More On Jobs Saved and Created

In an earlier post, I outlined how the government is counting the number of jobs created or saved by the American Recovery and Reinvestment Act, or the stimulus package passed by Congress in February. Since the government used a formula that related so much spending to a job, it ignored the fact that some of the spending would be replacing other spending. For example, spending on green technologies means less spending on "dirty" techonologies. A job created in one area offsets the loss of a job in another rather than creates a new job.
The Wall Street Journal now has an article on estimates the states are reporting to the federal government about the number of jobs created or saved. The figures are much less than the estimates of the federal government.

Baucus Health Care Plan

The New York Times reports (see here) that Sen. Baucus has issued a health care plan. It is cheaper than the other plans that have been proposed, and the Congressional Budget Office estimates even lower costs, although still over $700 billion. Republicans have blasted the plan over making so many cuts in Medicare to pay for the coverage of the uninsured and other increased or new benefits. Democrats claim that the reductions in the rate of growth of Medicare will be accomplished through greater efficiencies rather than reductions in benefits. I am sure there are inefficiencies in Medicare. But, if reductions in costs could be made through reducing inefficiences, what is stopping the government from doing so?

Odds and Ends

A couple of items to look at if the reader is interested. Sunday's NY Times business section had a number of good articles and columns about the year anniversary of the collapse of Lehman Brothers. Definately is worth a look.
On another topic, a blog that relates economics and theology that I find very good is Kruse Kronicle. He is providing a series of posts on key economic issues. The first dealt with scarcity, a concept accepted by economists but there are theologians who dispute that scarcity if a worthwhile starting point.

How Did Economists Get It So Wrong?

Paul Krugman had an essay in Sunday's New York Times magazine. He argued that modern macroeconomics was unable to see the crisis coming and that a new macroeconomics would have to start with Keynes. My colleague, Marty LaBarge, and I submitted the following letter to the editor of the magazine:

Paul Krugman offers a critique of modern macroeconomics in his essay, "How Did Economists Get It So Wrong?" He cites a concern for mathematical elegance over truth and reliance on efficient marekt theory as reasons for economists missing the instability in markets. But similar arguments could be made about the Keynesianism that Krugman advocates. In its heyday, Keynesianism included elegant mathematical models that demonstrated marekts are inherently unstable, and had its own version of an efficiency theory, only it was government that was efficient; a wise and good government could "fine-tune" the economy through appropriate fiscal policy, ignoring how real-world governments actually operated. While financial markets do fall short of perfection, the progression of the "perfect storm" of events that generated the worst recession since the Great Depression--the global saving glut, low interest rates, securitization, and government policy supporting homeownership--cannot be blamed on "extraordinary delusions and the madness of crowds."

Krugman pays no attention to the approximately twenty-year period of good macroeconomic performance known as the "Great Moderation." He also ignores "bubbles" that didn't lead to recessions. Something is at work besides irrational financial markets. The market system works well most of the time. Perhaps a key factor affecting whether a shock to the system or even 'irrational exuberance" leads to a serious recession is the level of buffer stocks held by households and firms. When savings exist and debt levels are not inordinately high, the economy adjusts to a shock. But when debt levels are high and savings low, the bursting of bubbles in houses and equities can turn into a severe recession. The crucial question now is whether taking on huge levels of government debt is the best way back to sustainable growth.

We don't know if the letter will be published or not.

Bailout Payback

Some of the banks that received bail-out money last year are paying funds back and the U.S. government is receiving a profit. (An article on this from the NYT is here.) At the time of the bailout, it was said the government could end up getting much of the money back. This is a good sign that the claim may be true. As the article notes, though, not all banks and other institutions may be able to repay the funds and the government could experience a loss overall.

So, does this indicate the bailout was successful? Unfortunately, we can never know what would have happened absent the government's actions. The return to the government is good, but less than private investors would have made because the government paid above market price for some of the assets. Of course, the purpose of the bail out was to help the balance sheets of banks look better. If the system would have gone under without the bailout, then any profit has to be a plus; if the system would not have gone under, then it should have been left to private investors. Again, a problem with economic as a science is that the controlled experiments rarely happen. We can bail out the banks and see what happens or we can not bail out the banks and see what happens, but we cannot do both.

Bernanke Chosen for Second Term as Fed Chairman

President Obama has nominated Ben Bernanke for another term as chair of the Fed. (For a news article on this, see here.) Bernanke likely will face some sharp questioning in his confirmation hearings because of his role in the financial bail outs. Likely, he will face criticism from both the left and the right. But I think he is a good choice for a couple of reasons. First, his knowledge of the Great Depression has proven valuable in the ways he handled the Fed's reaction this time. Second, his focus has been on the task at hand rather than his own ego. Third, he is respected by other central bankers and many within the Fed. Fourth, he has to better than Larry Summers, who apparently was on a short list for the job. (Janet Yellen would have been better, but Bernanke is better yet).
I have some reservations though. I fear that his actions may impinge long term on the Fed's independence. I also am leery of adding more regulatory power to the Fed because that may make it more difficult to remain independent.
Senators tend to be great Monday-morning quarterbacks, so I expect the fact that Bernanke made some mistakes will be emphasized in the hearings. Hopefully, it will just be a lot of huffing and puffing, and Bernanke will be confirmed.

In Fed We Trust

I read recently a new book on the Federal Reserve and its handling of the recent financial and economic crisis. The author, David Wessel, is economics editor of the Wall Street Journal. The book is In Fed We Trust: Ben Bernanke's War on the Great Panic. It is the best book I have read relating to the crisis. While it's focus is narrow, it is thorough and the economics in it are good. So many of the books that have come out focus on greed and are sensationalistic. This book is not sensationalistic, but is a sensational read. I highly recommend it.