A GREAT OP-ED BY AHSAN HABIB

This piece, by my colleague and friend Ahsan Habib, recently ran in the (Adrian, Michigan) Daily Telegram. I am posting it here with his permission.
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ADRIAN, Mich. — Recently it was announced that the current U.S. recession ended 14 months ago and our Gross Domestic Product (GDP) has started to increase since then. Surprisingly there has been very little improvement in the employment situation. In fact during some of those months of recovery the country actually lost jobs. More surprisingly, despite the end or recession, the Federal Reserve Bank has indicated that the economy needs more support in coming months. This raises the question: Does GDP measure the health of the economy anymore?

In dealing with many situations, economists have stopped looking at GDP as an indicator of economic performance. Concepts like the Human Development Index or Fulfillment of Basic Needs have been created as alternatives. It is high time that we create a new measure of economic performance which reflects the employment and economic conditions more pragmatically.

Changing or switching economic definitions is not new in this country. In 1991 we changed from Gross National Product (GNP) to GDP reporting for political expediency. GNP does not include the income earned by foreigners but GDP does. Therefore, as long as foreigners earned more in the USA than Americans earned abroad, GDP will be to our advantage. There were other political reasons as well. At that time the dollar gained strength in the world market. So American overseas income deflated when converted to dollars for GNP calculation. GDP did not have that problem. Also as America’s overseas debt burden was growing, GDP appeared to be a better choice since income earned by foreign investors in the U.S. is not subtracted from the U.S. GDP.

The essential point is that the federal government has a vested interest in trying to change the definition of sensitive economic terms. The definitions used for budget deficit, unemployment and many more have been modified for political gains. But these “convenient” economic numbers fail to reflect the real picture. So GDP increases but misery continues to grow, budgets show a surplus but national debt rises, and jobs are lost but unemployment stays the same!

We are entitled to vital economic data that are not deemed to be tailored with November in mind. Look at employment numbers. It is being claimed a success that the private sector has added jobs for several months in a row and that it surprised experts by adding 67,000 jobs in August. But that number is not very meaningful. All these 67,000 people could have worked for just one hour per week and no more! Also they all could be hired at minimum wage and with no additional benefits. Surely government economists can devise an employment number that would be simple but convey the real picture of employment. The Bureau of Labor Statistics does report an unemployment number called U6 which counts the discouraged workers — who stopped looking for jobs, and hence are not called “unemployed” in the primary statistics — as unemployed. The question that comes to mind is why that number is not publicized more widely?

The desperate desire of governments to show bright economic numbers has come from a false premise. For a long time governments of all countries including the U.S. have been asking for more power from citizens with a false promise to deliver economic prosperity. But the truth is governments can make noticeable economic impact (good or bad) only in centrally planned economies. In capitalist economies, governments’ power to change the economic landscape is very limited. It is about time that they recognize this and abandon their futile efforts to create economic prosperity.

To show that they can create economic miracles, governments have tried to produce artificial economic results by resorting to bad economic practices; indiscriminate borrowing being one of them. Also a host of benefit seekers who could use their resources elsewhere more productively are misusing it to gain government favor. Most importantly, many government policies have created fundamental distortions in the operation of free market economy.

This is not to suggest that the government should abstain from promising and undertaking every economic activity. They should produce highways, defense services, income safety programs and so on. But they should make it clear that they do not have power to make the economy grow or to fix the private sector employment problems. Of course, if recession strikes, government should step forward to help the people who are suffering, the same way as it steps in to help flood victims. But just as government does not promise good weather, they should not promise a prosperous economy.

An economy is too big for government to handle. Many former socialist countries learned that lesson the hard way. Instead, governments should focus only on specific targets. Then the public will expect less from them and there will be less pressure on them to create and publish politically motivated economic data.

Ahsan Habib is a professor and chair of the economics department at Adrian College.

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Ban The Asterisk!

According to polls, increasing numbers of Americans do not trust our leaders. I have not seen any polls measuring trust in advertising, but if public confidence in ads is not way down it probably should be. To see why, we need only consider the asterisks (**) so often encountered in commercials.

Deceptive advertising is nothing new. Otherwise, why would we need the Federal Trade Commission? I well remember my first youthful encounter with a deceptive ad. Efforts (pre-transistor) to miniaturize radios fascinated me. An outfit advertised a kit for a “pocket radio” which measured only 2 by 4 inches. I ordered it and it was true that the radio was 2 inches wide and 4 inches high. But it was also 4 inches deep, a fact the seller neglected to disclose and I hadn’t noticed. Not being a kangaroo, I couldn’t get the thing in my pocket. Since then I have read ads more carefully and taken them with a grain of salt.

I now put less and less salt on my food, but I find myself needing a lot more of it when coping with ads. There are the ads for TV cable, internet, or phone service at amazingly low prices. The asterisk points to a statement, in exceedingly small type: “for 6 months.” You must sign a contract for a lot more than 6 months to get this price, and they don’t bother to say what the price will be then.

Perhaps these guys figure if it is ok for banks to push adjustable rate mortgages on folks, thereby subjecting people to increased risk of bankruptcy when low initial interest rates inevitably skyrocket, it is ok to quote misleading initial prices for lower cost items.

Or how about the furniture store offering wonderful low prices, free delivery, delayed payment, etc., but with the asterisk pointing to a message which flashes briefly across the bottom of the TV screen in very small and blurry type: “minimum purchase $2999”!

Then there are the dentists offering mouthfuls of implanted teeth in one day. The asterisk points to small, blurred, fleeting type at the bottom of the screen: “after initial workup.”

And we all know about the airline fares, in big type, followed by the usual asterisk pointing to the fact that this price is for one-way but you must buy a round trip, and that taxes and fees are on top of all this.

The most ridiculous ad I have encountered offered subscriptions to The New Yorker for a very good price. I almost sent off my money before I noticed the asterisk pointing to the words: “plus postage and handling.”

Ads like these help create a climate of general mistrust and suspicion. They somehow slip through the Federal Trade Commission nets, and crafting laws to prohibit them might be very difficult.

Absent law, there is something we can all do to discourage businesses from putting asterisks in their ads: we can resolve to have nothing to do with businesses which use asterisks.

LET’S END UNEMPLOYMENT ONCE AND FOR ALL

Buried in discouraging unemployment numbers recently released was proof that a straightforward way to end unemployment (and not just reduce it) actually exists.

The private sector of the economy created 83,000 additional jobs in June, but total employment fell because 225,000 temporary census workers were let go.

The census workers had real jobs and these were additional jobs that reduced unemployment. They demonstrate that there are two possible ways to reduce unemployment, not just one.

The government has been trying to reduce unemployment by “stimulating” the economy so that private employers would become willing and able to put more people to work. But it is unclear how well this strategy has worked.

The alternative is for government itself to hire the unemployed and put them to doing useful things. This is what the Census Bureau did, and back during the Great Depression this is what the WPA and other government programs did. In Oregon many public improvements, including Timberline Lodge at Mt. Hood, were produced by these “make-work” programs. The only public swimming pool in Redmond, where I lived during my grade-school years, was constructed by one of these programs.

President Franklin D. Roosevelt felt that it was better to pay people to do something than to pay them to do nothing. They could be doing something constructive, and there was more dignity in working than in just receiving a dole.

There is plenty of work that needs doing. It would seem, therefore, that we shouldn’t be repeatedly extending eligibility for unemployment compensation payments. Instead, the government should offer to hire everyone who is willing and able to work but cannot find another job and pay them the federal minimum wage of $7.25 per hour for 40 hours a week.

People could receive unemployment compensation while their eligibility remains, and then take one of the new jobs, or they could forgo unemployment compensation and go directly into a job.

As soon as they can find private sector jobs that pay better, of course these people will do so. But in the meantime even minimum wage employment will be a lot better than nothing.

If all 14.6 million currently unemployed took such government jobs, and if on top of minimum wages the government paid $400 per month towards medical insurance for each employee, it would cost about $24 billion per month, or $289 billion per year, not including administrative costs.

We have certainly been paying at least this much for the current “stimulus” programs

whose results are debatable and which at best have only slightly reduced unemployment rather than eliminating it.

If we have a pool we want to fill with water, does it make more sense to turn on a faucet and fill it up, or to hire pilots to seed the clouds and try to make it rain? Cloud-seeding, like our current approach to dealing with unemployment, would be discredited “trickle down” theory with a vengeance!

Why not go with a straightforward approach whose costs and results are measurable, which has worked in the past, and which could put a total end to unemployment rather than just reducing it?

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This article appeared on CommonDreams on July 6, 2010.

Why we should fire all civil servants and public school employees (but only for five minutes)

It is troubling that in a time of high unemployment state governments and school districts in Oregon and other states may have to lay off hundreds of thousands of people. The U.S. Education Secretary has warned that without an additional $23 billion in emergency federal aid, 100,000 to 300,000 public school teachers and administrators could lose their jobs. But the federal government itself is already running alarming deficits and might not come up with the money.

There is an obvious alternative to firing so many people: keep them all on but make the necessary savings by reducing their salaries and fringe benefits. To some extent this has already been done, with freezes in salaries and benefits here and there, and perhaps even a few actual reductions in pay. But other public employees continue getting raises, and cutting pay is politically difficult even for a lame duck like Governor Kulongoski.

Even leaders who are willing to cut salaries might not legally be able to do so because of collective bargaining contracts with various unions. “A contract’s a contract,” as Ken Allen, director of the state American Federation of State, Country and Municipal Employees was recently quoted in an Oregonian headline.

This indeed is a problem. Oregon unions are reported to be hopping mad about Kulongoski’s proposed continuation of pay freezes, and the chances they would agree to substantial reductions in pay are nil. And starting July 1 the Oregonian reports that “union-represented state workers are scheduled to get step increases of 4.75 percent.” Just to pay for this raise for those remaining would require firing about 5% of these workers. (So much for labor “solidarity”!)

Perhaps I am wrong here, but normally collective bargaining contracts merely specify what people will be paid if they have a job and do not guarantee that anybody will have such a job. That is why layoffs are possible when money must be saved.

If this is the case, there is a solution to our current woes. It is an unhappy solution, one that no one would advocate except for the fact that the alternatives are all worse. The state of Oregon must fire all state civil servants and school employees. The laws providing for collective bargaining for state employees must be repealed. All former employees who would like a job would be hired with salaries and fringes determined on the basis of the available money (subject to further reductions later on if that proves necessary). Although vested rights in PERS would be preserved, just as they are for layoffs today, no future rights would be accrued and the state would shift to a defined contribution retirement system for all workers.

To avoid even temporary closing of schools, lack of police and fire protection, and throwing the prison gates open, the newly hired employees could go on the payrolls five minutes after they are fired from their previous positions. (Details could be worked out in advance.)

These admittedly draconian steps would avoid increasing unemployment, keep our schools fully staffed, and allow the state budget to be balanced. They would inflict moderate amounts of pain on all state workers rather than the huge amounts of pain that would be inflicted on those state workers who will lose their jobs under our current system.

The bottom-line question we must answer is whether Oregon government primarily exists to serve the people of Oregon, or whether its prime function is to promote the well-being of the people who work for it even when this conflicts with the general interest.

More on the "carried interest" scandal

To their credit, Congressional Democrats have proposed legislation greatly reducing the ability of investment fund managers to get away with paying a 15% capital gains rate income tax on their sometimes billion dollar earnings.

This morning the Wall Street Journal published an attack on this proposed legislation. Unfortunately, the article is available on-line only to subscribers to the on-line WSJ, so I cannot direct you to it here.

I have sent a letter to the editor responding to this article. It follows:


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To the editor:

John Rutledge’s defense of allowing investment partnership managers to pay a 15% federal income tax on their often huge compensation is not lacking in nerve.

Rutledge points out that no special loophole was created to allow them to get away with this, since it just “reflects two long-accepted tax practices.” But the very fact that these “practices” allow managers who make a billion dollars a year to pay a much smaller percentage of their income than do the custodians who clean their offices suggests that these practices should no longer be accepted.

This injustice is just one more example of the pernicious gamesmanship encouraged by taxing income from different sources at different rates in the first place. The proposed legislation that Rutledge criticizes does not go far enough. Congress needs to tax all personal income----salaries, dividends, capital gains, you name it!----at the same rate. While this might produce adverse economic effects in the short run, in the long run it would make our economy more efficient by eliminating much complexity and releasing a lot of accountants and tax lawyers to more productive activities.

Paul F. deLespinasse, Ph.D.

Corvallis, Oregon

A version of this letter appeared in the Wall Street Journal on May 28, 2010.

Masking the federal budget deficit

A very good article by my colleague, Ahsan Habib:

By Ahsan Habib
Daily Telegram

ADRIAN, Mich. —

Two things happened on April 21. First, I looked at my copy of the Wall Street Journal. The headline said “Debt Masking Under Fire,” referring to a practice of Wall Street banks.

Second, the 2010 edition of the Economic Report of the President came in the mail. I opened to Page 423, a historical table of government finance. According to the table, in 2009 the federal debt reached an unprecedented level of $1.5 trillion. The same table also shows that during 2009 and 2010, the federal government’s debt increased by about $1.9 trillion dollars not by 1.5 trillion, the size of the deficit.

Why did the debt increase by about half a trillion dollars more than the budget deficit? Is there a debt masking by the federal government as well?

The answer is yes. In 1968 President Johnson signed into law a provision which would let the federal government treat Social Security funds as current year revenue. They gave up the age-old principle of measuring revenue by the taxes collected for current expenditures. Every year the federal government receives some money from the public not as tax per se but as payment for future claims.

There are about half a dozen such accounts. The list includes Social Security trust fund, civil service retirement fund, federal supplementary medical insurance trust fund, federal hospital insurance trust fund, unemployment trust fund, military retirement fund, transportation trust funds, employee life insurance and more. Money in these accounts is not tax revenue for current expenditures. These are payments for the future obligations and are meant to be kept as reserve. That is how these funds operated since their inception, and it continued until 1968.

The net effect of the new reporting rule was to reduce (mask) the federal deficit as long as the trust funds were in surplus. In subsequent years, several attempts were made to reverse the procedure and treat Social Security as an off-budget item. 1986 was set as a target year when this reversal would take place. But in that year, the Gramm-Rudman-Hollings rule threatened to cut many programs. So the federal government found an easy escape from Gramm-Rudman-Hollings mandated cuts by using the trust funds surpluses to reduce a deficit. Similar concerns also prevented another attempt to revert to the old system during early 1990s.

With President Johnson’s proclamation, “reported” federal deficits went down. But some people were not happy with that. That is why they refused use it in showing the debt level of the government. As a result, the economic report of the president reports two types of federal debt: one that is held by the public and the other, the gross federal debt. Clearly the latter is larger than the former. To see why the latter is the true measure, ask anyone what is our current national debt. No one will say it is $7.5 trillion, which emerges if we ignore intragovernment debts. Rather, everyone will say that the federal debt now is about $12 trillion or about 83 percent of our GDP.

This masking of federal budget deficit also explains the paradox of how we had federal budget surplus for three years during the time of President Clinton, but our national debt still increased every year. This happened because in each of those so-called surplus years the federal budget would have shown a deficit if the intragovernment debts were not counted as current revenue.

In March of 2010, an unprecedented thing happened. For the first time, Social Security paid more than it collected in revenue. Which means instead of adding to the Social Security trust fund and hence lowering the federal budget deficit, it will actually increase the federal budget deficit. This will make the people in Washington very uncomfortable.

My prediction is that sometime in the future, either by President Obama or by a future president, rules of the game will change again. Instead of including Social Security funds in the current budget, they will propose to treat the funds as off-budget item, the way it was prior to 1968.

Perhaps the practice of debt masking will be clear from the following example. Say my monthly income is $600 and each month I spend $800. I have a monthly deficit of $200. But suppose my brother gives me $250 each month to save for his son’s college education. I use that money to mask my deficit and claim to have a surplus of $50.

Looks great until my nephew goes to college. Then I will have to come up with a huge sum of money to start the payback phase of my life. It appears our federal government has now entered its payback phase.

Ahsan Habib is a professor and chair of the economics department at Adrian College.