projected unfunded liability was in the TENS OF TRILLIONS. And sure enough if you consulted the Medicare Report and examined the actuarial projections for Medicare Part A you would find that number. But a funny thing happened with the 2010 Report and is shown in the data table above: the 75 year number is down to $6.9 trillion, a big number but only 0.5% of projected GDP over that period, and the infinite future number is actually a $600 billion SURPLUS……

Oddly this multi-multi trillion dollar turnaround did not result in banner headlines in the NYT or the WaPo, nor did congratulatory telegrams pour into the offices of Nancy Pelosi, Harry Reid and dare I say it Barack Obama from the folk at Cato and Concord that have been weeping bitter, bitter tears about ‘intergenerational inequity’ and begging us to ‘think about the grandchildren’. Because that is not how they roll nor was any of this what the kerfluffle has been about. The fundamental hostility to Medicare among the self-style deficit hawks is not because it is broken, but instead because it works. For them that infinite future $600 billion SURPLUS is terrible, terrible news. Which is why it never made it to the inboxes of Lori Montgomery and Perry Bacon at the WaPo, though you can bet big that any deterioration would have. Funny that.”

Beezer here.  It’s astonishing how information that you’re fed on a daily basis becomes truth, when in fact it isn’t.  All it needs is to be repeated endlessly.  And it also needs an ignorant, lazy journalist profession which spends its time being spoon fed ‘facts’ that it never bothers to check.

No wonder we’re in such a mess!  Also, you have to keep some perspective.  These tables go far into the future.  These are projections.  One reporting period shows a deficit.  The next a surplus.  Right now, based upon the most recent calculations, Medicare doesn’t look like a troubled program at all.  Far from it.  We’ll just have to wait for the next report and its projections.

I have a deep suspicion that the Republicans know that the public doesn’t understand the national budget.  And knowing that, they can tell the public things that they (the Republicans) absolutely know to be false.

This from a comment to a New York Times blog post by economist Paul Krugman.

“This says that the domestic balance, the government balance, and the external balance must sum to zero. If the external balance is constant, then a domestic surplus must be offset by an equal government deficit, and vice versa. Both the government and private sector cannot be in surplus if the trade balance doesn’t accommodate. No one realistically expects the US trade balance to do this, at least anytime soon.

Therefore if the private sector desires to rebuild balance sheets by saving and delevering, then the government must run a deficit that accommodates this desire, or nominal aggregate demand will sag further, risking deflation and depression. The government can run a deficit with either increased expenditure or decreased taxation, or a combination thereof in order to address this. Monetary policy cannot directly affect nominal aggregate demand, as the past year goes to show. Fiscal policy can.

The immediate problem is lagging demand, which created an output gap that is resulting in historically high unemployment. Government deficits must address this in a timely way, since the foregone opportunity of an output gap and the degradation of human resources due to high unemployment and underemployment are very costly. Therefore the multiplier associated with the various forms of stimulus must be considered. The multiplier associated with tax cuts is low, while the multiplier associated with expenditure is much higher. So while a payroll tax holiday would help the middle class rebuild balance sheets, what is needed more is expenditure aimed at bolstering demand. This could be accomplished with per capita block grants to states and amplification of the automatic stabilizers. Worrying about increasing deficits will just be more costly in the end.”

Beezer here.  I would add infrastructure projects as a first priority in spending.  They do create jobs and resulting demand, but they also create public goods that are necessary for developed economies.

Irrespective of who you blame for creating the Great Financial Recession that is now into its third year, the underlying reality is the private market stopped creating jobs and instead went about ruthlessly destroying them.  More than 8 million of them so far, and any return to weakness will force the private sector to accelerate job destruction once again.

Three years ago the economy started a big shrink.  Demand plummeted as individuals, small businesses and large businesses pulled back their spending.  A positive feedback loop formed as declining demand spurred increased job destruction which, in turn, fed back into and added to  declining demand.

The federal government spent almost $800 billion to shore up failed bank balance sheets.  It spent another $787 billion for a three-year stimulus package that included tax cuts, infrastructure spending and other spending to support the automobile industry and so-called ‘green’ industries aimed at reducing the country’s debilitating dependence on foreign produced petroleum.  And the Federal Reserve stepped in to buy more than a trillion dollars in private assets, further reducing the pressure on bank, non financial corporation and individual balance sheets.

The Congressional Budget Office (CBO) estimates that the counter-cyclical stimulus package, by itself, created about 3 million more jobs than there would be without the effort.  Without it unemployment would be 11.5% as of this writing, instead of 9.6%.   Because there is another 36% of the package yet to take effect, another 500,000 jobs are yet to be created. 

The most effective part of the stimulus package is that spent on building new, or improving upon existing public infrastructure.   The Political Economy Research Institute of the University of Massachusetts estimates infrastructure spending creates 18,000 jobs per billion dollars invested, compared to 14,000 jobs created by tax cuts.

And it’s not as though there’s any mystery about how much infrastructure spending needs to be done.  The American Society of Civil Engineers estimates there are $2.2 trillion in already identified public works maintenance/improvement projects.

Consider the New England region.  From PERI:  

“In this new study, PERI Research Professor Jeffrey Thompson presents compelling evidence that investing in state infrastructure and building the skills of the current and future workforce are among the most effective ways to create jobs in New England.

Prioritizing Approaches to Economic Development in New England provides ample evidence that infrastructure (roads, bridges, dams, energy transmission systems, drinking water, and the like) and education are effective approaches for creating jobs and generating economic growth. By necessity, infrastructure repairs employ local workers and use local materials. These activities would also meet an increasingly urgent need: evidence reviewed by Thompson shows that 40% of bridges in the region are structurally deficient; 80% of the region’s dams present significant hazard; most of our roads are in poor or mediocre condition; and our drinking water infrastructure is in need of $12 billion worth of repairs and renovations.

Thompson describes how, instead of making these investments, state policymakers are too often turning to corporate tax breaks to lure businesses to their state and public subsidies for employers who promise to hire workers in the state. These policies have been tried for decades, but Thompson presents the clear evidence that these tax subsidies don’t work to create jobs or revitalize state economies.”

It’s why economics professor Laura Tyson, a member of President Obama’s Economic Recovery Council, wrote in a recent New York Times op-ed article:

“Over the next five years, the federal government should work with state and local governments and the private sector to finance $1 trillion worth of additional investment in infrastructure. It should extend the Build America Bonds stimulus program, which in the past year has helped states finance $120 billion in infrastructure improvement.”

The work needs to be done.  It creates more jobs than do tax cuts.  And it helps maintain economic activity that is counter-cyclical to the negative effects of the poor demand/job destruction cycle now in full swing.

So why aren’t we already doing this?  Why aren’t we doing what creates jobs best in the current environment?  And why aren’t we doing what we have to do anyway:  Maintain the necessary infrastructure for a modern, developed economy?

Because the Republican Party doesn’t want to do it.  If it is done and jobs are created, the recession wouldn’t be as bad.  It might even look like things are improving.  And that’s not good for the Republican Party.   Republicans want back in power, particularly in the House of Representatives where spending is authorized.  If the public is miserable then the party in power, the Democrats, will be blamed.

If the public suffering is what it takes to regain power, the Republican Party is more than willing to let the suffering go unabated.  In direct contradiction of their claims of fiscal responsibility, Republicans aren’t even willing to let the Bush tax cuts expire as scheduled.  These are tax cuts that reduce government revenue by more than $600 billion annually, further aggravating government deficits and hobbling the government’s responsibility to maintain critical public infrastructure.

President Obama must take these facts, and their consequences, directly to the court of public opinion.  The Republican positions are built like a house of cards.  Any whiff of common sense, pro-active opposition would expose the entire charade.  And it wouldn’t take long because absolutely nothing in the Republican Party rational stands up to real world facts.

Tax cuts are relatively ineffective, compared to actual projects like those on infrastructure, in creating jobs–the economy’s number one need right now.  The private economy is barely holding jobs right now, and has destroyed 8 million jobs the past three years.  To say this part of the economy is going to suddenly start creating new jobs, as Republicans apparently believe, is total nonsense.  Even the public, especially the public working in the private sector, knows this isn’t going to happen any time soon.  It doesn’t even pass the ‘smell’ test at the local level.

The country needs jobs now.  It needs demand now.  Jobs create demand.  The government can create the jobs now.  The private market cannot create jobs now.

The problem is obvious.  So is the cure.  President Obama should take this case to the public now.  They will recognize its value and vote that way in November.