UC-Berkeley Professor, and former Clinton economic advisor, Laura Tyson lays out why she believes we need a second stimulus. Her op-ed is a worthwhile read for understanding the basic assumptions behind modern Keynesian thinking.

Foremost among those assumptions is a belief we are in a recession due to “a collapse in private demand.” In Professor Tyson’s world, if only everyone would buy more, everything would be OK (starts to sound a lot like President Bush in 2002). But what exactly has been going on with private demand? Judged by private personal consumption expenditures, it is actually up and higher than at any point during the boom, after reaching bottom in the Spring of 2009.

The following chart, from the St. Louis Federal Reserve, nicely illustrates the direction in private demand.

So if Tyson’s narrative that weak demand is holding back employment is false, or at least incomplete, then what is holding back unemployment? In a word: Investment.

Unlike consumption, which has largely rebounded, investment today is about 20% below its peak. Of course we should keep in mind, that peak was a bubble. The good news is that investment in such things a equipment and software, are slowly, but steadily, climbing back. The real drag on investments is from the construction industry, particularly residential, which is still down about 50% from its peak. 

What most of this suggests to me is that unemployment is being driven mainly by a mismatch between skills of the unemployed and available job openings. You simply cannot, overnight, turn a construction worker into a nurse or computer programmer. Tyson seems to half-way recognize this when she argues for stimulus to be directed into education, although she only seems to be talking about future skills mismatch and ignores the mismatch facing the economy today. For if increased aggregate demand is all we need today to reduce unemployment, then wouldn’t the same hold true for future unemployment, removing the need for educational funding?

At the end of the day, what we need to get employment increasing is to create an environment where business feel confident to invest.

Today Politico Arena asks:

Should national party organizations stay out of primaries?

My response:

Political parties are, strictly speaking, private entities. Therefore, they’re free to insinuate themselves into primary contests, or not. But as they do, so they will be judged.

Haley Barbour was absolutely right, therefore, to say that national party organizations shouldn’t endorse (ordinarily, incumbents) in primaries — much less assist one candidate over others. To the extent they do, they confirm the view of many Americans that the political class is more interested in preserving power — its own — than in governing for the common good under constitutional principle.

Do we need any better evidence than the way Republicans ran from the term limits plank in the Contract with America after they took over Congress in 1995? Oh, I forgot, there is better evidence: the way Democrats never even paid lip service to term limits.

Two weeks ago, I responded with dismay to George Mason University economist Tyler Cowen’s op-ed against free parking. This led to a variety of responses in the blogosphere, none of which address my point. Instead, they all argue against the minimum-parking requirements found in many zoning regulations.

In particular, Cowen himself points to a study that found that Los Angeles’ minimum-parking requirements forced some developers to build more parking than they would have without such requirements. But Cowen’s op-ed was titled, “Free Parking Comes at a Price,” not “Minimum-Parking Requirements Come at a Price.” The op-ed was based on a book by Donald Shoup titled The High Cost of Free Parking, not The High Cost of Minimum-Parking Requirements.

Nothing I wrote defended minimum-parking requirements. Instead, I pointed out that, even without such requirements, most businesses still provide free parking for their employees and customers. It is one thing to oppose minimum-parking requirements as an unnecessary form of government regulation. It is another thing to favor government regulation mandating that private businesses charge for parking.

That certainly seems to be what Cowen favors. His article concluded, “if we’re going to wean ourselves away from excess use of fossil fuels,” then “imposing higher fees for parking may make further changes more palatable by helping to promote higher residential density and support for mass transit.” There are a lot of fallacies in those statements. Will higher residential density significantly reduce use of fossil fuels? Probably not. Will support for mass transit significantly reduce use of fossil fuels? Probably not. Even if you believe we excessively use fossil fuels, do indirect tools such as “imposing parking fees” make sense when more direct tools are available? Certainly not.

Claims that parking is subsidized would carry a lot more weight if 5 percent of the people drove and the other 95 percent had to pay 75 percent of the cost. Those are, in fact, the ratios for transit (less than 5 percent of American workers take transit to work but fares cover less than 25 percent of transit costs), which Cowen wants to promote. With driving, the numbers are practically reversed: discounting air travel, more than 90 percent of travel is by car and auto drivers pay more than 90 percent of the costs of driving.

I suspect someone has made the case for minimum-parking requirements: without such requirements, businesses might try to externalize some of their costs by letting someone else provide parking for them. But let’s ignore that. Cities should get rid of zoning codes that have minimum-parking requirements. (Cities should get rid of zoning codes period.) Cities should charge market rates for on-street parking and any publicly owned off-street parking. But even if these things happen, private businesses will still provide free parking to their employees and customers in many areas — in fact, practically everywhere outside of old downtowns.

Note: My previous post on this subject quoted Cowan quoting Donald Shoup saying, “On average [in the U.S.] a new parking space has cost 17 percent more than a new car.” I commented that this was ridiculous. Someone sent an email saying that Shoup actually estimates there are four parking spaces for every car, and the combined cost of those spaces is more than the average car. Without searching Shoup’s 733-page tome to check his arithmetic, I am still not certain why this is important.

Most people who buy homes want to room to park their cars. People also need room to park at work and elsewhere. Should we only have one bathroom for every four houses because the average bathroom is in use only a couple of hours every day? Is it a waste that almost every home in the country has a kitchen, when there are plenty of kitchens in restaurants (not to mention many workplaces) as well? Then why is it a waste that homes, as well as offices, stores, and other businesses, have parking?

Every August, the Federal Reserve Bank of Kansas City sponsors a conference on monetary policy. It is the most valued invitation of the year for central bankers and Fed watchers. The Fed Chairman typically presents his views on monetary policy and the economy, and his talk inevitably makes headlines. (A select few reporters are invited.)

This year, Ben Bernanke promised the Fed will do whatever it takes to aid the faltering U.S. recovery, and most of all to prevent deflation. The problem for the Fed Chairman is that the central bank is plainly running out of options, as some had the cheek to observe. He suggested the Fed could do more of the same (purchase long-term securities), or try something new and untested (tweak the interest rate it pays on bank reserves).

Bernanke also suggested a third option, plus offered some professorial speculation on another. Taken together, these suggest the Fed may be prepared to chart a dangerous course.

In its policy statement, the Federal Open Market Committee has promised to keep interest rates low “for an extended period.” Bernanke suggested (as the third option) that the FOMC might make it clear that rates will remain low for an even longer period than markets are currently expecting. Within the Committee, there have been calls for caution and to remove the “extended period” language from the statement. These have been led by Thomas Hoenig, president of the KC Fed and host of the conference. By suggesting the only option was lengthening the period of low interest rates, Bernanke delivered the back of his hand to his host and the other inflation hawks on the FOMC.

Bernanke then mused about suggestions by some economists that perhaps the Fed should set an inflation target — that is, promise to deliver higher inflation rates to stimulate the economy. Fed chairmen do not engage in abstract speculation about policy, and to raise the inflationary option gave it place above all other possibilities. Bernanke hastened to add that there was at present no support for such a policy within the FOMC, and it “is inappropriate for the United States in current circumstances.”

In other words, the Fed chairman is thinking about an inflationary policy and, if circumstances change and he can build support within the FOMC, he is willing to implement it. When central bankers speculate in public about the possibility of an inflationary monetary policy, the currency is in jeopardy and the country in peril.

In the private sector, no business owner would be dumb enough to assume that higher prices automatically translate into proportionately higher revenues. If McDonald’s boosted hamburger prices by 30 percent, for instance, the experts at the company would fully expect that sales would decline. Depending on the magnitude of the drop, total revenue might still climb, but by far less than 30 percent. And it’s quite possible that the company would lose revenue. In the public sector, however, there is very little understanding of how the real world works. Here’s a Reuters story I saw on Tim Worstall’s blog, which reveals that Bulgaria and Romania both are losing revenue after increasing tobacco taxes.

Cash-strapped Bulgaria and Romania hoped taxing cigarettes would be an easy way to raise money but the hikes are driving smokers to a growing black market instead. Criminal gangs and impoverished Roma communities near borders with countries where prices are lower — Serbia, Macedonia, Moldova and Ukraine — have taken to smuggling which has wiped out gains from higher excise duties. Bulgaria increased taxes by nearly half this year and stepped up customs controls and police checks at shops and markets. Customs office data, however, shows tax revenues from cigarette sales so far in 2010 have fallen by nearly a third. …Overall losses from smuggling will probably outweigh tax gains as Bulgaria struggle to fight the growing black market, which has risen to over 30 percent of all cigarette sales and could cost 500 million levs in lost revenues this year, said Bezlov at the Center for the Study of Democracy. While the government expected higher income from taxes in 2010 it has already revised that to the same level as last year. “However, this (too) looks unlikely at present,” Bezlov added. Romania, desperately trying to keep a 20 billion-euro International Monetary Fund-led bailout deal on track, has a similar problem after nearly doubling cigarette prices in 2009 then hiking value added tax. Romania’s top three cigarette makers — units of British American Tobacco, Japan Tobacco International and Philip Morris — contributed roughly 2 billion euros to the budget in taxes in 2009, or just under 2 percent of GDP. They estimate about a third of cigarettes in Romania are smuggled and say this could cost the state over 1 billion euros.

A front-page New York Times headline reads:

Struggling Cities Shut Firehouses in Budget Crisis

Because certainly American cities spend their money on nothing that is less important than fire protection.

More on the Washington Monument Syndrome here.

Over at Downsizing Government, we focused on the following issues this week:

• If federal policymakers won’t reverse course on high-speed rail, let’s hope state policymakers step up to squelch this budding boondoggle before it’s too late.
• Joe Biden demonstrates the arrogance of the political class, which at its core believes that free individuals are incapable of making the “right” decision without the guiding hand of the state.
• Short-term measures implemented by policymakers to “fix” the economy have also introduced unwelcome economic distortions.
• The Interior Department’s Minerals Management Service was “captured” by the industry it regulated. Not the first example of regulatory capture; won’t be the last.
• Alaska’s Manufacturing Extension Partnership shows that economic development agencies are better at “press release economics” than promoting policies that will result in real economic growth.