Author: Derek Thompson

The Senate is close to passing a new $150 billion stimulus package that would extend jobless aid for up to a year. Over the past few days I’ve written quite a bit about why I think extending unemployment benefits is a no-brainer. For Cato Institute employment expert Alan Reynolds, it’s also a no-brainer — that we should stop extending them.

Before we get to the chat (and it’s a long chat!) let’s look at the raw numbers of the worst jobs crisis in 60 years. We’ve lost 8.4 million jobs — the equivalent of the entire population of Iowa and Minnesota combined — since December 2007. About half of that number — say, the population of West Virginia and New Mexico — have been without a job for more than 27 weeks.
 

I say getting stimulus money into the hands of the cash-poor is an easy call when private demand is down and jobs aren’t hiring. These folks will immediately spend the next dollars on cable, clothes, and essentials at a time when broad consumer confidence is at a year-low. Depressed economies need more churn and unemployed Americans are most likely to churn the money they receive quickly.

Of course, there is a downside to all of this poor cash. Subsidies encourage behavior. If you give money to people who are unemployed, you risk encouraging unemployment. The Congressional Budget Office acknowledges this danger, but it still calls jobless aid the most effective way to stimulate job creation. Yes,that means better than tax credits, better than tax cuts, and better than infrastructure spending.

Not everybody agrees.

“Statistically on average, we know that the intensity of search picks up when you’re about to run out of benefits,” Reynolds told me. The evidence is overwhelming that the stimulus added at least two percentage points to the unemployment rate by keeping Americans at home rather than pushing them to work, he told me (for more background, see his column for the New York Post).

I responded that search intensity doesn’t matter as much in this recession because employers weren’t hiring, anyway.

“The ratio of unemployed Americans to job openings has been at an all-time high of six-to-one for six months,” I said. Why would it matter if we were discouraging Americans from looking for jobs that didn’t exist? Reynolds said he hadn’t seen the information I was citing. Here’s what I sent him after our conversation (all data from the Bureau of Labor Statistics):

In September, unemployed Americans exceeded job openings by the largest ratio on record: 6-to-1. Three months later it was still growing. In January, the ratio fell to 5.5-to-1. That’s the latest available data. The table below shows job openings and total unemployment (both listed in thousands) in January 2009 and through the last six months. The unemployed-to-openings ratio for each month is on the right:

I sent this chart to Reynolds. Here is the response he emailed back. My response is below:

“Economics suggests there no such thing as a fixed number of job openings. It depends on the price — the after-tax cost to employers and the after-tax benefit to potential job seekers.[1] Taxes and transfer payments (UI benefits) can both put a wedge between employers and workers …

Your table shows job openings up in December and early January and unemployment down since October. So, the ratio fell from 6.24 to 5.48 in a very short time.[2] More to the point, because a large number of those identified as more-or-less unemployed are either not hustling much or holding out until the last minute for a better job, then the denominator of the ratio would fall quickly if the maximum duration of extended unemployment benefits was reduced from 99 weeks to, say, 52 weeks.

Even with mediocre GDP growth of about 3% (very weak for the early stages of recovery), the unemployment rate would then drop to about 8 percent within 9-12 months, and the average duration of unemployment spells would fall dramatically too. Would those who got off benefits in one year rather than two be worse off? I quoted the 2007 OECD Employment Report saying subsidizing long spells of joblessness is typically bad for the future incomes of those we’re ostensibly trying to help.”[3]

[1] I agree that giving money to somebody without a job marginally reduces his incentive to look for work, but I’m not convinced that it should discourage employers from listing job openings. On the contrary, the government has cut taxes for the vast majority of workers and employers and offered numerous incentives like non-recourse loans to small businesses throughout the last year. Unless America’s employers are steeped in Ricardian equivalence theory, I can’t imagine why the government’s stimulus policies would make them less likely to hire, especially with GDP growth strongly in the black. Yet, lo and behold, here the employers are, overwhelmingly not ready to hire.

[2] The jobless-to-openings ratio has fallen. I’m happy for that. Job openings are up 9 percent from their record low in 2009. I’m happy for that, too. But if Reynold’s argument is that Americans are “not hustling” or “holding out” on jobs that are available, we should see the job openings number start to really pick up, right? Instead, it’s a nose ahead of its all-time low. I see no evidence that unemployed Americans are increasingly passing up jobs to rest on the federal dole.

[3] Reynolds is right that unemployment benefits subsidize joblessness. I am willing to concede that at the margins, it might dampen some Americans’ energy to seek out jobs. But the families in this Washington Post article are making $1,200 and $1,650 a month and supporting four and six children, respectively. In other words, the federal government is spending $240 per family member per month. These men have every incentive to look for more work, and they are. Moreover, their meager spending is a part of depressed private demand. I cannot imagine how canceling their benefits, which would further reduce personal consumption, would have a positive effect on demand or company revenues — much less lower the unemployment rate by two percentage points and create 3 million net jobs in two years.

This has gone on long enough, so I’ll try to sum it up my argument in a few sentences. The primary reason 15 million Americans are still out of work is that employers are not hiring. Employers are not hiring because there is no demand for their products and services. One way to juice short-term demand for their products and services is to put money in the hands of Americans most likely to spend their next dollar and get money churning throughout the economy, which can be paid back to the government in the form of taxes from those transactions, and from future transactions when we’ve achieved healthier employment and sustainable long-term growth.

The Senate is close to passing a new $150 billion stimulus package that would extend jobless aid for up to a year. Over the past few days I’ve written quite a bit about why I think extending unemployment benefits is a no-brainer. For Cato Institute employment expert Alan Reynolds, it’s also a no-brainer — that we should stop extending them.

Before we get to the chat (and it’s a long chat!) let’s look at the raw numbers of the worst jobs crisis in 60 years. We’ve lost 8.4 million jobs — the equivalent of the entire population of Iowa and Minnesota combined — since December 2007. About half of that number — say, the population of West Virginia and New Mexico — have been without a job for more than 27 weeks.
 

I say getting stimulus money into the hands of the cash-poor is an easy call when private demand is down and jobs aren’t hiring. These folks will immediately spend the next dollars on cable, clothes, and essentials at a time when broad consumer confidence is at a year-low. Depressed economies need more churn and unemployed Americans are most likely to churn the money they receive quickly.

Of course, there is a downside to all of this poor cash. Subsidies encourage behavior. If you give money to people who are unemployed, you risk encouraging unemployment. The Congressional Budget Office acknowledges this danger, but it still calls jobless aid the most effective way to stimulate job creation. Yes,that means better than tax credits, better than tax cuts, and better than infrastructure spending.

Not everybody agrees.

“Statistically on average, we know that the intensity of search picks up when you’re about to run out of benefits,” Reynolds told me. The evidence is overwhelming that the stimulus added at least two percentage points to the unemployment rate by keeping Americans at home rather than pushing them to work, he told me (for more background, see his column for the New York Post).

I responded that search intensity doesn’t matter as much in this recession because employers weren’t hiring, anyway.

“The ratio of unemployed Americans to job openings has been at an all-time high of six-to-one for six months,” I said. Why would it matter if we were discouraging Americans from looking for jobs that didn’t exist? Reynolds said he hadn’t seen the information I was citing. Here’s what I sent him after our conversation (all data from the Bureau of Labor Statistics):

In September, unemployed Americans exceeded job openings by the largest ratio on record: 6-to-1. Three months later it was still growing. In January, the ratio fell to 5.5-to-1. That’s the latest available data. The table below shows job openings and total unemployment (both listed in thousands) in January 2009 and through the last six months. The unemployed-to-openings ratio for each month is on the right:

I sent this chart to Reynolds. Here is the response he emailed back. My response is below:

“Economics suggests there no such thing as a fixed number of job openings. It depends on the price — the after-tax cost to employers and the after-tax benefit to potential job seekers.[1] Taxes and transfer payments (UI benefits) can both put a wedge between employers and workers …

Your table shows job openings up in December and early January and unemployment down since October. So, the ratio fell from 6.24 to 5.48 in a very short time.[2] More to the point, because a large number of those identified as more-or-less unemployed are either not hustling much or holding out until the last minute for a better job, then the denominator of the ratio would fall quickly if the maximum duration of extended unemployment benefits was reduced from 99 weeks to, say, 52 weeks.

Even with mediocre GDP growth of about 3% (very weak for the early stages of recovery), the unemployment rate would then drop to about 8 percent within 9-12 months, and the average duration of unemployment spells would fall dramatically too. Would those who got off benefits in one year rather than two be worse off? I quoted the 2007 OECD Employment Report saying subsidizing long spells of joblessness is typically bad for the future incomes of those we’re ostensibly trying to help.”[3]

[1] I agree that giving money to somebody without a job marginally reduces his incentive to look for work, but I’m not convinced that it should discourage employers from listing job openings. On the contrary, the government has cut taxes for the vast majority of workers and employers and offered numerous incentives like non-recourse loans to small businesses throughout the last year. Unless America’s employers are steeped in Ricardian equivalence theory, I can’t imagine why the government’s stimulus policies would make them less likely to hire, especially with GDP growth strongly in the black. Yet, lo and behold, here the employers are, overwhelmingly not ready to hire.

[2] The jobless-to-openings ratio has fallen. I’m happy for that. Job openings are up 9 percent from their record low in 2009. I’m happy for that, too. But if Reynold’s argument is that Americans are “not hustling” or “holding out” on jobs that are available, we should see the job openings number start to really pick up, right? Instead, it’s a nose ahead of its all-time low. I see no evidence that unemployed Americans are increasingly passing up jobs to rest on the federal dole.

[3] Reynolds is right that unemployment benefits subsidize joblessness. I am willing to concede that at the margins, it might dampen some Americans’ energy to seek out jobs. But the families in this Washington Post article are making $1,200 and $1,650 a month and supporting four and six children, respectively. In other words, the federal government is spending $240 per family member per month. These men have every incentive to look for more work, and they are. Moreover, their meager spending is a part of depressed private demand. I cannot imagine how canceling their benefits, which would further reduce personal consumption, would have a positive effect on demand or company revenues — much less lower the unemployment rate by two percentage points and create 3 million net jobs in two years.

This has gone on long enough, so I’ll try to sum it up my argument in a few sentences. The primary reason 15 million Americans are still out of work is that employers are not hiring. Employers are not hiring because there is no demand for their products and services. One way to juice short-term demand for their products and services is to put money in the hands of Americans most likely to spend their next dollar and get money churning throughout the economy, which can be paid back to the government in the form of taxes from those transactions, and from future transactions when we’ve achieved healthier employment and sustainable long-term growth.

Everybody knows that “figuring out” online advertising is an enormous challenge. Newspaper publishers miss the days when big ad images on dead trees in readers’ hands could fund a real news staff with enough money left over to keep the coffee flowing and the donuts fresh. That’s not the world we live in, alas. But why exactly are ad revenues so much lower online? Not surprisingly, Google has an answer.

The Google Public Policy Blog has an excellent take on the economics of news production. Here are three stats I took away from the post:

1) The Time Problem. “The average amount of time looking at online news is about 70 seconds a
day, while the average amount of time spent reading the physical
newspaper is about 25 minutes a day.” That’s a significant — and surprising, right? — point. Advertisers in actual newspapers expect readers will live with the publication for a while, which gives us plenty of time to come across their dazzling photos and catchy slogans and feel the urge to buy something. A 70-second impression is zip, and advertisers comparatively pay zip per impression.

2) The Audience Problem. “According to comScore, clicks from search engines account for 35-40% of traffic to major U.S. news sites.” The nice thing about advertising on paper is that advertisers have a good idea of which readers buy the paper. It’s usually a local audience of readers with a certain level of affluence and menu of interests. But if up to 40 percent of your traffic online is readers entering the site horizontally through Google and Bing, you’ve lost a sense of audience identity. Who are these readers? Where do they live? What do they like? Web analytics can begin to answer these questions. When the Internet opens local newspaper pages to the world, newspaper win eyeballs. But they’re still working on making those eyeballs print money.

3) The News Problem. “The real money in search engine advertising is in the highly commercial verticals like Shopping, Health, and Travel.” But those verticals don’t just live on newspaper sites anymore. They’ve left the nest and made homes all over the Internet, at destinations like Edmunds (cars) Orbitz (travel) Epicurious (food). That leaves newspapers … well, the news. The online newspaper and magazine community is moving toward verticals because if you can attract a bunch of regular readers to a page dedicated to, say, Business, you can begin to demonstrate to certain advertisers that you’ve created a logical destination for their product/service images.

What’s my solution? I don’t really have on yet. But in the meantime: stay on our site! Click over here to read about how tennis could have saved Eliot Spitzer. Or here to read about a possible Israeli attack on Iran. Or here to see the view from one reader’s window in Barcelona. Then go visit our advertiser Nissan and buy a car (but only if you have the money.)

Nutrition pyramids exist to give us a sense of how much we’re supposed to eat from each food group. The federal government’s food subsidy policy exists to manage supply and protect prices for farmers with excellent lobbying groups. These two things share as much in common as the fast food industry and PETA. So when turn them into pictures and put them side-by-side, we get this:

:

I’m sympathetic to the argument that taxing “bad” food is too blunt an instrument to use in the war against obesity (food isn’t like cigarettes, because we don’t need tobacco to live, etc…). But let’s be clear: the federal government already has a tax policy affecting what we eat, and it dramatically distorts the price of our food … and the size of our waists.

[via Economix]

The strange thing about deficit reduction is that even as politicians duck the question of entitlement reform or tax increases, there is broad agreement in the economic community that deficit reduction would involve some combination of spending cuts — probably within entitlements — and tax increases — probably along the lines of tax expenditures or a broad-based low-rate value-added tax. Of course, that’s exactly the problem for the Obama administration. Entitlement cuts are anathema to Democrats and new taxes oppress the conscience of Republicans. There is no political victory in promoting either, and yet both will probably be necessary.

Enter the Wall Street Journal editorial board, doing that thing where it stands athwart common sense, yelling stop:

Now that they have raised federal spending as a share of GDP to 25% and
don’t want to return to the 20.7% 40-year average, Democrats are
looking for political cover to pay for it. They want the commission to
declare that there’s no way you can cut future spending enough to
balance the budget, and then to propose ways to raise huge new chunks
of revenue beyond the current tax code. Mr. Obama’s nominees will
endorse both propositions, and if GOP appointees go along the headline
will be: Bipartisan Commission Says Taxes Only Way to Balance Fisc.

Look, I don’t begrudge the WSJ editorializers their right to be conservative. I begrudge them their right to create a separate reality. There is no way you can cut future spending enough to balance the budget. We will have to raise new chunks of revenue beyond the current tax code. To say otherwise is either delusional or draconian.

Former CBO director Rudy Penner explained to me what a deficit reduction plan would look like if we didn’t touch taxes, and the two highlights are: (1) move the full entitlement benefit age back five years, means-test the programs, and put them on a tight budget; (2) squeeze defense spending until you can’t build new weapons systems or wage full-scale wars. It would, in other words, require the dramatic dismantling of our senior entitlement program and the crippling of our military. That’s is what not touching taxes looks like.

President Obama’s health care reform plan does two basic things on the spending side: it extends subsidies to help lower-income Americans purchase health care (paid for with taxes and Medicare spending cuts) and it establishes a foundation for cost reduction in the future. That first part gets almost all of the attention (especially those eight words I put in parentheses), but the second part is glossed over with surprising regularity. That’s a shame because for many economists and health care experts, the efforts to bring down cost growth inside the health care system is a major reason to support reform. As former CBO Director Bob Reischauer told me in a conversation I posted on Sunday, this bill “creates a platform off of which further measures to reduce cost growth can be built.”

Health care inflation is a hydra and there’s no single axe we know of that can cut off all the heads at once. There are only smaller hatchets we can use to hack away at the beast. David Cutler, a Harvard economist writing in the Wall Street Journal, has a good step-back-and-breathe column about all the various hatchets in the current health care bill. Here they are:

1. Form insurance exchanges

2. Reduce excessive prices

3. Moving to value-based payment in Medicare

4. Tax generous insurance plans

5. Empower an independent Medicare advisory board

6. Combat Medicare fraud and abuse

7. Malpractice reform

8. Invest in information technology

9. Prevention

Reischauer would say, and I would agree, that there’s no guarantee these reform hatchets work. “Combating Medicare fraud and abuse” is a fine ambition, but it’s hard to know how well the administration would execute the promise after acknowledging last year that improper payments in Medicare rose almost 40 percent year-over-year to $98 billion. An independent Medicare panel could make tough, valuable choices that help us move to value-based payment in Medicare; but any significant reforms could unleash a backlash from doctors or patients groups who will find it easy to rail against an occult agency of unelected egg heads with stethoscopes telling them what medicine they can and cannot take.

At the end of the day, there’s nothing Cutler, Reischauer or I can say that will convince a conservative to accept a hundred-billion-dollar-a-year health care government program. I get that. But I still think this bill offers a host of prudent and plausible attempts to cut down health care costs. It is easy, and also important, to point out all the ways these hatchets can fail. We should swing them anyway.

Breaking up is hard to do, but your friend the Internet is here to help!

Here’s a company that will deliver the bad news to your significant other for nothing more than a small fee, and the price of your dignity. The company is descriptively called iDUMP4U, and that’s pretty much exactly what it does. Catherine Rampell from the Economix blog at The New York Times has their billing information:

$10 Basic Breakup — “We will call your other and make them your ex using the information you have given us.”

$25 Engagement Breakoff – “Yeah it’s heartless, but
remember the Runaway Bride and all the trouble she caused in Atlanta or
wherever? This is a lot easier way to do it. When you are ready to talk
to your fiancé/fiancée, we recommend you do however.”

$50 Divorce Call — “Sometimes it is just easier to
get a divorce in motion by having someone else do it for you, some
people might choose their mistress, etc. … but we can do it for you
as well.”

Well, that’s pretty much horrible! Sometimes I find myself arguing that social media programs like Facebook and Twitter, despite appearing to change the nature of our relationships, is actually helping both near and far-flung friends stay closer and more connected to each other’s lives than ever before. Needless to say, I will not be making that argument today.

If you’re interested in learning how the service works, you can listen to a sample call here (it turns somewhat NSFW once the girl realizes that call isn’t a prank).
The representative on the phone, whom I believe is iDUMP4U founder
Bradley Laborman, has the sensitivity of Truper 18” Machete, and it’s
really just a miserable performance all around.

Here’s what I knew about our jobs crisis: Unemployment is at 9.7%, and almost fifty percent of the unemployed have been without a job for half a year. What I didn’t know was how different the jobless ranks are today compared to the last great recession of the early 1980s. Ryan Avent of the Economist points me to a chart from Calculated Risk and explains some scary things:

:

To cut unemployment from near 11% back to 7% in the early 1980s, you
could employ a lot of people who had been out of work for less than six
months. And you see that that’s what happened.

But there’s just not that much room to cut
unemployment by putting the short-term unemployed back to work in this
latest recession. To get the
unemployment rate down below, say, 7%, you have to take a big chunk out
of long-term unemployment.

It’s true that the United States experienced a marvelous recovery in the mid-1980s, and there are lessons to learn from the past about stimulus and job creation, but it’s important to point out that the demographics of the unemployed are very different today. Americans have lost jobs in companies or industry sectors that are not coming back.

Here’s another way to look at the picture, in a graph from the Bureau of Labor Statistics. Permanent job losses now account for half the jobless ranks, the highest on crecord. This graph very clearly demonstrates how over the last half century, the number of long-term unemployed has steadily inched up throughout booms and busts.

“The golden age of the Web is coming to an end. Prepare for the Splinternet.”

Thus announces Josh Bernoff in an interesting post about how new gadgets designed for surfing the Web — our smartphones, e-readers, tablets and even TVs — are fighting with each other to redefine how we access information online. But what is the “Splinternet” and why should the answer even matter to you?*

Let’s take a step back and think about some of the new gadgets on the market. Smartphones and e-readers are not like laptops, where each computer lets you interact the same Web. For example, Apple iPad won’t support Flash software, which supports most online videos. Ben Kunz of BusinessWeek suggests this is a blatant move to force iPad users to satisfy all their video cravings through Apple stores. Similarly, in the e-reader arms race, Apple, Sony and Amazon are competing with different libraries of books and products.

If the last 10 years were a heyday for open content on the Web, the next ten years could be the age of platforms. Today to reach the universe of new mobile browsers, you can’t assume that your audience is using only a laptop to access the same version of your content. So it won’t be enough to have just a magazine website. Instead you’ll need a website and a Kindle App and an iPhone/iPad app and another app for another device that has a distinct audience and requires a specific template. Kunz sums up the problem for content providers like this:

The device-portal tie-up isn’t necessarily bad for consumers, who have
plenty of choices for media consumption. But it creates a thorny puzzle
for businesses striving to build audiences. How do you compete when
your potential customers are using devices and content systems that
lock one another out?

Let’s bring this back to advertising, because money is at the heart of this platform battle. The first wave of the ad war was fought on a couple fronts, dominated by display ads on content pages and search ads on search pages. Google’s great revenue revelation was that you could make a bazillion dollars selling online ads next to search results, because you’re putting ads through an obvious filter: what the user wants to find. Google has parlayed that discovery into $23 billion business. It is the success story in advertising in the last five years.

But in the Splinternet age, ads are more tightly controlled by platform. My old Blackberry defaulted to Bing search because Verizon has a deal with Mircosoft. But my new phone that runs Google Android software serves Google ads under apps for programs like Pandora. Meanwhile Apple has banned any apps that use location-based software to serve up targeted ads, presumably because it wants to corner that market on its own device. This is a new age, where gadgets have a “hidden agenda” to hold you in their ecosystem of content display and advertising. There are walls are going up just as the walls to mobile Internet access are falling down.

_____
*For reference, here’s how Bernoff distinguishes between the Old Internet and New Splinternet:
,

We all know the Great Recession set fire to the housing market. But because the US government plays a extraordinarily intimate role in the housing market, it’s fair to say that the Great Recession also set a fire under our housing policy. Rep. Barney Frank, the influential chairman of the House Financial Services Committee, is worrying loudly about the safety of government-chartered mortgage loan companies Fannie Mae and Freddie Mac, and Treasury Sec. Tim Geithner says the government will release a long-term housing strategy in 2011.

But the debate is underway today. Robert Shiller, the Yale economist behind the influential Case-Shiller home price index, had a column in the Sunday New York Times on the many reasons the
government plays a large role in homeownership. Shiller locates “a
long-standing feeling that owning homes in healthy
communities is connected to individual liberties that embody our
national identity.” But just some people believe homeownership is good for America doesn’t mean the United States should be in the real estate business.

According to a piece in CQ Weekly by Robert Tomkin, our housing policy is uniquely designed to encourage homeownership compared to the world. Only the US offers full tax deductibility of mortgage interest payments. Only the US “maintains a government agency that insures mortgages (the Federal Housing Administration), a government agency that guarantees mortgages securities (Ginnie Mae), and government-chartered companies that buy and sell mortgages and…mortgage-backed securities (Fannie Mae, Freddie Mac and the Federal Home Loan Bank system).”

Despite this unique government promotion of the housing market, US homeownership rate (67%) lags behind countries like Spain (86%), Ireland (75%), Australia (70%), the United Kingdom (70%) and Canada (68%). In Canada, government-backed mortgages account for only 30 percent of the market. In the United States, the number is 85%.

Like so many things, the push to reform our housing policy derives from — and is contained by — the recession. On the one hand, economists note that the full deductibility of mortgage interest encourages widespread debt, and that the successful securitization of mortgage loans grew banks’ appetite for more customers and riskier customers, which walked us toward a subprime meltdown. On the other hand, removing the tax subsidy on mortgage interest (and replacing it with, say, a single multi-thousand dollar tax credit for each home buy) would cause already weak home prices to collapse, and it’s crazy to imagine that outlawing complex mortgage-backed securities alone will prevent future housing crises.

The health care debate revealed a deep-seeded resistance against large-scale reforms, both in and outside of Washington. But our federal support for home mortgage finance will eventually require its own time in the reformist spotlight. Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation summed the problem up nicely in the CQ Weekly piece: “These policies amplified the boom as well as the resulting bust … This crisis represents the culmination of a decades-long process by which our national policies have distorted economic activity away from savings and toward consumption, away from our industrial base and public infrastructure and toward housing, away from the real sectors of our economy and toward the financial sector.”

President
Obama hopes to sign both additional economic stimulus plans and a
comprehensive health care bill within the next two months. To get some
perspective on these two critical issues, I spoke with Robert
Reischauer, the director of the Congressional Budget Office between
1989 and 1995. He is currently the president of the Urban Institute and
a nationally respected expert on the budget and our entitlement system.
In this, the second half of our conversation about stimulating the economy, passing
health care reform and solving our long term debt crisis, we go back and forth on the debt and President Obama’s ability to address it. Part One — in which Reischauer weighs in on the economic stimulus and health care debates — is here.

Since 2009 you’ve been calling on the president to include in his budget some provision about future debt reduction. How painful would such a provision have to be, and do you think Americans are ready to receive it today?

The average American does not accept that we have to address this problem, and that in addressing it we’re going to have to affect programs and taxes that that average American cares about. We’re at at stage where people can say mañana: “I accept that we have a terrible debt problem but there is no pressing need to tighten our belt in the immediate future.”

I hoped Obama would have put in this year’s budget some kind of statement saying “I won’t enact a stimulus bill unless there is some legislation that will begin to trim spending and raise taxes starting in 2013.”

Politically there are obvious risks with this kind of plan, but what about economically: Would you be worried about a Ricardian equivalence effect, where Americans don’t spent the stimulus money today because they’re afraid that their taxes are scheduled to dramatically increase within the next three years?

But what do you think happens in three years if we keep running the deficit? A collapse of the dollar? Increase in interest rates? Remember back in 1993, we had a weak economy and people were arguing that we should raise taxes and cut spending and the Clinton administration did and the impact of that was to provide confidence in markets.

There are some economists who argue there is no debt problem. They say look what happened after World War II. Public debt was well over 100 percent of GDP, more than twice the current levels. But in 1946 the deficit declined without a catastrophic recession, because the public debt in the hands of the public was the engine of the late-40s and 50s boom. Savings bonds that provided us with purchasing power and all those interest funds spent back in the US was an enormous fiscal stimulus. But today the CBO is projecting enormous interest payments over the next few years and also slow economic growth. Are they misreading something?

The difference back then was that we owned our own debt. Today half of it is owned by foreigners. That’s a very different situation. At that point, the US was the only industrial power left standing and the rest of the world was in ruins and the demand for goods and services produced in America was huge. People because of the depression and the rationing during the war had huge pent up demand for goods and services that they hadn’t bought in years. It was a very very different time.

Still there are plenty of respected thinkers like Paul Krugman who consistently say it’s damaging to warn about a debt crisis today, since interest rates are exceedingly low and the economy still needs government assistance to replace weak private demand. Is it dangerous to talk about the debt today?

I wouldn’t worry about real action over the next two to three years. But the question is: When should we worry? When the economy recovers, we’ll say there’s no reason to worry with employment high and corporate profits high. We’re reducing our ability to respond to crisis in the future. We’ve mortgaged ourselves to countries that do not share our values or our geopolitical aims. Do you want to have to think twice before setting up a meeting between the president and Dalai Lama, or sell arms to Taiwan and South Korea?

The Chinese don’t seem terribly concerned about our debt today. Do you really foresee a geopolitical crisis resulting from our debt burden to countries like China?

It’s just one thing. It’s the tip of the iceberg. There will come a time if we continue to run trillion dollar deficits that the question will arise: do we have to think twice about new initiatives in our defense budget when the Chinese are paying for it?

Let’s look under the hood of the debt. It’s no secret that the main driver is entitlements: Medicare and Medicaid and, to a less extent, Social Security. On one end of the spectrum, Republican Rep. Paul Ryan has called to transform Medicare into a tightly budgeted voucher program. On the other end, you’ve got calls to expand Medicare and Medicaid to cover millions more. Where do you stand?

There’s no way to save significant amounts in Medicare and Medicaid without transforming the health sector at large. We don’t have a Veterans Administration or Indian Health Services analogue that treats the elderly, disabled and low income people in a different system. They get their services from the same providers that we get our services from. We have to bring down the growth of costs across the entire spectrum.

If we lower the amounts that we pay providers in Medicare then providers won’t perform services for these individuals and there will be an access problem. If we begin raising the cost on beneficiaries, you’ll quickly find that minority of Medicare beneficiaries have the wherewithal to pay. I’m for raising the burden for those with means. We do some of that in Medicare Part B already. But Medicare is a less generous policy than the average worker has from a large employer in America. So I don’t think there’s a lot to be gained there, even though this administration has suggested that we should start doing more to means test Part D as well.

Raising the burden on, or cutting benefits for, older Americans with means — ie means testing — could be one approach?

Some of Medicare, like Part B, is already means-tested. I’m for that. But again the solution has to come from within system to lower the rate of growth of spending. By some rough estimates 30 percent of the services provided to everybody are of little, no, or negative value. The problem is identifying that wasted care ahead of time, and it’s hard if not impossible to do if we remain on a fee for service basis. In the long run, moving toward capitation is the only way to align the incentives of patients, providers and payers in the direction of providing high quality and affordable care.

You’re talking about moving away from fee-for-service toward a broader definition of medicine, something like fee for care. When you told me you supported health care reform, you said it bulldozed the landscape to prepare us for something bigger. So is fee-for-care the proverbial building we want to build over the bulldozed health care landscape?

I think that could be right.

As the Senate plugs away at a $15 billion jobs bill — sorry, business tax cut! — it’s worth taking a step back and acknowledging its limitations. The bill would exempt all new hires from payroll taxes in 2010. How much money back is that? For a $60,000 worker hired on May 1, it would save about $2,500 in 2010 according to Sens. Chuck Schumer and Orrin Hatch. That’s not chump change, but it leaves the vast majority of compensation up to the employer.

So put yourself in the boss’ shoes. If demand for your products and services is still low and the government offers to withhold $2,000 in taxes, that’s probably not enough to justify a $60,000 investment in human capital. It’s precisely this concern that has critics of the $15 billion bill wondering whether the only employers who will take advantage of this tax credit would have hired anyway.

You can lead a horse to water, but you can’t make him drink if he’s not thirsty; and you can dangle tax credits in front of employers, but you can’t make them bite if there’s no demand for what they’re selling. So let’s take a look at the state of demand. We all know consumer confidence is in the toilet. But Tim Duy crunches some numbers on a relatively obscure economic indicator called “real personal income less transfer payments.” Simply defined, this is what people make in income not including all money they get from the government (such as unemployment benefits). The red line is the trend line of rising personal income since 1991. The blue line is the actual data. Personal income has fallen off severely since 2007, about eight percent.

At the same time, overall disposable income — what people have the ability to actually spend — has stayed steady over the last two and a half years. Why? Because of government transfers to Americans in the form of tax breaks and automatic stabilizers. Here’s what the government’s helping hand looks like:

Demand is weak in 2010. But without the tax breaks and transfers from the 2009 Recovery Act and follow-up unemployment benefit extensions, Americans would be without hundreds of billions dollars to spend on goods, and employers would be without hundreds of billions of dollars in revenue, meaning hundreds of billions of dollars they can’t spend retaining employees. In normal times, enormous government transfer programs like unemployment benefits could distort the economy, raise the incentive not to work, and increase the tax burden on the 50-60% of Americans who pay net federal taxes. But these are not normal times; 15 million Americans are out of work because nobody will hire them, and the greatest risk to our future tax burden is that the government does nothing to lift sagging personal income.

Paul Krugman had a nice piece over the weekend explaining why jobless benefits are a “good, quick, administratively easy way to increase demand, which is what we really need.” What we really need is jobs. New tax credits might help. Healthy demand would help more.

With the $15 billion jobs bill passing the House and Senate and another $150 billion stimulus bill proposed by Sens. Reid and Baucus, we’re heading back to a very public debate about more stimulus. Is it time to pull back or is it time to keep going? 

The House passed a slightly modified version of the $15 billion jobs bill Thursday, which eliminates payroll taxes for new hires this year. Will it work? Depends on your definition of work. The Congressional Budget Office considered the impact of payroll tax exemptions for new hires on job creation and concluded that $15 billion could create the equivalent of 120,000
and 270,000 full-time jobs in 2010 and 2011. That’s potentially 200,000 families with more money to spend throughout the economy, pay their mortgage, begin to erase their debt and so forth. But this number needs perspective. The United States requires 200,000 new jobs created each month for the next seven years
to hit 5 percent unemployment by 2017.

One of the Democrats who voted against it had this to say (via NYT):

“We should stop calling it a jobs bill, and instead acknowledge this is
about business tax cuts,” said Representative Barbara Lee, a California
Democrat.

She meant that as an argument against the bill. But I wonder if it’s a good tactic nonetheless. Let’s be super-sanguine and assume this jobs bill adds 300,000 jobs in 2010 and 2011 against an army of unemployed that today sits at 15 million people. This is not going to move the official unemployment rate significantly. In the next few weeks and months, it’s important for Democrats to convince Americans that their first priority is “jobs, jobs, jobs.” But if by October Americans aren’t seeing jobs (much less jobs, jobs, jobs) what will they blame: underlying weakness in the economy, or broken Democratic promises? The former is amorphous. The latter has a face and a re-playable sound bite.

I’m just thinking out loud here. But maybe emphasizing this $15 billion as a business tax cut rather than an employment elixir is a better political argument for the bill than against it.

The official unemployment rate is stuck at 9.7%, but as Dan Indiviglio writes there’s a lot going on under the hood of that number. Read his piece here. I waned to add a bit of garnish to his analysis, and I found some in this fascinating graph from Calculated Risk. It compares unemployment to mortgage delinquencies for each state and finds — not surprisingly — a strong relationship. Not every state is labeled, but Michigan, California, Florida, Arizona and Nevada are. They’re all on the high end of both unemployment and mortgage delinquencies. They’re also a part of the five-headed hydra of economic pain: Yes, I’m talking about MichiCaliFlAriVada.

Unemployment and weakness in the housing market feed off each other. Without jobs, families can lose their homes. Weakness in strong housing markets can devastate real estate employment (ask Florida). The administration’s housing credit is set to expire in two months. With the Fed winding down its MBS purchases at the same time, mortgage rates could begin to inch up by as much as a percentage point, further squeezing the weak housing market. That makes Congress’ action on unemployment all the more significant, as CR explains:

Imagine if there were no unemployment benefits. As Mark Thoma noted yesterday, Unemployment Compensation has Broad Based Benefits,
but one benefit he didn’t mention is that it keeps households in place.
Even though there is a relationship between the unemployment rate and
the delinquency rate, I suspect the trend line would be steeper without
unemployment benefits (so there would be even more delinquencies as the
unemployment rate rises without benefits).

For more on why unemployment benefits are key to economic recovery, go here.

Rupert Murdoch, the media mogul whose News Corp produces some of the great scourges of liberalism (Fox News, WSJ op-ed page, and a global panoply of magazines and papers), is the subject of a wonderful New York Magazine profile by Gabriel Sherman. Rather than mellowing with age, Murdoch is waging a three-front war, battling the New York Times for Big Apple dominance, Google for online revenue, and his children for control of the company. I suggest you read the whole piece, because it’s really quite good — and Sherman is one of the best media journalists out there — but I did come away observing a particular tension within the Murdoch brand. (I hesitate to wade too deep in these waters, knowing there are some writers like Michael Wolff who have successfully turned Murdochology into a hobby if not primary vocation, but here I go…)

The tension with Murdoch is that he truly seems to respect journalism as both a weapon and a craft. Everybody recognizes that Murdoch likes to do battle with headlines and ad rates, but there’s an almost quaint “instinctual belief in the power and importance of
newspapers and the wherewithal to continue to invest in them.” Murdoch overpaid for the Journal by half (taking into account subsequent write-downs), spent $80 million to spruce up WSJ’s headquarters and invested tens of millions of dollars in a new NYC-centric section. His bid for the Journal is called a wayward luxury purchase — “the worst deal he ever did” borne from an “an Ahab-like obsession” — but what outsiders call a wayward purchase, journalists call a pay check and readers call a paper. Supporters argue that he saves newspapers by injecting them with verve. Critics will argue that he “saves” his papers by destroying their credibility. Either way, in an age where newspapers are dying, Murdoch had the audacity to believe otherwise.

Even if his faith in dead trees is old fashioned, Murdoch looks to be the future of journalism, in at least two ways. First, as the decline of classified and ads erodes newspaper revenues, large papers feel pressured to turn to moguls. I’m thinking now of Mexican billionaire Carlos Slim’s 7 percent ownership of the New York Times Company (7 percent and growing, as rumors have it.) Second, his once distinctive flair — the flashy headlines, the juicy photos, the winking (or sometimes bludgeoning) partisan tilt that for years was a staple of European papers rather than American — turns out to be quite imitable, a return to the yellower days of journalism. Online, the style’s genealogy winds its way through Drudge, the Huffington Post and many blogs. On television, MSNBC has found fortune providing a mirror to Fox News’ rightward tilt. Somber objectivity is on the wane, for better or worse — and there are fine arguments for both — and the rise of the Internet has coincided with, or catalyzed, the rise of voice in journalism. Whether or not the Murdochization of the news is a good or bad thing is up for debate. What’s not up for debate is that it’s becoming Murdoch world, and we’re all living in it.

From the department of really, really unintended consequences: public service announcements designed to shame binge drinkers could actually increase instances of binge drinking.

A study from Northwestern University’s Kellogg School of Management found that when PSAs try to shame their audience, it can have one of two effects. Either the intended viewer ignores the ad in a defensive posture, or he feels so guilty about his bad habits that he … well, drowns the guilt in booze.

Here’s the money quote from Advertising Age:

“If you’re talking to a student about cheating on an exam, and one of
these ads comes up, you can bet they are headed straight to the bar,”
said Ms. Agrawal, who conducted the study along with her Indiana
University colleague, Adam Duhacheck.

The researchers suggest that the PSA authors use positive messages rather than traffic in guilt, which my mom will tell you violates more than five millennia of tried and true Jewish mothering. In any case, the advertisements previewed in the AdAge article just aren’t very compelling: a woman bent over a toilet beneath the ironic banner, “Best night of my life”; a woman slumped on the bathroom floor above the message, “This isn’t what they meant by ‘on-campus accommodation.’” Um, what?

The problem with these PSAs isn’t guilt, it’s the PSAs. If you show a college sophomore a picture of a drunk person next to the line “Best night of my life,” he’s going to smile, nod slowly in knowing remembrance back to last weekend, and continue living his life. It doesn’t pay for PSAs to be hip and knowing. Just show a picture of a decrepit alcoholic or something with the tagline “He used to say ‘It’s only college’ too.” Or show a dim-witted looking person and make some point about binging and brain cell death. Inasmuch as drinking PSAs can be successful at all, sincerity scares. Irony doesn’t.

Rep. Paul Ryan is the wonky Republican representative who wants to save American health care by putting health benefits entitlements in a stiff straitjacket. Ezra Klein is a wonky liberal blogger who supports the president’s health care plan to extend health care to tens of millions of Americans, even if it increases federal spending by over one hundred billion annually. Their conversation today on Ezra’s blog is a wonderful showcase of two extremely smart people who have done their homework and then some of the minutiae of health care reform. It’s also a good example of two extremely smart people with … what’s that term? ah yes … fundamental disagreements about the big ideas in health care reform. This exchange is telling:

Ryan: Look, I believe we need to do health-care reform. And the
employer-tax exclusion is the place to go. That is a huge driver of
health inflation, no one has the guts to take it on, and what’s a crime
in my mind is that I think people in the administration would agree
with this. I think economists would agree with it. That’s where we
should go to fund health-care reform. But we’re not. Because of
politics. And unfortunately, we’re creating a fiscal house of cards
instead. We’re not dealing with the entitlements that are unfunded
right now. We’re creating a new one.

Klein: But on the exclusion, Max Baucus wanted to fund reform through the exclusion. And the administration, which had attacked John McCain on his attempt to repeal the exclusion, were ready to go with him. They didn’t get any Republican support on that, though. If Bob Bennett and four Republicans had come to them and said, look, if you go hard at the exclusion, you have my vote, they could’ve gone hard at the exclusion.

Ryan: There’s a distinction though. The Patient’s Choice Act that I have
doesn’t repeal the exclusion and put the money in a new government
spending program. It takes the money and gives it to the individual.
There’s a very big difference of opinion here. You don’t end the
exclusion and have the government spend it on a program. You give it to
every individual. But the point I’m trying to make is we spend enough
on health care. We don’t need to do more. We need to do what we do more
efficiently and effectively.
________

This point bears repeating: it doesn’t matter that Democrats and Republicans agree about some details in this bill. The overlap is interesting to talk about, but it’s peripheral. What matters is that most Democrats want a new government spending program and Republicans don’t. In his New Yorker column this week, I think the wonderful Hendrik Hertzberg missteps:

The health-care reform bill–which, despite everything, is
still alive–is an ambitious piece of legislation, however modest it
may be by the measure of the rest of the developed world. Ideologically
and substantively, it is centrist. It has Republicans, and
Republicanism, in its family tree. For better or for worse, it’s
already bipartisan.

So health reform adheres to the Republican platonic ideal, even if no flesh-and-bone Republicans vote for it? Maybe. Or maybe it doesn’t adhere to Republicanism at all because it’s garnishing a decidedly liberal goal with conservative touches. Maybe saying “it’s already bipartisan” is like a steakhouse saying its filet mignon is vegetarian, because it’s served with quite a lot of carrots.

Here’s the basic logic of health reform to me, if we start with with the premise that insurance must be reformed: the insurance reforms Obama seeks like banning the practice of denying people with preexisting conditions would send premiums through the roof if young healthy Americans knew if they could wait until they got sick to get care. So we need a universal mandate to buy insurance and a penalty for those who don’t. But some of the non-insured can’t afford coverage on their salary. So we need a robust subsidy package to help them out. But robust subsidies cost tens of billions of dollars we can’t make up with Medicare cuts. So we need to find new tax sources. That makes sense to me. But if the idea of a new government program repulses you, then naturally you’re going to see any conservative trimmings — Medicare cuts, and interstate exchanges, and employer benefit taxes, and tort reforms — as Trojan horses rolling new federal obligations into Washington.

I don’t put much stock in a Ryan’s consumerist solution to health care reform for the reasons Brookings’ Henry Aaron enumerated. But I do think that having an honest debate about health care — even if it’s too late now — begins with acknowledging fundamental differences between both sides. To end where I began, that’s what I found so elucidating about the conclusion of the Ryan-Klein conversation. Sometimes smart honest people just don’t agree.

Schools will hire one million new teachers in the next four years, according to a new NYT Magazine piece by Elizabeth Green. But how do we make them good teachers? That’s the big question of the piece, and two months ago the Atlantic’s Amanda Ripley offered some insights from the folks at Teach for America:

In general, though, Teach for America’s staffers have discovered
that past performance–especially the kind you can measure–is the best
predictor of future performance. Recruits who have achieved big,
measurable goals in college tend to do so as teachers. And the two best
metrics of previous success tend to be grade-point average and
“leadership achievement”–a record of running something and showing
tangible results. If you not only led a tutoring program but doubled
its size, that’s promising.

In an interesting blog post that you should all read, Matt Yglesias notes that we need to have more available research on basic teaching strategies. Teaching is an intensely personal experience that is difficult to regulate with a best practices manual, but I think I agree that we could use more authoritative information about simple strategies that appear to flat out work, no matter who’s standing at the head of the class.

In college, I spent time studying education reform in Asia. One finding was that some countries like Singapore — which consistently scores near the top of most international standardized tests in reading and math — include a centralized pedagogy training program that appears to be extremely successful. It would also certainly be rejected in the United States as undemocratic and unfeasible. So while I think studying successful models like Singapore is important, it’s equally important to acknowledge that a south Asian city-state renowned for its draconian order might not be the “right” model for a sprawling federalist republic.

The natural inclination of US education policy is centrifugal. The Department of Education plays an important role, and has a budget of around $40 billion, but the fed leaves testing standards up to the states. And testing standards vary wildly. A lot of public school funding comes from local property taxes. And public school funding varies wildly, both inter- and intra-state. So the frustration (at least that I have) with designing an education policy, or even a teacher’s comparative effectiveness portfolio, is that the United States education system is not the kind of system that will respond to pedagogical mandates from on high. It’s already too steeped in the values of local control. Local control can be a good thing for parents, for teachers, for charter schools. But it’s also more impervious to reform from an federal Education Policy — with a capital E and P. What you’re left with is the soft bribing of programs like Race to the Top.

President Obama found his voice on health care. Now he needs to find his voice on economic policy. The paradox of our recovery is that we need more public debt and greater consumer spending to grow out of the recession, but lower public debt and more responsible consumer spending to avoid the next crash. But how do you actually put that into words?

The president has struggled to do so. He’s said things like “if families are tightening their belt, the government should do the same,” which is utterly backward (with private demand slagging, government spending is growing). Obama likes to focus on the long arc of reform, but many reforms we need on that long arc are unattainable in the short term.* It’s difficult to acknowledge that times of crisis call for crisis policies — like record deficits — that would normally appear irresponsible. But the key is to explain that our short-term economic policy and our long-term economic policy are not the same, and should not be. Sick patients take potent medicines that healthy patients shouldn’t. And that’s a good thing! You don’t want to slam good strong drugs, but you do want to discourage refilling that prescription indefinitely.

A piece that reminded me of our unique position is this argument about consumerism’s comeback in TIME:

The great recession was supposed to teach all of us one lesson. Debt is
bad. If we were going to pull out of this, we were all going to have to
lock up our wallets and focus on paying off our bills. And indeed the
savings rate did initially turn up. It is still well above its low of
1% … While we might cheer a drop in savings in the short-term, in the long-term, savings has no real downside.

So the recession’s lesson is clear: debt = bad. What’s not clear is when we should learn the lesson. The paradox of thrift states that widespread saving during a recession hurts the economy and leads to lower total savings. Today the government is spending more to encourage Americans to spend more (see graph below). Tomorrow the government wants to spend less and encourage Americans to save more. This is paradoxical stuff, and it’s not easy to fit into a sound bite. But it’s crucial that Obama explain that the only way to properly view American economic policy is with bifocals: our near and far term goals are distinct, but they must be made clear.

_________
*Just looking at our tax policy,
it might be wise to slash the mortgage interest deduction, but doing so
today would hurt the weak housing market; and it might be wise to eliminate
the state and local tax deduction, but doing so today would hurt our
weak state budgets…