How Not to Write a Jobs Bill

New York Times editorial "How Not to Write a Jobs Bill" (February 11th, 2010) makes a reflexive claim about jobs and tax cuts that may not be valid. Specifically, the Times argues that tax cuts are unconnected to jobs. Further, it appears to support creation and maintenance of governmental jobs.

An $85 billion proposal put forward Thursday morning by Max Baucus, the chairman of the Finance Committee, and by Charles Grassley, the committee’s top Republican, scarcely began to grapple with the $266 billion in provisions for jobs and stimulus that President Obama proposed in his budget. It was not even in the same league as the modest House-passed $154 billion jobs bill.

Worse, about half of the proposal had nothing to do with new jobs. The single largest chunk, about $31 billion, went to renew expiring tax breaks that are generally useful but unrelated to jobs. Another $10 billion would renew an expiring Medicare payment formula so doctors wouldn’t face a pay cut

Harald Uhlig's 2010 Working Paper "Some Fiscal Calculus" suggests that in the long run, a discounted $2.60 is lost for every dollar the government spends, while tax cuts on labor offer up to $1.7 in gain. The relevant idea is that removal of distortionary taxes improve outcomes, while short-run multiplier benefits are temporary and small.

While time Times mentions tax cuts on labor, it focuses on fiscal aid to states and increasing the supply of government jobs. The Times demands more government jobs:

What senators don’t understand or choose to ignore is that state budget cuts mean layoffs. State and local governments are among the nation’s largest employers, responsible for 15 percent of the labor force, about the same share as the health care sector and far larger than manufacturing or the financial sector. Since August 2008, states and localities have eliminated 151,000 jobs.

From the perspective of Corrections, this may be good news for the economy. In "The Current Financial Crisis: What Should We Learn from the Great Depressions of the Twentieth Century?" (March 2009) Federal Reserve Bank of Minneapolis Working Paper, Gonzalo Fernández de Córdoba and Timothy Kehoe, reporting that sharp productivity drops are a main contributer to depressions, write:

With banks and other financial institutions in crisis, the government needs to focus on providing liquidity so that banks can provide credit at market interest rates, and using the market mechanism, to productive firms. Unproductive firms need to die. This is as true for the automobile industry as it is for the banking system. Bailouts and other financial efforts to keep unproductive firms in operation depress productivity. These firms absorb labor and capital that are better used by productive firms. The market makes better decisions than does the government on which firms should survive and which should die.

Corrections suggests the same goes for one of the few employers whose labor productivity appears fundamentally disconnected from wages, and whose labor allocation is distorted by a labor force that is 36.8% unionized, a figure that is approximately the highest private sector union density ever reached, in the mid 1950's. Government job shrinkage appears to serve a double purpose: increase productivity in the long run as well as serve as a (Ricardian) tax cut in the short.

Supreme Court opens the money gates

Christian Science Monitor article "Supreme Court opens the money gates" (January 21st, 2010) argues that the fact that members of Congress limited campaign financing by corporations proves that even they believe that corporate donations to politicians are morally troublesome.

But even members of Congress, whose energy is increasingly diverted to fundraising, have long recognized the potentially corrupting effect that big money can have on them. More than 100 years ago they banned corporations from donating directly to federal candidates.

Government has power to create monopolies, adjust prices, and tax, and wields considerable other anticompetitive powers. It is in the interests of corporations to bribe politicians to benefit them at the cost of consumers. Framed another way, politicians have a franchise with which they accrue the monopoly rents they create for firms through bribes. If a law creates $10 million for a corporation in excess rent, then a politician should be able to gain up to $10 million in bribes, as firms compete for the rent.

Let us imagine that this legislation prevents future competition and allows firms to gain full monopoly rents in the future, rather than politicians. In such a case, long-lived corporations would be willing to pay the full net present value of monopoly profits today. In other words, we might imagine that short-lived politicians one hundred years ago sold their franchise at the expense, not of consumers, who lose the same amount either way, but of future politicians.  The transaction  is displayed graphically below (click to enlarge).

Just because politicians banned their future selves from doing something does not mean that they thought it immoral--it can simply be them selling their franchise for donations today.

Foreign interpreters hurt in battle find U.S. insurance benefits wanting

Los Angeles Times article "Foreign interpreters hurt in battle find U.S. insurance benefits wanting" (December 18th, 2009) provides an interesting observation without explanation. Specifically, Iraqi interpreters, injured in Iraq while running the same risks as American soldiers there, are not given the same benefits.

Payments intended to provide a decent standard of living in Iraq or Afghanistan leave the recipients below the poverty level in this country.

and

'When we were in Iraq, we were exactly like the soldiers,' Hadi said. 'Why are we treated differently now?'

After establishing that Iraqi interpreters are paid less, the article deepens the question. A normal, reflex response might be to say that Iraqi interpreters were paid less because they were worth less. After all, in competitive markets, people are paid at least what their second-best-offer is. The article gives evidence that interpreters were worth just as much, in terms of productivity, as U.S. soldiers on the ground.

Retired U.S. Army Col. Joel Armstrong, who served in Iraq and was a leading proponent of the 2007 troop buildup, or 'surge,' that helped reduce violence in the country, said Iraqi interpreters were crucial to the strategy's success.

'Without them, you really can't operate effectively as a force. It's just impossible,' Armstrong said.

Taking the Times at its word, the lapidary answer to Corrections is that when it comes to interpreters of Iraqi Arabic living in Iraq, the U.S. Army is all but a monopsony, a single consumer of a good for which there are many producers. In that vein, Iraqi interpreters will not be given their marginal product of labor, while U.S. soldiers, for which the U.S. Army is not the sole option, shall.

We note that even though contractors hire interpreters, we view them simply as intermediaries, and the article's concern about AIG disputing insurance payments will be reflected in higher ex ante wages rather than ex post coverage. This is true especially if private insurance can be purchased, while risk aversion makes the system less efficient.