JOBS | Trading Growth for Sustainability–"Kurzarbeit"

Kurzarbeit ("Short Work") has been
effective at least since 2009. Ich 
war dabei!="I was there!"

Glenn Hutchins, Vice Chairman of the Brookings Institution, argues today in the New York Times that the United States should follow the German example and trade growth for jobs.

The German Government does this by supporting companies that cut back hours of workers during a recession, rather than laying them off. The employees' salaries are maintained through a system of national subsidies administered by the company.

The companies continue paying workers a reduced salary but do not cut them from the payroll. The reduced salary is subsidized by the government.

This approach builds a reserve of trained workers ready to go to work. When demand picks up, the company asks the workers to come in for more hours. It obviates the need for new hiring and catchup training programs for new workers when the business cycle improves. A reserve of workers remains in place, much like that U.S. Army Reserve and the National Guard in which civilians maintain their military skills to be ready in case of a need for rapid deployment.

Paul Krugman recommended the concept favorably back in 2010, noting that Germany's growth rate in GDP was slower than that of the United States, but its employment rate (i.e., employment relative to population, a more reliable number than unemployment because it doesn't depend on subjective surveys of intent to find a job) did not fall as much.

As they say to the guy on first base in baseball, when there is someone on third and only one out– "Always trade a run for an out."

Trade growth for higher employment, especially when our employment rate is tanking.

Krugman vs. Taylor on the Zero-Bound Fed

Here's how I see the Great Debate about monetary policy, with John Taylor opening with an op-ed in the Wall Street Journal (http://on.wsj.com/VY0Iet) on the Fed being a drag on the economy through its continued zero-interest rate FOMC directive and Paul Krugman lambasting him via his NY Times perch for arguing that the low interest rates are inhibiting lending. (http://nyti.ms/VwkXU7):

Taylor is a "hard money" man (consistent with the dour mien of John Calvin, although Krugman says he has Calvin of Calvin & Hobbes in mind), unhappy at low interest rates that don't sufficiently reward prudent savers/debt-holders, so that banks withhold loans. Krugman has maintained consistently that the economy has not been stimulated enough on the fiscal side after the meltdown in 2008 and therefore staying at the zero-interest-rate bound at the short end of the market is a consequence; he is a continued-easy-money man.

Krugman's answer to Taylor's argument is that his theoretical framework is one of a ceiling, which is inappropriate. In fact the FOMC directs open market operations (buying short-term Treasury bills to put cash into the economy), and the equivalent in the longer end of the bond market, Quantitative Easing (buying longer-term Treasurys to bring down longer-term rates) also operates in the open market for debt.

The Fed does not regulate interest rates. It just buys and sells Treasurys.

For those who don't have time to pore through this exchange and its 60+ comments, I excerpt three comments that were posted around 9 am this morning to exemplify the struggle that the commentators have to be fair and to try to figure out who is right.

Justin - Brooklyn, NY: Can anyone kindly explain what this sentence is purporting to say? (I know that Krugman is refuting it, but this went over my head.): "low rates engineered by the Fed are just like a price ceiling that reduces the supply of loans, and therefore reduces overall lending."

AndyfromTucson - Tucson AZ: The reasoning is that the interest rate is the price paid for borrowing money, and so if the government caps the price at an artificially low level then it will reduce the supply of loans. Like if the government put a $5000 cap on the price of new automobiles all the car manufacturers would cut production. What Krugman is saying is that interest rates are not a legal cap, so this analysis doesn't work. Jan. 30, 2013 at 9:41 a.m.
save10percent - Denver, CO: My understanding of it is that as the price goes down (talking about the cost of taking out a loan, which is the interest paid), the quantity demanded goes up, but the quantity supplied goes down (econ 101). Taylor is saying that the fed sets the price ceiling too low and therefore banks aren't lending (less supply). Krugman says that the fed does not set a price ceiling for the interest on loans that banks make, so Taylor's argument doesn't make sense.

I have no doubt that Taylor will be back with an involved explanation why he was misunderstood. Meanwhile the winner of the debate pro tem is Paul Krugman and as one commentator observes, we can be glad that Gov. Mitt Romney did not win the presidential election, because if he had, Prof. Taylor was in line to become his Treasury Secretary.

The Elephant in the Treasury - Why the Palladium Coin Was Rejected

The elephant in the room at the Treasury and Fed is the fear of being accused of "monetizing the debt". When the country is at the "zero bound" where interest rates on Federal debt are being constrained by Federal Open Market Committee policy to approach near-zero percent, then the difference between debt and money approaches near-zero.

So why the Treasury and Fed concern about a palladium coin valued at $1 trillion? It would solve the big problem of the debt ceiling. Paul Krugman has pointed out in his column in the print edition of the NY Times on Friday, January 11, that the Congress failing to authorize the debt ceiling forces the Executive Branch to withhold authorized payments, which blurs the roles of the Executive and Legislative branches.

Raising the debt ceiling wouldn't grant the president any new powers... [and] if the debt ceiling isn't raised, the president will be forced to break the law; either he borrows funds in defiance of Congress, or he fails to spend money Congress has told him to spend.

The palladium coin would also not appear to require Congressional approval - although the law does seem to require a "marketing plan" for the coin to be submitted to the Congress and a $25 palladium coin issue went through the Congressional legislative process in 2009-2010 as I have previously noted.

Here are some objections:
1. Separation of fiscal and monetary policy is an article of institutional and theoretical faith than no one wants to interfere with. For the Treasury to issue a trillion-dollar coin to deposit at the Treasury would open up all kinds of questions about this separation.
2. The zero-bound situation is temporary and everyone would like to escape from this difficult world as soon as possible. Former Fed Governor Larry Meyers said in December 2008 that at the zero bound the FOMC has nothing much to do and they should all take a very long vacation.  I am sure, however, he was not expecting the vacation to last until 2013.
3. A system with Federal Reserve independence is more resilient than one where the Fed and Treasury are combined. It's the 100th anniversary of the creation of the Fed, which was created to maintain orderly financial markets (the Fed was a remedy for the Bankers Panics of 1907-1908) and to preserve the value of the dollar. The fear that a head of state might tamper with the money supply to finance a war or excessive consumption is well founded. A monetary authority protecting the value of the people's money is a widely emulated institution.

So, however annoyed we may be about GOP misuse of the debt ceiling as a bargaining chip for something else, and thereby interfering with the conduct of government, the Treasury and Fed are right in opposing something that would blur the distinction between them.

However, some other plan better be ready to thwart a debt-ceiling blackmail.

For Green Jobs, Cut Fossil-Fuel Subsidies

Paul Krugman has a post on the green jobs issue. He wonders why wind energy investments and jobs have not been growing as fast as many have hoped. He argues that the "right incentives" have not been put in place and one reason is that progress on environmental issues is stymied by opponents of government intervention, i.e.,  believers in the markets. Krugman then makes the case that opponents of environmental intervention actually lack faith in the potential of markets. Markets would go to work to solve environmental problems if the right incentives were in place. For example, a price on carbon would be such an incentive.

I commented that in the context of the current debt-ceiling debate, the most promising path ahead in the Congress - especially for independent Republicans - is to push hard to end subsidies for fossil fuels. 

This is not a pipe dream. Last year I attended a press conference in Washington of the Green Scissors campaign, a 15-year-old group led by three organizations concerned about the environment. The campaign has identified $200 billion in wasteful and environmentally harmful subsidies, such as subsidies for petroleum and ethanol. The press  conference was bipartisan, including independently minded Republicans like Rep. Tom Petri of Wisconsin, who spoke in favor of reducing these subsidies.

The debate over the deficit and the debt ceiling is an opportunity for advancing alternative energy and energy efficiency by ending subsidies for the production of fossil fuels and ethanol.