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Alan Krueger: Predictable, conventional, and Keynesian

August 29, 2011, 11:00 PM UTC
Alan Krueger
Alan Krueger

President Obama has been fairly predictable in his selections for key cabinet and personnel decisions. Generally, the key members of the Obama team have two criteria: they have served in government before and they served in the Clinton administration. Some of the key examples include:

–Peter Orzag was replaced by Jack Lew at OMB, who was serving in the State Department and ran the OMB under Clinton;

–Secretary of Defense Bob Gates was replaced by Leon Panetta who was then head of the CIA and a prior Chief of Staff to President Clinton;

–Obama Chief of Staff Rahm Emmanuel was replaced by Bill Daley, who served in Clinton’s cabinet; and

–Larry Summers was replaced at the National Economic Council by Gene Sperling who was then serving in the Treasury Department and was a prior member of the National Economic Council.

This list could certainly be extended, but the simple take away is that given the conventional and predictable choice on personnel decisions, Obama has made, well, the conventional and predictable choice by nominating Alan Krueger for chairman of the White House Council of Economic Advisers.

In addition to having both governmental experience and a prior post in the Clinton administration, Krueger is also personally close to Summers, Geithner, and Bernanke. According to press reports, Krueger is tennis buddies with Summers and Geithner and is a member of the Princeton economics department with Bernanke. Predictable is as predicable does.

Just because he is a known entity and has strong ties to Obama’s current and past economic advisors, that doesn’t necessarily mean Krueger is not qualified for the role. In fact, he is probably more than qualified based on his resume, but the question is whether is the right man for the job at this time.

In reviewing some of his key writings, we have found Krueger to be, at times, an unconventional and out of the box thinking that does belie his Princeton/Clintonian/government training. In particular, as sticklers for data integrity, we are fans of Krueger’s focus on economic data integrity and his leadership at the Princeton Data Improvement Initiative. Despite this, the negatives surrounding Krueger appear to outweigh the positives for the role of leading the CEA.

The core of Krueger’s academic work has been in the area of labor economics, which, given the high and sticky unemployment rate, could be of benefit to the Obama administration. In fact, analyzing the most unemployed areas of the economy and determining how to re-train or reallocate those resources may well be the key to improving the outlook for employment. That said, it is not clear, at least based on some of his recent comments, that Krueger actually has a grasp on the current employment issues. In a March 30th opinion article for Bloomberg, Krueger wrote:

“Instead, I suspect we’re going to see a continuing decline in the unemployment rate, though there surely will be some blips along the way.”

When he penned that article almost six months ago, the unemployment rate was 8.9%. It has since ticked up to 9.1% in direct contrast to his prediction.

A review of Krueger’s writings has also revealed that he is about as Keynesian as economists come. On this front, one of his more recent writings that is worth highlighting is from the Economix blog from the New York Times on January 12th, 2009. The article was titled, “A Future Consumption Tax To Fix Today’s Economy” and the title about says it all.

To be fair, there are certainly some merits to a consumption tax. In fact, Canada implemented a 7% consumption tax in the 1991 and was at least partially responsible for getting Canada’s fiscal house in order. Krueger, though, is proposing something that’s a slightly different tact, which is to implement a consumption tax in a time of economic duress to fix the economy. According to Krueger:

“In the short run, the anticipation of a consumption tax would encourage households to spend money now, rather than after the tax is in place.”

No doubt in the highly rational halls of academia, this concept makes sense, but in the real world consumers won’t spend more today because of the fear of some tax in the future. Even floating this idea shows a basic misunderstanding of the confidence component related to consumer spending. That is, as consumers feel good about the economic future, their job security, and the prices of their assets (homes and portfolios), they will naturally spend more. It shouldn‘t take a PhD in economics from Harvard to realize that the fear of a punitive future tax is illusory as it relates to promoting consumption.

The concept of an increased role by the government to solve economic problems is a common theme in Krueger’s publicly expressed views. The most recent example of this is from Krueger’s September 21st, 2010 testimony to the Senate Banking, Housing and Urban Affairs Committee in his role as Assistant Treasury Secretary of Economic Policy on the topic of the nation’s infrastructure.

In the testimony, Krueger tied the high sticky unemployment to a lack of recovery in the construction sector. As he rightfully noted, “one in five jobs lost since 2007 was in the construction sector” and “the construction industry has lost over 25 percent of its total payroll jobs.” So, in Krueger’s view, creating incentives to grow employment in the construction sector should go a long ways in solving the nation’s unemployment agency. An adroit point, but to solve this issue he proposes the creation of a new pseudo-government entity called a National Infrastructure Bank. In a nutshell, according to Krueger, the solution for the country’s construction woes are for the government to take over the construction financing industry via this new entity.

Another key article of Krueger’s to highlight is an October 20, 2008 blog for the New York Times in which he, and probably rightfully, criticizes the Bush administration’s lackluster efforts at privatizing public labor exchanges. According to Krueger:

“Public labor exchange offices were established in the early days of the New Deal to help the unemployed find jobs. This function is now done in One-Stop Career Centers, which help to match workers to job openings and monitor that Unemployment Insurance recipients are actively searching for work. Some 3 million unemployment insurance beneficiaries a year are placed in jobs through the labor exchanges, and 9 million utilize their services.”

The core of Krueger’s argument in this article was that private labor exchanges worked, and that Bush administration attempts to privatize them were ineffective. No doubt that is a fair point that has been supported by fact, but unfortunately Krueger went on to write:

“Just as it has tried to with other government functions such as Social Security, the Census, the Federal Emergency Management Agency and national defense, the Bush administration has been trying to outsource or eliminate services for the unemployed.”

While there is merit in Krueger defending a specific government program with which he has deep knowledge, the danger is to then go on, with a broad brush, and assess that the government is more effective than the private sector at managing a wide range of activities.

In general, this was a pretty uninspired choice by President Obama and unfortunately not a choice that is going to guide the President to a new way of thinking in attempting to solve the nation’s economic woes.

Follow Daryl Jones on Twitter @HedgeyeDJ.