Sunday, November 30, 2008

The Next Team

What would you call a group of economists who are skeptical of regulating mortgage markets, who think unemployment insurance and unions increase unemployment, who say that tax hikes retard economic growth, and who believe that the recovery from the Great Depression was a monetary phenomenon rather than the result of New Deal fiscal policy?

No, it is not a right-wing cabal. It's Team Obama.

Here's the evidence:

When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of “risky exotic and subprime mortgages,” he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.....Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult. New research from some of the leading housing economists in the country, however, examines the long history of mortgage market innovations and suggests that regulators should be mindful of the potential downside in tightening too much.

--Austan Goolsbee

Unemployment insurance also extends the time a person stays off the job. Clark and I estimated that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months. If unemployment insurance were eliminated, the unemployment rate would drop by more than half a percentage point, which means that the number of unemployed people would fall by about 750,000. This is all the more significant in light of the fact that less than half of the unemployed receive insurance benefits, largely because many have not worked enough to qualify.

Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions.

--Larry Summers

Tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.

--Christina Romer (writing with husband David)

Given the key roles of monetary contraction and the gold standard in causing the Great Depression, it is not surprising that currency devaluations and monetary expansion became the leading sources of recovery throughout the world....the new spending programs initiated by the New Deal had little direct expansionary effect on the economy.

--Christina Romer

All points well taken. Indeed, quotations like these make me pleased with recent economic appointments. I just hope that the above lessons make their way into the President-elect's briefing memos and that he is persuaded by them.

These quotations also make me a bit surprised we have not heard more complaining from the left-wing of the Democratic party. But that may be still to come.