Obama Supports VAT Sympathizer for Top Job at Council of Economic Advisers
The White House has announced that it is nominating Alan Krueger, a professor at Princeton, to be the new Chairman of the Council of Economic Advisers.
In a Freudian copy-editing slip, the Fox News story (at least as of 8:44 a.m.) says “Krueger’s job will be to provide policy prescriptions on ways to spur unemployment.”
That’s obviously tailor-made for a joke about the Obama Administration not needing any help when it comes to stimulating joblessness.
On a more serious note, though, I’m worried about Krueger’s sympathy for a value-added tax (VAT). Here’s what he wrote back in 2009.
…a 5 percent consumption tax would raise approximately $500 billion a year, and fill a considerable hole in the budget outlook. In addition, a consumption tax would encourage more saving in the long run. Many economists consider a consumption tax an efficient way of raising tax revenue, especially in a global economy. The prospect of greater revenue flowing into federal coffers would probably help lower long-term interest rates because the government would need to borrow less down the road, and further bolster the economy.
To be fair, Krueger was very careful to leave himself some wiggle room, even going so far as to write that, “I’m not sure it is the best way to go.”
But it seems rather obvious that Krueger, like other leftists, wants this giant new source of revenue. Heck, President Obama also has semi-endorsed a VAT, saying it is “something that has worked for other countries.”
The President’s assertion is especially foolish. After all, European nations imposed VATs about 40 years ago, which simply encouraged more spending and more debt — and now several nations are on the verge of bankruptcy.
If that’s “something that has worked,” I’d hate to see the President’s idea of failure.
The real lesson is that the United States should not copy Europe’s mistakes. This short video has the key arguments against this European-style national sales tax.
P.S. For a humorous perspective on the VAT, take a look at these clever cartoons (here, here, and here).
Can Unemployment Benefits Create Jobs?
At the Center on Budget and Policy Priorities, sociologist Michael Leachman claims “some of the most effective job-creation and job protection measures” in last year’s American Recovery and Reinvestment Act are excluded from the job figures to be released on recovery.gov on January 30. He explains that, “Most of ARRA’s distributed dollars to date have gone directly to individuals (including greater jobless benefits and food stamps) and states (including greater federal support for Medicaid). Although these dollars are likely protecting or creating hundreds of thousands of jobs, none of the aid for individuals or the Medicaid support are [sic] reflected in the January 30 jobs data release.”
In particular, Leachman claims Recovery Act funds to extend unemployment benefits from 26 to 79 weeks (and to 99 weeks since November) “produces and sustains jobs.” For proof, he cites estimates from Mark Zandi of Economy.com “that every dollar spent on extending unemployment insurance benefits produces $1.61 in economic activity.”
This analysis runs into two big problems. The first is that it assumes that the amount of time people spend on unemployment insurance is unrelated to how long the government offers to keep paying benefits. The second is that it assumes that the assumptions about “fiscal multipliers” built into Economy.com econometric model are actually evidence rather than just assumptions.
On the first point, page 75 of the 2007 OECD Employment Outlook explains: “It is well established that generous unemployment benefits can increase the duration of unemployment spells and the overall level of unemployment… This could have a negative impact on productivity through inefficient use of resources and depreciation of human capital during long spells of unemployment. In addition, by reducing the opportunity cost of unemployment, generous unemployment benefits may lead existing employees to reduce their work effort, thereby lowering productivity (see e.g. Shapiro and Stiglitz, 1984; Albrecht and Vroman, 1996).”
As I recently noted, the overwhelming evidence that extended unemployment benefits raise the duration and rate of unemployment comes from economists in the Obama administration, Larry Summers and Treasury economist Alan Krueger, as well as many others such as Lawrence Katz of Harvard and Bruce Meyer of the University of Chicago.
Contrary to Leachman, bribing people to stay on the dole for an extra 53-73 weeks leaves them with less money to spend, not more. It also looks bad on resumes, and may cause lasting damage to future job prospects.
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