Are you a demand-sider or a supply-sider?
The BBC reports that the Obama administration has designated $50 billion dollars for infrastructure improvements as part of efforts to jump-start the US economy. The claim that the project will help jump-start the economy is contestable, but difficult to prove either way.
Broadly speaking, there are two influential schools of macroeconomic thought. One is the Keynesian or demand-side school, which blames the collapse of demand for economic malaise. During economic downturns, it is the government’s job to make up for the shortfall by employing people, purchasing things, and inducing private actors to do the same. This is the principle behind public works projects, temporary tax cuts, and programs like “cash-for-clunkers.”
By contrast, the neoclassical or supply-side school argues that prolonged economic problems are the result of the economy’s inability to produce an adequate level of goods and services. The government’s response to economic downturn ought to consist of making it easier for individuals to supply labor and firms to supply goods and services. This is the rationale behind permanent tax cuts for all (including corporations and the rich), deregulation, and a reluctance to extend unemployment benefits.
Though economic in nature, these two claims tend to accompany differing assumptions and values about human nature. Put crudely, the Keynesian approach favors the consumer, in hopes that the producers will follow. The neoclassical one favors the producer, in hopes that the consumers will follow.
Of course, all humans are both consumers and producers. But which role is more important? In a crisis, should we try to induce people to buy things, or to induce them to work? Should workers and consumers be favored over entrepreneurs and companies?
There is of course some middle ground between the two extremes. Maybe the answer lies in a bit of both.
-Charles
Image by Flickr user Cain and Todd Benson used under a Creative Commons Attribution License
Executive compensation
A while ago, I investigated how much CEO's deserve to make. My conclusion, we needed better tools for quantifying the worth of executives to a company.
This presents a further challenge, that of determining the value of the executive to the company. Supporters of current executive salaries would argue that these people are the most important figures in gigantic corporations, and that their salaries reflect their contribution. Given that the ratio of a CEO salary to the average worker in the company is increasing so sharply, this would mean that the relative value of company executives has been rising exponentially.
Debates over executive compensation have ignored these trends, and commentators have failed to seriously investigate metrics that could actually measure the value of a CEO to a company.
Unfortunately, that’s the only way to settle this contentious debate.
Trading values
Project Syndicate has an ongoing series by Columbia University economist Jagdish Bhagwati on “The Open Economy and its Enemies.” There is more or less a consensus among economists that free trade promotes economic growth; the law of comparative advantage still holds nearly two centuries after it was formulated. But the opinions of both the public and other social scientists are more ambivalent.
Competition is the means by which actors in an open economy are disciplined. But competition generates losers and winners, too –at least in the short run. Non-economic concerns with free trade include growing inequality, the constant displacement of people under conditions of ruthless competition, environmental degradation, the globe-spanning hazards of mutual dependency, and national security.
Critics of free trade may accuse economists of linear thinking for ignoring the messiness of reality. But economists might equally accuse critics of free trade for ignoring the bottom line –that increased wealth will expand the possibilities of what a society can accomplish.
The free trade debate, like many others, asks how willing we are to trade increased levels of wealth for other values, and under what conditions. Not surprisingly, this debate tends to come to the fore in times of economic uncertainty.
-Charles
Image by Flickr user free range jace used under a Creative Commons Attribution License
It's the economy, stupid
Equality butts heads with freedom
Jonathan Martin and Ben Smith write at Politico that a new debate about first principles and the role of government has replaced the social issues at stake during the “culture wars” of the last three decades.
This dispute over first principles is deeply entwined with questions of national identity and the appropriate role of the government in the economy.
On one extreme is a minimalist state, in which the government is responsible for little more than upholding the rule of law and providing for a common defense. On the other extreme is a socialist state in which the government manages all facets of economic activity.
Neither extreme applies to any industrialized country today. Rather, the modern world is populated by welfare states of various stripes.
Educating the public
Pay, accountability and teachers’ unions
The Los Angeles Times has a new series “exploring the effectiveness of public schools and individual teachers in the Los Angeles Unified School District.” The study, which relies on standardized test scores rather than more comprehensive metrics, is obviously far from perfect. But, as the LA Times explains, this is surely better than nothing when “…across the country, parents have no access to objective information about teacher effectiveness…” Arne Duncan, Obama’s Secretary of Education, has professed support for the LA Times releasing the data.
However, the program has provoked hostility from the Los Angeles and national teachers unions, who claim that the study unfairly scapegoats teachers, many of whom are in poor districts and face unenviable classroom conditions.
When choice doesn't matter
Charles asks some provocative questions in his post today about the role of government versus the power of the market to lift people out of extreme destitution.
But his approach, which focuses on individual responsibility and government constraint, begs the question by assuming, first, that all government action counts as a constraint on liberty and, second, that all individuals are capable of personal responsibility.
This account is not baseless, but it leaves little space for one reason people may suffer: structural barriers to opportunity and liberty. Read more
Poverty, choice and coercion
Should the poor be allowed to choose?
The New York Times reports that malnutrition and starvation remain stubbornly entrenched decades after India’s Green Revolution, which modernized agricultural practices, massively increased agricultural yields and eliminated the specter of famine.
The existing government food distribution system relies on bureaucratic rationing, through which the poor are given ration cards to purchase food from government-run distributors. It is notoriously inefficient and plagued by corruption. Some reform proposals emphasize improving monitoring and delivery within the system. Others favor entirely dismantling the system, replacing it with vouchers or cash payments to the needy. Read more
Corporations and generosity
Do corporations have a responsibility to help the economy?
Daniel Gross has a front-page article on Slate claiming that certain specific companies can “afford” to match employee 401(k) contributions again; companies like UPS and FedEx put their matching programs on hold during the worst of the recession.
The article uses two facts to assert its conclusion:
- It would be good if workers had more money
- At least some companies have cash reserves
What Gross doesn't seem to understand is that corporations don't have an obligation to The Economy — they have obligations to their shareholders (and
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, of course, to comply with government regulations).
This would be a simple and quite charming misconception if thinking like this didn't end up on the front page of popular national publications.
What's pernicious about Gross's position is that it doesn't make a call for any action that might actually help. Corporations are not likely to be shamed into providing benefits higher than they must. If wages must go up, employees will have to demand them, governments will have to mandate them, or employees will have to deliver more value. (I tend to prefer the last.) If Gross valued the long-term health of the economy he would have an eye on international competitiveness and productivity, not the short-term marginal compensation of a few thousand employees.
-John
Image courtesy Wikicommons.
Performance and reward in the public sector
California Governor Arnold Schwarzenegger has called for the salaries of top local government officials to be made public in the wake of a pay scandal in the city of Bell, where three top officials (who have since resigned) drew a combined salary of nearly $1.6 million, despite 16% unemployment and a 17% poverty rate in the Los Angeles County city. Meanwhile Congress debates pay raises for the military and perennial questions about teacher salaries are dealt with in today’s constrained budget environment.
These cases bring to mind the question of appropriate compensation. What is the appropriate pay for a soldier, judge, teacher, or police chief? And how do we determine the appropriate relationship between performance and reward? The private sector generally relies on the logic of supply and demand. But compensation for public employees is far more difficult to determine, especially when analogous examples in the private sector are lacking. Different value systems that place differing weights on the relative contribution of each to society will arrive at different answers.
-Charles
Photo by Flickr user liewcf used under a Creative Commons Attribution license.
Money for nothing
A story over at Newsweek profiles three people who want to bring the estate tax back. The main arguments for this tax concerned the deficit:
To Julian Robertson, the founder of hedge fund giant Tiger Management and a major philanthropist, the economic and moral case for an estate tax increase was simple. “You get out of a credit crisis by getting your house in order, and in America’s case bringing your deficit down. This implies tax increases.” The fairest way to do it, he said, is to tax “the least deserving recipients of wealth, which are the inheritors.
I’ve written earlier this week about the concept of desert, but it is interesting to consider where the concept of fairness combines with desert in this and similar arguments.
-Han
Photo by Flickr user propertytaxonline used under a Creative Commons Attribution license.
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