Cariacature of Larry Summers by donkeyHotey

Larry Summers and Ed Glaeser have teamed up with Benjamin Austin to tell us all what ails employment prospects in certain parts of America. The end result of their musings is that there should be a Federal policy to do something about it. Yet the actual logical outcome of said musings is that we should use federalism to solve this. That is, the Federal part of government should butt out of this problem.

But then, you know, that’s true of so much of modern governance. It’s just nice to see it quite so obviously here:

While the whole country is experiencing this decline in male work rates, Austin, Glaeser, and Summers argue that the trend is geographically concentrated (as shown in the maps above, showing male joblessness in 1980 versus 2015) and that this justifies policies specifically targeting areas that are hardest hit. In particular, they argue that subsidies meant to encourage work, such as an expanded earned income tax credit, should perhaps be changed to be more generous for recipients in struggling regions, where they might do more to encourage additional employment and reduce joblessness.

Well, OK. My own solution for this sort of problem would be rather more like the sort of thing Ed Glaeser has been suggesting elsewhere. Tear down the restrictions that stop people moving to the coastal cities – both zoning and licensure – and deal with the problem that way. If that means depopulation of parts of the heartland then so be it. This is something which is happening in many parts of the rich world and it’s something we’d better get used to.

OK, not politically acceptable when such heartlands have congresscritters but still.

America’s regional disparities are large and regional convergence has declined if not disappeared. This wildly uneven economic landscape calls for a new look at spatially targeted policies. There are three plausible justifications for place-based policies–agglomeration economies, spatial equity and larger marginal returns to targeting social distress in high distress areas. The second justification is stronger than the first and the third justification is stronger than the second. The enormous social costs of non-employment suggests that fighting long-term joblessness is more important than fighting income inequality. Stronger tools, such as spatially targeted employment credits, may be needed in West Virginia than in San Francisco.

Again, my solution would be to move the people. Or more accurately, to remove the barriers to the people moving themselves. Yes, I’ve walked this walk, I’ve worked on two continents, in 6 countries and several different locations in two of those countries. Still, that’s not what they recommend:

We document that increases in labor demand appear to
have greater impacts on employment in areas where not working has been historically high,
suggesting that subsidizing employment in such places could particularly reduce the not working
rate. Pro-employment policies, such as a ramped up Earned Income Tax Credit, that are targeted
towards regions with more elastic employment responses, however financed, could plausibly
reduce suffering and materially improve economic performance.

Yes, there are state level EITCs but it’s really a Federal program. Which is why it’s the wrong solution here.

The very analysis insists that this is a local problem. The solution to a local problem is going to be found locally, not nationally. Thus we don’t want even an attempt at a Federal solution we want a federalist one. Another way to say the same thing is that certain states, or areas within them, have economic problems. Our solution is for those states, or the areas within them, to change their economic ways therefore.

Which was all rather the point of the way the Founding Fathers set the place up. That Federal Government should only be dealing with the national things which have to be dealt with at the national level. States with things at the State level, counties with county level and so on. The entire point was the realisation that the tax leeches in DC aren’t going to know how to deal with unemployment in Squirrel Hollow, WV but that the folks in the county seat might have a clue. DC might even be able to think through matters like national aggregate demand (although Hayek didn’t think so) but not the specific problems of 600 Scots Irish crouching among the rubble of mountaintop removal coal extraction.

It’s being defined as a local problem therefore the solution must be local – the Feds should butt out. Unlike the recommendations of the paper which is something of a pity.

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  1. “Devise a national [sic] economic policy” means take one region’s problems and make them someone else’s problem. Frequent gripes have not led to a national beer policy, but they have led to a national health policy, even though these punters are much more ignorant of the process and no one knows what he is buying, how much it costs, or what the outcome will be.

    By the way, there is no authentic federal power to devise national [sic] economic policies; only maintain the sanctity of contracts, and deal with interstate commerce, which meant to prevent state customs inspections, not to give Washington supremacy over every industry whose products occasionally cross a state line.

    Another component to solve “long-term joblessness” must be to rethink not just licensure but welfare, especially the racket of “permanent disability,” now including substance abuse, subjective complaints, and sometimes failure to speak the important language.

  2. And then there’s the question of who’s responsible. The city, the county and the state all come before the feds. But the feds soak up the resources and make the rules. Making it impossible to row back from submission to the feds in states where it has been standard. One thing that comes to mind is for federal land to be signed over to the people. The constitution never envisaged the federal govt owning such a large proportion of land area.

  3. The US Fed has decided to start unwinding QE. Janet Yellen has said the process will be as exciting as watching paint dry. And who knows? Maybe she is right. After all, there is no precedent. It’s obviously possible that this could go well. But I doubt it.

    The reasons should not need stating, I would have thought, but it seems that they do. This is not, after all, a microeconomic issue about the Fed reducing the size of its balance sheet, which is how most commentators seem to be decribing it. This is, instead, a macroeconomic issue about money supply, interest rates and desired rates of growth.

    From the way reports are being written it would seem as if the Fed creating money is a sin: a large Fed balance sheet is a weakness in the descriptions offered. Whether Yellen actually thinks that or not I am not sure. What I know is that I do not read comment in the press about commercial banks needing to cut the size of their balance sheets, let alone celebrating when they do.

    I make the comparison deliberately. It so happens that we should want commercial banks to cut the size of their balance sheets. We have a debt crisis, after all. Debt is what fuels the size of their balance sheets. And the evidence is very clear. Those balance sheets are too big. The consequence is the risk of another crash.

    But as we also know, private sector debt reduction is the equivalent of saving. And if there is saving there are consequences. First, there is less money to go round. It was, after all, a crisis of too much saving (or debt reduction) post 20o8 that required QE in the first place. Second, less money going round means slower growth. Third, it also means that someone has to match the saving with a borrowing. That’s what the sectoral balance dictates. And as the government is the borrower of last report they pick up the tab.

    Now let’s look at the US (and think about the UK). The US has some (but I would call it shaky) growth, low interest rates, modest inflation and some pretty big uncertainties, all underpinned by far too much private debt because the middle class has been hollowed out. It’s not a pretty prospect. And in the middle of all this Yellen wants to suck money out of the economy by selling part of the Fed portfolio (which is much broader in base than the Bank of England’s) back into the market even though the government is still running a pretty massive deficit and personal debt is too high.

    I have to say I can only see three potential consequences of that. The first is a drain on the economy and a reversal of the modest growth.

    The second is a pretty big increase in interest rates to get people to buy this stuff that they don’t prima facie need right now, with a consequent pretty big drain on the real economy and the unveiling of just what debt stress really means in the US context, with a pretty hard hit in the economy for a multitude of reasons as a result.

    Or third, I see a pretty quick policy reversal. Unless Yellen’s sale is so small it hardly constitutes a policy at all, which is the other option that exists i.e. this is all show and of no real substance anyway.

    But even if this last was true this would be worrying. There is a debt crisis in the US, in private banks (as here). And there is a crisis of government underspending on what is needed, like infrastructure, as here (except their bridges really do look like they are falling down in the parts I visit). And instead of managing a shrinkage of the balance sheets of private banks, matched by an increase in the size of the Federal (not Fed, unless a form of People’s QE was used) balance sheet it is the Fed that is to be shrunk . There’s one real reasonable reaction to that. This is the wrong policy at the wrong time and for the wrong reason. The wrong outcome will result.

    There will be tears. But Yellen will have gone by then.

  4. Oh boy! Three knobs from Harvard look at a complex problem (if you want to call it a problem, that is) and their solution? Dial everything back 50 or so years and, in essence, re-introduce welfare. How innovative!

    Never ask an economist how to fix a problem… What they will propose as a solution is a new, and different, problem.