Payments to Veterans and Survivors

Professor Ryan Edwards writes

"I recently put out an NBER wp that looks at historical war costs and reports that between a half and a third of the present value of costs are long-lived payments to veterans and survivors, and that the half lives of payments have averaged 30 years.

http://www.nber.org/papers/w16108

One of the big questions this raised in my mind was what the broader macro effects of war spending really was, since it's clearly not (or at least, no longer) a temporary shock as in the standard textbook model."

Quarterly Housing Prices through 2010 Q2

still waiting for the Case Shiller June 2010 value, but that would have to be way out of bounds to put Q2 below Q1.

The Costs of War

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As the midterm elections approach, Democrats and Republicans will each try to convince us that their party wasted less tax money than the other. The stimulus law and the Iraq War will be favorite examples. So let’s examine some economic principles for valuing the human cost of the war.

More than 4,000 American troops have been killed in Iraq and more than 30,000 wounded. And these totals do not begin to count the human losses among the civilian personnel and the militaries of other countries.

At the same time, the Congressional Budget Office recently estimated that the United States Treasury spent about $700 billion on military operations in Iraq between 2003 and 2010. That total includes some human costs but not others.

The United States has an all-volunteer military, which means that personnel chose to serve their country and accept the risks associated with a military occupation, in exchange for salary, training, benefits and any nonpecuniary benefits that military service offers.

It would be double-counting if a monetary value of military deaths and injuries were added to the military payroll, unless a subtraction were made for the hundreds of thousands of troops who received salaries and benefits and finished their Iraq duty without injury. At the same time, the time frame for American military expenditures should reflect the time frame over which personnel are compensated for the risks they accept.

Some commentators have noted that future Department of Defense expenditures on Iraq veteran health and other benefits should be counted, and I agree. Part of the deal for volunteer military personnel is that they and their family will receive retirement benefits and help with medical expenses for the rest of their lives. In this regard, expenditures on the Iraq war could continue for more than 100 years, although presumably at a reduced rate (the last Civil War veteran’s widow died in 2004!).

When the Iraq war began, active and reserve military personnel were obligated to serve when asked, a consequence of the salary and other benefits they had been receiving since enlisting in the military. For this reason, expenditures to compensate for the human cost of the Iraq war began actually before the war did, in 2003, and probably date back to the 1980s.

None of this counts the lost lives and health among Iraqis. So it’s clear that the Iraq war cost more than the $700 billion so far tabulated by the Congressional Budget Office.

The Supply of Bureaucratic Nightmares

The AP reports today

"Many borrowers have complained that [Obama's mortgage modification] program is a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork."

I am not surprised because, as I wrote earlier this year, "lenders have an incentive to foreclose on borrowers deemed modification eligible by the federal programs." Rather that overtly contradicting the U.S. Treasury by denying eligible borrowers, banks are just encouraging borrowers to deny themselves.

The Seasonal Job Surge: Supply or Demand?

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Keynesian economists designed a fiscal stimulus law that targets aggregate demand and runs roughshod over supply incentives. Evidence on the seasonal labor market shows why their stimulus was ultimately self-defeating.

Keynesian economists contend that labor supply — the willingness of people to work — doesn’t matter right now (or even that a more willing work force would reduce employment). If they are right, then a stimulus law that increased spending might work even if the law were taking incentives away from people to work and employers to hire.

Under the assumption that the cycle for teenage employment is a supply phenomenon — that is, the seasonal surge is more a result of teenagers’ becoming available for work than it is a change in employer demands — I showed last week that the Keynesians are wrong. Supply matters a lot, even in the depths of this recession, which is why the stimulus law was doomed to failure.

A few readers asserted that the teenage employment surge is a result of labor demand rather than supply. Fortunately, economics offers several tests of whether demand or supply is the dominant factor in the labor market.

First, the supply side of the problem obviously is related to school enrollment: population segments with more school enrollment during the academic year have a greater supply shift when summer arrives. So if supply were an important factor, we should see a larger summer job surge for groups with higher school enrollment rates.

The chart below confirms this hypothesis, using data from 1980-2007: the summer employment spike is a greater percentage for the younger teens, and those are exactly the age groups for whom school enrollment is highest. (The summer employment spike is measured by the log deviation of July’s value from the average of May and September values.)

In fact, there is essentially no employment spike for the 25-to-34 age group, and that group has hardly anyone in school. If summer labor demand were as great as my critics claim, summer ought to bring some extra employment for the 25-to-34 group too.

Summer does involve some demand shifts, but the unemployment data readily show that the summer supply increase dwarfs demand in the labor market for young workers. Figure 2 below displays unemployment spikes for the same age groups.

When school lets out, students storm into the job market and jobs are created for most of them. A few students spend some of the summer unemployed because students, and not their employers, are the ones who suddenly decided that summer is the time when they are available to work. That’s why the summer unemployment spike is positive — unemployment per capita for these groups is greater during the summer than during the academic year, especially for the groups with more school enrollment.

Not surprisingly, summer unemployment is higher than normal even for nonstudents, because many young people out of school compete in the labor market with students who are set free from school each summer.

The Keynesian claim that supply doesn’t matter in recession is quite radical and contradicted by the labor market’s seasonal variation. The sooner we can undo the supply-harming provisions in Obama-era legislation, the sooner our labor market can have a real recovery.

Housing PPI Turns Down

Job Finding Miracles: Denmark Edition

http://economix.blogs.nytimes.com/2010/08/16/why-denmark-is-shrinking-its-social-safety-net/

Is This Recovery, or Not?

The BEA revised its consumer spending data for 2008 & 2009, and the revisions give good reason to be more pessimistic about this recovery.

However, I continue to believe that there will be a partial recovery, meaning that the ratio of employment to population will return (only) about half way to what it was before the recession. I think even the revised consumption data support this. Moreover, if there were never to be a recovery, even partial, then investment would not have fallen so much initially, and would not show the kind of recovery it shows now.

Separable Preferences, Review of My Forecasts

When, in early 2009, I began modeling this recession and the recovery, I considered whether my model should reflect the fact that non-work time and market consumption are substitutes. Professors Aguiar and Hurst have done a lot of work on this topic, showing convincingly that people cut their market spending when they retire from their jobs, because they have more time to do tasks like cooking and shopping, and because they no longer need work related expenses.

In theory, the same could be true when people temporarily(?) loose their jobs, as in this recession. However, Professor Hurst advised me that unemployed people do not use their spare time to replace market consumption expenditures to the degree that retired people do. For that reason, and for ease of computation, the model I constructed last year assumed separable preferences.

However, even if Aguiar and Hurst are correct about the time allocation of unemployed people (and those patterns have repeated themselves in this recession), it is clear that unemployed people do not make work related expenditures like working people do. So for now I have decided to consider a measure of consumption that excludes personal expenditures on transportation, in addition to the measured I had considered before, without making any changes to my model and the forecasts derived from it.

The figures below show the data (through mid-2010) and my forecast scenarios. Recall that I have always given most weight to the "partial recovery scenario" shown in green in each of the Figures.






When consumption is measured to include transportation, and includes the BEA's latest revisions (see the black circles in Figure 5c), it seems to conform to the no-recovery scenario! But, for the reasons cited above, that is a mismatch between the model and data. The model refers to a consumption drop that derives solely from a wealth effect, whereas I think that transportation spending also falls because that spending is associated with going to work.

The consumption series without transportation spending (shown as black triangles in Figure 5c) conforms more closely to the "partial recovery scenario." So that scenario continues to be the likely one, although with the BEA revision I now see some of the first suggestions that it might be a little bit too optimistic.

As shown in Figures 5b, 5d, and 5e, the partial recovery scenario continues to fit the labor usage data very well, and fits the investment data well during the past couple of quarters. The model fits the general productivity trend (Fig 5d), although not all of the quarter-to-quarter changes.

Summer: Is it Demand or Supply?

A few readers have wondered whether the summer employment surge, especially for teens, reflects demand or supply.

Of course, to some degree the demand for teenage workers shifts during the summer. But the demand shift is less than the supply shift. To see this, you could look at the seasonal for wages or, as I did in my paper, look at the seasonal for teenage unemployment.



If demand were shifting more than supply, then teen unemployment would be low in the summer -- summer would be the easiest time for an eager teenager to find a job. If supply shifted more than demand, then teen unemployment would be high in the summer, especially early in the summer before the market had much time to absorb all of those students storming out of school, because each teen job searcher has so many other teens with whom to compete.