The Wealth of Nations and Economic Growth

This is the name of one of the chapters of Tyler Cowen and Alex Tabarrok's new textbook, Modern Principles: Macroeconomics. It is an interesting read and a very clear, intuitive primer into the basics of economic growth, the factors that affect economic growth, the relationship between economic growth and the wealth of nations, and the various differences between richer and poorer nations. The chapter is available (temporarily I believe) online here.

Also, here is a post explaining the differences between this textbook and other Macroeconomics texts.

Brad Delong on the Stimulus

A good read, I tell you.

BERKELEY - Of all the strange things that have happened this winter, perhaps the strangest has been the emergence of large-scale Republican Party opposition to the Obama administration's effort to keep American unemployment from jumping to 10% or higher. There is no doubt that had John McCain won the presidential election last November, a very similar deficit-spending stimulus package to the Obama plan - perhaps with more tax cuts and fewer spending increases would have moved through Congress with unanimous Republican support.

As N. Gregory Mankiw said of a stimulus package back in 2003, when he was President George W. Bush's chief economic advisor, this is not rocket science. Deficit spending in a recession, he said, "help[s] maintain the aggregate demand for goods and services. There is nothing novel about this. It is very conventional short-run stabilization policy: you can find it in all of the leading textbooks..."

I can understand (though I disagree with) opponents of the stimulus plan who believe that the situation is not that dire; that the government spending will be slow and wasteful (whereas properly targeted tax cuts would provide a more effective stimulus); and thus that it would have been better to defeat Obama's stimulus bill and try again in a couple of months.

I can also understand (though I disagree with) opponents who believe that the short-run stimulus effect of the plan will be small, while America's weak fiscal position implies a large long-run drag on the economy from the costs of servicing the resulting debt.

What I do not understand is opposition based on the claim that the stimulus package simply will not work: the government will spend its money, households will receive their tax rebates, and nothing will happen afterwards to boost employment and production. In fact, there is a surprisingly large current of thought that maintains that stimulus packages simply do not work, ever.

This opposition is not coming only from politicians who are calculating that opposition to whatever is proposed may yield electoral benefits; indeed, it does not even reflect any coherent right-wing or indeed left-wing political position. Root-and-branch stimulus opponents whose work has crossed my desk recently include efficient-markets fundamentalists like the University of Chicago's Eugene Fama, Marxists like CUNY's David Harvey, classical economists like Harvard's Robert Barro, gold bugs like the Council on Foreign Relation's Benn Steil, and a host of others.

I simply do not understand their arguments that government spending cannot boost the economy. As far as I can tell, they are simply burying their heads in the sand.

At the start of 1996, the US unemployment rate was 5.6%. Then America's businesses and investors discovered the Internet. Over the next four years, annual US spending on information technology equipment and software roared upward, from $281 billion to $446 billion, the US unemployment rate dropped from 5.6% to 4%, and the economy grew at a 4.3% real annual rate as the high-tech spending boom pulled extra workers out of unemployment and into jobs.

Back at the start of 2004, America's banks discovered that they could borrow money cheaply from Asia and lend it out in higher-yielding domestic mortgages while using sophisticated financial engineering to wall off and strictly control their risks - or so they thought. Over the next two years, annual US spending on residential construction roared upward, from $624 billion to $798 billion, the US unemployment rate dropped from 5.7% to 4.6%, and the economy grew at a 3.1% real annual rate.

In both of these cases, large groups of people in America decided to increase their spending. You can argue that neither group should have boosted its spending to such a degree that both were subject to "irrational exuberance" - and that someone should have taken away the punchbowl earlier. But you cannot argue that these groups did not increase their spending, and that their increased spending did not pull large numbers of Americans - roughly two million in each case - into productive and valued employment.

The government's money is as good as anybody else's. If businesses' enthusiasm for spending on high-tech gadgetry and new homeowners' enthusiasm for spending on three-bedroom houses can boost employment and production, then what argument can Harvey, Fama, Barro, Steil, and company make that government spending will not? I simply do not see it.

Rumors

Economics bloggers beware!  It seems that if you are  blogging out of South Korea your stinging criticism of national monetary policy or bailout plans can bring you to court!  In general though:

The government has denied wanting to suppress online freedom of expression, but it has long voiced concern about the influence of Internet rumors. Officials blamed online demagogues in part for huge protests last summer against U.S. beef imports that paralyzed the government for weeks.

I have no doubt that with the growing popularity of economics blogs and alternative opinion sources that some bloggers could become active forces in swaying public opinion, but is that a bad thing and should it be against the law to spread 'rumors' about the government? Luckily the court found the latter question's answer to be "no".

Can Transportation Investment Reduce Income Inequality

Interesting little article from the Economic Policy Institute about a potential effect of investing in transportation and infrastructure development in the American Recovery and Reinvestment Act of 2009. Namely, that it could reduce income inequality. Ethan Pollack explains:

According to research that will be presented at an upcoming EPI event, workers in jobs created or supported by these investments are less likely to have a college degree and more likely to be union members compared to workers in the overall economy. Despite employing workers with less education on average, fewer of these jobs are low-wage jobs. Green investments—including mass transit, but also energy efficiency, electric grid, etc.—result in very similar job characteristics and are thus equally effective at reducing wage inequality.

I don't really have more details than that. It would probably be a small effect. But interesting. Here is the graph, reprinted from the EPI:

Monster Employment Index Declines in March

What a misleading headline.

Who Wants to Bet on the Recession?

Earlier, I noted that Robert Reich predicts that we should see economic recovery by the second quarter of 2010.

Now, here is a poll taken by BBC/Globescan of people's expectations on the recession:



It's pretty even between those who think the recession will last for another two to three years (28%) and those who think it will end by the end of the year (26%).

By the way, Intrade has the likelihood of the United States reaching depression (defined as GDP declining by at least 10% from its peak value between Q4 2008 and Q4 2009) as 18%. The likelihood that the US will hit at least 9% unemployment rate, however, is a stunning 80%. (The current official unemployment rate was about 8.1% in February, according to the Bureau of Labor Statistics).

So again, who wants to take bets?

Will the Public Support Nationalization? (I'm Really Asking!)

So Chrysler needs a bailout and Obama has issued an ultimatum to them, along with GM, basically requiring they get their acts together if they wish to be eligible for government aid. But Andrew Leonard asks the question:

The real question is how can Obama say this:

Year after year, decade after decade, we have seen problems papered over and tough choices kicked down the road, even as foreign competitors outpaced us. Well, we have reached the end of that road. And we, as a nation, cannot afford to shirk responsibility any longer. Now is the time to confront our problems head-on and do what's necessary to solve them....

And this:

It will require creditors to recognize that they cannot hold out for the prospect of endless government bailouts.

And not understand that Congress and the American public are sure to ask why Citigroup and Bank of America are not being held to the same standard. Treasury Secretary Tim Geithner's plan to create a market price for toxic assets has been widely lambasted as a scheme to paper over banking sector insolvency. If Obama can force Wagoner to resign, based on his record, then why haven't Citigroup's Vikram Pandit and Bank of America's Ken Lewis been forced to step down? If the White House can declare that GM's bondholders must accept they will not be repaid in full what they are owed, then why aren't Citigroup and Bank of America's debtholders being told the same thing?

Leonard goes on to propose two reasons: one being that Wall Street really runs everything and Obama is doing some pandering. The other is that the Geithner Plan (see previous posts here, here and here) is really just an intermediate step towards nationalization, which is the true goal of the Obama administration. In fact, Leonard argues for the latter, somewhat loftily stating:

Which of these scenarios is more likely to be true? Recent history is on the side of those who believe that Wall Street pulls the strings. Only the course of events over the next few months will tell us whether the alternative explanation holds water. But as I watched Obama speak, I could not shake the feeling that this was a trial run, rather than a sell-out, as preparation for the application of further strong medicine, rather than avoidance of the real problem. He's too smart, and his advisers are too smart, to think that he could go before the American public and criticize the "principle of endless bailouts" without knowing that he would be held to account for those words.

And let's remember that notwithstanding the huge size of GM is and its centrality to the economy of the United States, the logistical complexities and downstream impact of a GM bankruptcy restructuring likely pale against those involved with a Citigroup or a Bank of America. Telling the nation that GM will not survive in its present form has investors selling shares and workers in Michigan and Ohio angry. Telling the world that Citigroup is toast would drop an even bigger bomb.

I would love to believe this, and in fact still have not lost my faith in Obama. However, I hesitate to assert that behind everything that's going on in public, Obama secretly has a master plan free of all hypocricy and error, and that it will all come together in a glorifying moment when the American public realizes that everything was part of the plan. That's like saying we had planned to let the aliens take out New York, Los Angeles and Washington in the film, Indpendence Day, just so we could ultimately unite and beat them. It's entirely possible that Obama makes mistakes...though it's not to say that he did.

The other question, which Ezra Klein asks, is whether nationalization will even be politically possible given the failure of the Geithner plan. Will the American public be willing to support it as a measure of last resort, having exhausted all other feasible solutions? Or will they be so disillusioned by previous attempts at restoring bank assets that they will protest at the prosect of involving more taxpayer funds?

I am not embarassed to say that I simply don't know. I sure hope it's the former, and that there's a grand plan, and that we'll all unite and kill the alien mothership on the moon...

Will Legalizing Drugs Curb Violence?

Jeffrey A. Miron, a senior lecturer in economics at Harvard, thinks that the United States should legalize drugs (and hints also at gambling and prostitution). Many of you have already heard the big arguments for legalization (especially of Marijuana): the Federal government will save money spent on the drug war, collect new revenues from "sin" taxes imposed on drugs (much like tobacco and alcohol) in order to fund health care, education, etc., and possibly even reduce the incidence of drug use (we pursue that which we cannot have). But, Miron argues that a crucial benefit of legalizing drugs is that it could significantly reduce violent crime. Here is Miron:

Prohibition creates violence because it drives the drug market underground. This means buyers and sellers cannot resolve their disputes with lawsuits, arbitration or advertising, so they resort to violence instead.

Violence was common in the alcohol industry when it was banned during Prohibition, but not before or after.

Violence is the norm in illicit gambling markets but not in legal ones. Violence is routine when prostitution is banned but not when it's permitted. Violence results from policies that create black markets, not from the characteristics of the good or activity in question.

The only way to reduce violence, therefore, is to legalize drugs.

Miron then goes out and points out the other major reasons for legalization, most of which you have heard, including: minimizing corruption, enhancing civil liberties, improving national security and foreign relations (this is an interesting one), improving public health, and improving the economy.

Hat Tip: Gren Mankiw.

The Geithner Plan and Congressional Approval

Via the Economist's Free Exchange blog, we have Steve Waldman, who is upset about the Geithner plan's ability to circumvent congressional approval. Here is Mr. Waldman:

In my view, the Geithner's PPIP includes two mechanisms intended to ensure that "private investors" offer substantially inflated bids for "legacy" assets, and the net cost of the plan will be comparable to that of TARP. I might be wrong about that, but I might be right. Much of the risk will be due to loan guarantees offered by the FDIC. Is there any legal basis for using the FDIC this way? Aren't the laws describing how the FDIC is and is not supposed to behave?

And isn't Congress supposed to have the power of the purse? A loan guarantee is a contingent liability, a cost in real terms. Can the US Treasury spend money without Congressional approval, as long as it promises to spend only if a coin flip comes up heads? That's exactly what the Geithner plan (along with the scandalous but already active "Temporary Liquidity Guarantee Program" program) does. Is that even Constitutional?...

It seems to me that committing hundreds of billions of taxpayer dollars should still be considered a serious business. It seems to me that if Congress wouldn't approve the Geithner plan, in a democracy, that ought to have some meaning, and not just get written off as populist outrage and then extralegally ignored.

So I'll ask again, who passed the Geithner plan? What deliberative assembly gave the plan a pass? What's that you say? The stock market went up by nearly 500 points when it was announced on Monday? Oh. I guess the buys have it, then.

First of all, I'm curious as to why Waldman chose to put "private investors" in quotes in the first sentence. Is the implication here that they are not really private investors, which would be a ridiculous claim, or that the $35 billion that the private sector is kicking in for the bailout plan isn't enough, which would be equally ridiculous. I assume the latter is what Waldman is implying here, to which my reply is that I think any larger of a ratio would act as a disincentive for investors to buy up these assets at all, which would ruin the plan before it even started.

On to the main point about Congressional approval. Many folks have been throwing around the term "giveaway," which is understandeable, but there is a considerable difference between offering subsidies directly and offering them in the form of no-recourse loans, which is what's going on here. It is true that this could backfire if most of these assets turn out to be bad, in which case the loans would be forgiven and the government would lose lots of money. On the other hand, if these assets turn out to be good and rise in value, the investors profit, the government gets paid back with interest. This would be good.

Of course, Waldman's concern stems from the uncertainty. There has been considerable outcry from the left and right regarding the effectiveness of the Geithner bailout plan and it seems that the consensus (at least among mainstream pundistry) is that the plan will fail. See Paul Krugman, whose opposition is loud, proud and almost irritating (if not for the fact that the man has attained almost 'do-no-wrong status' in my eyes). So then why commit all of this money to a plan that may or may not work, at best? The reason is because we have to. First, let's recap why the plan is necessary (Congressional approval or not0. I have stated earlier that I think the Geithner plan is a necessary step, politically, in that considering the alternatives (nationalization or the original Paulson plan), it is the easiest to kick-start without causing massive social (and market) upheaval. See Mark Thoma and Brad Delong for more on this. In fact, let's throw in a quote from Thoma, just to drive the point home:

So I do not take a binary (or, I suppose, trinary), either/or approach to the proposals where I think one plan will work and the others will fail miserably. All three plans have their pluses and minuses. The politics of the Paulson plan make it a non-starter, I have no quarrel with the view that it constitutes a giveaway that is not justified, so the only way the Paulson plan will work is if we can convince people that equity stakes or some other mechanism makes the plan sufficiently equitable. I prefer nationalization because it provides a certainty in terms of what will happen that the other plans do not provide, the Geithner plan in particular, but it also appears to suffer from the political handicap of appearing (to some) to be "socialist," and there are arguments that the Geithner plan provides better economic incentives than nationalization (though not everyone agrees with this assertion).

More to the point now, what about Congressional approval? Mustn't the appropriation of all these funds for an iffy plan require a democratic approval process? Well, this is a tricky issue. One that Matt Yglesias actually wrote about several days ago, complaining that the no one addressed the topic. Here's Matt:

One aspect of the Geithner plan that I think people aren’t focusing enough attention on is that unlike the other main alternative approaches, it can be executed without further congressional approval. The reason is that there are federal agencies with a standing authority to make loans. And though the plan does have a potentially giveaway structure, technically what’s being offered aren’t subsidies but no recourse loans. Or to put it another way, the subsidies are in the form of no recourse loans rather than direct appropriations, so the government has the authority to move forward under existing TARP legislation and other laws. That, I think, clearly explains the somewhat byzantine structure of the plan’s operations and is also, if you’re sitting in the West Wing, a considerable advantage over a nationalization plan that would require large additional appropriations to cover the debts of nationalized institutions.

There is the legal side. Of course, as Yglesias notes later, this can be considered much too technical, and almost a cheap way of getting around legislation. However, I would like to argue that given the current economic and political climate, it is necessary to pass this as quickly as possible. As Krugman notes, "Every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost." Is this enough of a reason to warrant such actions by the Obama administration? One can at least argue the case.

Furthermore, and let me just say that the following is not an argument to side-step Congressional approval, but consider the historical use of "presidential prerogative," a term that should be prevalent by now; in the midst of impending crisis, the executive takes measures that often bypass boundaries set forth by the Constitution. Lincoln did it, Roosevelt did it, Bush did it (though the latter isn't the greatest example). Again, it is of course arguable whether such prerogatives are both a) applicable now, and b) whether they are merited at all, ever. Something to think about, though.

Understanding the Banking Crisis and Geithner Plan

For those of you who need some clarification on what's going on in the economy right now, both Brad Delong and Mark Thoma have written some wonderful pieces illuminating the mechanics for the layperson. Delong's is in the form of an FAQ. Thoma compares the situation to purchasing a car under uncertainty. Highly recommended.

Robert Reich on Economic Recovery

Robert Reich says that the economy should see an economic upswing, if even a mild one, by the 2nd quarter of 2010. What's interesting is that his reasoning is predicated more on political cycles rather than economic theory. For example:

A president's party tends to lose seats in the first midterm elections, but Obama knows he can hold on to his majorities if he handles the economy well. Voters respond to economic trends more than to current levels -- to where the economy is heading rather than to where it is. Regardless of how the economy is doing in the months leading up to the midterm election in November 2010, voters will keep Democratic majorities in the House and Senate if they think the economy is on the mend.

That's why the $787 billion stimulus package was designed like a timed-release cold capsule. Stimulus spending will increase through to the end of 2009 and continue full blast in 2010. Although it's too small to restore the economy to full health by Election Day, the stimulus needs only to give the economy enough momentum by then to convince voters it's on the way to being restored.

Remember that Reich was one of those economists that actually warned us last March of recession. Can he do it again?

Let the betting begin. Where is the Intrade commodity market for this?

Will the Stimulus Work?

I have no idea. However, there are two very interesting columns today over at Vox. One is by Richard Clarida of Columbia University, who argues that Obama's stimulus might not achieve its desired effect:

What is the source of this concern that the US fiscal package will not deliver a lot of ‘bang’ for the ‘bucks’ committed? Because of the severe damage to the system of credit intermediation through banks and securitisation, policy multipliers are likely to be disappointingly small compared with historical estimates of their importance. Recall the Econ 101 idea of the Keynesian multiplier – the impact traditional macro policies are ‘multiplied’ by boosting private consumption by households and capital investment by firms as they receive income from the initial round of stimulus. It important to remember why and how policy multipliers actually come about. Policy multipliers are greater than 1 to the extent the direct impact of the policy on GDP is multiplied as households and companies increase their spending from the increased income flow they earn from the debt-financed purchase of goods and services sold to meet the demand from the initial round of stimulus.

There is a second reason while the bang of the fiscal package will likely lag behind the bucks. Even if the global financial system soon restores some semblance of order and function, the collapse in global equity and housing market values has so impaired household wealth that private consumption (which represents 60% to 70% of GDP in G7 countries) is likely to lag – not lead – economic growth for some time, as households rebuild their balance sheets the old-fashioned way – by boosting their saving rates. Just in 2008 alone, I estimate that the net worth of US households fell by some 10 trillion dollars, with much of this concentrated in older demographic groups who, in our defined contribution world, must now be focused on building back up their wealth to finance retirement, which is not that far away. This means more saving, less consumption, and smaller multipliers.

Then there is Brad Delong of the University of California, Berkley, who posits that Americans need not fear greater stimulus measures to ease us out of recession:

If the stimulus is going to be ineffective because it generates bottleneck-driven inflation, we can identify that problem as the price or wage of the bottleneck good or service spikes. If the stimulus is going to fail because of capital flight-driven inflation, we will see the value of the dollar collapse as foreign-exchange speculators front-run the capital flight – and then we will see import prices spike and put upward pressure on prices in the rest of the economy. If the stimulus is going to fail by crowding out private investment, we first will see the medium-term corporate interest rates relevant to financing plant expansion spike. And if it is going to impose a crushing debt repayment burden, we will see long-term Treasury bond interest rates spike instead.

Right now, however, we see none of these things. No signs of bottleneck-driven or wage-push inflation gathering force. No signs of approaching rapid dollar depreciation. No signs that the stimulus is pushing up medium-term interest rates on corporate borrowing. No signs that the stimulus is pushing up long-term interest rates on government bonds.

If any of these start to materialise, expect me and a number of other stimulus advocates to start backpedalling rapidly. But so far, so good.

Both these columns are worth reading in full.

Obama's Budget

Via Laura D'Andrea Tyson, writing for the WSJ:

Critics charge that President Obama's tax rates for high-income earners will strangle small business and stifle economic growth. Such claims are misguided or disingenuous. A full 97% of small businesses will see their rates unchanged or enjoy additional tax benefits under the Obama plan. And the strong expansion of the 1900s proves that the tax rates on income, capital gains and dividends in the Obama budget will support rapid economic growth and substantial income gains at the top. Moreover, the higher tax revenues resulting from these rates will reduce the deficit by about $750 billion, bringing it down to an average of 3.9% of GDP over the next 10 years and to 3.1% of GDP by the end of the decade. This compares to an average deficit of 3.6% of GDP between 1982 and 1997, when the Dow Jones Industrial Average increased by 835%.

In addition, the president proposes to limit the deductions for dependents, charitable contributions and other expenses to 28%, the top rate for such deductions under Ronald Reagan. Some critics claim this is class warfare. But why should a family in a higher tax bracket get a bigger break on expenses than a middle-class family? And restoring this limit to its Reagan level will raise enough revenue to cover about half of the $634 billion reserve President Obama needs to finance health-care reform with the other half coming from savings in health spending. These savings include competitive bidding in order to reduce Medicare payments to private insurance plans, increasing the Medicaid rebate for brand-name drugs, and strengthening Medicare pay-for-performance incentives for hospitals.

[...]

The president's budget is progressive and ambitious. It will not, however, explode the size of government as some critics warn. If the economy recovers as projected, over the next decade taxes as a share of GDP at around 19% will be lower than they were during the second half of the 1990s, government spending as a share of GDP at around 22.5% will be about where it was under Reagan, and nondefense discretionary spending at around 3.6% of GDP will fall to its lowest level since that data was first collected in 1962.

The Bright Side of the Recession

From "The Recession is Awesome!" via McSweeneys:

Mom and Dad keep talking about this recession and I gotta say: it's awesome! Yesterday, I ate pizza for breakfast, mac and cheese and hot-dog cubes for lunch, and then more pizza for dinner! Mom said that I could eat as much McDonald's as I want, and she even offered to leave me there in the ball pit for an entire day while she went and looked for new jobs! Awesome!

Every day after school, I used to go to violin lessons, but now Mom says I don't have to go anymore! This is so awesome because the violin was so boring and my teacher, Mrs. Calabrass, smelled like the attic and didn't let me drink soda! But now I don't have to deal with Mrs. Calabrass or listen to stupid Brahms with her! I hate the attic—but I love this recession!

We'd planned to go to France or something for our family vacation. But now, since it's the recession, we're all going to Gilbert's Goofy Park and playing minigolf and going on the go-karts! And even batting cages maybe, too! I don't think France has any batting cages or go-karts, so this is an amazing, amazing thing! I think if I'm good I can probably eat pizza at Gilbert's Goofy Park! I love pizza and I love this recession!

Dad's been home so much recently and it's been awesome! He just wears underpants and watches sports highlights and eats Cooler Ranch Doritos, which sounds super fun! I have to go to school, so I only get to see him when I get home, but yesterday Dad and I played Xbox together for six hours! He started off pretty good at the games, but each hour he got worse and worse, and soon he started making weird noises! He even started saying his words all slow and jumbled like a crazy man! He's really having a good time in this recession! So am I!

We used to have to drive like a gazillion hours in the car to get to Grandma's weird big blue house with no TV, but now Grandma drives her new house over to us in her new RV! It's amazing! I totally didn't know cars could also be houses and have stoves and have TVs, but they can! Grandma has it all thanks to the recession. And so do I!

Man, I hope this recession never ends. Me and my friends always high-five each other when we hear an older person say, "Not in this economy," because we know it always leads to something awesome for us! This is the best childhood ever! I could live like this for the rest of my life!
I love this recession!

Economics is Hip

Apparently economics is seeing a wave of new prospective students eager to be the next tenured econ-blogging superstar.

At Ohio's Oberlin College, registration in undergrad economics classes is up 25 percent this year, and the chair of the department says he's never seen anything like it. Host Robert Smith finds a similar surge in the classrooms of American University and across the country. So is undergraduate economics getting sexier? In a word: yes.

So when picking out that new grad school consider going into economics--everyone else is doing it.

(Fortunately, the loans you'll most probably be taking out will be payed off with stronger dollars once you get out of school and us all out of this recession with your economics know-how)

The Value of Education

It's pretty valuable.

But an undergraduate degree has become—and graduate degrees are becoming—an important qualification. Students obtain one, because without it they'll be unable to get an interview for most of the best jobs in the country. If everyone could spontaneously agree that students should attend school only up to the point at which the value of the actual knowledge gained exceeded the cost of tuition, then we could dispense with much of this unnecessary rigmarole. Since that's unlikely to happen, the optimal individual decision is to get the undergrad degree, and then often to get a graduate degree, as well.

And if you're going to go back to school, now is the time to do it. Not only is the opportunity cost of the time spent extremely low—wages aren't likely to rise any time soon, and there may not be a job available anyway—but so to is the opportunity cost of the money invested. What, you'd rather have that tuition sitting in the market right now? Or in a home?

Go to grad school, folks!

O Canada

From today's Economix:

If unemployment continues to rise over the next few months in the United States, as predicted, many families will lose their health insurance coverage or struggle to pay premiums they can ill afford. By contrast, increased unemployment won’t reduce Canadian access to health care.

As the economist (and fellow Economix blogger) Uwe Reinhardt explains, the single-payer Canadian health care system delivers very good results for about half the per-person cost of ours — with huge savings from reduced paperwork. Economic disparities in access to health care are significantly lower there.

and...

According to latest estimates from the Organization for Economic Cooperation and Development, a married worker earning the average wage, with two children, could expect 78 percent wage replacement in Canada, compared to 52 percent in the United States. The differences are even greater for those earning higher than average wages, because of low benefit ceilings.

The recently passed Economic Stimulus and Recovery Act offers incentives to states to expand unemployment provision to part-time workers and to those leaving jobs for “compelling family reasons.” The Canadian unemployment insurance system offers more comprehensive family benefits, including paid sick leave, paid compassionate care leave, and paid maternal and parental leaves of up to 50 weeks. Many American workers aren’t even eligible for the 12 weeks of unpaid family leave guaranteed by the Family and Medical Leave Act — although President Obama promises to change that.

Finally...

There’s no evidence that Canada’s public provision of health care and social benefits has reduced its economic growth, and the federal budget just presented is the first to show a deficit in 11 years.

What explains more support for public spending there? Slightly lower income inequality may encourage slightly more solidaristic policies. Such policies, in turn, reduce income inequality. The French social-democratic traditions of the province of Quebec exert a distinct influence. The Canadian political scientist Keith Banting argues that explicit efforts to develop a strong but multicultural national identity have strengthened norms of mutual support.

Stimulus Agreement

The House and the Senate reached an agreement on the stimulus bill. I think the Economist's Free Exchange put it best:

The total is now down to about $789 billion. Coverage of the negotiations again suggests that getting the headline figure below $800 billion was a high priority and again offers nothing in the way of explanation as to just why that's the case.

I'm about as stumped as any of you.

Increase Government Spending

Justin Wolfers thinks that a stimulus package should be more oriented on government spending, rather than tax cuts. He presents a clear explanation as to why.

Our current problem is deficient aggregate demand. The government can raise total spending either by buying more stuff, or it can lower taxes and hope that consumers take their tax breaks to the mall. If consumers do indeed spend their full tax cuts (a big if), you might think that either approach stimulates aggregate demand in roughly equal measure.

But that’s not the whole story. Tax cuts stimulate both aggregate demand and aggregate supply. If taxes are temporarily lower, they make working today more attractive than working tomorrow, and thus increase labor supply. This boost to the nation’s productive capacity means that a tax-cut-based stimulus doesn’t do as much to narrow the gap between output and what we can produce.

Under normal circumstances, this doesn’t present a problem, because the Fed can lower interest rates to close this output gap. But right now, the Fed has set interest rates as low as they can go, and so different principles apply. Eggertsson’s concern is that a big output gap will lead inflation to fall, leading real interest rates to rise in the middle of the recession. These higher real interest rates further dampen economic activity, and with the Fed powerless to offset this, there’s the very real risk of a deflationary spiral. And so a tax-cut-based fiscal stimulus might actually backfire.

Gimme Only What I Need

I found this to be interesting. Today's Economix column presented some survey data from the Pew Research Center on goods that consumers consider "luxury" or "necessity" stratified by year and age. Take a look at the following charts from the NYTimes:

Take a look at what consumers considered "television" to be, in particular. Notice that respondents who felt that television was a necessity consistently hovered around 60% from 1973 to 2006. Also notice how, seemingly counterintuitively, more of these people are older, with about 71% ranking it a necessity in the 50 - 64 and 73% in the 65+ range. This is actually not that surprising, however. As the column notes, much of this is probably due to the fact that younger populations have found new means of watching television shows (internet, DVDs, etc.). I also suspect that older populations use television as a considerable passtime once retired. Though, I wonder what the data would look like had children under the age of 18 been included in the sample.

Still, it is interesting to have this bird's eye view of what consumers consider necessity today and realize how signfiicantly spending habits have changed over the years.