Friday, May 20, 2016

Hard Hats That Are Green

We are in a global recession.  We have been for some time.  National economies are now much more closely linked than they were in the 1930s.  Nevertheless, in the U.S. the media tend to look at American GDP statistics and connect those to U.S. government policy, more or less ignoring what is happening globally.  The U.S. economy is limping along.  Some stats, like the unemployment rate, suggest it is really humming.  Others, like flat wages that have been the pattern for more than a decade, provide an indicator of persistent sluggishness.  It is my sense that the latter is the more accurate picture.

Fiscal policy, what I was taught should be the primary tool to combat such economic performance when I was in graduate school, has gone by the wayside.  Monetary policy is the tool du jour.   In the immediate aftermath of the financial crisis, it surely was helpful in restoring liquidity to the system.  But now, the right metaphor for monetary policy is pushing on a string.  That won't get you very far.  This gets me to reconsider fiscal policy, if only as a pipe dream, which is what I will do in the rest of this post.  Pipe dreams occupy much of my time now.  For quite a while I've had this line going around in my head.

The New Deal didn't cure The Great Depression.  Shicklgruber cured The Great Depression.  

It's from Axel Leijonhufvud's book, On Keynesian Economics and the Economics of Keynes.   (This may not be an exact quote.  I don't have that book in front of me and am writing this from memory.  But it is pretty close even if it is off a bit.)   Let me decouple the meaning from the line, in case it is not clear.  The scale of fiscal spending during the Great Depression, large though it may have seemed by historical standards, was nonetheless inadequate for the task.  It took the production effort of World War II to make the economy fully function again.  All stops to fiscal spending had been removed at that point, because the circumstance demanded complete urgency to win the war, even though America was initially a reluctant participant.

Now there is this terrible fear of deficit spending by the Federal Government, a fear that doesn't match the current circumstance.  That fear has served as a stop on fiscal policy even when the Democrats controlled Congress.  The other stop is what once was the Republican small government philosophy, which has morphed into - all non-military government spending is bad.  Perhaps the current Trump candidacy will get the Republicans to reconsider on this point, for fear of otherwise losing their main constituency.  I doubt that it will happen, but one can dream it might happen.

Here I don't want to dream.  So let me take on the inflation fear among the Democrats and advance what I think is a reasonable way to consider the issues.  (It's how I think about them, reasonable or not.)  If inflation were a pure bad than deflation would be a pure good.  But, in fact, deflation is horrible and very scary.  When prices are generally declining, the economy is performing poorly.  Unemployment is high and economic growth is negative.  While there may not be a Phillips Curve that is stable over time, it is still reasonable to envision a tradeoff between overall economic performance and inflation.  The ideal represents a balance between the two, though as I will argue next, where that ideal lies can be a source of disagreement.

As much debt is not indexed, inflation represents a real wealth transfer from creditors to debtors.  High inflation, in other words, erodes the value of the debt in real terms.  In our society the rich are creditors and those of more modest means are debtors.  In other words, the Average Joe should actually want inflation for this reason.  That such folks are scared by the size of the National Debt because it will cause runaway inflation is a tribute to the effectiveness of propaganda (which favors the creditors).  Those fears are influenced by graphs such as this one, which shows the Debt/GDP ratio increasing during the Obama years. 

There is a third issue when inflation is sizable, as it was in the U.S. in the late 1970s, and still another issue when there is a hyperinflation and people have lost faith in the currency.  But there is a tendency to confound the one for the other.  Our minds worry too much about the extreme risk and not enough about more moderate risks.

There is a textbook ideal of pure inflation, where all prices of goods and services go up at exactly the same rate.  A pure inflation, if it existed in otherwise stable economic conditions, might not be so bad.  The economy is never that stable, however; supply and demand change from one market to the next so relative prices change over time as a consequence.  (A relative price is that ratio of the price of a good in one market to the price of a different good in its market.)   Relative price changes drive adjustments in consumer and producer behavior.  Such adjustments make the economy function better overall.

With modest inflation, those adjustments can proceed apace.  When the inflation rate is higher and some prices rise faster than inflation while others rise more slowly, it is harder to discern what the relative price change really is, especially since not all prices change continuously over time but rather are fixed for a substantial period and then take some steps up or down.  This inability to discern the relative price changes makes the economy less able to make the proper adjustments and does impede performance.  An economy that has a sustained substantial inflation will perform worse than an economy with a more modest inflation, for this reason.  But this issue you read about not at all.   Instead, at least a few years ago, you would read quite often about the fear that America would turn into another Greece.  The totally improbable commands attention while the eventually possible does not.

So I am not saying that inflation can be ignored on a permanent basis.  However, if the rest of the world remains in recession the inflation risk in the U.S. will stay modest to nonexistent.  Therefore, for the time being the Democrats should abandon this stop altogether.  It will take many years to get the world economy out of the doldrums.  There is ample time to change tack once the global economy begins to grow again.

* * * * *

All of this is meant as backdrop for a proposed major sustained fiscal policy - my conception of what our economy needs to get it jump started.  These are my views alone.  They don't represent what any of the candidates for President have been saying.  People who read this might think I'm crazy - it will never work.  I may very well be crazy, but in regarding likelihoods I think it far more likely that we'll never try it, because our politics won't let us, than that it wouldn't be effective if we did indeed try it.  
I will begin with a list of goals and then give a sketch of how this might be done.

1.  A Jobs Policy meant as an Incomes Policy.  The same Jobs Policy would address unemployment and underemployment of non-college males and females, whether white or black.  The thought is that if there are enough decent jobs out there, much of what currently ails us can begin to seem as if there is a solution.  Jobs themselves are not a total answer.  But the lack of decent jobs surely is the primary cause of the other problems we are experiencing.  Tackle the root cause and we'll be well on our way to get at the related issues.

2.  The Jobs Policy must address (a) our decaying infrastructure, but more importantly (b) our urgent need to take on Global Warming in a big way.  We must move to a zero-carbon future as our ideal and do so quickly.  This second imperative might create a groundswell of support, at least among Democrats, akin to the support America had for the war effort during WW II.  But we are not there yet, for sure, as evidenced by this piece which argues that within the Democratic Party there is a perception that jobs come only at the expense of the environment.  We need to be all in on both jobs and the environment.  It is the only way.   But people are so lacking in trust now that they only concern themselves with how their own side of the bread is buttered.  We've got to solve it all, if we are to really address any of it.

3.  An effort that sustains for quite some time (I'm thinking for at least 10 years) and not reverse itself after a couple of years time.  This is a comment about the politics of doing something like this.  The Democrats had control in 2009-10, though not a Filibuster proof majority in the Senate.  They got a lot done then, but then there was the Tea Party reaction and that had a major consequence on fiscal policy since.  A replay of this will not do.  Nobody should expect a complete fix in two years.  The problems are too entrenched.  People should expect some progress.  That needs to be enough to sustain the effort.

4.  There will be a substantial multiplier effect as a consequence.  By this we mean that related private sector jobs will be created as the people who hold these construction jobs will demand goods and services and that demand will create new jobs.  In turn the people with those jobs will also have demands they want to satisfy, etc.  The multiplier is the cumulation of these effects.

5.  If the U.S. does comparatively well to other developed nations under this policy, as I would expect, then this produces copycat approaches around the globe.  That should be welcomed both because as other economies grow more the demand for U.S. exports will increase and because Global Warming must be addressed worldwide.

6.  The time period under which this policy is in place is meant to give us time to work through what will come next and how to make our economy economically inclusive.  Nobody has all the answers for that now, but if many of the people who fill these jobs demonstrate they can be productive when there is demand for their employment, it would dispel many of the current myths that seem to be holding people back in our economy as it is currently constituted.

Now to the sketch of what is to be done, along with a few numbers that are no doubt fantasy island in conception but that will help people work through what is being suggested.

Envision 10 million new jobs in construction, each of which pays $40,000 a year.  These jobs are either in the public sector, in the private sector though funded substantially with suitable publicly provided subsidy to encourage the work, or in some public-private hybrid.  I'd like to take on each of these numbers a bit to provide some rationale for why they are there.

The salary number is easier, so let's start there.  An individual earning $40K can do okay for himself or herself.  In a household with two wage earners, let's say the other one has a $30K/year job.  (This might be a full time job at the proposed $15/hour minimum wage.)  In total, then, the $70K that this household earns would place them well above current median income in the U.S., which Wikipedia tells us is now under $52K but even at its peak never exceeded $60K.   The idea then is to generate jobs that really do enable a middle class lifestyle.  Unlike many other government provided incomes program, which focus on the Poverty Line (see here) this program from the get go is aimed at allowing working people to be part of the middle class.  That is its raison d'etre.

As I write a piece like this I envision myself debating various pundits that I read.  One of those is Ross Douthat, a Conservative columnist for the New York Times.  In a column from a couple of weeks ago entitled, The Conservative Case Against Trump, he writes:

It would be a particularly stark mistake for conservatives who feel that the basic Reaganite vision that’s dominated their party for decades — a fusion of social conservatism, free-market economics, and a hawkish internationalism — still gets things mostly right.

Undoubtedly, Douthat would not like the proposal I'm putting forward here.  I am not expecting otherwise.  But he can't be allowed to say that free-market economics in the U.S. is mostly getting things right.  It isn't .  It has been terribly destructive.  Trickle down doesn't work.  The only way you can say otherwise is if the working class folks in this country remain invisible, in the sense that Ellison wrote about more than 60 years go, except then he was writing about Black America and now it's all of the working class that has become invisible.  When these people become visible again and their well being now counts, just as the well being of every citizen should count, the only conclusion to draw is that capitalism is failing, big time.   I don't have any illusions that there would be agreement on the cure.  But I'd hope that we might agree on the disease.

Let me turn to the size of the program and that 10 million jobs numbers, which admittedly is a wild guess.  Consider the following to ask whether we're in the right ballpark with that number.  The Bureau of Labor Statistics provides sector specific employment data with a historical basis.  Here is a graph for manufacturing over the last 10 years.   According to it about 2 million jobs have been lost in that time, though there has been some rebound since the trough was reached.  Here is another such graph with a similar shape, this time for construction.  About a million jobs have been lost in that sector.  The 10 million number would then go well beyond replacing those lost jobs.  It is meant to include now discouraged potential workers who are out of the labor force entirely as well those who have jobs that they don't find satisfactory but it's all they can do under the circumstances.  Both group need to get meaningful work with decent pay.

How many people are we talking about here?  I really don't know.  Perhaps some labor economists who are much more cognizant of the numbers than I am would be able to venture a more informed view of what the numbers really would look like.  Here I will content myself to describing the principles that I envision would determine the size of the program.  There will be certain eligibility requirements.  Even the military has such requirements for enlisting.  In this case I'd assume those requirements would be specified by the nature of the work, though not include the specific human capital necessary to do the job.  Those who sign up would get the appropriate training to do the job.  Other requirements, however, are sensible.  Construction is demanding physical work.  People who do the job need to be up to it.  There are cognitive demands as well.  Would a high school degree be necessary?  I don't know.  What about age eligibility?  Again, I don't know.  These are things that would need to be determined.

Given those eligibility requirements that do emerge, there will be a certain level of demand for participating in the program among those who are eligible.  I would want that demand to be satisfied and not have jobs in the program rationed because the jobs are scarce.  But before going further on this point, let me say that I envision these jobs to be sighted at specific locations, with the locations chosen because they are program targets.   At first pass, I envision the program to provide jobs but not housing.  People will apply for a job at a sight because they live within commuting distance of that job.  One of the harder points of calibration of the program would be local sizing to more or less equilibrate local job demand with program need for work to be done.  That concern is beyond the scope of this essay.  Here let's consider aggregate demand for the work only.

What if the 10 million number is way to low?  If we knew this in advance, we could tweak either the salary these jobs would pay or the eligibility requirements to reduce the demand somewhat, but only after we've done the appropriate budget exercise, which we have not done yet.  (I'll do a bit of it below.)  The issue of what sort of program we can afford surely is occurring to the reader.  It is not hard to envision a program that is entirely unaffordable.  But it is difficult to construct the boundary for affordability within which we're okay.   My view is that people tend to be too conservative about specifying that, in large part because they don't really support the program but don't want to go on record saying that.  You can kill a lot of government programs without weighing in on them, simply by saying they are too expensive.   Yet this way of viewing things, too expensive or not, makes the choice seem optional.  At the outset with that quote from Leijonhufvud, I invoked the imperative of World War II in considering this program.  If that imperative is kept in mind, the program will not be too expensive as I hope to show below. 

For budgeting purposes I'm going to assume only the first category of jobs, entirely government provided, as that gives the upper bound on the public expenditure, the full $40,000 of salary.  Add to this, say $9,000, to cover benefits and administrative costs to implement the jobs.  That makes $49,000 in direct and indirect labor costs.  When I was an administrator working in the information technology organization, the rule of thumb was that labor costs were 70% of overall costs.  I'm going to use that same figure here.  This makes the overall cost per job $70,000.  If we are to have 10 million of these jobs, the price tag will be $700 billion.

Not surprisingly, since I'm cooking these numbers to make them easy to manipulate and otherwise to give the reader some sense of the scale I'm talking about, the total works out to something we can readily compare it to.  This number exceeds the combined total of the budgets in the Department of Defense and the Department of Homeland Security.  It is a very big number, no doubt about it.  How could it be otherwise if we are to go all in with regard to improving the economic prospects for the average person?   Now that the number has been articulated, the reader will ask again, how can we possibly afford it?  Here are a few responses, though I recognize that none of them are complete.

There are 133 million households in the U.S. with average size 2.6 persons.  If the bill were apportioned to households and only those in the 90th percentile or above bore the cost, that's about $55K per such household.  Income at the 90th percentile is $143.6K, though since that piece was written in 2012, the number is a bit higher now.   Mean income of those who are at or above the 90th percentile is $295.8K.  This would be an 18.5% tax increase on average or, if apportioned as a linear tax above the threshold, a 36.1% increase of tax on incomes above the 90th percentile.  This is do-able though clearly many people won't like it.  I did this exercise not to recruit folks for this alternative, just to show it is possible.

Now let me talk about something that is fairer.  This would be to focus on wealth (a stock) rather than income (a flow).  Corporate America is now sitting on about $2 trillion.  Business investment is quite low in spite of the strong financial position that many companies find themselves in.  This is a big pile of cash, enough to finance just about 3 years of the program.  One might envision a use it or lose it tax on corporations as one way to fund the program.  Alternatively, a wealth tax on individuals could be imposed.  U.S. wealth is now about $85 trillion, the linked piece is from about a year ago so there may be small changes in that number based on variations in market values.  Over the full 10 years of the program the cost would be $7 trillion.   In this look, the program is clearly affordable.

Wealth is disproportionately held by the uber rich.  So paying for the program via a wealth tax would amount to a very large redistribution of wealth away from the uber rich and to average Americans.  Is it feasible?  Sure it is.  Could it happen willingly by the wealthy?  That is a question I can't answer, but something that needs to be considered.  What would it take for a Warren Buffet or a Bill Gates to be in favor of something like this?    

Having done a first pass at financing the program let's consider the activities that the program would support.  Here is one place to start, on America's infrastructure, which is currently in woeful condition.  Another place would be on inner city development.  Here the refurbishment or replacement of buildings that go beyond infrastructure is surely needed, but has to be part of other aspects of urban development that are aimed at improving the lives of current residents.  These other aspects would have to happen outside the program but then in collaboration with it.  There is then the issue of smaller towns that have been decimated by factory closings, with substitute employment hard to come by.  I confess not to have a good answer for this on the question whether these towns should be rebuilt with new business encouraged to locate there or if instead the people should move to where there are jobs.  Here let me hedge by saying that if the program were up and running it could promise new construction in those towns that had generated a threshold of new business activity and thereby use that promise as a way for town leaders to try to lure new business to their location.

Now I want to get to the coup de gras, which is to use the program to make a major push on renewable energy sources and thereby dramatically reduce our carbon footprint nationally.  I am going to do this by example because I don't yet understand how to think of this in a scaled up way, where I could talk about it in aggregate.

I live in a comparatively new house in a fairly recent subdivision in western Champaign.  Our house is 12 years old and we were the first occupants.  The subdivision is no more than 20 years old, maybe less than that.  So most of the homes in it are similar that way.  When I do commute, most of that is to the University, about 6.5 miles away, and then I do some light shopping around town.  My wife is similar in that regard, though she drives much more than I do overall.

Imagine that my house, and all the other houses like it, were fitted with solar panels in the roof or elsewhere on the exterior, and a battery or set of batteries, for storing the electricity generated there, and that our cars were upgraded to electric cars that could also run on gas in a pinch when on a long road trip.  With the exception of those long road trips, the goal would be for us to be totally carbon independent, and actually become net producers of surplus electricity (when our batteries are near capacity and we still have quite a lot of generating capacity).  Likewise, imagine that all the commercial establishments in Champaign, the University too, and the Hospitals as well, were similarly equipped.

For the most part I want to note that we are talking about private property, not publicly owned capital.  And instead of just looking at Champaign, Illinois consider all suburbia and thriving small towns in the U.S.  If a zero carbon footprint for these locations is technically possible, ask what it would take to get it done.  This program would then have part of its aim to be achieving that end.  And what I'm saying here is that for this particular investment, even when it is on private property, the cost would be covered by the public dime.

In the above I'm assuming it would be harder to do this in older housing stock, though on the practicalities of the matter I'm totally ignorant.  Taking that assumption as given, a next issue would be what to do with about older houses, as a matter of policy.  My view is that depending on the condition of the home, replacement stock should be provided that is carbon independent, preferably at the same location as the older home, or if not that then certainly nearby to the older home.  This would be done en masse, as a way to move our energy reliance away from carbon.   Some people, of course, would prefer to stay in their old homes.  Lacking an eminent domain argument, energy prices would have to change to reflect the social desirability of the move.  Again, it is useful to invoke the specter of WW II.  This has to be an all in effort.  (In today's New York Times, Paul Krugman has a column called Obama's War on Inequality.  The President is to be applauded for his efforts to reduce income inequality, though I don't like Krugman's use of the the war metaphor in this instance.  Given what the President can accomplish through his efforts about overtime pay this will, at best, make for small changes at the edges and is not of the same order of magnitude in impact as to what is contemplated here.)

If a remake of the suburbs in this way is possible, urban areas would be next.  The problem is harder because the ratio of square footage of living space to available roof space is much higher in cities.  (It may also be that installs of the solar panels and batteries would be much more disruptive in the urban setting.)  So how far down this path it is reasonable to expect us to go in urban areas, I don''t know. But, clearly, there would be lessons learned from the suburban install experience.   One might then hope that a fair amount of progress could be made in big cities as well.  If not that, perhaps there would be some reconsideration on where work is located.  If cities become very expensive, because of their carbon footprint while suburbs become essentially energy independent, that could be a sizable factor in business location decisions.

* * * * *

I write up my pipe dreams not because I expect any of them to become reality but rather because I hope that my readers will ask whether any of the ideas, in whole or in part, might work if suitable modifications were made to the sketch that's been presented.  More importantly, I'd like readers to ask whether we should want this, if it were in fact possible to deliver.  This is particularly important to ask for those in the professional class, residing with a significant other who is a professional as well, and thus who live in an over-the-90th-percentile-in-income household and who'd have to pay more in taxes to make such a vision a reality.

I wonder how many of them have been thinking about our current politics that way.  As for me, I can't get away from thinking about this particular issue. 

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