A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Friday, February 26, 2010

Transcript: 360 Where jobs come from, an object lesson

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Today, Idiot of the Week


We want to point out quickly that you don't hear us debate on idiot the nonsense from the Right about how well free markets can get us out of here and the rest of the bunkum. You can't even have a debate on the color of the sky if your opponent is pointing down. This is not economics, it is some sort of religion cultivated by messing with people's minds.

There is a group of people we might have a constructive conversation with, and in that group I would put our president. Later, we are going to hear from business interpreters, who are less coherent, and then we will lay out why economic policy from the demand side makes markets work, and why the supply side nonsense, like creating jobs in the quantities we need through tax incentives, does not work.

First, though, the winners are in at the Dynamite Prize. We told you about that last week.

First place, Alan Greenspan, Maestro Magoo. Certainly a turnover for the esteemed chairman from one short decade ago, when as a co-author of the New Economy, he was acclaimed as the man who brought us the end of the business cycle.

Second place, Milton Friedman, the P.T. Barnum of economics.

Third place, and co-winner, Lawrence Summers. Another co-author of the end of the business cycle, the rise of the self-regulating financial markets, and principal proponent of the too little, too late style of economic stimulus.

But really, all the nominees were deserving of this prize. Now up is the Revere Prize at RWER.wordpress.com. Many fine economists, including the odds-on winner Hyman Minsky, have been nominated. We were, oddly, first to get in Joseph Stiglitz name. While Stiglitz came at the financial collapse not from the Minsky-Keen point of view of overwhelming debt, but from an analysis of perverse incentives, he was there looking at the outcome years before it manifested sufficiently for the orthodox mainstream. By manifested sufficiently, I guess we mean, before it hit them in the back of the head with a two by four.

Now back to idiot of the week.

Here is part of an interview between Bloomberg Business Week's Jim Ellis and that magazine's editor in chief Josh Terangel on the latter's exclusive interview with the commander in chief.


Note, we intended to get the venture capitalists in on this by way of a Brookings-Lazard California conference, but that is too much nuance for one podcast. We hope to get them in soon.

Fundamental to demand side analysis is the proposition that business needs nothing so much as customers -- a healthy market, strong -- yes -- demand.

What is wrong with President Obama's portrayal? And why is his prescription shared by others -- like Joe Stiglitz, for example -- who we normally agree with?

First of all, let's admit that when anybody talks about small business, they are talking about big business, just not humongous business. We're dealing with hundred million dollar corporations in small business.

Second, when we say small business creates the jobs, what we are saying is that a good or service produced by a company finds a market demand that motivates it to hire workers and designers and marketers. What we are not saying is that a small business hires somebody and this then creates some sort of economic dynamic that ratifies the hiring. In the best case for subsidized hiring, jobs are pulled forward from next year and if done in sufficient number these people begin to buy.

But it is fundamentally anti-market. The process requires bureaucratic hoops and a projection, one would assume, not of currently visible demand, but of something beyond the veil. Otherwise the business would be hiring anyway. And in fact, the majority of hiring under such a program would be of people who would have been hired anyway. It only makes business sense. If we are asking businesses to operate in a philanthropic way, we are asking them to corrupt what is the basic dynamic of the market. If we want to act philanthropically, we can just hire the people directly to do things like teach our kids.

And because it will be taken advantage of mostly by the big small businesses and those who get in on the crafting of the legislation, it will leave out the real small businesses.

We have already salted the tax code with enough subsidies for business. What they need are customers, not back-door bailouts. With more customers, more demand, the companies can sort themselves out according to the market value of their product. Insofar as markets are not corrupted by the dominance of huge companies and other distortions.

Let's compare this with a demand side approach, say the carbon tax.

First of all, it is in the right scale. Big. It is not a cost to government, but a revenue. In the case of the Cantwell-Collins CLEAR Act, our favorite, the revenue is 75% rebated to citizens on a per-capita basis, but that does not hurt its economic value.

If the tax is phased in over ten years or so, there is ample opportunity to avoid it by citizens and businesses in the form of being more carbon efficient. But how do they do that? They invest in alternatives.

If you look at the experience of the oil dominated energy market, you see that the problem only begins with its high price. When the price is high, yes, businesses and citizens are hurt. Particularly when the price spikes and people are stuck with their current technology. They cannot easily avoid it in the short term. But they begin to and new energy technology is developed, new and better sources begin to be tapped. Then the price goes down, and the alternatives are no longer economically competitive.

So it is really not -- from the economy's point of view -- the high price of oil that is the problem, it is the fluctuations that make the market erratic and at the control of the oil producers. A stable market price is best for everybody. We don't have that. In our view, however, this is the reason OPEC declines to go after the highest price possible. They know it will only create demand for alternatives, and the longer these alternatives are delayed, the better for them.

But a carbon tax is a floor on the price. A phased-in carbon tax is a rising floor that innovators can count on as the minimum price for their own products. Plus, businesses and citizens can make rational, long-term decisions on equipment and retrofitting and insulation.

This is harnessing the market for the benefit of everybody, except, of course, the purveyors of climate altering substances. Another way would be to require these purveyors to buy climate change insurance. If it proves out that their product does not kill the planet, then they can get the money back. If in fact, the overwhelming consensus of legitimate scientists is correct and the climate changes, we can use the money to evacuate the low-lying areas and rebuild cities and the rest. But in the short term, the insurance premiums would likely bid up the price of oil and we would have the benefits of a healthy market for alternatives. Which market change would in and of itself, even if totally meaningless for long-term survival of the planet, create the investment we absolutely must have for economic survival.

In the Cantwell-Collins proposal, 75% of the revenue is rebated to citizens on a per-capita basis, as we said, which offers the demand potential for alternatives or a good impetus for beating the tax by walking and thus an increase to household income.

This is a healthy market, connected to reality, targeted to encouraging real investment, creating the demand without which businesses have no being. They can do without tax cuts and targeted hiring subsidies, but they cannot do without customers.

In order of importance to businesses, at least based on their decisions on where to site new facilities.

  1. Markets
  2. Transportation, land, air, sea
  3. Workforce -- appropriate and available
  4. Educational facilities, primary, secondary and colleges and universities,
  5. and near statistical irrelevance: Tax Structure

Yet the prinicpal plea you hear in legislatureson behalf of business is for tax breaks and regulatory relief. Why is that? What possible explanation is there for the discrepancy?

A cottage industry of lobbyists and business organizations has grown up whose only product is mining the government for tax and regulatory preferences. These professional courtiers grow constituences among legislators with their access to ample campaign cash. They punish the opposition with sophisticated media. But they need a tangible, useful product. This they have at the micro level with the tax and regulatory preferences. At the macro level, these are destructive of open and free markets, but at the micro level there is a cost-benefit calculation. Hence all acting together produce income for lobbyists and business organizations, but undermine healthy markets and vigorous development of human and physical infrastructure. Unfortunately for the businesses who sponsor these groups and individuals, it is the latter that are the basis for prosperity and incidentally business profits.

Again, this cottage industry is fundamentally anti-free market, because it seeks to sekw rules in favor of its clients and capture regulators for its own designs. Of course, in some sense, the more perfect the market, the more competition and information, and the more profits are competed down. Only market distortions create deadweight profits. Monopolies, oligopolies, cartels, and the shifting of costs of producing and consuming to those outside the specific market.

This last is the so-called externality. Disposal, pollution and so forth. These costs are external only in the instance that they escape the moment of purchase and sale. The price is not only the market signal, it is in a very real sense the market.

Which is why the cost of carbon needs to be in the price of carbon. Bringing it in, no matter what dominating corporations may say, improves the market.

The purchase-sale limitation also displays why markets don't produce public goods efficiently. They can only handle goods which convey directly to the buyer the majority of benefits. They cannot handle the free rider problem. Roads, education, health care, public safety, national defense, are far beyond their ability to produce efficiently.

And we should also note that businesses are compulsively self-serving, motivated by individuals whose concept of sanity is of a world with billions of entirely self-interested people. So it is natural for them to be captured in the micro market of lobbyists and business organizations.

But we've gone a long way from our goal, a list of demand side dynamic processes. Rather than squeeze it in at the end, we'll push that out to next week.

Didn't get very far in the idiot category either. These are well-meaning people, just deluded. Like Alan Greenspan, Milton Friedman and Larry Summers. Congratulations.

Since it's Friday, we'll leave you with a reminder of our forecast. Yes. We still claim the U.S. is in recession. The President may claim for his stimulus an avoidance of the Depression, but that is still in the cards, since we've done nothing substantive to remedy the mess in banking or to restart investment. And insofar as we have done better, much is due to the automatic stabilizers of Social Security and unemployment insurance and Medicare, the New Deal and New Deal style social safety net. The stimulus package has given us a bump in the numbers, but nothing like recovery. And we still have the downward sloping floor from contracting state and municipal governments.

We see stagnant GDP, double digit unemployment, with the all-in U-6 measure reaching 20 percent. We also see a 50-50 chance for another financial crisis, possibly related to credit default swaps or the impending insolvency of second tier, not too big to fail banks.

We'll send you out with Martin Wolf, describing why.


That is Martin Wolf, the eminent columnist for the Financial Times.


  1. In many ways a carbon tax has other benefits. The US has much higher energy dependence than its competitors. During the last oil shocks Europe and Japan suffered far less from the rise in oil price. Imposing a carbon tax would force the US to invest to cope with future oil shocks. This could create a boom for capital investment.

    If brought in rapidly it actually encourages investment, which could be used to subsidise renewable generation. As you say it puts a floor on the price of energy which makes renewable investment far more likely to go ahead because it guarantees the price that the can be gained from installation.

    In the short term it could be used to fund insulation which can actually be very stimulative because it has a high labour component. This could create jobs for many small firms to install insulation.

    Medium term that increases the efficiency of the economy in the use of energy. That helps lower the import of crude oil. Some years ago The Economist magazine estimated that every 1 cent in federal tax would raise $1 billion in tax annually. It would also slow the transfer of wealth from the US to the middle east.

    In the longer term it can be used to offset the federal deficits. Though this objective could be brought forward once the economy is under its own power.

  2. Just so, productive investments. The multiplier is interesting, too, as the number of jobs per dollar in oil production and distribution is lowest, less than half of public sector jobs, investment jobs and retrofitting jobs.