Why a Balanced Budget Amendment Would Be Profoundly Destabilizing

This week the House is expected to vote on a balanced budget amendment (BBA), introduced by Bob Goodlatte (R-VA), chairman of the Judiciary Committee. The amendment would require federal budget outlays to equal receipts each year.

Subjecting fiscal policy to rules, rather than allowing it to be driven purely by political impulse, would be a good idea, but not if the rules are the ones envisioned by this amendment. Far from stabilizing the economy, this kind of BBA would radically destabilize it, leading to dizzier booms and deeper recessions. Here is why.

How the budget affects the business cycle, and vice versa

To see why a balanced budget amendment would undermine stability, we need to understand how the budget affects the business cycle, and how the business cycle affects the budget. When we look at the pattern of federal receipts and outlays over time, as shown in the following chart, we see a lot of ups and downs. Where do they come from?

Trump Signs Executive Order on Work Requirements. Why Such Requirements Have Failed in the Past

On Tuesday, President Donald Trump signed an executive order directing all federal agencies to review and strengthen work requirements for all federal poverty programs, including Medicaid, food stamps, housing, and others. The preface to the order invokes familiar rhetoric:

The United States and its Constitution were founded on the principles of freedom and equal opportunity for all.  To ensure that all Americans would be able to realize the benefits of those principles, especially during hard times, the Government established programs to help families with basic unmet needs. Unfortunately, many of the programs designed to help families have instead delayed economic independence, perpetuated poverty, and weakened family bonds.  While bipartisan welfare reform enacted in 1996 was a step toward eliminating the economic stagnation and social harm that can result from long-term Government dependence, the welfare system still traps many recipients, especially children, in poverty and is in need of further reform and modernization in order to increase self-sufficiency, well-being, and economic mobility.

Conservatives have hoped for years that shouting “Get a job!” loudly enough will induce people now on public assistance either to enter the workforce, or if not, to quietly fade from view. Although work requirements have proved ineffective time and again, hope dies last.

There are better ways to address the problems of our broken social safety net. Here are some points I have made in previous posts:

• The new executive order invokes the 1996 welfare-to-work reforms as a success story, but a careful review of the results shows that the effects of those reforms were disappointingly small.
• The main reason that work requirements have small effect on actual work behavior is that a majority of low-income people who can work already do work. Most of those who do not have paid jobs are working as unpaid caregivers, in school, or hampered by physical and mental health problems.
• Where requirements are introduced simply as a stick to drive people to work, they fail. To the extent they are successful, they must be backed up by substantial investment in training, job placement, and one-on-one counseling to cajole people into overcoming personal problems that may make them unattractive to employers. If state and federal governments are unwilling to invest in the administrative infrastructure needed to run work requirement programs well, they will do more harm than good.
• Often the biggest barriers to self-sufficiency are the punitive benefit reduction rates and other implicit and explicit marginal taxes on low-income workers. This earlier post provides details and explains how programs could be redesigned to reduce work disincentives.

The continuing conservative hope is that shouting “Get a job!” loudly enough will induce people now on public assistance either to the workforce, or if not, to quietly fade from view. Hope dies last.

Reposted from NiskanenCenter.com

Guaranteed Jobs, Hungarian Style

In a recent blog post, Niskanen Center’s Samuel Hammond expressed skepticism about the idea of job guarantees. In his view, such policies do not attack the real problem, they are easily politicized, and, as active labor market policy, are inferior to wage subsidies for private sector jobs.

To see how guaranteed jobs work out in practice, we need look no farther than Hungary, where Prime Minister Viktor Orban has made the replacement of welfare by workfare a centerpiece of the claimed Hungarian economic miracle that helped him win re-election in last Sunday's election.

Writing recently for The New York Times, Patrick Kingsley and Benjamin Novak provide an overview of job guarantees, Hungarian style. Their article, which focuses on a small village in which 73 of 472 residents participate in the program, makes an effort to show both the positive and negative side of workfare. They note that although the guaranteed jobs pay only about half the minimum wage, that is twice what participants previously received in unemployment benefits. Participants told them that the pay, although minimal, was enough to make a difference. The program has also brought some small but welcome improvements in the town’s infrastructure.

“This little bit of money goes a long way in this village,” said Eva Petrovics, 60 who helps to clean the village nursery school. “The fridge is full now.”

The program has also helped to spruce up the village. Since 2012, workfare participants have built a small bridge, added a drainage system, and renovated the town hall and sports fields.

However, there are downsides to workfare, too. Hammond’s concerns about politicization seem to have been borne out. Kingsley and Novak note that the program have made participants more dependent on Orban’s Fidezs party, which is expected to retain power in this weekend’s election, and on the town’s mayor, who determines job assignments.

Moreover, despite better drainage and tidier soccer fields, workfare participants do not really put in all that much time doing useful work. Often, they report to work for an hour or so and then go home. There is especially little to do in winter.

Popular though it may be in the Hungarian countryside, Orban’s workfare policy has many critics, both in Hungary and in Western Europe. Annamária Artner is a Senior Research Fellow at the Centre for Economic and Regional Studies of the Hungarian Academy of Sciences. Writing for the progressive website Social Europe, headquartered in London, Artner maintains that

The implied threat of the punitive workfare regime is effectively sweeping the unemployed under the carpet. The unemployment insurance system in Hungary, introduced in the early 1990s following the transition to a market economy, effectively no longer exists.

Reposted from NiskanenCenter.com.

Why the "Sound Money" Components of Popular Economic Freedom Indexes Should Be Used with Caution

Institutions matter. Economists of the classical period knew that well. In recent years, economists have increasingly included institutional variables in their empirical work. The economic freedom indexes from the Fraser Institute and the Heritage Foundation have been among the most widely used institutional indicators.

The purpose of an economic freedom index, according to Heritage, is to “document the positive relationship between economic freedom and a variety of positive social and economic goals.” Many studies support that claim, finding that countries with high economic freedom scores are, in fact, more prosperous and dynamic than those that are less free. However, not all aspects of economic freedom turn out to be equally important. In earlier posts, I have been critical of the components of the economic freedom indexes that focus on the size of government and regulation. Here, I take on those that focus on price stability—the Fraser “Sound Money” component and the Heritage “Monetary Freedom” component.

I find that these price stability components add little to our understanding of economic freedom. Furthermore, because they incorporate an exaggerated fear of even moderate inflation, an attempt to achieve maximum price stability, as defined by these indicators, would be less likely to bring prosperity than to undermine it.

Is price stability an institution or a policy outcome?

The first problem with the Fraser and Heritage price stability indicators is that they do not really measure economic freedom in the sense that it underlies other components of the indexes. Robert Lawson, a senior member of the team that publishes Fraser’s Economic Freedom of the World reports, once wrote that an economic freedom index is, or should be, only that—“not an index of economic growth policies, efficient government provision of public goods, macroeconomic stabilization policies, or ideal income distribution policies.” If so, then the sound money indicators, as indexes of the success of monetary policy, are just what an economic freedom index should not be.

The Chickens Come Home to Roost: EPA Seeks to Weaken Fuel Economy Standards as New Car Prices Soar

On Monday, the EPA announced that it is is getting ready to  relax the ambitious automotive fuel economy standards (CAFE standards) that were set during the Obama administration. Those standards would have required new cars sold in 2025 to average more than 50 miles per gallon. EPA administrator Scott Pruitt said that the Obama administration had set the standards "too high" and "made assumptions about the standards that didn't comport with reality."

CAFE standards are coming under fire, in part, because of the rising cost of new cars, which reached a record high of $36,000 at the end of 2017. The extra costs of building fuel-efficient cars might be worth it if CAFE standards were really an effective way to cut greenhouse gas emissions, but they are not. Instead, they are among the most notoriously inefficient of federal regulations.

The fundamental problem is that CAFE standards attack emissions only indirectly. Buying an efficient hybrid instead of a gas-guzzling SUV is just one of many ways you can cut back on fuel use. You can, instead, consolidate errands or make your next trip to the supermarket in your Honda, instead of your Ford F-250, if you have one of each. Given more time to adjust, you can switch to public transportation, move closer to work and shopping, or work at home.

CAFE standards encourage fuel saving only when choosing what car to buy. Once you upgrade to a low-mileage vehicle, though, the cost of driving an extra mile goes down, reducing your incentive to take other fuel-saving measures. As a result, the cost of cutting fuel use via CAFE standards is higher than achieving the same result more directly through a carbon tax or higher gasoline taxes—six to fourteen times higher, according to a study by a team of researchers at MIT.

So, if CAFE standards are such a bad idea, why do we have them? As I explained in an earlier post,

If you are an economist, choosing higher fuel taxes over CAFE standards looks like a no-brainer, but if you are a politician, fuel taxes have an obvious drawback. Fuel taxes make the cost of reducing consumption highly visible. You see the big dollars-per-gallon number right there in front of you every time you drive up to the pump. CAFE standards, in contrast, hide the cost. You pay the price of a higher-mileage car only when you buy a new one, and even then, the part of the price attributable to the mileage-enhancing features is not broken out as a separate item on the sticker. You may notice that your new car costs more than your old one did, but there are lots of other reasons for that besides fuel economy.

But that logic only goes so far. As new car prices push into the stratosphere, the chickens are coming home to roost. The administration is sure to get a lot of political mileage out of making cars more affordable, climate be damned.

Reposted from NiskanenCenter.com