Arnold Kling:

Mauldin’s claim is that we are in what he calls the “endgame,” meaning that the Keynesian option of increasing government borrowing is no longer available to European countries. The only willing lenders are banks, which in turn need to be propped up, and ultimately they can only be propped up by printing money.

My take-away from Mauldin is that, contra the mainstream media narrative, the real dilemma in Europe is not fiscal–deciding whether to maintain government spending or not. The real dilemma is financial–whether to recognize losses and absorb defaults (by both governments and banks) or turn loose the monetary printing presses.

(Via Tyler Cowen.)

Tyler Cowen asks what the definition of “austerity” is, and sort of answers it:

I wonder if some Keynesians have in mind the baseline of “the expansionary policies which I think would be appropriate,” in which case doing less than the Keynesian optimum is always a form of austerity.

I have a more simple definition: it’s a word used to cast moral and emotional judgment on a set of policies without having to actually discuss what those policies are and whether they may be justified or have some basis.

While the decrease in unemployment is encouraging, it isn’t reflected in GDP data. From the Economist:

This is hardly the unshackling of a Titan. As befits a recovery characterised by such fine gradations as the distinction between modest and moderate, there are a lot of caveats. For one, gross domestic product (GDP) does not look nearly as healthy as the jobs data imply. The drop in unemployment since August is on a scale that would normally be expected only if annualised growth were up to 5%, according to Ben Herzon of Macroeconomic Advisers, a consultancy. In fact GDP grew by only 3% (annualised) in the fourth quarter. It is tracking 1-2% in the current quarter. Most economists still expect growth this year of only about 2-2.5%. That is roughly the rate needed to keep unemployment stable; it is not enough to reduce it further.

We’re in much better shape than we have been since 2008, but the recovery is tenuous indeed.

Tyler Cowen:

Frankly, it is a bit of an embarrassment for many commentators that the (admittedly weak) recovery is coming right after the end of the fiscal stimulus. Of course this does not refute the standard account of fiscal policy, namely that it can work but is hard to pull off politically in a manner which contributes to sustainable growth. The correct answer for the timing of recovery, relative to the end of stimulus, is “confounding factors,” but that is exactly the point. The confounding factors are more important than we had thought, and the fiscal stimulus not quite as important as we had been led to believe. That is another point against the Old Keynesian view.

Good news: the unemployment rate dropped to 8.3 percent in January from 8.5 percent in December 2011, and 243,000 jobs were added. Most importantly, the drop in the unemployment rate was not due to people dropping out of the jobs market, as it has been in prior months—it was due to people actually finding jobs.

The economy does seem to be gaining some momentum, and while it’s still not strong (and we have a huge hole to climb out of), that’s absolutely good news. Hopefully Europe can remain stable enough to allow the economy to strengthen.

Tim Ricchuiti takes exception with my characterization of Greece, Italy and Spain’s problem as being too much debt:

Not quite. It’s not the heavy weight of debt (as Krugman has posted about at length the past week, most notably in this column) that’s causing European nations to struggle. What’s causing those nations to struggle is their inability (until recently) to finance that debt at any sort of tenable rate (7% or under). The reason those governments couldn’t finance their debt is that investors don’t want to purchase debt that might not be paid back. The reason the debt might not be paid back is that, unlike the case of the United States, Great Britain, Finland, and various developing nations, European countries like Spain, Italy, and yes, Greece, can’t print their own money (their own money being Euros). Therefore, they’re at risk of not being able to pay back their Euro-denominated debt. The United States, on the other hand, will never be unable to print dollars, and will always be able to pay back its dollar-denominated debt.

Greece and Italy used substantial amounts of debt to sustain their welfare states, and while their economies are doing reasonably well, there’s no problem—they can roll over their debt before it comes due at similar interest rates and everything works out fine. The problem they now face is their economies are not doing well at all, tax revenue has decreased, and thus their deficits have shot up as they continue to fund their expensive government programs.

As their deficits have continued to grow, and their debt has continued to grow as a percentage of GDP, investors became afraid that they would not be able to pay their debt. Which is why, as Tim says, investors would not purchase their new debt at a sustainable rate: because their debt burden is too high.

Tim argues that this is only a problem because Greece and Italy are on the euro—rather than their own currency—they cannot “print” more money, that is, devalue their currency so the past debts are worth less now than they were then and are thus more affordable to pay.¹ Tim further argues that the U.S. will never have this problem, because since we do control our own currency, and our debt is denominated in our currency, we can inflate our currency to reduce the magnitude of our debts.

That’s perfectly accurate, but that does not happen in a vacuum. Everything else is not held equal. Investors will factor the risk of intentional inflation into their investments, and expect higher interest rates for future debts, too. Perhaps Greece and Italy (and the U.S., if we don’t right our ship in the interim) will leave the euro, re-denominate their debt, and pay their existing debt of a smaller magnitude. But what happens when Greece and Italy go back to those same investors, who just received substantially less than they were supposed to from their debt, and ask them to purchase their new debt? It’s going to be expensive, and unless Greece’s and Italy’s economies begin growing strongly, they’ll have the same problem all over again.

I never intended “…the heavy weight of their debt” to be a conclusive summation of Italy and Greece’s problems. Their problem is a confluence of a very poor economy, low tax revenues as a result, and debt used to finance an expensive welfare state. It’s but a piece. A very large, very heavy, piece.

1. Let’s set aside normative criticisms of this, which are substantial—”inflating” your currency for the purpose of making past debts more affordable is essentially stealing from creditors, because in real terms, they receive less than they were supposed to. [↩]

Edward Luce:

In the words of David Autor, a leading labour economist at Harvard University, the labour force is suffering from a growing “missing middle”.

In short, the middle-skilled jobs that once formed the ballast of the world’s wealthiest middle class are disappearing. They are being supplanted by relatively low-skilled (and low-paid) jobs that cannot be replaced either by new technology or by offshoring – such as home nursing and landscape gardening. Jobs are also being created for the highly skilled, notably in science, engineering and management.

Austan Goolsbee:

Certainly the countries of Southern Europe must rein in excess. In the long run, however, even the deepest of cuts won’t suffice. Southern Europe needs to grow or it will never control its debt levels. But with the euro zone keeping Southern Europe uncompetitive, the region’s growth prospects will remain dismal.

Northern Europe has fueled its growth through exports. It has run huge trade imbalances, the most extreme of which with these same Southern European countries now in peril. Productivity rose dramatically compared to the South, but the currency did not.

Europe’s problem isn’t just debt. The problem is Northern and Southern European nations are very different economically. Germany’s workers are highly productive and their economy relies on exports as a result, while Southern nations are not productive and thus cannot use exports to grow their economy. If they were not a part of the euro, they could devalue their currency to make their exports less expensive (and more competitive), but they aren’t, so they can’t. Their only way is to increase productivity.

Paul Krugman, in 2009:

Why, people ask, would I want to compare us to Belgium and Italy? Both countries are a mess!

Um, guys, that’s the point. Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.

Thanks for the advice, Paul.

Financial transaction taxes are no panacea. Kenneth Rogoff:

Such taxes surely reduce liquidity in financial markets. With fewer trades, the information content of prices is arguably reduced. But both theoretical and simulation results suggest no obvious decline in volatility. And, while raising so much revenue with so low a tax rate sounds grand, the declining volume of trades would shrink the tax base precipitously. As a result, the ultimate revenue gains are likely to prove disappointing, as Sweden discovered when it attempted to tax financial transactions two decades ago.

Worse still, over the long run, the tax burden would shift. Higher transactions taxes increase the cost of capital, ultimately lowering investment. With a lower capital stock, output would trend downward, reducing government revenues and substantially offsetting the direct gain from the tax. In the long run, wages would fall, and ordinary workers would end up bearing a significant share of the cost. More broadly, FTTs violate the general public-finance principle that it is inefficient to tax intermediate factors of production, particularly ones that are highly mobile and fluid in their response.

A large part of the support for these kinds of taxes seems to come out of a desire to punish traders. Any time a policy is supported because it makes certain people suffer, rather than it’s sound policy, it’s probably time to reconsider it.

No, public control and unions don’t reduce innovation:

The University of California last week tentatively agreed to a deal with UC-AFT that included a new provision barring the system and its campuses from creating online courses or programs that would result in “a change to a term or condition of employment” of any lecturer without first dealing with the union.

Bob Samuels, the president of the union, says this effectively gives the union veto power over any online initiative that might endangers the jobs or work lives of its members. “We feel that we could stop almost any online program through this contract,” Samuels told Inside Higher Ed.

(Via Tyler Cowen.)

What a triumph.

Seth Godin argues we’re at a juncture in economic history, just like the rise of mass production in the twentieth century:

The industrial age, the one that started with the industrial revolution, is fading away. It is no longer the growth engine of the economy and it seems absurd to imagine that great pay for replaceable work is on the horizon.

This represents a significant discontinuity, a life-changing disappointment for hard-working people who are hoping for stability but are unlikely to get it. It’s a recession, the recession of a hundred years of the growth of the industrial complex.

Mass production of standardized goods—underpinned by workers doing very tightly defined jobs that can, with relatively minimal training, be done by anyone—provided incredible value. This was because up until then, goods were largely made individually with poorly defined standards and processes, so they were expensive and time consuming to make. Mass production made goods cheap and plentiful because the processes for making them were standardized so that anyone could do it. The twentieth century was almost entirely about turning people into cogs in a machine in order to squeeze as much efficiency out of each one as possible.

Because there were so many gains to be made by using mass production for goods, it helped create an explosion of economic growth and development and, along with it, jobs. We needed cogs for those production processes. This was very beneficial for workers; because there was so much value created by mass production, companies could afford to pay very respectable wages and salaries and provide long-term benefits, all while the worker was responsible for very little more than following a series of steps.

But those gains have now been used up. There’s no more potential for growth in mass production, except in countries where labor costs are lower than others, and that will be used up in time, too. In manufacturing, it’s a race toward eliminating cost as much as possible, and that inevitably means eliminating people altogether.

What Godin argues is that the idea of long-term, stable jobs where individuals are responsible for very little besides doing their very specific job—an idea we grew up believing to be true because that’s what we saw in the twentieth century—is a myth created by the temporary explosion of economic productivity unleashed by mass production. It isn’t something we can always have or something we will soon get back to after this recession is over. It no longer exists.

This means suffering for many people, as we are seeing. Our society has been built on the assumption that, if only we do well in school, there’ll be a stable and respectable job waiting for us. That is no longer the case, and now people will have to adjust to it. A high school diploma and a college degree is no longer a ticket to a comfortable future. Rather than simply put in the time and work to be comfortable, we must now find insights into the world that will make us all better off. That’s the new frontier.

The Age of Insight

The nineteenth century was the age of the industrial revolution, the twentieth the age of mass production, and the twenty-first will be a new age, too, of the same scale.

Godin continues:

When everyone has a laptop and connection to the world, then everyone owns a factory. Instead of coming together physically, we have the ability to come together virtually, to earn attention, to connect labor and resources, to deliver value.

Stressful? Of course it is. No one is trained in how to do this, in how to initiate, to visualize, to solve interesting problems and then deliver. Some see the new work as a hodgepodge of little projects, a pale imitation of a ‘real’ job. Others realize that this is a platform for a kind of art, a far more level playing field in which owning a factory isn’t a birthright for a tiny minority but something that hundreds of millions of people have the chance to do.

Whereas the last century was about making goods—food, clothing, cars, toys—cheap and plentiful, the twenty-first century will be about making insights into what will truly make us better off.

It was easy to make huge gains in quality of life in the early twentieth century: providing any kind of affordable clothing, food and car was a giant leap forward. We can’t make those same gains now. That trick only works once.

Now, we have to be smarter. Now, we have to figure out what’s a better use of resources. We have to figure out what kind of car will both be more environmentally efficient and delight its owners. We have to think about completely disparate fields—say, manufacturing, software development, design, and psychology—and combine them to make products that conform themselves to humans, rather than making humans contort themselves to the product in order to use it. We must think about big ideas—ideas that will change society and how people interact—and the little ideas that merely improve people’s lives just a little.

We have to think. This is an age where all of our gains will come from insights into what make products, services, processes, and structures fundamentally better for us. Whereas the twentieth century was about standardization and following a series of steps in a well-defined process, in this new century, there are no defined processes. Everything is to be questioned, re-thought, re-made, or even thrown out altogether.

This century is about having a vision for the way things should be, and the audacity to make it so. Just a decade or two ago, it took immense amounts of capital to launch an idea that could change the world. Now, it takes a few people with an idea, a computer, and the willingness to learn how to build it.

The only thing holding us back now is ourselves.¹ We are all artists, designers, manufacturers, managers, musicians, writers, creators—if we choose to be. And that is the fundamental difficulty of this new age: we all are responsible for our own success.

The twentieth century had a well-trodden path for people to follow: you graduate from high school, go to college, you’ll get a respectable and stable job, and you’ll live in comfort. Our responsibility did not extend beyond following that path.

That will no longer work. We will all have to take responsibility for ourselves, our future, and our ideas. We have to learn to think this way—to think critically of the things we see, of how they could be better and how we could make it so, and thus to see opportunities for ourselves.

We have to change how we think to be successful in this century, and we have to re-design our schools to prepare people for it. I have some ideas for how to do that, but what’s obvious is we aren’t ready for it yet. Not even close. We’re still preparing kids for the last century.

This is a new age, and we better start thinking about it that way.

1. This is not, unfortunately, true for everyone. Poverty and lack of opportunity takes on a new meaning in this century. Rather than hold people back from an education and access to well-paying jobs, it now means holding people back from education that gives them the opportunity to discover a passion from something and discover a way to make something better and, therefore, make a living for themselves, because they are too busy simply trying to survive. This creates two very different classes in society, and is a fundamental threat to it. This, I think, will be one of the great challenges for our century: how do we not only revamp our educational system for a new economic age, but how do we truly make education available to everyone so everyone can participate? [↩]

Michael Pento:

Krugman argued that inflation would address our debt problem by reducing our bill in current dollar terms and that the Second World War was a giant stimulus plan that actually worked. Thankfully, he added the refrain, “Hopefully we don’t need a world war to get there,” but I sensed a tinge of regret in his voice. After all, the Keynesian economist’s favorite pastime is seeing people waste their lives digging holes in the ground or sacrifice their lives in war. Both acts create economic growth according to the topsy-turvy logic of men like Krugman.

The truth is that wars are a miserable misallocation of capital and usually leave financial ruin in their wake. The US did not boom in the ’50s because we fought World War II, but because we resoundingly won. It was the byproduct of having an unscathed manufacturing base, solid infrastructure, an intact military, most of the world’s gold, and the only reserve currency.

Not all work is work you want. What you’re allocating capital toward matters.

There’s been a rash of cancer drug shortages, including drugs used to treat leukemia, lymphoma, and testicular cancer. These shortages aren’t due to shortages of raw materials used to make them. They’re due to Medicare regulation introduced in the Bush administration’s Medicare prescription drug bill.

Ezekiel Emanuel—not exactly someone concerned about technocratic health care regulation—explains why:

The underlying reason for this is that cancer patients do not buy chemotherapy drugs from their local pharmacies the way they buy asthma inhalers or insulin. Instead, it is their oncologists who buy the drugs, administer them and then bill Medicare and insurance companies for the costs.

Historically, this “buy and bill” system was quite lucrative; drug companies charged Medicare and insurance companies inflated, essentially made-up “average wholesale prices.” The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed by President George W. Bush, put an end to this arrangement. It required Medicare to pay the physicians who prescribed the drugs based on a drug’s actual average selling price, plus 6 percent for handling. And indirectly — because of the time it takes drug companies to compile actual sales data and the government to revise the average selling price — it restricted the price from increasing by more than 6 percent every six months.

The act had an unintended consequence. In the first two or three years after a cancer drug goes generic, its price can drop by as much as 90 percent as manufacturers compete for market share. But if a shortage develops, the drug’s price should be able to increase again to attract more manufacturers. Because the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug.

There will always be unintended consequences when we attempt to control complex systems. Those regulations seem, on their face, to be perfectly logical, but what effect they will have is rarely understood before they are implemented.

Emanuel begins his editorial by quipping that Obama administration critics must be disappointed they can’t pin these shortages on Obama, but this is a perfect example of concerns critics—including me—had about the President’s health care reform. The PPACA’s main cost control mechanism is the Independent Payment Advisory Board (IPAB), an unelected board with the power to reduce Medicare payments to providers, and there is no reason to think they won’t fall into this same trap.

Emanuel seems blind to the similarities between these regulations introduced by the Bush administration and the IPAB; he says these shortages are caused by government interfering with natural market functions, yet he is a large proponent of an unelected board of technocrats with the power to decide what drugs and treatments are and are not supported by Medicare.

(Via Megan McArdle.)

Georgia passed a tough anti-illegal immigration law that, among other things, makes using fake identification to get a job punishable by up to 15-years in prison, and here are the results:

Thanks to the resulting labor shortage, Georgia farmers have been forced to leave millions of dollars’ worth of blueberries, onions, melons and other crops unharvested and rotting in the fields. It has also put state officials into something of a panic at the damage they’ve done to Georgia’s largest industry.

So, the state passes a bill to push illegal immigrants out of the state to reduce their use of government services, and torpedoes their agricultural industry. I’m just shocked.

Smart move, there. I suppose this settles the “if we just get rid of illegal immigrants our problems are solved” myth that’s so prevalent on the right. (Or, more likely, not.)