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There has been a lot of praise about Obama’s jobs speech that he delivered last night, both in style and in substance. I thought the style was just fine, and has set Obama up in a position where he can clearly smack Republicans in the general election should they resort to obstructing the American Jobs Act. And they shouldn’t! It’s a very Republican-friendly plan and I do have to say that I admire many of the different projects on merits, but I can’t help by think that the plan and the subsequent cacophony of commentary is fiddling around the edges while dodging what has been the fundamental problem of the last few years — a problem that only the Fed can remedy — and that is abysmal growth in nominal spending.

The plan broadly consists of three classes of measures, the first is cutting the payroll tax on both the employer and employee side. Along with my co-blogger Karl, I am in favor of this proposal as a measure to remove supply side barriers to new hiring. While Karl’s preferred plan is to cut the payroll tax to zero, this plan is none-the-less fairly bold…however, I am skeptical that it will deliver the amount of new hiring that Obama is promising.

The second measure is tax incentives for hiring specific classes of people. In this case, there is an incentive for hiring veterans, the long-term unemployed, and for giving raises to current employees. I am roundly not in favor of this type of policy, especially the incentive to artificially prop up wages. The last time this was tried as a counter-recessionary measure was the 1933 National Industrial Recovery Act (which subsequently choked off the fastest recovery in American history). Now, it is hardly the case that money wages will jump 20% overnight after the passing of this bill, but if you’re in the business of wanting to to jump-start new hiring, incentivizing higher wages (and thus, necessitating higher productivity) is clearly the wrong way to go about it.

The third part of the plan is direct spending on infrastructure — namely schools and transportation. Sure, great, do it! Real rates are at zero or below all the way out to 10 years…that means (as has been pointed out ad nauseam) it’s cheaper to borrow than to tax now, and defer taxation to the future, when there will presumably be robust growth. I don’t know the specifics, but I’ve heard talk about an infrastructure bank that will provide safe, liquid assets to private investors and provide loans to contractors. It is all well and good that the government maintain infrastructure that is already in the public domain…after all, we’ve already built it, and built our lives around it, might as well maintain it until such a time we devise a different arrangement. My problem is with characterizing infrastructure spending as “stimulus” that will “employ millions of people”. There are plenty of hurdles to jump there, and the spending is slow. Worthwhile “shovel-ready” projects, while much talked about, always fail to materialize at the time they are needed.

Whatever the well-meaning intentions of the designers of these plans, I heard nothing from Obama or anyone else regarding the real issue, depressed nominal spending. Imagine a scenario in which the AJA takes effect, and achieves the maximum spending multiplier ever dreamed up in a model. All of this extra nominal spending (demand) would eventually lead to rising prices, most immediately in sensitive commodities such as food and energy. Now, imagine that the monetary authority views sub-2% inflation as optimal…and is internally pressured to begin unwinding their balance sheet (tightening policy). Rapidly rising prices would be a great cover that would allow them to choke off any good created by the miracle supply-side fiddling that you engaged in with your jobs act. I was disappointed by the prospects of further monetary easing in Bernanke’s Jackson Hole speech. However, there has been a lot of clamoring around the blogosphere (even making it to the WSJ) regarding the actions of the Swiss National Bank. Perhaps I’ll be gleefully proven wrong!

Obama’s plan will succeed to the extent that the Fed allows it…and just for reference, here is the Cleveland Fed’s expected inflation yield curve:


[Click Image to Enlarge]

First, I’m sorry about my extended absence from blogging, both to my co-bloggers and audience. My schedule has been very full, and I’ve been battling mysterious fatigue and abdominal pain which makes it hard to concentrate on anything. I’ve been seeing multiple doctors and am heading to a specialist here at the end of the month. They have ruled out Chron’s, celiac sprue, acute intermittent porphyria, and irritable bowel syndrome…along with the more common stomach problems. I know that is not a real excuse, and I should battle through it for the good of you readers. For that, I’m sorry.

In any case, the story that caught my eye today is that Obama has issued an order to government to trim rules that are not “cost-effective and cost justified, transparent, coordinated/simplified, flexible, science-driven, or necessary and up-to-date.”

And then there were flying pigs. The NYT identifies a few rules that are simply dumb:

There is a federal regulation that dictates that place names on new highway signs must be spelled with just one capital letter — like This, not THIS.

Federal rules say that beef from a state-regulated slaughterhouse cannot be sold in other states, but bison from the same slaughterhouse can.

And as President Obama told the nation on Tuesday, one federal agency until recently listed saccharin, a common coffee sweetener, as a form of toxic waste.

Of the stupid rules listed above, only the second has any real material consequence. The NYT Economix blog also has a discussion of further stupid rules.

And then there was pie in the sky. I don’t have much faith that this is of much consequence. As noted above, we may be able to get rid of some quirky rules that are left over because no one notices that they are there…but most dumb rules exist because they benefit somebody, somewhere. Perfect competition is a very cruel mistress. If there is a rule that is of material (economic) consequence, it is likely that it exists because some interest agitated that it be so. Thus, trimming the government of rules that aren’t cost-effective, or aren’t coordinated or flexible is a political battle.

However, I can think of something that is of extreme consequence, that is not cost effective or cost justified, flexible, coordinated/simple, science-driven. It’s also of dubious necessity and certainly not up-to-date. I wonder if it’s on the chopping block?

So writes Steve Chapman at Reason. Obama, he argues, is a moderate at heart, despite conservatives and progressives who thought he would be very liberal. Chapman cites the deficit commission, the smaller first round stimulus, the bailing out of the banks, the lack of a public option, the continuation of Bush policies in Iraq, and escalation in Afghanistan. To be fair, not all liberals were fooled. Paul Krugman has been saying all along that liberals were going to be disappointed in Obama and that he wouldn’t be progressive enough. I believed Paul was right, but in contrast I took comfort in his predictions.

I believe the center right should be most pleased with Obama. I can’t imagine how a democrat having been elected in the wake of 8 years of Bush could have done much better than he did to moderate populist liberal demands. Obama has even managed to govern in a way that has aroused small government yearnings at minimal pain and in a very short time since conservatives were supposed to be out in the wilderness.

As Chapman says:

“Liberals and conservatives have one thing in common: They have both persisted in believing that Obama, in his heart of hearts, is a man of the left. But by his fruits, they—eventually—shall know him.”

I’m a tad bit late on commenting on the tax compromised reached between the White House and Republicans, but I think that there has been some fairly high-quality commentary around the blogosphere. I stand mostly with the reasonable left in supporting what was put into the package, even though we got the wrong payroll tax cut, and a strange and potentially politically deadly compromise on the Estate tax (which I otherwise oppose, but wouldn’t let my positing get in the way of providing economic stimulus, like some on the left).

Mark Thoma worries that the payroll tax cut will become permanent (edit: found the link). This is the mirror of the argument that government spending tends to become permanent, as well…which I have an inkling that Mark doesn’t mind that feature so much.

I think Kevin Drum misses a grand opportunity to call out to the left to articulate a better way forward here:

In the end, this is the second stimulus we all wanted. It’s not a very efficient stimulus, and it sadly caves into the conservative snake oil that the sum total of fiscal policy is tax cuts, but them’s the breaks. Anyone who doesn’t like it needs to spend the next two years persuading the public not just to tell pollsters they don’t like tax cuts for the rich, but to actually vote out of office anyone who supports tax cuts for the rich. That’s the only way we’ll win the replay of this battle in 2012.

I’m not looking to go tit-for-tat on whether direct government spending/investment is “more efficient” than providing payroll tax cuts, as it’s pretty clear which side we are both on (as I’m much less sanguine on the Keynesian consumption function, for a reasonable view from the other side, see here), however I do want to address his prescription of a public awareness campaign in order to return to “normal”, with normal being defined as roughly “Clinton-era tax rates” on capital and high incomes.

I view this very compromise as a golden opportunity for the left to reinvent themselves with regard to taxation, win an adjacent political battle (and a dear progressive goal), and wrap it all up in a bow that not only makes our government funding more efficient, but lowers tax rates for virtually everyone. And that is to begin a campaign of gradually removing the income tax, in exchange for a revenue-neutral tax on carbon, which would be gradually instituted as the income tax was phased out. In addition, offer an automatic stabilization policy of payroll tax cuts (all of them, or at least all of the “employers share” — the better side to cut — in exchange for a sharply more progressive payroll tax, used to fund Social Security and Medicare/caid. Institute a progressive VAT or GST with a standard deduction of the first $25,000 of income for all taxpayers, and expand a means tested EITC, as well. You could trade this for elimination of minimum wages, but that’s not a real pressing problem in my mind. At the end of the line, offer a land tax in exchange for really whatever the right happens to want for it. Repeal of the estate tax, maybe?

That would be a real “progressive” package that would end the debate regarding the level of income taxation (from any source; labour, capital, etc). It would simplify our tax code, and get rid of ridiculous inefficiencies like the mortgage income tax deduction. More importantly, contrary to our current tax code, the new consumption-based funding of government would encourage a greater savings and investment equilibrium.

Beyond the scope of this post — but relevant — is different ways that you can find to streamline efficiency of the government. I seem to remember an argument put forth by Matt Yglesias that I personally agree with (and can’t find the link to currently), and find it baffling that it is so often overlooked; and that is that there are some government workers whose marginal utility is so low, that paying them anything at all constitutes overpayment. So it’s not a question of overpayment, it’s a question of marginal utility. At the margin, is society gaining utility by paying various individuals? If yes, then pay them. If not, then don’t.

That aside, I do think that this is a unique opportunity for Democrats to articulate a new vision for government funding that better enables elements of the welfare state that they hold so dear, this is highly progressive, removes the distortions and bad incentives created by the income tax, and genuinely makes the economy more efficient — facilitating growth. It could be a popular platform, and one that I would vote Democrat for, and I’ll be that many other pragmatic libertarians would feel the same way.

Of course, at the end of the day, I still believe that monetary policy is the last mover. The Fed has quietly indicated that it is looking at extending QE2, which is definitely good for the prospects of any pet fiscal policy.

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