Tuesday, October 13, 2009

Tax credits

Here's a NYT article via CR about tax credits for employers to create jobs:

Timothy J. Bartik, a senior economist at the Upjohn Institute for Employment Research who is working on the draft with John H. Bishop of Cornell, estimates that it would cost about $20,000 for each job created.

And here's another one the geniuses in Washington have dreamed up (naturally with a little creative support from the National Association of Homebuilders):

From the NAHB:
Extending the credit through Nov. 30, 2010 and making it available to all purchasers of a principal residence would result in an additional 383,000 home sales ...
The NAHB has also been arguing to expand the tax credit from $8,000 to $15,000. But using $8,000 per home buyer - and estimating 5 million home sales over the next year - the total cost of the tax credit would be $40 billion.

According to the NAHB this would result in 383,000 additional home sales. Dividing $40 billion by 383 thousand gives $104,400 per additional home sold!

It's easy to understand why tax credits are the favored approach of Congress -- Congress exists to regulate, and if money (or credit) doesn't continue to drop from their hands like mana from heaven, their power as regulator is diminished.  This simple survival tactic is the basic feedback loop that keeps government expanding and expanding (growth tactic, really. No organism 'fights for survival'.  They either grow or they can't, survival is just the world pushing back, and not very hard in the case of Congress).  And you can see that it doesn't matter how inefficient this form of regulation is, which tells you immediately that the supposed goals -- propping up home prices and reducing unemployment -- are not the real goals.

But I digress. 

Because my main point was the reaction I had to that initial article about the job creation tax credit.  $20,000 per job.  You know with certainty that this is a dramatic underestimate.  I don't remember how much Congress estimated that the housing tax credit would cost when they put it in place, but I know it wasn't even in the ballpark of $100K per home.  So let's say they underestimated the cost per job by a factor of 2, and the credit will amount to $40K per job if it passes. 

Now, you're asking yourself, if it's going to cost them $40K per job, isn't that about what you'd have to pay some out of work person anyhow to get them back in the saddle?  Why doesn't the government just hire the guy themselves?  Yeah, yeah, I know, creeping socialism blah blah blah.  But what the fuck do you think we have now!?  It just creeps from a different direction, going through the banks and through the bailout of inefficient high-employment low-value industries (consider which business would benefit, relatively from the credit -- it ain't the money losing start-ups and other creative stuff that really makes the economy dynamic).  Why don't we just get over the fact that capitalism has really always been State capitalism, and simply try to push the State into the form and roles that are appropriate to it?  Why don't we have the State employ the people directly, if that's what ultimately needs to happen, and let the rest take care of itself?

This turns out to have been the crux of Minsky's argument, and as I've thought about it more it's grown on me.  To review: his basic idea was that capitalism is inherently unstable, because large capital intensive projects require large financing.  So the simplistic I-cook-while-you-build-houses market exchange is complicated by the need for a banking system to finance these big projects.  Competition in this new financial sector makes it inherently unstable and prone to crisis, as people can profit from making shorter and shorter term loans at lower rates to finance long-term projects by just refinancing more frequently.  At some point, the financing becomes so speculative and Ponzi-esque that any small bump in the road in terms of the profitability of these projects causes the financiers to go bankrupt and results in a debt-deflationary spiral.  People try to cover their debts by liquidating the longer-term assets.  If everyone tries to do this at the same time, these productive assets are idled, the associated workers unemployed, and the strategy doesn't even work because all the liquidating drives the price of the assets even lower, whereas the debt you are trying to pay off stays fixed. 

Capitalism differs from a pure market economy and does not settle into an equilibrium the way such an economy would.  Why? It's the debt, stupid.  The structure of ownership gets us into a log-jam type of situation where money can no longer circulate, and money circulating is the bread and butter of the economy operating somewhere near equilibrium.

I think this is a pretty reasonable story.   I think there are also additional reasons why capitalism is unstable, but I think the effects of money and finance are probably the most wobbly leg of the edifice.  So, let's say we take this instability to be the main problem.  How are we going to fix it?  How are we going to get money to circulate and not just pile up in the wrong spots (whether that is mattresses or bank reserves at the Fed)?  How are we going to get people working and making stuff again?

Over the years, we (as a society) have tried a variety of solutions
  1. Do nothing.  Eventually you get a Depression deep and long enough that prices fall to the point of stimulating a recovery.  This is self-regulating market equilibrium of a sorts, it's just that the time scale can be excruciating.  I remember Jim Grant commenting that the depression of 1873 become the depression of 1878 before there was anything like a move to "do something" about it.
  2. Have the government manage the money supply.  If you think that finance is at least partly unstable because it is subject to occasional crises of confidence with no deep basis in reality (liquidity panics as opposed to solvency crises) you can alleviate some of the instability by having a lender of last resort.  In the US, this was JP Morgan at one point, and then we invented the Fed. 
  3. Have the government spend money directly.  The problem with (2) is pretty obvious once you realize that you almost never have a liquidity crisis without at least the real threat of a solvency crisis.  People are scared and want their money back because they think they might not get it.  If everyone wants to save up and pay off their debt we have a debt-deflationary problem, and the only way to save the system is to have the government go into debt while everyone works their way out of it.  This is the upshot of classic Keynesianism, though I'm bending it a bit in light of Richard Koo's later adaptation.  Keynes didn't imagine that the government would have to go into debt for years and years to get money circulating again.  He seems to have thought of it as a one-off sort of a thing that would soon become self-fulfilling.  The length of this though depends on how deeply in trouble the financial system got.
  4. Regulation.  Post GD I, we decided to have much more tightly regulated banks, the idea being that we could oversee the financial system and its tendency towards instability, and preempt the build up of debt that causes trouble.  That worked pretty well for a while (until the 70's) and then not so much.  I'm enough of a cynic (or an optimist, depending on your perspective) so as not to believe in the perfectibility of human control over large complex systems.  Hence I think this solution is evolutionarily unstable, and I'm surprised we even got 20 years out of it.
  5. Attack the problem directly.  If we want people to keep making stuff and keep spending money so that it continues to circulate, why don't we ... um ... pay them to do stuff.  Why do we insist on sending this money through the banking system or crediting it to businesses.  Why don't we just have the government hire people to do stuff we all want.  We could build parks or teach kids or grow publicly funded high quality hydro.  I don't mean as a temporary stimulus measure designed to restart the economy, and I don't mean the government going into debt to 'stimulate' the economy through tax credits of bank bailouts or defense contracts.  I mean, if the problem is not enough jobs, let's invent some more fucking jobs already.  Let's have the government guarantee everyone a minimum wage job producing whatever it is we collectively think we need.  Yeah, there are problems with how we decide what we need, but they don't seem more insurmountable to me than the problems attendant upon any of these other solutions. 
Number (5) was basically Minsky's adaptation of Keynes.  The government as employer, not lender, of last resort.  If you are out of work the government will give you a crap job.  It won't pay as much as you used to make, so you won't be tempted to stick around after business improves, but it will keep you eating and producing, and keep the money moving, which is what the economy is all about.  Let the big banks fail.  If no one can be out of a job, you have put a backstop behind the economy, and it won't be long before new banks arise to take their place.

Minsky's idea sounds crazy and socialist, but I wonder whether in the end it doesn't actually amount to the smallest government intervention into the economy that is consistent with its basic principle -- namely to let us play as many non-zero sum games with one another as possible.  Everything else involves a lot of regulating and fine tuning and bailing-out and etc ... Here, the only difficulty is in deciding what the people you hire ought to make.  We're more than capable of getting that wrong, but we might even be able to get it right.

1 comment:

adam said...

I'm all for (5). Krugman fielded a question about the FDR work programs recently and said it was a great system, but politically impossible today. Also, K points out that only WORLD WAR could politically motivate enough guvmint jobs to really get things moving.

So how does one even start to think about making this kind of thing politically possible?