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Economix Blog: Laura D’Andrea Tyson: The Tradeoff Between Economic Growth and Deficit Reduction

December 14, 2012 by Leave a Comment

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Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Bill Clinton.

The economy is continuing to recover from its deepest recession since the Great Depression, but the pace of recovery is frustratingly slow. The question is why, and the answer has profound implications for fiscal policy and for the debate over deficit reduction and economic growth that has transfixed Washington.

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Since 2010, annual growth of gross domestic product has averaged about 2.1 percent. This is less than half the average pace of recoveries from previous recessions in the United States since the end of World War II, according to a recent study by the Congressional Budget Office. Both potential G.D.P., a measure of the economy’s underlying capacity, and actual G.D.P. have grown unusually slowly compared with previous recovery periods.

Slow G.D.P. growth has meant slow growth in employment. Payroll employment has been expanding at a rate of about 150,000 jobs per month during the last two years, only slightly above the growth of the labor force. Employment growth has been largely consistent with overall G.D.P. growth and with the “jobless” pattern of the 1990-91 and 2001 recoveries.

In both this recovery and the previous two, the rebound in employment growth has been weaker and later than the rebound in G.D.P. growth. But G.D.P. growth in the current, jobless recovery has been slower. Another salient difference is that the loss of jobs in the most recent recession was more than twice as large as in previous recessions, so a slow recovery has also meant a much higher unemployment rate.

Why has G.D.P. growth been so tepid compared with previous recoveries? Most economists believe that weak aggregate demand is the primary culprit. The 2008 recession resulted from a systemic financial crisis rooted in an asset bubble that gripped the housing market with particular ferocity. Private sector demand contracts sharply and recovers slowly after such crises.
The large and persistent decline in private-sector demand that began the 2008 recession and that explains the painfully slow recovery is apparent in the private-sector financial balance — net private saving, the difference between private saving and private investment.

The private-sector financial balance swung from a deficit of −3.7 percent of G.D.P. in 2006, at the height of the boom, to a surplus of about 6.8 percent in 2010 and about 5 percent today. This represents the sharpest contraction and weakest recovery in private-sector demand in the post-World War II period.

Growth in two components of private demand — consumption and residential investment — has been especially slow in this recovery compared with the average for previous recoveries. This is not surprising.

Residential investment is still depressed as a result of overbuilding during the 2004-8 housing boom and the tsunami of foreclosures that followed. Large losses in household wealth, deleveraging from excessive debt, weak growth in wages and household income, and a decline in labor’s share of national income to a historic low have combined to constrain consumption growth. Wobbly consumer confidence and the concentration of most income gains at the top of the income distribution have also contributed.

The recovery of business investment demand has followed a different pattern. Indeed, the growth of business investment has been slightly stronger during the current recovery than the average for previous ones. But after plummeting to new lows during the recession, the ratio of net business investment to G.D.P. remains depressed by historical standards. Lower net investment compared with the economy’s capital stock is a major reason that the growth rate of potential G.D.P. has been so slow.

Throughout the recovery, business surveys have identified lackluster customer demand and weak sales prospects as the primary factors holding down business investment. Business confidence has remained subdued as a result of uncertainty about the future growth of markets both at home and abroad and more recently about the future course of United States fiscal policy.

Limits on credit availability were also significant deterrents to investment, especially by small and medium-size firms at least through 2010, when banks began to ease their commercial loan terms.

Weak investment demand cannot be explained by low profits and high taxes: the profit share of national income has hit a historic peak and taxes on investment income are at historic lows.

Another factor contributing to the slow pace of the current recovery relative to previous recoveries has been the relatively weak growth of government spending on goods and services by both state and local governments and by the federal government.

Indeed, the contraction in state and local government spending and the associated decline in public-sector employment have been major headwinds restraining G.D.P. growth.

The increase in federal government purchases of goods and services in the 2009 stimulus bill mitigated but did not offset the effects of weak private-sector demand through 2010. But since then, the slowdown in such purchases has been a drag on G.D.P. and employment growth.

After three years of recovery, the economy is still operating far below its potential and long-term interest rates are hovering near historic lows. Under these circumstances, the case for expansionary fiscal measures, even if they increase the deficit temporarily, is compelling.

A recent study by the International Monetary Fund finds large positive multiplier effects of expansionary fiscal policy on output and employment under such circumstances.

And more output and employment now would mean higher levels in the future, because stronger demand now would encourage more private investment and stem the loss of skills and productivity resulting from long-term unemployment and the drop in the labor force participation rate.

The rationale for expansionary fiscal policy is particularly compelling for federal investment spending in areas like education and infrastructure that have large multiplier effects on the current level of output and employment and strong returns over time.

By the same logic, the $600 billion of revenue increases and spending cuts scheduled for next year — the so-called fiscal cliff — would have large negative effects on demand, output and employment and would reduce future potential output as well.

The fiscal cliff packs a powerful punch: there will be 3.4 million fewer jobs by the end of 2013 if Congress allows these policies to take effect.

The economy does not need an outsize dose of fiscal austerity now; it does need a credible deficit-reduction plan to stabilize the debt-to-G.D.P. ratio gradually as the economy recovers. As I contended in an earlier Economix post, the plan should have an unemployment-rate target or trigger that would postpone deficit-reduction measures until the target is achieved. (In a move that signals its abiding concern about the recovery’s strength and resilience, the Federal Reserve has just announced an unemployment-rate target for monetary policy, committing to keep short-term interest rates near zero until the unemployment rate falls to 6.5 percent.)

The goal of deficit reduction is to ensure the economy’s long-term growth and stability.

It would be the height of fiscal folly to kill the economy’s painful recovery from the Great Recession in pursuit of this goal.

Article source: http://economix.blogs.nytimes.com/2012/12/14/the-trade-off-between-economic-growth-and-deficit-reduction/?partner=rss&emc=rss

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Today’s Economist: Simon Johnson: Volcker Spots a Problem

December 13, 2012 by Leave a Comment

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Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

On Monday, at the end of a long day of wrangling over technical details at the Federal Deposit Insurance Corporation’s Systemic Resolution Advisory Committee, Paul A. Volcker cut to the chase. The resolution authority created by the Dodd-Frank financial reform legislation was a distinct improvement on the previous situation, making it easier to handle the failure of a single large financial institution.

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It does not, however, end the myriad problems associated with that most daunting and modern of phenomena: too big to fail.

At age 85, Mr. Volcker, the former chairman of the Federal Reserve, speaks softly and displays a razor-sharp mind. The room where the committee met was hushed as everyone leaned forward to catch his words. Mr. Volcker incisively observed that the general legal framework of Dodd-Frank, as currently being put into effect, definitely puts more effective powers in the hands of the Federal Deposit Insurance Corporation to handle the failure of what is known as a systemically important financial institution.

But the bigger issue is a point made by Mr. Volcker and others at the table. When big banks boom, they find new ways to finance themselves and, too often, regulators go along. The assets they buy look like a sure thing until the moment they collapse in value. This is the classic and future recipe for systemwide panic and potential collapse. The only solution to prevent this is to limit the size of the largest institutions and the activities they can undertake.

The F.D.I.C. has long had the powers necessary to handle the failure of a bank whose deposits it insures. It can take over such an institution, sell off the viable parts of its business and place the remainder in a form of liquidation, so that as much asset value as possible is recovered. Management and boards of directors are immediately let go (with no golden parachutes). Shareholders are typically wiped out – meaning that the value of their shares falls to zero, as it would in the case of bankruptcy. Creditors to the original company also suffer losses – with the full extent determined by how much value the F.D.I.C. can recover; again, a close parallel with bankruptcy, but the F.D.I.C. is in charge, not a bankruptcy court judge.

Sometimes this kind of F.D.I.C.-managed process is referred to as nationalization – in fact, that is the term the White House used to describe this option in early 2009, when it was proposed that Citigroup, Bank of America and other large bank-holding companies should go through a form of F.D.I.C. resolution. But nationalization is a complete misnomer and President Obama was poorly advised when he used the term.

The F.D.I.C. operates state-of-the-art bank resolution processes. Depositors typically do not lose access to their funds for even five seconds – and that includes all forms of electronic access. And the reason we want the F.D.I.C. to do this is simple: it prevents the kind of disruptive bank runs that previously plagued the United States and that helped make the economy of the 1930s so depressed.

The question for the modern financial world, however, is not so much how to handle the failure of small and medium-size banks with retail deposits. The specter that haunts us – in the form of Lehman’s bankruptcy and the bailouts provided subsequently to other large firms – is how to handle the imminent collapse of large nonbank financial companies.

The F.D.I.C. is now central to a process that can take any kind of financial company through resolution. The Federal Reserve and the Treasury are also involved, and safeguards are in place to prevent capricious action. These may sometimes delay action.

But the F.D.I.C. unquestionably now has the legal authority and practical ability to impose losses on shareholders and creditors of the holding company. It has also embarked on an ambitious outreach program to explain that the goal is to allow operating subsidiaries to keep functioning, in the hope of minimizing the disruption to the world’s financial system. (Big banks are now organized with a single holding company owning and controlling a large number of operating subsidiaries.)

No taxpayer money is supposed to be put at risk in this situation. Shareholders in the holding company will be wiped out. Creditors will find their debt converted to equity, typically involving a reduction in value. This new equity forms the capital base of the continuing company – meaning its obligations are restructured so that it is again solvent (meaning the value of its assets exceeds the value of its liabilities).

Creditors to operating subsidiaries would suffer losses only if there were not enough debt at the holding-company level – in other words, after reducing all that debt to zero (converting it entirely into equity), the company’s liabilities still exceed its assets.

Together with Sheila Bair, the former chairwoman of the F.D.I.C., and other colleagues, I wrote to the Federal Reserve Board earlier this year, impressing upon them the importance of ensuring there is enough debt at the holding company – relative to potential losses at the operating subsidiary level. I was disappointed to learn on Monday that the Fed is still a considerable distance from issuing even a proposal for comments on this important issue.

In addition to Mr. Volcker, among the other heavyweights at the table were Anat R. Admati of Stanford, Richard J. Herring of Wharton, David Wright of the International Organization of Securities Commissions and several experienced practitioners.

Big banks do not typically fail individually. More often, there are herds that stampede toward a particular issue or fad: emerging-market debt (1970s and 1990s); commercial real estate (United States, 1980s); residential real estate (United States, Spain, Ireland, Britain, 2000s); sovereign debt (Europe, 2000s).

These banks finance themselves with short-term wholesale money – creating the impression that this is safe, when in fact it is incredibly precarious (think Iceland in 1998 or the exposure of American money-market funds to European banks as recently as 2011.) In any truly dangerous boom, markets and regulators become equally infatuated with this new way of doing business – until it collapses.

Can the new resolution authority handle the next big wave of potential failures, whatever it might be? Probably not, even with the greater level of cooperation announced on Monday of the F.D.I.C. and the Bank of England, with an eye to handling cross-border resolution of difficulties between the two nations, which could be immense considering how our big banks operate.

If it is built well and works properly, a good resolution framework allows a company to fail, without socializing losses and without destabilizing the financial system. As a result, it will provide a level of market discipline that should lessen the herd mentality of taking on the kind of risks that create a systemic problem – and the next big wave of failures. But the primary lesson from F.D.I.C. planning and our discussions is this: no resolution framework can correct a systemic problem once it has occurred.

The United States needs multiple fail-safes. As Professor Admati has been arguing, we should rely on equity – not debt – to absorb losses in our financial system (see this comment letter). In addition, I stand with the original intent of the Volcker Rule and with the current position of Thomas Hoenig (the current vice chairman of the F.D.I.C.): in addition to stronger resolution powers and much more equity capital, the size of the largest financial institutions should be capped and the activities they can undertake limited.

Article source: http://economix.blogs.nytimes.com/2012/12/13/volcker-spots-a-problem/?partner=rss&emc=rss

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Today’s Economist: Casey B. Mulligan: The Microeconomics of Poverty Since 2007

December 12, 2012 by Leave a Comment

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Government safety net programs were put on steroids by the 2009 stimulus law, erasing incentives for a significant fraction of the unemployed.

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Last week I noted that poverty, when measured to include taxes and government benefits, did not rise from 2007 to 2011. That result, I contended, indicated that people in the neighborhood of the poverty line faced marginal tax rates of about 100 percent. I also noted that 100 percent marginal tax rates were excessive.

These three statements generated many angry comments, so it’s worth examining them in more detail.

One possibility is that the poverty rate did rise significantly, even when adjusted to reflect taxes and government benefits. That possibility would contradict Jared Bernstein’s work in this area, because he concluded that America had “the deepest recession since the Great Depression and poverty didn’t go up.” It would also contradict Arloc Sherman’s findings that the poverty rate was essentially unchanged (thanks to generous new subsidies).

The measurement of poverty and its trends is an important and continuing research area, and future research could suggest that the poverty rate had increased. However, future research could also point in the other direction.

In 1995, a panel established by the National Research Council to evaluate poverty measurement concluded that it might make sense to recognize not only the monetary resources available to families, but also the amount of free time they had. After 2007, many people found themselves with less pretax income and more free time because they had lost their jobs. Because the official poverty measures consider only the pretax income, adjusting poverty measures to reflect free time would cause the poverty rate to fall more, or increase less, after 2007.

Assuming for the moment that Mr. Bernstein and Mr. Sherman are right about the poverty changes, a second possibility is that poverty failed to rise even while marginal tax rates were significantly less than 100 percent. As one blogger put it, “Just because poverty rates didn’t rise doesn’t mean that the government imposed a 100 percent implicit tax rate.”

One might wonder exactly how, in theory, poverty rates remained fixed when millions of people lost their jobs, and when the government did not essentially replace all the disposable income lost because of layoffs. The magnitude of marginal tax rates imposed by the government is ultimately an empirical question, though. As far as I know, none of my detractors have offered any estimates.

I have been examining marginal tax rates under the American Recovery and Reinvestment Act of 2009, especially as experienced by families near the poverty line. The chart below shows some of my results pertinent to Mr. Bernstein’s poverty measures.

The chart examines households that in 2007 had household income of less than 175 percent of the poverty line and were therefore at risk of falling into poverty if they were later laid off from their job. The chart organizes unemployed heads and spouses in terms of their marginal tax or “job acceptance penalty” rate. With that rate, I mean the fraction of a person’s employee compensation that goes to federal, state and local government treasuries or to expenses associated with commuting to work (I assume that is $5 for each one-way trip) as a consequence of working full time at the same wage as before layoff rather than remaining unemployed. (The remainder of the worker’s compensation, if any, is left to enhance the disposable income of the worker and the worker’s family.)

The chart also organizes unemployed people in terms of what they earned weekly before layoff, with special attention to the group in the $250 to $349 range, which is near the weekly earnings of a full-time minimum-wage job.

Among the unemployed who had earned near minimum wage (shown in red in the chart), a majority had a job-acceptance penalty rate of at least 100 percent, meaning that accepting a job with the same pretax pay as they had before layoff would not increase their disposable income. If they were to accept such a job, all the compensation would go to the Treasury in additional personal income taxes, additional payroll taxes and reduced unemployment insurance benefits (under the stimulus, unemployment insurance benefits alone were more than half of the pretax pay from the previous job), and in some cases reduced benefits from the Supplemental Nutrition Assistance Program, known as SNAP, and Medicaid.

Only 18 percent of those earning near minimum wage had a job-acceptance penalty rate of less than 80 percent.

My results consider the unemployment insurance program and its federal additional compensation and subsidies for Cobra, which gives workers who have lost their jobs the right to purchase group health insurance for a limited period of time; SNAP; Medicaid; the regular personal income tax (both federal and state); the earned-income tax credit, the child tax credit, the additional child tax credit and the “making work pay” tax credit.

Job-acceptance penalty rates of 100 percent or more are probably more prevalent than shown in the chart because I did not include child care costs among employment expenses and did not include programs like disability insurance, Temporary Assistance for Needy Families and Supplemental Security Income, means-tested housing subsidies, means-tested tuition assistance, means-tested energy-assistance programs and other programs that impose positive implicit marginal tax rates.

I agree with Mr. Bernstein that government policy, especially the 2009 stimulus law, is responsible for preventing a rise in the poverty rate. But it achieved that end by erasing incentives for a significant fraction of the unemployed.

Article source: http://economix.blogs.nytimes.com/2012/12/12/the-microeconomics-of-poverty-since-2007/?partner=rss&emc=rss

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Today’s Economist: Casey B. Mulligan: A Time for More Nations

November 28, 2012 by Leave a Comment

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Catalonia, which includes Barcelona, has long been a part of Spain, but its peaceful residents increasingly talk about being an independent country again. In elections over the weekend, where independence was one of the most discussed campaign issues, a majority of offices were won by parties that support more Catalan independence, in one form or another.

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An independent Catalonia would reinforce a worldwide trend. The world’s economics and demography are changing, and economic theory predicts that national borders will change with them (see “The Size of Nations,” by Alberto Alesina and Enrico Spolaore or “A Theory of the Size and Shape of Nations,” by David Friedman in The Journal of Political Economy ).

The number of countries has grown since World War II, especially since 1990. The Soviet Union broke into multiple nations. Czechoslovakia split into the Czech Republic and Slovakia; Yugoslavia dissolved.

In most cases, many citizens of the parts wanted independence from the larger whole. The large countries were often divided by language or ethnicity and were often held together by nondemocratic leadership. The new independent countries emerged as democracy took hold, or shortly after.

In a few instances, countries combined. East Germany and West Germany unified. North and South Vietnam became one when North Vietnam won the Vietnam War. North Yemen and South Yemen were unified. As their names suggest, they have some common language, culture and history, more so than many former Soviet republics did.

Catalonia has its own language, Catalan, and a long history. Under Franco, Spain suppressed many Catalan institutions. And labor was mobile in Spain during the Franco regime, with many Spanish-speakers moving to Catalonia, Spain’s most prosperous region. The prevalence of Spanish in Catalonia, as well as the heavy hand of Franco, may have undercut an independence movement. But Franco’s death in 1975 and the emergence of democracy in Spain did not foster an independent Catalonia.

New generations have been learning Catalan, however, and that may be tipping the balance toward independence.

Catalonia objects to the amount of taxes it pays Spain’s central government, compared with the benefits it receives. One potential step would be to address that situation without full independence, by having Spain’s central government “charge” Catalonia less for being part of Spain by providing tax breaks or more public services.

As governments and redistribution grow, richer regions find taxes to be increasingly burdensome. With the cold war over, ethnically unique regions no longer perceive the same national security benefits of being part of a larger nation.

Catalonia’s situation is worth watching, as it may hold lessons for Libya, Iraq and even the United States, where regions sometimes diverge in terms of culture, language and preferences for governing. A small nation can be established peacefully and may prove to have long-term benefits.

Article source: http://economix.blogs.nytimes.com/2012/11/28/a-time-for-more-nations/?partner=rss&emc=rss

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Today’s Economist: Bruce Bartlett: Tax Cuts, Tax Rates and Tax Shares

November 27, 2012 by Leave a Comment

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Last week, the Internal Revenue Service posted the latest individual income tax data for tax year 2010. Supporting the Republican worldview, the data show that the share of total income taxes paid by the rich increased; supporting the Democratic worldview, they show that the wealthy’s share of total income increased more, leading to a decline in their average tax rate. Sorting through these competing facts is a bit like determining whether the glass is half-empty or half-full, but I’m going to try.

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I will start with the top 1 percent of income taxpayers, who are unambiguously rich by any definition of the term. In 2010, this group included all tax filers with adjusted gross incomes above $369,691. Remember that A.G.I. excludes many forms of income, including benefits such as employer-provided health insurance, unrealized capital gains and interest on tax-exempt municipal bonds.

Internal Revenue Service

Conservatives like to contend that the increasing share of federal income taxes borne by the wealthy shows that they are carrying the rest of us on their backs, so to speak. Indeed, the percentage of all income taxes paid by the top 1 percent has risen to 37.4 percent from 33.2 percent in 2001. This necessarily means that the share of the bottom 99 percent has fallen.

The following table shows that in fact the share of total income taxes borne by those with lower incomes has indeed fallen. For example, the bottom 90 percent of tax filers now pay 29.4 percent of all income taxes, compared with 36.3 percent in 2001.
 

Internal Revenue Service

Liberals note that a key reason for this is that the incomes of most people outside the rich have stagnated or fallen. In 2001, it required an income of $23,187 in 1990 dollars to be in the top 50 percent of tax filers; in 2010, that income figure had fallen to $20,586. Concomitantly, the share of total income accruing to the bottom 50 percent fell to 11.7 percent in 2010 from 14.4 percent in 2001.

Another key reason for the declining share of income taxes paid by the nonwealthy is that Republican tax policy since the 1970s has consciously aimed at reducing their tax burden.

The following chart from the conservative Tax Foundation illustrates how Republican-sponsored increases in the personal exemption and creation of the earned-income tax credit and child credit completely eliminates the income tax liability for a family of four with $45,000 of income.

Tax Foundation

The declining share of income taxes paid by the nonwealthy was at the root of Mitt Romney’s charge that 47 percent of Americans are dependent on government. After the election, he attributed his loss to “gifts” that certain constituencies, “especially the African-American community, the Hispanic community and young people,” receive courtesy of taxpayers.

Needless to say, there are many problems with this grossly simplistic view of who gets government benefits and who pays for them.

It’s undoubtedly the case that a great many of the elderly still think of themselves as taxpayers even though they may not have actually paid any income taxes in years. Nor do they view themselves as receiving gifts in the form of Social Security and Medicare benefits. They believe they paid for these benefits from taxes during their working lives and would resent being characterized as moochers.

Another problem is that when Republicans talk about the rising share of income taxes paid by the wealthy, I think they are implicitly assuming that the government is still paying for all its spending with taxes. But it’s not; the federal government has run deficits since fiscal year 2002, to a large extent because of tax cuts. According to the Congressional Budget Office, lower revenues have been responsible for about half the increase in the national debt since 2001, about half of which resulted from legislated tax cuts and half from slower-than-expected growth.

Congressional Budget Office

Across-the-board tax cuts financed with deficits will necessarily raise the share of taxes paid by those with upper incomes. Consider this example. The government raises $10 in taxes and it is divided among three taxpayers. Ms. Poor pays $1 (10 percent), Ms. Middle pays $3 (30 percent), and Ms. Rich pays $6 (60 percent). Now the government gives everyone a $1 tax cut and its revenues fall to $7. Ms. Poor now pays nothing, Ms. Middle pays about the same percentage (29 percent), but Ms. Rich now pays 71 percent. Everyone received a tax cut, but the tax shares are now skewed much more toward the wealthy.

In a general sense, this is what has happened to the income tax and illustrates why it is possible for effective tax rates on everyone to fall and at the same time raise the share of taxes paid by the wealthy.

Article source: http://economix.blogs.nytimes.com/2012/11/27/tax-cuts-tax-rates-and-tax-shares/?partner=rss&emc=rss

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Today’s Economist: Simon Johnson: Mary Miller vs. Neil Barofsky for the S.E.C.

November 22, 2012 by Leave a Comment

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Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

The Obama administration is floating the idea that Mary J. Miller, under secretary for domestic finance at the Treasury Department, could become its nominee to lead the Securities and Exchange Commission. Ms. Miller, a longtime executive in the mutual funds industry, has served in the Treasury under Timothy Geithner since February 2010.

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Ms. Miller represents the financial sector’s preferred approach to financial reform — some talk but very little by way of serious effort. She has no time for people who are serious about making the financial system safer. And there is no willingness to really face down powerful people on Wall Street.

Her potential candidacy faces three major obstacles: Neil Barofsky, money market funds and the new momentum for reform.

Neil Barofsky, above, former inspector general for the Troubled Assets Relief Program, and Mary J. Miller, below, a Treasury under secretary, possible candidates to head the Securities and Exchange Commission, have sharply divergent views on tough regulation.Mark Wilson/Getty Images Neil Barofsky, above, former inspector general for the Troubled Assets Relief Program, and Mary J. Miller, below, a Treasury under secretary, possible candidates to head the Securities and Exchange Commission, have sharply divergent views on tough regulation.Andrew Harrer/Bloomberg News

Mr. Barofsky is the most important obstacle, because as soon as you think about him you see an instantly plausible chairman for the S.E.C. The former special inspector general for the Troubled Assets Relief Program, or TARP, he is an experienced prosecutor who understands complex financial fraud. For example, he brought Refco Inc. executives and their legal advisers to justice in the mid-2000s (Refco was a commodities giant where top people engaged in accounting fraud). And he’s tough — he took on Colombian drug traffickers early in his career.

Most recently, he confronted Mr. Geithner over how TARP was carried out — pushing for answers on why bailout terms were so favorable for big banks and so unfavorable for everyone else. He also pursued a number of securities fraud cases, including one involving Colonial Bank, which illegally obtained more than half a billion dollars from TARP. Mr. Barofsky’s office stopped that fraud in its tracks and eventually obtained one of the few high-level convictions resulting from the financial crisis.

Mr. Barofsky’s account is published in his highly readable book, “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.” Mr. Barofsky understands as much about finance as anyone in the industry, and no one would ever think he was captured by the worldview of big banks.

Mr. Barofsky is a lifelong Democrat who has enjoyed bipartisan support in Congress. Since I suggested Mr. Barofsky’s name in a post last week, there has been an outpouring of support. A petition that Credo Action has put online urging President Obama to appoint an S.E.C. chairman who will hold Wall Street accountable, and naming Mr. Barofsky as a worthy choice, had more than 35,000 signatures by Wednesday morning.

The petition also recommends former Senator Ted Kaufman of Delaware and Dennis Kelleher of Better Markets — both of whom I endorsed here last week — and it expresses support for Sheila Bair, who would be terrific for the job (in a separate column last week, I said she was one of five people who deserve serious consideration to be Treasury secretary).

The White House does not like to take public suggestions of names for prominent positions; the Washington way is to do everything behind closed doors. And Mr. Barofsky is not popular with Mr. Geithner, precisely because he has stood up to authority for all the right reasons.

“Barofsky is exactly what the S.E.C. needs to restore its tattered reputation as a guardian of the capital markets,” said Matt Stoller, a fellow at the Roosevelt Institute.

Still, considering Mr. Barofsky as a potential nominee makes the case for Ms. Miller look very weak.

She has no experience as a regulator or as an enforcer of the law. She has never worked on securities fraud. And she has no track record of standing up to powerful vested interests; in fact, she helped push the recent JOBS Act, which greatly undermines the protections available to investors. In addition, her work experience is entirely within the mutual fund industry — 26 years at T. Rowe Price. And a major agenda item now for the S.E.C. is mutual funds and how to make them less vulnerable to the kind of runs that occurred in September 2008. (For a primer, please see my recent column for Yahoo Finance.)

The mutual fund industry does not want reform, and it worked long and hard to keep Mary Schapiro, the departing S.E.C. chairwoman, from pushing forward some sensible ideas. After outside pressure was brought to bear, including by Ms. Bair’s Systemic Risk Council (of which I am a member), there are signs that the S.E.C. will finally at least issue some proposed changes for public comment.

I do not know where Ms. Miller stands on money-market reform; indeed, from her public remarks it is very hard to know precisely where she is on any reform issue. It would be most unfortunate to put her in at the S.E.C. precisely when the mutual fund industry is about to come in for some serious scrutiny. The optics, as they say in Washington, would not be good.

More broadly, there is a new push for financial reform — even from people who are close to Wall Street. In a wave of speeches and other statements (some you have seen and some you will see soon), voices are being raised against the too-big-to-fail approach and related causes of financial fragility. In particular, a speech last month by Daniel K. Tarullo, a governor of the Federal Reserve, seems to have released a great deal of pent-up creative thinking within the official sector.

Size caps for big banks are definitely on the drawing board, at least along the lines that Mr. Tarullo identified, which would limit nondeposit liabilities at any one institution relative to the size of our economy.

Given this momentum for responsible reform, does President Obama really want to appoint a financial services executive — with a nonexistent or weak track record on reform — to a prominent public policy and enforcement position?

As Steven Ramirez has pointed out, Big Finance went all in for Mitt Romney and against Senator Sherrod Brown of Ohio and Elizabeth Warren, elected to the Senate in Massachusetts. This was a comprehensive electoral defeat for Wall Street; whenever its behavior was at stake, people voted for change. And the contributions of the Wall Street community did not seem to produce the outcomes it wanted.

There is a view in Washington that politicians need Wall Street and its money — to start campaigns, to provide a wall of financing at critical moments and to help create a generous endowment for post-presidential activities. Without a doubt, this has been the pattern in the past.

But in this big country there are many diverse business sectors — and lots of people willing to give money without asking for special-interest favors.

Choosing a new chairman of the S.E.C. is the perfect time for President Obama to decide whether, despite everything, to go for the status quo — which brought us to our current economic predicament — and nominate Ms. Miller for the S.E.C. Or does he really want effective change? In that case, he should nominate Mr. Barofsky or someone who can match his stellar qualifications.

Article source: http://economix.blogs.nytimes.com/2012/11/22/mary-miller-vs-neil-barofsky-for-the-s-e-c/?partner=rss&emc=rss

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Today’s Economist: Simon Johnson: Changing the Conventional Wisdom on Wall Street

November 15, 2012 by Leave a Comment

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Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

There are two fundamentally different views regarding modern Wall Street. The first is that the financial sector has been terribly and unjustly put upon in recent years – regulated into the ground and treated with repeated disrespect, including by the White House.

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There was, for example, an impressive amount of whining this week when no one from a big bank was invited to a high-profile meeting with the president on fiscal issues. As the people holding strongly to this view run large financial institutions and have effective public relations teams, this has become an important part of the conventional or establishment wisdom, repeated without question in some parts of the media.

The second view is that the powerful people who run global megabanks have lost all sense of perspective, including failing to realize that they have more access to people at the top of our political power structures than any other sector has ever had. Anyone who doubts this view, or wonders exactly how the revolving door among politics, lobbying and banking works, should read Jeff Connaughton’s account, “The Payoff: Why Wall Street Always Wins” (which I have written about in more detail before). Mr. Connaughton is most gripping when he describes the failure of law enforcement around securities issues, including issues with both the Department of Justice and the Securities and Exchange Commission.

Which of these views is correct? We will soon know, because there is a simple and direct test that is fast approaching: Whom will President Obama nominate as the new chair of the S.E.C.? (Mary Schapiro, the current chairwoman, is widely reported to be stepping down soon.)

There are only two possible outcomes.

The president could pick someone who is very close to the securities industry — for example, a senior financial services executive or one of the industry’s favorite lawyers or someone who already works in its “self-regulatory” apparatus. Any former politician who has taken large donations from Wall Street or an academic who sits on the board of a large financial company would also fit into this category. There is no shortage of candidates from this side of the contest.

Alternatively, the president could choose someone who is not only willing to enforce the law and regulation but who would actively seek to change the conventional wisdom around finance. For example, all too often we hear – including from some top officials – that if we relax the capital requirements, the economy will grow faster in a sustainable manner.

This is a very dangerous idea that completely ignores that Europe went much farther than we did in reducing bank capital in the run-up to 2008 (i.e., allowing banks to finance themselves with more debt and less equity) and that this directly contributed to the complete disaster they now face. Thank goodness that Sheila Bair, then head of the Federal Deposit Insurance Corporation, and a few others, successfully resisted attempts to lower bank capital in a parallel manner in the United States. (If you want more detail on these points, look at Ms. Bair’s new book, “Bull by the Horns,” or the coming book by Anat Admati and Martin Hellwig, “The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It.”)

Without doubt, part of the problem that led to the crisis of 2008 was weak regulation. But at times when conventional wisdom affirms some form of “new economy” in which asset prices can only go up – and therefore financial institutions should be allowed to borrow a great deal more relative to their shareholder equity — can any regulation be effective?

To make Wall Street safer – and more helpful to the rest of the economy – implementing new rules is not enough. We need completely new thinking about securities markets, including all dimensions of how investors are treated and where financial-system risks lurk. We must be able to trust the financial system again, and we are a long way from this point.

There are three potential S.E.C. chairmen who could have this kind of impact. If you have other names, see if they match these three in terms of integrity, willingness to go against the consensus and ability to get things done.

First, former Senator Ted Kaufman of Delaware has been a consistent advocate for financial-sector reform and was one of the clearest voices during the 2010 legislative process that led to Dodd-Frank. His advice was ignored then; in fact he was opposed directly by Treasury and the White House (see Mr. Connaughton’s book for details). It is not too late for the president to change his mind. (See the longer piece I did a few days ago on Senator Kaufman for this Boston Globe feature.)

Second, Neil Barofsky is the former special inspector general in charge of oversight for the Troubled Asset Relief Program. A career prosecutor, Mr. Barofsky tangled with the Treasury officials in charge of handing out support for big banks while failing to hold the same banks accountable — for example, in their treatment of homeowners. He confronted these powerful interests and their political allies repeatedly and on all the relevant details – both behind closed doors and in his compelling account, published this summer: “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.”

His book describes in detail a frustration with the timidity and lack of sophistication in law enforcement’s approach to complex frauds. He could instantly remedy that if appointed — Mr. Barofsky is more than capable of standing up to Wall Street in an appropriate manner. He has enjoyed strong bipartisan support in the past and could be confirmed by the Senate (just as he was previously confirmed to his TARP position).

Third, Dennis Kelleher is a former senior Senate leadership aide with a great deal of political experience, including during the financial crisis and in the negotiations that led to Dodd-Frank, and now runs the pro-reform group Better Markets. Previously, he was a partner at the international law firm of Skadden, Arps, Slate, Meagher Flom, where he specialized in the S.E.C., securities, financial markets and corporate conduct in the United States and Europe. No one has been a more effective advocate of implementing substantive reforms.

Mr. Kelleher and his team are in the trenches every day, arguing on behalf of taxpayers and ordinary citizens at every opportunity before the entire range of regulators, in court cases and with Congress and the administration. They are also amazingly effective – particularly considering the huge resources of the firms that they go up against (for some examples, see this New York Times profile of Mr. Kelleher). His private and public sector experience and expertise are very highly regarded throughout the financial regulatory agencies and in the legislative and executive branches more broadly. He also has strong relationships on both sides of the aisle and would be likely to be confirmed.

At the start of this second presidential term, many people are optimistic that President Obama will finally push hard for meaningful change around Wall Street, including at the S.E.C.

Goldman Sachs, JPMorgan Chase and Citigroup were all big donors to the Obama campaign in 2008 (see this recent column by William D. Cohan), but they did not make the top 10 list this year. Now would be a perfect time for the president to clean up Wall Street with a strong S.E.C. that is focused on enforcing the law and overturning dangerous parts of the conventional wisdom.

Article source: http://economix.blogs.nytimes.com/2012/11/15/changing-the-conventional-wisdom-on-wall-street/?partner=rss&emc=rss

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Today’s Economist: Simon Johnson: Read This Book, Win the Election

October 11, 2012 by Leave a Comment

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Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

With the presidential election looming and both sides looking for a knockout blow in the vice-presidential debate on Thursday evening, now is a good time for both Democrats and Republicans to look for one more defining issue. The new book by Sheila Bair, “Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself,” offers exactly that – to whichever party is smart enough and fast enough to take up the opportunity.

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Ms. Bair lays out a compelling vision for financial-sector reform and for dealing with the continuing mess around mortgages. Neither presidential campaign is likely to endorse her ideas in all their specifics. But if a candidate signaled that he had read and understood the main messages in this book, this would have great appeal with undecided centrist votes and – importantly – with their respective bases.

Ms. Bair was chairwoman of the Federal Deposit Insurance Corporation from June 2006 to July 2011. She had a seat at the table for all the big decisions during the financial crisis of 2007-9, and she was also an important player during the financial reform negotiations of 2009-10, leading up to the Dodd-Frank financial reform legislation of 2010.

(Disclosure: I’m a member of the nongovernmental Systemic Risk Council that Ms. Bair created and leads; I was also appointed to the F.D.I.C.’s Systemic Resolution Advisory Committee while Ms. Bair was still chairwoman.)

Ms. Bair, a Republican from Kansas, worked with Bob Dole and was appointed to the F.D.I.C. by President George W. Bush. Her defining positions were against the interests of the very largest financial institutions.

And her biggest confrontations were with Treasury Secretary Timothy Geithner, the former president of the Federal Reserve Bank of New York, and, according to Ms. Bair, someone who continually favored the largest banks and their profitability in the mistaken view that this would serve the broader social interest in financial stability and sustained economic prosperity.

During the height of the financial crisis, Mr. Geithner wanted at various times to commit more taxpayer resources with fewer conditions to support very large banks, including allowing them to pay very large bonuses to executives. Ms. Bair was consistently on the side of wanting more strings attached – the point being that these financial institutions had managed themselves into great trouble. As she notes on Page 363:

An institution that is profitable is not necessarily one that is safe and sound or one that is serving the public interest. All of the large financial institutions were profitable in the years leading up to the crisis, but they were making big profits by taking big risks that ultimately exploded in their – and our – faces.

Ms. Bair’s point was not about any kind of retribution but rather that the long experience of the F.D.I.C. indicated that the best time to clean up any financial sector mess was at the moment and point of intervention. Because it has insured small depositors – the public – since the 1930s, the F.D.I.C. has developed a well-informed approach to failing banks. It works hard to ensure that depositor protection works – and it does – without imposing costs on the taxpayer.

When I worked at the International Monetary Fund during 2004-6 and 2007-8, we regarded the F.D.I.C. as carrying out best practice in the world with regard to how to handle failing banks.

In Ms. Bair’s persuasive account, the George W. Bush and Barack Obama administrations were primarily focused on protecting the large banks. Both administrations consistently ignored the relationship between the need to fix our bloated, free-wheeling financial sector and sustaining our broader economic prosperity. And both administrations paid insufficient attention to the persistent problem of mortgages.

In most financial crises, there is some form of “debt overhang” problem, meaning that the economy cannot fully get back on its feet until loans are written down, typically through some form of bankruptcy or negotiated restructuring process. Some of the most fascinating details in “Bull by the Horns” concern instances when Ms. Bair and her F.D.I.C. colleagues proposed various ways to deal with mortgages, only to be shot down or undermined by Mr. Geithner and his colleagues at Treasury (see, for example, Chapter 21).

Judging from the most recent presidential debate, the candidates are still not drawing the link from stable finance to economic prosperity, and they are offering no ideas on how to restructure mortgages.

As new cases are brought against big banks for their mortgage-lending practices, including JPMorgan Chase (for activities of Bear Stearns, which it acquired in 2008) and, this week, Wells Fargo, policy thinking increasingly must grapple with how to structure a potential “global settlement” on mortgages.

It would be good for Ms. Bair to have a seat at that table; most of the workable ideas are already articulated in her book. More broadly, her policy suggestions are simple and obvious, like putting tougher limits on the ability of large financial institutions to take risks with borrowed money, requiring those who securitize mortgages to retain risk if the mortgages later default and breaking up institutions so large and interconnected that they cannot be resolved in bankruptcy without causing wider damage to our economy.

Ms. Bair’s messages and common sense have appeal across the American political spectrum. The right wants an end to implicit government subsidies for large financial institutions. The left wants to curtail the power of global megabanks. Independents want Wall Street to have less political sway in Washington. These are all reasonable and responsible requests.

Either Mr. Romney or Mr. Obama could seize upon the themes in Ms. Bair’s book, craft these into political language and hammer home the substance in the concluding weeks of the campaign.

Or they could just quote the final paragraph of the book:

Life goes on, as Robert Frost observed. But financial abuse and misconduct don’t have to. Tell the powers in Washington that you want these problems fixed, you want them fixed now and that you will hold all incumbents accountable until the job is done.

Article source: http://economix.blogs.nytimes.com/2012/10/11/read-this-book-win-the-election/?partner=rss&emc=rss

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Today’s Economist: Uwe E. Reinhardt: Redistribution of Wealth in America

September 28, 2012 by Leave a Comment

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Uwe E. Reinhardt is an economics professor at Princeton.

A recent article in The Washington Post and an audio clip accompanying it on the Web featured an excerpt from a speech in 1998 by Barack Obama, then an Illinois state senator, at Loyola University Chicago.

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In that speech he remarked, “I actually believe in redistribution, at least at a certain level, to make sure that everybody’s got a shot.”

The article then quotes Mitt Romney: “I know there are some who believe that if you simply take from some and give to others then we’ll all be better off. It’s known as redistribution. It’s never been a characteristic of America.”

Really?

Aside from hard-core libertarians, who view the sanctity of justly begotten private property as the overarching social value and any form of coerced redistribution as unjust, how many Americans on the left and right of the political spectrum would disagree with Mr. Obama’s very general and cautiously phrased statement?

In fact, I wonder whether even Governor Romney actually disagrees with that general statement, aside from some dispute over “the certain level” at which redistribution takes place. After all, he has promised elderly voters to protect the highly redistributive Medicare program, which would remain highly redistributive, or become more so, under proposals by his running mate, Representative Paul D. Ryan, for restructuring Medicare.

The fact is that redistributive government policy — mainly through benefits-in-kind programs, agricultural policy and the like — has been very much a characteristic of American life, just as it has been in every economically developed nation, albeit at different levels.

Start at the local level. Through property taxes, local governments all over the United States routinely take from high-income Americans living in expensive houses to subsidize the education of children from lower-income families. It is the American way, based on the widespread belief that doing so will make society as a whole better off. Is there a significantly large constituency for abolishing this form of redistribution at the local level and instead letting every family fend for itself, with its own budget, in a private market for education?

The same can be said, at the local level, for fire and police protection. One could imagine a world in which every family cuts a deal with private contractors to provide fire and police protection — leaving poor neighborhoods to fend for themselves — but that is just not an American characteristic. Is there a sizable constituency in America for completely privatizing local fire and police protection?

At the state level, consider Medicaid. By design, Medicaid is purely redistributive. It takes from higher-income people at the state and federal levels and pays fully for the health care of low-income people. Is there a strong constituency for abolishing Medicaid and letting the poor, when they are ill, fend for themselves in the market for health care?

Or take public colleges and universities. Although tuition has increased in past years, these institutions are still heavily supported by the states and charge tuition much below the full cost of the education they impart.

At the federal level, Social Security and Medicare were deliberately structured by their designers to be in part redistributive. As Eugene Steuerle and Adam Carasso of the Urban Institute’s Retirement Project have reported, both programs redistribute from retirees who had been high-income earners in their work years to those who had been low-income earners.

Would elimination of this redistributive feature inherent in Social Security and especially in Medicare have much of a political constituency today? Would any politician dare propose openly — and I stress openly — that Medicare beneficiaries who had been high-income earners in their work years should have a health care experience superior to those who had low incomes in their work years? Would that proposal be a winner this year?

By the way their benefits and the financing of these benefits are structured, Social Security and Medicare also redistribute income from the current working population collectively to the currently retired population collectively. Is that fair?

In thinking about this issue, keep in mind that a young generation about to enter the workplace has, for a fifth to a quarter of a century, been the beneficiary of huge transfers of human and nonhuman capital. Overwhelmingly, they have taken from society and not contributed to it.

By human capital economists mean the education and training that foster in the young marketable skills that can be traded for cash at the workplace. Although, unlike students in many other countries, American students do contribute significantly to the financing of their human capital — at the college and postgraduate levels — the production of their human capital remains very heavily subsidized by the preceding generational cohorts. Charge the total value of that transfer to an intergenerational account.

Charge to it next the nonhuman capital transferred to the young. This includes the vast array of physical structures built and largely financed by preceding generations, transferred virtually free of charge to the younger generation for its use, along with the scientific knowledge and the blueprints for applied technology developed and financed by previous generations but available, again largely free of charge, as an economic platform for the younger generation.

I believe the designers of Social Security and Medicare were mindful of this vast redistribution of assets to the young when they embedded in these programs a social contract creating a reverse redistribution from the young to the old during the latter’s retirement years.

These designers seem also to have kept in mind that future generations benefit greatly from the secular increase in overall productivity in the economy. It can reasonably be assumed that future long-run growth in real gross domestic product per capita will be 1 to 2 percent a year. At only 1 percent, real G.D.P. per capita in 2050 will be about 46 percent larger than it is today. At 2 percent growth, it will be more than twice as large.

At issue between the two political camps in this election season, then, is not redistribution per se, which is as American as apple pie. Rather, at issue is the “certain level” to which that redistribution is to be pushed. An honest and thoughtful debate on that would certainly be useful at this time. It would be useful at any time.

To be respectful to voters, such a debate should proceed at a level concrete enough to allow voters — or at least researchers and news organizations — to estimate fairly precisely how different families would fare under the different visions of that “certain level.”

It is the minimum voters ought to expect from political candidates.

Article source: http://economix.blogs.nytimes.com/2012/09/28/redistribution-of-wealth-in-america/?partner=rss&emc=rss

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Today’s Economist: Casey B. Mulligan: Labor-Market Scars Left by Redistributive Public Policy

September 26, 2012 by Leave a Comment

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Casey B. Mulligan is an economics professor at the University of Chicago.

The social safety net became more generous under Presidents George W. Bush and Barack Obama, and as a result massively altered employment patterns in the labor market.

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I have explained in previous posts how public moneys have recently been used to help the unemployed, the poor and the financially distressed endure the recession, but at the same time have dramatically eroded incentives for people to maintain their own living standards by seeking, accepting and retaining jobs, as well as incentives for employers to create jobs that are attractive to workers.

My forthcoming book “The Redistribution Recession” (see the introductory chapter online) quantifies those incentives and their changes over time in terms of marginal tax rates, which refer to the extra taxes paid, and subsidies forgone, as a result of working, expressed as a ratio to the income from working.

As a result of more than a dozen significant changes in subsidy program rules, the average middle-class non-elderly household head or spouse saw her or his marginal tax rate increase from about 40 percent in 2007 to 48 percent only two years later. Marginal tax rates came down in late 2010 and 2011 as provisions of the American Recovery and Reinvestment Act expired, but still remain elevated – at least 44 percent.

Americans have different economic and family situations, and subsidy program rules are complex. As a result, the marginal tax rate changes for particular households vary significantly from the average eight-point increase. A few households even saw their marginal tax rates jump beyond 100 percent – meaning they would have more disposable income by working less.

Marital status and skill (that is, what people are capable of earning) are important determinants of the marginal tax rate and its changes over time. Married people saw their marginal tax rates increase less than average, because even when out of work they are likely to be ineligible for a number of antipoverty programs because of amounts earned by their spouse.

Skilled people saw their marginal tax rates increase less because a number of the new subsidies were fixed dollar amounts, and a fixed dollar amount is a lesser fraction of what a skilled person can earn than it is a fraction of what an unskilled person can earn.

Little attention has been paid to marginal tax rates lately, under the Keynesian assumption that the labor market is slack during a recession and that for the time being labor supply has nothing to do with labor-market outcomes. As Paul Krugman put it: “What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant.”

One way I tested, and rejected, the Keynesian assumption was to compare work-incentive changes and work-hours changes between 2007 and 2010 across 10 demographic groups differentiated according to their skill (five categories) and marital status (two categories). In the Keynesian view, the two changes would be correlated only by coincidence.

The group-specific incentive changes are measured (most recently in my paper “Recent Marginal Labor Income Tax Rate Changes by Skill and Marital Status“) on the horizontal axis in the chart below as percentage changes in the share of what people keep from what they earn, net of taxes paid and subsidies forgone. For example, work incentives were eroded about 20 percent for unmarried household heads (red squares) in the middle of the skill distribution, while they were eroded about 12 percent among married heads and spouses (black circles) with the same level of skill.

The vertical axis of the chart measures the percentage change in hours worked per person, most of which is due to increased unemployment rates. Each tick on the vertical axis is 2 percent, which makes each tick as large as some recessions.

Among unmarried people, hours worked tended to fall more for the less-skilled groups. I explain this result as a consequence of greater incentive erosion among less-skilled unmarried people compared with more-skilled unmarried people, but others have suggested that less-skilled people experience greater demand changes during recessions or otherwise have behavior that is more sensitive to economic conditions.

Remarkably, the same skill pattern does not hold up among married people. All but the top skill group have essentially the same hours changes and are uniform in terms of their incentive changes. Also remarkable are the huge differences by marital status between hours and changes and incentive changes. For example, the married people in the lowest skill group saw their work hours fall about half of the drop for unmarried people with the same skill, which lines up with the huge difference in their incentive changes.

Keynesians can explain different labor-market experiences by demographic groups to the degree that groups differ in their propensities to work in declining industries, except in this case marital status has very little correlation with industry of employment. All of this makes sense to economists who think that labor supply still matters, because groups facing the same demand for their labor can nonetheless have different labor-market outcomes because of their varied supply situations.

The fact that marginal tax rates rose so differently for various groups means not only that redistributive public policy depressed the labor market but has also sharply, and arbitrarily, altered the composition of the work force in the direction of people who are married and more skilled.

Article source: http://economix.blogs.nytimes.com/2012/09/26/labor-market-scars-left-by-redistributive-public-policy/?partner=rss&emc=rss

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