Monday, August 29, 2011

Alan Krueger to lead the CEA

The NYTimes reports that Alan Krueger will be the next chairman of the Council of Economic Advisors. A well respected, serious professor from Princeton, that almost everybody from Mankiw to Krugman will approve of. He is a labor economist, and yes that is a problem. My concern with labor economists, is that they tend to think in microeconomic terms when it comes to employment creation, and that is definitely not a solution for the current situation.

For example, the Times tells us that:
"Dr. Krueger was also one of the administration’s chief spokesmen for a payroll tax cut designed to encourage employers to hire, a policy that was in effect under the HIRE Act during 2010. The tax incentive, which was designed by Senators Chuck Schumer and Orrin Hatch after a raft of competing proposals floated through Washington, was criticized by some economists as being too small and ill-targeted to make much of a difference in hiring."
Don't get me wrong a reduction of payroll taxes, a regressive tax that burdens low income groups more heavily, is a good idea. But the reason is that it would stimulate consumption, not that it would reduce costs and lead to additional hiring. Why would a firm hire workers, because costs are lower, if they don't have demand for their products? Employment creation is NOT about incentives to the supply side, but about creating more demand!

1 comment:

  1. As Matias predicted, Krugman has heard the concern that Krueger is a microeconomist and therefore is wrong for the times, and while to my ear did not exactly leap to the ramparts, he defends nevertheless.

    He says true, but he also gets macro, after all he is a saltwater Princeton type economist.

    Sort of like Professor Krugman himself. And I certainly admire people who can change their minds with added data and thinking about that data.

    But after all we are entangled in a crisis which is a macro crisis, not a micro crisis, and needs immediate response. (Like 400K jobs a month hell or high water).

    So we need someone who instinctively responds at a macro level first. Alan Krueger had better get very wise very fast if he is going to be of any use in digging out of the disaster.


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