Possible Insight

Robert Reich: Wrong About State/Local Bailout

with 6 comments

Rafe linked to this essay by Robert Reich.  I don’t have much of a problem with his first point backing Obama’s plan to offer a tax credit for hiring.  I think temporarily suspending the employer’s share of payroll tax is a better mechanism (as suggested by Bryan Caplan a year ago), but close enough.

However, I think he goes off the rails at the end where he suggests the federal government should prop up spending by state and local governments.  No.  They’re the problem, not the solution.  Fortuitously,m Bryan’s partner Arnold Kling referred just today to this Reason essay by Steven Greenhut revealing that the number of state and local workers per 100 citizens has grown from 2.3 to 6.5 since 1946.  Yes, that’s 180% growth in the fraction of people employed by state and local governments.

Recall my own analysis showing that real per capita state and local spending in California increased 38% in the last 10 years and that we would have no budget problem if we had kept real per capita spending at 1999 levels.

The problem is we have more bureaucrats riding on the backs of productive workers.  Economic innovation and growth comes from the private sector.  Much better to substitute every single dollar Reich wants to give to state and local governments for more tax breaks to private sector employers that hire people.


Written by Kevin

January 29, 2010 at 9:39 pm

Posted in Economics

6 Responses

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  1. I think we all need to realize that the networked world works by completely different principles. Central government and large corporation roles have changed. Structural unemployment is a sign that the old system isn’t working. We should all start becoming entrepreneurs and content creators, while outsourcing production instead of creating mindless hierarchical jobs to keep the masses dumb and “happy”. The pace of progress is not showing any signs of slowing down. It’s time to get used to creative destruction (aka learning). Great piece in Wired relating to all this:

    Alex Golubev

    February 1, 2010 at 9:28 am

  2. “However, I think he goes off the rails at the end where he suggests the federal government should prop up spending by state and local governments. No. They’re the problem, not the solution.”

    So were (are) the Wall Street bankers, but we bailed them out. And rightly so, under the circumstances. Yes, we increased the moral hazard, but we can change the laws to reduce it in the future. Similarly, we need provide and protect jobs on Main Street. The quickest way to do that now is to bail out state and local governments. Yes, that introduces moral hazard, but we can change the laws to reduce or eliminate that in the future. it is a mistake to think that we are out of the woods, just because we have moved from Red Alert to Amber. Historically, the combination of financial crisis and recession takes at least two years to work out. There is no reason to think that, “This time it’s different.”


    February 3, 2010 at 1:56 pm

    • You’re wrong about the best we to protect jobs. Where exactly is the evidence that bailing out state and local governments is better than a payroll tax holiday? Not to mention looser monetary policy by targeting NGDP rather than interest rates?

      And I think you misunderstand how “moral hazard” and reputation work. Just as you can change the laws now, you can change the laws later . It’s what’s called “Cheap Talk”. When your prior actions say you’ll do one thing, people plan for you to do it in the future, no matter what you say now. Oh, and you will do it in the future too.

      We were wrong to bail out Wall Street and GM and we’re wrong to bail out state/local governments.


      February 3, 2010 at 2:09 pm

    • Min, the financial crisis has never been worked out. we merely delay the consequences and reallocate resources. Both contribute to an increasing systemically risky moral hazard.

      Answer this – why is “unemployment” bad? “unemployment” 99% of the people refer to is in a hierarchial structure. Here’s an analogy – as countries convert to democracies from dictatorships, no one keeps statistics on dictatorial “unemployment”.

      When you start using excel for something you used to use a calculator for and you do it 100 times better, you don’t refer to calculator unemployment. There’s structural unemployment in developed countries because we all live in a giant network now, where hierarchies are highly inefficient. Everyone has access to everyone and everything now. The more we fight it, the more we’re completely missing the point. (check out the Wired link above. they put it much more succinctly).

      Alex Golubev

      February 4, 2010 at 8:40 am

      • Unemployment is not bad per se, in the sense of not being employed. But what is the difference between unemployment and leisure? For the person involved, it depends on what they want. From their standpoint unemployment is bad.

        Unemployment is normally bad for society, because society misses out on the goods and services the unemployed person would provide if employed. Unemployment is bad for employed workers, because it depresses their wages. In extremis it leads to the creation of an underclass and economic slavery. (We are not there yet, but who knows?)

        At the dawn of the Industrial Revolution thinkers such as Benjamin Franklin, as I have heard, foresaw the potential of the widespread availability of labor-saving devices, and imagined a world with general prosperity and leisure. To some extent this has happened, but mostly it has not, and the trend in the last generation has been stagnant, if not in the opposite direction. Two factors in that are the commoditization of labor and the increasing appropriation of wealth by the rentier class. The capitalist is in the middle, except for the tendency to join the rentier class.

        I was an early adopter of the personal computer. I imagined that it would be a labor saving device. Instead, I found that it increased my productivity. I still worked as much as before, if not more, because it increased the present possibilities of things to do. However, if I had been employed by a boss who just wanted me to do what I was doing before, and for whom the other things I could do and would do were not of interest, I might well have been replaced and ended up unemployed, overqualified for the now menial job.

        The tendency of the rentier class to suck up productivity was apparent to Henry George in the 19th century, and he wrote a good deal about it. His “one tax” solution I am not qualified to comment on, but he does seem to have nailed the problem and in doing so earned the opposition of the mainstream economics profession, then and even now.

        So, yes, unemployment is a structural problem. 🙂


        February 4, 2010 at 8:56 pm

      • don’t remember who said it, but the worst form of slavery is the illusion of freedom. I think that we’re living in one of the most interesting times in history because information distribution is now free, so we have the potential to crowd-source practically everyone for solutions. but first we need to reach critical mass with the major structural problems.

        The problem is information asymmetry between the boss and the employee, the inventor and the consumer or competitor, student and teacher. The roots are really deep and i’m not sure to what degree they’re fully fixable – greed, jealousy, etc… Capitalism AIMS to align self interest with public interest, but it fails for many reasons.

        The solution in my opinion lies in creating increasingly complex ranking systems to filter out the crap. Anyone that says that we’re human and machines can’t help us there is missing the point that very little of what we do is “natural” per se including language. We need to remove “human decision maker” from the pedestal in never truly deserved. We live in groups (family, friends, coworkers, government, etc…), so we must work on incentives between the individuals within those groups. Just imagine if your boss always asked his subordinates to come up with solutions and then evaluated them using the Bayesian Truth Serum and you in turn got paid based on how well you scored using BTS.

        Alex Golubev

        February 5, 2010 at 5:30 pm

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