Published in Standard-Examiner, Ogden, UT, April 7, 2009
By VIJAY K. MATHUR
The relevant part of federal public debt is privately held public debt, a concept of debt used in this discussion. It is similar to the often-used concept called "net public debt." Here I discuss the role of budget deficit in the conduct of tax and expenditure policy (fiscal policy) and its limits.
Budget deficit in any given year consists of interest payment on last year's public debt plus the difference between government spending and tax revenue net of transfer payments in the current year (called primary budget deficit if positive and surplus if negative); all variables are adjusted for inflation. Note that the official measure overstates budget deficits, not realizing that with positive inflation rate the Treasury makes payments to the debt holders with cheaper dollars.
Since the 1930s, budget deficits have been more common than surpluses. Budget deficits tend to increase in recessions and decrease in boom times. However, addition of discretionary spending in recessions and/or significant reduction in tax rates without compensating reduction in spending in boom times may aggravate the deficit problem. For example, during President Reagan's presidency (1981-89) budget deficit as a percent of Gross Domestic Product increased until 1983. But it remained significantly high in spite of the robust average economic growth of output of 3.7 percent per year during 1983-89.
It makes economic sense to balance the budget over the business cycle -- deficits during recession years and surpluses during boom times. Automatic stabilizers like income tax, payroll tax, corporate tax, unemployment compensation, Medicaid, food stamps and housing subsidies are built into the budget by law, and therefore they change with the state of the economy. For example, progressive income tax burden increases in boom times and decreases in recession years, thus providing stability to consumption expenditures and the economy. In recessions, discretionary spending and /or reduced tax rates, and automatic stabilizers contribute to budget deficits meant to boost the economy.
What is worrisome is the fact that since the 1980s deficits are not only persisting, but are increasing irrespective of the states of the economy, except during Clinton presidency. Higher debt is the result of past deficits, and therefore to stabilize debt the government must run budget surpluses equal to interest payments. However, since the economy tends to grow over time it is advisable to focus on debt to GDP ratio (debt per dollar of economy's income). A fruitful approach to understand the relationship between the debt to GDP ratio and budget deficits is proposed by economist Olivier Blanchard.
Blanchard shows that debt-GDP ratio would increase when real interest rate (adjusted for inflation) is higher than the inflation-adjusted economic growth, and/or the primary budget deficit (excluding interest payment on debt) to GDP ratio increases. During 2000-2008 privately held public debt has grown at the rate of 9 percent per year.
Using estimates from The Economist on nominal interest rate on long term Treasury bonds, inflation rate, GDP growth rate and OMB estimate of budget deficit to GDP ratio in 2009, I tentatively estimate that PHPD-GDP ratio of 41 percent in 2008 would grow to be 46 percent in 2009.
Obviously this 12 percent growth rate in the ratio cannot be sustained for a long time. Large deficits and hence debt may cause an increase in inflationary pressures and increase in interest rates, thus crowding out private investment, reducing consumption spending and economic growth, in turn making deficits as a fiscal policy tool unsustainable.
Note that using taxes as opposed to deficits to finance spending in recessions reduce consumption and work effort, thus diminishing the expansionary effect of spending on economic growth. In addition, changing tax rates from time to time to balance the budget is cumbersome and creates uncertainty in consumption and investment plans. Tax smoothing requires budget deficits in recessions and surpluses in boom times.
Obama's administration is facing a difficult task of fighting a very severe recession which requires expansionary fiscal policy and budget deficits. At the same time the President is facing the prospect of unsustainable growth in public debt. In order to decrease the budget deficits over time and therefore the debt-GDP ratio, it is crucial that:
* 1) policies in place generate robust economic growth higher than the real interest rates the Treasury has to pay to bond holders and
* 2) the federal government starts reducing over time the primary budget deficits-GDP ratio and perhaps moving toward budget surpluses when the economy is on the path of robust growth.
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. At present he resides in Ogden.
Sunday, April 26, 2009
Thursday, April 16, 2009
On Roosevelt and the Depression
Published in Standard-Examiner, Ogden, UT, March, 3, 2009
By VIJAY K. MATHUR
In the media, among both politicians and the general public, the Great Depression is a hot topic. The Great Depression accelerated in October 1929 with the stock market crash and lasted almost three and a half years.
Recently questions have been raised about the efficacy of New Deal policies under President Franklin D. Roosevelt aimed at pulling the economy out of depression. Economists Harold Cole and Lee Ohanian argued (Wall Street Journal Feb. 2) that some of the New Deal policies on prices and wages were responsible for prolonging the depression.
This skepticism about the effectiveness of the New Deal has spilled over to the current debate on the stimulus package signed by President Obama. Hence, it might be instructive to put this skepticism to the test of empirical evidence before and during the time of the New Deal.
Let me first point out that during the economic depression (1929-1933), President Hoover increased income taxes to raise revenues and pursued protectionist policies to curb imports, which led to retaliation by other countries and shrinkage of world trade.
President Roosevelt served from 1933 to 1945. Many believe that it was World War II and not Roosevelt's New Deal that got us out of the Great Depression. In order to ascertain the effectiveness of the New Deal, let us compare the evidence based upon the data on several economic indicators for the periods 1929-33 and 1933-39 (just before WWII). My main sources of the data are U.S. Bureau of Economic Analysis, Macroeconomics by Robert Gordon, American Economic History by Jonathan Hughes, and America's Greatest Depression 1929-1941 by Lester Chandler.
One of the most important indicators of economic activity is real GDP (Gross Domestic Product adjusted for prices). It measures the real value of output in the economy. Real GDP (in 1929 prices) declined from $103.7 billion in 1929 to $76.1 billion in 1933 and rose to $114 billion in 1939. Hence, the average growth rate went from negative 7.4 percent per year under Hoover (1929-33) to positive 7.1 percent per year during (1933-39) under Roosevelt.
Most official and non-official data sources, including the ones above, overestimate the unemployment rates from 1929 to 1943. Economist Michael Darby's estimates, published in the Journal of Political Economy (1976), are based on analytically sound methodology. He found that the unemployment rate peaked at 20.6 percent in 1933and declined to 11.2 percent by 1939.
Other measures of economic activity, for example, personal consumption expenditure, fixed investment, net exports (exports minus imports), and annual real earnings of employed, rose sharply during the New Deal, more than offsetting the decline between 1929 and 1933. As measured by Consumer Price Index (1929 = 100), deflation of 25 percent in Hoover's time changed to inflation of 7.4 percent during 1933-39, providing incentive for businesses to grow. In money and financial markets, money supply -- a measure of liquidity -- decreased 27 percent from 1929 to 1933 but increased 74 percent during 1933-39. Long-term interest rates also declined more during 1933-39 than during the Hoover period. Even the stock market started rebounding significantly during Roosevelt's presidency.
President Roosevelt's mistake was to support the passage of the National Industrial Recovery Act of 1933, later ruled to be unconstitutional by the Supreme Court. It was designed to reduce competition in products and labor markets. It may have contributed to slower recovery, but the economy did rebound significantly, if not completely, during 1933-39. In those days economic policy was in its infancy. However, we have learned that in recessions and/or depressions one does not fix prices and wages, raise taxes or decrease public spending.
President Obama's stimulus package is not economically ideal due to political reasons, but it is based on sounder economic principles than followed in the past. The evidence from the New Deal provides us encouragement that the stimulus, in conjunction with other policies, has a great probability of success in combating this severe recession.
It may be advisable that politicians, media pundits and many so-called experts in the media reduce their rhetoric on the stimulus package and engage in constructive criticisms and/or present alternate solutions to handle the current crisis, not based on ideology but based on robust evidence and cogent arguments. It serves no productive purpose if leaders in all walks of life and the media feed on the fear of common citizens about their well being, because it leads to a vicious circle of fear. Americans are resilient people but the resiliency should be supported, and not stymied, by the burden of fear.
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. At present he resides in Ogden.
By VIJAY K. MATHUR
In the media, among both politicians and the general public, the Great Depression is a hot topic. The Great Depression accelerated in October 1929 with the stock market crash and lasted almost three and a half years.
Recently questions have been raised about the efficacy of New Deal policies under President Franklin D. Roosevelt aimed at pulling the economy out of depression. Economists Harold Cole and Lee Ohanian argued (Wall Street Journal Feb. 2) that some of the New Deal policies on prices and wages were responsible for prolonging the depression.
This skepticism about the effectiveness of the New Deal has spilled over to the current debate on the stimulus package signed by President Obama. Hence, it might be instructive to put this skepticism to the test of empirical evidence before and during the time of the New Deal.
Let me first point out that during the economic depression (1929-1933), President Hoover increased income taxes to raise revenues and pursued protectionist policies to curb imports, which led to retaliation by other countries and shrinkage of world trade.
President Roosevelt served from 1933 to 1945. Many believe that it was World War II and not Roosevelt's New Deal that got us out of the Great Depression. In order to ascertain the effectiveness of the New Deal, let us compare the evidence based upon the data on several economic indicators for the periods 1929-33 and 1933-39 (just before WWII). My main sources of the data are U.S. Bureau of Economic Analysis, Macroeconomics by Robert Gordon, American Economic History by Jonathan Hughes, and America's Greatest Depression 1929-1941 by Lester Chandler.
One of the most important indicators of economic activity is real GDP (Gross Domestic Product adjusted for prices). It measures the real value of output in the economy. Real GDP (in 1929 prices) declined from $103.7 billion in 1929 to $76.1 billion in 1933 and rose to $114 billion in 1939. Hence, the average growth rate went from negative 7.4 percent per year under Hoover (1929-33) to positive 7.1 percent per year during (1933-39) under Roosevelt.
Most official and non-official data sources, including the ones above, overestimate the unemployment rates from 1929 to 1943. Economist Michael Darby's estimates, published in the Journal of Political Economy (1976), are based on analytically sound methodology. He found that the unemployment rate peaked at 20.6 percent in 1933and declined to 11.2 percent by 1939.
Other measures of economic activity, for example, personal consumption expenditure, fixed investment, net exports (exports minus imports), and annual real earnings of employed, rose sharply during the New Deal, more than offsetting the decline between 1929 and 1933. As measured by Consumer Price Index (1929 = 100), deflation of 25 percent in Hoover's time changed to inflation of 7.4 percent during 1933-39, providing incentive for businesses to grow. In money and financial markets, money supply -- a measure of liquidity -- decreased 27 percent from 1929 to 1933 but increased 74 percent during 1933-39. Long-term interest rates also declined more during 1933-39 than during the Hoover period. Even the stock market started rebounding significantly during Roosevelt's presidency.
President Roosevelt's mistake was to support the passage of the National Industrial Recovery Act of 1933, later ruled to be unconstitutional by the Supreme Court. It was designed to reduce competition in products and labor markets. It may have contributed to slower recovery, but the economy did rebound significantly, if not completely, during 1933-39. In those days economic policy was in its infancy. However, we have learned that in recessions and/or depressions one does not fix prices and wages, raise taxes or decrease public spending.
President Obama's stimulus package is not economically ideal due to political reasons, but it is based on sounder economic principles than followed in the past. The evidence from the New Deal provides us encouragement that the stimulus, in conjunction with other policies, has a great probability of success in combating this severe recession.
It may be advisable that politicians, media pundits and many so-called experts in the media reduce their rhetoric on the stimulus package and engage in constructive criticisms and/or present alternate solutions to handle the current crisis, not based on ideology but based on robust evidence and cogent arguments. It serves no productive purpose if leaders in all walks of life and the media feed on the fear of common citizens about their well being, because it leads to a vicious circle of fear. Americans are resilient people but the resiliency should be supported, and not stymied, by the burden of fear.
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. At present he resides in Ogden.
Wednesday, April 15, 2009
Clarifying certain issues related to public debt
Published in Stabdard-Examiner, Ogden, UT, March 30, 2009
By VIJAY K. MATHUR
Concern about the rising public debt is currently a hot topic. The fear and outrage against public debt is driven by misunderstanding of the role public debt plays in public policy. The historical role of public debt in financing wars is well understood, but many may not understand its role as a fiscal (tax and expenditure) policy tool of the federal government to fight depression and/or recessions.
President Franklin D. Roosevelt used it effectively for the first time to fight the Great Depression in 1930s. In this opinion piece I address certain measurement issues and matters of concern to many people about the federal debt. The issue of deficit financing as a fiscal policy tool and its limits will be discussed in another opinion article.
Let me first clarify the notion of public debt. Public debt of the federal government, as opposed to private debt, is incurred when the Treasury and other government agencies borrow money from willing private investors and public institutions by issuing securities to finance their spending. They promise to pay interest and principal at the end of the maturation period of securities of different duration. Note that the data reported by the Office of Management and Budget, Federal Reserve Board and the Treasury Bulletin are not exactly the same and are reported differently. I find Treasury data less confusing.
According to the Treasury Bulletin, March 2009, total public debt (TPD) comprises only outstanding Treasury securities, excluding securities issued by other federal agencies. In December 2008, the official TPD was $10,699.8 billion, which is 99.8 percent of the total federal government securities outstanding. The TPD is overstated by slightly over 2 percent because it is not adjusted for inflation.
Outstanding Treasury securities (TPD) are held by private parties (privately held public debt or PHPD), by the Federal Reserve System and by other intergovernmental agencies. Foreign ownership is 29.4 percent of the TPD. Many commentators and federal policy watchers tend to confuse TPD with PHPD, hence the confusion among the general public. It is more relevant to focus on the size of the PHPD ($5893.4 billion on December 2008 and overstated by 2 percent) because it is the confidence of private investors in Treasury securities that matters to the government.
Foreign ownership of PHPD (55 percent of PHPD, December 2008) is a matter of concern to many politicians and the general public. While criticizing the Omnibus Appropriations Act of 2009, Sen. Evan Bayh, D-Ind., expressed his worry in the March 4 Wall Street Journal. Even though foreign ownership represents claims on our resources and leakage of income, the benefits outweigh the cost of the leakage if debt financing is used productively. In fact, despite the current severe recession Treasury securities are still considered valuable long-term investment by both domestic and foreign investors, reflecting confidence and growth potential of our economy. Moreover, if foreign ownership is worrisome to Americans, they should save more, consume less, and invest more in physical and human capital to build this economy.
Is public debt like personal debt? The answer is no. Federal budget and the economy continue beyond our lifetimes. A politically stable and healthy economy would have the capacity to pay interest and principal on outstanding securities at maturity.
Matured securities could be paid by issuing new securities. Unlike tax financing, there is no reduction in current private consumption and saving when debt is refinanced by issuing new securities. Buyers who hold Treasury securities are asset rich and willingly sacrifice current consumption to earn a higher return in the future.
Does public debt burden future generations? If the future generation is taxed to pay for the interest and principal, their income and consumption is reduced. This represents a distribution of income from the future generation to the current generation, unless generations overlap. However, if the deficit financing is used to finance productive investment to stimulate the economy or to finance wars to secure the nation, future generations benefit from such investments and/or expenditures; hence they should be willing to pay part of the debt financing costs.
Alexander Hamilton called public debt a blessing if it is reasonable, and James Madison called it a curse. Curse or blessing, debt financing has been used in the past and will be used in the future.
It is an effective financing tool in both private and public sectors if it is used within limits of the capacity to pay debt holders.
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. At present he resides in Ogden.
By VIJAY K. MATHUR
Concern about the rising public debt is currently a hot topic. The fear and outrage against public debt is driven by misunderstanding of the role public debt plays in public policy. The historical role of public debt in financing wars is well understood, but many may not understand its role as a fiscal (tax and expenditure) policy tool of the federal government to fight depression and/or recessions.
President Franklin D. Roosevelt used it effectively for the first time to fight the Great Depression in 1930s. In this opinion piece I address certain measurement issues and matters of concern to many people about the federal debt. The issue of deficit financing as a fiscal policy tool and its limits will be discussed in another opinion article.
Let me first clarify the notion of public debt. Public debt of the federal government, as opposed to private debt, is incurred when the Treasury and other government agencies borrow money from willing private investors and public institutions by issuing securities to finance their spending. They promise to pay interest and principal at the end of the maturation period of securities of different duration. Note that the data reported by the Office of Management and Budget, Federal Reserve Board and the Treasury Bulletin are not exactly the same and are reported differently. I find Treasury data less confusing.
According to the Treasury Bulletin, March 2009, total public debt (TPD) comprises only outstanding Treasury securities, excluding securities issued by other federal agencies. In December 2008, the official TPD was $10,699.8 billion, which is 99.8 percent of the total federal government securities outstanding. The TPD is overstated by slightly over 2 percent because it is not adjusted for inflation.
Outstanding Treasury securities (TPD) are held by private parties (privately held public debt or PHPD), by the Federal Reserve System and by other intergovernmental agencies. Foreign ownership is 29.4 percent of the TPD. Many commentators and federal policy watchers tend to confuse TPD with PHPD, hence the confusion among the general public. It is more relevant to focus on the size of the PHPD ($5893.4 billion on December 2008 and overstated by 2 percent) because it is the confidence of private investors in Treasury securities that matters to the government.
Foreign ownership of PHPD (55 percent of PHPD, December 2008) is a matter of concern to many politicians and the general public. While criticizing the Omnibus Appropriations Act of 2009, Sen. Evan Bayh, D-Ind., expressed his worry in the March 4 Wall Street Journal. Even though foreign ownership represents claims on our resources and leakage of income, the benefits outweigh the cost of the leakage if debt financing is used productively. In fact, despite the current severe recession Treasury securities are still considered valuable long-term investment by both domestic and foreign investors, reflecting confidence and growth potential of our economy. Moreover, if foreign ownership is worrisome to Americans, they should save more, consume less, and invest more in physical and human capital to build this economy.
Is public debt like personal debt? The answer is no. Federal budget and the economy continue beyond our lifetimes. A politically stable and healthy economy would have the capacity to pay interest and principal on outstanding securities at maturity.
Matured securities could be paid by issuing new securities. Unlike tax financing, there is no reduction in current private consumption and saving when debt is refinanced by issuing new securities. Buyers who hold Treasury securities are asset rich and willingly sacrifice current consumption to earn a higher return in the future.
Does public debt burden future generations? If the future generation is taxed to pay for the interest and principal, their income and consumption is reduced. This represents a distribution of income from the future generation to the current generation, unless generations overlap. However, if the deficit financing is used to finance productive investment to stimulate the economy or to finance wars to secure the nation, future generations benefit from such investments and/or expenditures; hence they should be willing to pay part of the debt financing costs.
Alexander Hamilton called public debt a blessing if it is reasonable, and James Madison called it a curse. Curse or blessing, debt financing has been used in the past and will be used in the future.
It is an effective financing tool in both private and public sectors if it is used within limits of the capacity to pay debt holders.
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. At present he resides in Ogden.
Sunday, April 12, 2009
Focused and robust stimulus needed for economic recovery
Published in the Standard-Examiner, Ogden, UT, Feb. 6, 2009
Recently the House of Representatives passed the $819 billion stimulus package. It contains $244 billion for tax cuts, $217 billion for state and local governments, $104 billion for infrastructure (public capital expenditures), $120 billion to provide for a safety net, $59 billion for energy-efficiency projects and $54.6 billion for expenditures on human capital (education and training). At the aggregate level a third is devoted to tax cuts of various types and the rest is for direct government spending.
In order to put this stimulus package into perspective, let me briefly point out the genesis of this financial meltdown and the severe recession that could be worse than the recession of the 1980s, which lasted 16 months from peak to trough.
The current crisis started when the housing-market bubble burst and housing prices started plunging accompanied by defaults and foreclosures. That led to the decline in mortgage based securities and other related derivatives. Banks and financial institutions, loaded with those securities, started facing mounting debt and loss of confidence in their survival; that led the investors to pull out money from these institutions, and hence the precipitous decline in stock prices followed. The decline in equity capital and the inability to raise money in the bond market led to the financial meltdown.
The financial collapse dried up the credit flows to consumers and investors and thus the financial crisis spread to the real sector, which produces goods and services. Faced with high mortgage and other debts, homeowners were unable to find refinancing, thus causing defaults and foreclosures. This was followed by decline in consumption spending, retail sales, business contraction, layoffs and increasing unemployment.
The package passed by the House addresses neither the root cause of the crisis, nor is it sufficient in amount and focused to handle the severity of the recession. I am sympathetic to the idea of income tax cuts, payroll tax cuts and spending on safety net programs, but they (excluding unemployment compensation) do not belong in the stimulus package. A separate bill could quickly deal with these taxes and safety net issues. Supply-siders' argument that income tax cuts and payroll tax cuts would provide significant stimulus to the economy is not convincingly supported by any rigorous empirical evidence.
Even though the Fed and Treasury are contemplating actions I am about to propose, I do not notice a sense of urgency. The Fed, in collaboration with the Treasury, should stop the cycle of defaults and foreclosures in the housing market by mandating banks to renegotiate home mortgage loans. They could also insure losses on new loans. A "Bank of Recovery" could be set up to buy toxic assets at book value. On Jan. 20, the Wall Street Journal reported that expected loss rate of total troubled U.S. assets is about 14 percent ($1.3 trillion); it is much smaller for U.S. banks. Buying troubled assets of banks at book value would improve balance sheets of banks and would also infuse more capital. Given these actions, the Treasury could then require banks to unfreeze credit flows from the accumulating excess reserves.
As far as the fiscal policy is concerned, I would like to see the following in the stimulus package:
* corporate tax cut for three years,
* capital gains tax holiday for three years to those who buy stocks and/or corporate bonds in 2009, which would boost equity and/or debt capital,
* continue the postponement of mandatory withdrawals from 401(k) plans for three years to stop the leakage of private capital,
* investment tax credit for new investments over three-year period,
* expanding unemployment compensation for two years,
* and investment on infrastructure, for example, highways, bridges, schools and colleges, broadband, modern electricity grid, promotion of new technologies in energy to reduce oil dependence, health care and medical care technologies, mass transit systems and modernization of airports.
Those who fear mounting deficit at this time may recall that, when the economy was growing after the 2001 recession, we were running budget deficits. This is not the time to wobble on budget deficits. This is the time to take bold action and implement a robust stimulus package. I would prefer a $3 trillion package over a three-year period, with $1 trillion for each year and three-year freeze on CEO salaries, bonuses, other perks and dividends in those businesses who receive tax credits and/or direct subsidies.
Actions in the financial sector and the real sector have to be comprehensive and aggressive, followed by regulatory supervision and enforcement. The stimulus package should stick to programs that genuinely provide jobs in the short run as well as stimulate the private sector to provide jobs in the future.
Conquering this severe recession requires calculated risktaking without fear or timidity. As Mark Twain once said, "Courage is the mastery of fear, not the absence of fear."
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden.
Recently the House of Representatives passed the $819 billion stimulus package. It contains $244 billion for tax cuts, $217 billion for state and local governments, $104 billion for infrastructure (public capital expenditures), $120 billion to provide for a safety net, $59 billion for energy-efficiency projects and $54.6 billion for expenditures on human capital (education and training). At the aggregate level a third is devoted to tax cuts of various types and the rest is for direct government spending.
In order to put this stimulus package into perspective, let me briefly point out the genesis of this financial meltdown and the severe recession that could be worse than the recession of the 1980s, which lasted 16 months from peak to trough.
The current crisis started when the housing-market bubble burst and housing prices started plunging accompanied by defaults and foreclosures. That led to the decline in mortgage based securities and other related derivatives. Banks and financial institutions, loaded with those securities, started facing mounting debt and loss of confidence in their survival; that led the investors to pull out money from these institutions, and hence the precipitous decline in stock prices followed. The decline in equity capital and the inability to raise money in the bond market led to the financial meltdown.
The financial collapse dried up the credit flows to consumers and investors and thus the financial crisis spread to the real sector, which produces goods and services. Faced with high mortgage and other debts, homeowners were unable to find refinancing, thus causing defaults and foreclosures. This was followed by decline in consumption spending, retail sales, business contraction, layoffs and increasing unemployment.
The package passed by the House addresses neither the root cause of the crisis, nor is it sufficient in amount and focused to handle the severity of the recession. I am sympathetic to the idea of income tax cuts, payroll tax cuts and spending on safety net programs, but they (excluding unemployment compensation) do not belong in the stimulus package. A separate bill could quickly deal with these taxes and safety net issues. Supply-siders' argument that income tax cuts and payroll tax cuts would provide significant stimulus to the economy is not convincingly supported by any rigorous empirical evidence.
Even though the Fed and Treasury are contemplating actions I am about to propose, I do not notice a sense of urgency. The Fed, in collaboration with the Treasury, should stop the cycle of defaults and foreclosures in the housing market by mandating banks to renegotiate home mortgage loans. They could also insure losses on new loans. A "Bank of Recovery" could be set up to buy toxic assets at book value. On Jan. 20, the Wall Street Journal reported that expected loss rate of total troubled U.S. assets is about 14 percent ($1.3 trillion); it is much smaller for U.S. banks. Buying troubled assets of banks at book value would improve balance sheets of banks and would also infuse more capital. Given these actions, the Treasury could then require banks to unfreeze credit flows from the accumulating excess reserves.
As far as the fiscal policy is concerned, I would like to see the following in the stimulus package:
* corporate tax cut for three years,
* capital gains tax holiday for three years to those who buy stocks and/or corporate bonds in 2009, which would boost equity and/or debt capital,
* continue the postponement of mandatory withdrawals from 401(k) plans for three years to stop the leakage of private capital,
* investment tax credit for new investments over three-year period,
* expanding unemployment compensation for two years,
* and investment on infrastructure, for example, highways, bridges, schools and colleges, broadband, modern electricity grid, promotion of new technologies in energy to reduce oil dependence, health care and medical care technologies, mass transit systems and modernization of airports.
Those who fear mounting deficit at this time may recall that, when the economy was growing after the 2001 recession, we were running budget deficits. This is not the time to wobble on budget deficits. This is the time to take bold action and implement a robust stimulus package. I would prefer a $3 trillion package over a three-year period, with $1 trillion for each year and three-year freeze on CEO salaries, bonuses, other perks and dividends in those businesses who receive tax credits and/or direct subsidies.
Actions in the financial sector and the real sector have to be comprehensive and aggressive, followed by regulatory supervision and enforcement. The stimulus package should stick to programs that genuinely provide jobs in the short run as well as stimulate the private sector to provide jobs in the future.
Conquering this severe recession requires calculated risktaking without fear or timidity. As Mark Twain once said, "Courage is the mastery of fear, not the absence of fear."
Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden.
Saturday, April 11, 2009
Mass-transit and the highway system need not be substitutes but complements
Standard-Examiner, 9/29/2008, Ogden, UT
The Coalition for Accountable Government recently complained that the investment in FrontRunner is a waste of investment, and the planned extension of the system from Salt Lake to Provo should be dropped. The Coalition claims that so far FrontRunner has not reduced the congestion on I-15. However, the editorial “ Rail is necessary and valuable” of September 9, 2008 in the Standard-Examiner, argues against the views of the Coalition and ends the editorial with the statement, “Commuter rail is a good thing. It’s expensive, but we need it.” I am glad that the editorial recognizes the importance of the mass-transit system and the folly of the policy of meeting demand for commuting and mobility only by building more highways.
In an opinion piece on August 29, 2008 in the Standard-Examiner, I argued that the traditional response to highway congestion has been to increase the supply of more highways by building new highways and/or expanding the capacity of existing ones. When resources like oil, raw materials, space, and air quality are plentiful and available at a reasonably low price commensurate with income of the state and its people, it made economic sense to build highways. But, now we are finding out that shortage of oil, raw materials, space, congestion and air quality are driving up the social cost of construction and commuting; it is time that we plan for other modes of transportation.
The main purpose of any transportation department is to provide mobility to people and goods such that it maximizes net-benefit to the society (the difference between benefit and cost). Utah Department of Transportation (UDOT) should not be concerned only with building the transportation system at minimum cost but also in efficiently allocating users of the system among different modes of transportation. If the highway system is congested and leads to more pollution, it may be cheaper for society to divert users to another mode of transportation. Mass-transit complements the highway system because it reduces the congestion and pollution costs on Utah’s highways.
The nonprofit foundation TRIP reported in 2006 that for the top 10 most congested sections of the Utah highways system, congestion costs (extra fuel used and time spent in congestion) varied from $621 to $1275 per motorist per year. Among the top 10, 8 most congested sections are in Utah County and Salt Lake County. Total congestion cost per motorist per year was $4321 in the 5 sections of Utah County.
TRIP also found that during 1990-2004 vehicle traffic in Utah increased by 69%, 4th highest rate in the nation, while population increased by only 40%. Reason Foundation finds that trips in Salt Lake area take 28% longer to complete during rush hours as compared to non-rush hours. By 2030 the average rush hour trip will take 59% longer to complete if transportation system capacity is not expanded.
Another cost associated with driving on the highways is the pollution cost. Victoria Transport Policy Institute estimates that in 2002 an average car in the US imposed 6.2 cents per mile in pollution cost of greenhouse emissions during peak hours of driving. This implies that an average motorist imposed approximately $775 in pollution cost per year by undertaking a 50 mile roundtrip each working day during peak hours. Cost of riding mass-transit will be substantially less as compared to all costs of driving, including congestion and pollution costs.
One way to finance mass transit and at the same time reduce congestion and pollution costs to Utahns is to impose congestion pricing. This means that people will pay to drive during peak hours on congested Utah highways. It would encourage people to take mass- transit during peak hours. This would result in efficient allocation of users of the transportation network. Congestion pricing is tried successfully in cities like London, Stockholm and Singapore. According to Environmental Defense Fund, Singapore was the first to implement congestion pricing in 1975. It resulted in a 20% increase in the use of public transportation and 45% reduction in traffic. Similar results were found in London and Stockholm.
Given Utahns love for open spaces and clean environment, it is imperative that leaders at UDOT and the legislature take bold steps to build a transportation network with minimum social costs and maximum social benefits.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University in Cleveland Ohio. At present he resides in Ogden.
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The Coalition for Accountable Government recently complained that the investment in FrontRunner is a waste of investment, and the planned extension of the system from Salt Lake to Provo should be dropped. The Coalition claims that so far FrontRunner has not reduced the congestion on I-15. However, the editorial “ Rail is necessary and valuable” of September 9, 2008 in the Standard-Examiner, argues against the views of the Coalition and ends the editorial with the statement, “Commuter rail is a good thing. It’s expensive, but we need it.” I am glad that the editorial recognizes the importance of the mass-transit system and the folly of the policy of meeting demand for commuting and mobility only by building more highways.
In an opinion piece on August 29, 2008 in the Standard-Examiner, I argued that the traditional response to highway congestion has been to increase the supply of more highways by building new highways and/or expanding the capacity of existing ones. When resources like oil, raw materials, space, and air quality are plentiful and available at a reasonably low price commensurate with income of the state and its people, it made economic sense to build highways. But, now we are finding out that shortage of oil, raw materials, space, congestion and air quality are driving up the social cost of construction and commuting; it is time that we plan for other modes of transportation.
The main purpose of any transportation department is to provide mobility to people and goods such that it maximizes net-benefit to the society (the difference between benefit and cost). Utah Department of Transportation (UDOT) should not be concerned only with building the transportation system at minimum cost but also in efficiently allocating users of the system among different modes of transportation. If the highway system is congested and leads to more pollution, it may be cheaper for society to divert users to another mode of transportation. Mass-transit complements the highway system because it reduces the congestion and pollution costs on Utah’s highways.
The nonprofit foundation TRIP reported in 2006 that for the top 10 most congested sections of the Utah highways system, congestion costs (extra fuel used and time spent in congestion) varied from $621 to $1275 per motorist per year. Among the top 10, 8 most congested sections are in Utah County and Salt Lake County. Total congestion cost per motorist per year was $4321 in the 5 sections of Utah County.
TRIP also found that during 1990-2004 vehicle traffic in Utah increased by 69%, 4th highest rate in the nation, while population increased by only 40%. Reason Foundation finds that trips in Salt Lake area take 28% longer to complete during rush hours as compared to non-rush hours. By 2030 the average rush hour trip will take 59% longer to complete if transportation system capacity is not expanded.
Another cost associated with driving on the highways is the pollution cost. Victoria Transport Policy Institute estimates that in 2002 an average car in the US imposed 6.2 cents per mile in pollution cost of greenhouse emissions during peak hours of driving. This implies that an average motorist imposed approximately $775 in pollution cost per year by undertaking a 50 mile roundtrip each working day during peak hours. Cost of riding mass-transit will be substantially less as compared to all costs of driving, including congestion and pollution costs.
One way to finance mass transit and at the same time reduce congestion and pollution costs to Utahns is to impose congestion pricing. This means that people will pay to drive during peak hours on congested Utah highways. It would encourage people to take mass- transit during peak hours. This would result in efficient allocation of users of the transportation network. Congestion pricing is tried successfully in cities like London, Stockholm and Singapore. According to Environmental Defense Fund, Singapore was the first to implement congestion pricing in 1975. It resulted in a 20% increase in the use of public transportation and 45% reduction in traffic. Similar results were found in London and Stockholm.
Given Utahns love for open spaces and clean environment, it is imperative that leaders at UDOT and the legislature take bold steps to build a transportation network with minimum social costs and maximum social benefits.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University in Cleveland Ohio. At present he resides in Ogden.
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