Category Archives: 2008 Recession

On SNAP Eligibility and Spending

William Galston has an op-ed in the Wall Street Journal that begins as follows:

We are entering a divisive debate on the Supplemental Nutrition Assistance Program (SNAP), popularly known as food stamps. Unless facts drive the debate, it will be destructive as well.

I certainly agree with this statement. Unfortunately, I found the op-ed misleading and vague (a vague op-ed can be somewhat forgiven since word counts are limited).

The basic premise of Galston’s op-ed is that critics of the increased spending on food stamps are misguided in their criticisms. For example, he explains:

The large increase in the program’s cost over the past decade mostly reflects worsening economic conditions rather than looser eligibility standards, increased benefits, or more waste, fraud and abuse.

[...]

The food-stamp program’s costs have soared since 2000, and especially since 2007. Here’s why.

First, there are many more poor people than there were at the end of the Clinton administration. Since 2000, the number of individuals in poverty has risen to 46.5 million from 31.6 million—to 15% of the total population from 11.3%. During the same period, the number of households with annual incomes under $25,000 rose to 30.2 million (24.7% of total households) from 21.9 million (21.2%).

Critics complain that beneficiaries and costs have continued to rise, even though the Great Recession officially ended in 2009. They’re right, but the number of poor people and low-income households has continued to rise as well.

Thus, according to Galston, we can explain much of the increase in food stamp spending on the rise of poverty over the last 13 years (and especially the last 6 years). If Galston is correct, then we could examine the ratio of households who are receiving SNAP benefits to the number of people below the poverty line. Supposing that he is correct, we would expect that this ratio would be constant (or at least roughly so). In other words, as the number of people below the poverty line increased, the number of households receiving SNAP benefits would increase in direct proportion.

Such a comparison, however, casts doubt on Galston’s claim. Casey Mulligan, in his book The Redistribution Recession, has taken great effort to actually calculate such ratios. What Mulligan found is that from 2007 to 2010, the number of families below 125% of the federal poverty level increased by 16%. That is indeed a large increase. However, the number of households receiving SNAP benefits increased by 58%. This means that the SNAP recipiency ratio, or the ratio of households receiving SNAP to that below 125% of the poverty line (a higher threshold that Galston himself uses), rose by 37%.

So what can explain the fact that recipients are rising so much faster than poverty? One possible explanation are eligibility requirements. Since 2008, there have been several changes to eligibility for food stamps. For example, the Farm Bill passed in 2008 increased the maximum benefit that beneficiaries could receive, it excluded some income from the formula used to determine eligibility, and it weakened the evaluation of assets of potential enrollees. In addition, the American Reinvestment and Recovery Act also loosed eligibility requirements by once again increasing the maximum benefit that one could receive, gave states the ability to loosen the work requirement, and further loosened income requirements.

Galston, however, downplays most of these changes and argues that macroeconomic trends explain the vast majority of the rise of SNAP spending. However, the use of this type of explanation is problematic because it is taking the actual increase in recipients and then explaining the increase in spending ex post. To understand why this is misleading, consider the following example. Suppose that there is an individual who lost his job in 2009. Prior to 2007, he would not have been eligible for SNAP whereas after the changes he is now eligible. Thus, after 2007, this increases the number of recipients of SNAP. Galston might claim that this change is the result of macroeconomic trends because this person would not have enrolled in SNAP had he not lost his job. Others might say that this change is due to eligibility requirements becaus if the worker had lost his job two years prior, he would not have been eligible. While I certainly understand Galston’s perspective on this, the relevant comparison is to the counterfactual. In other words we can’t explain the rise in SNAP recipients ex post, we need to consider what actually happened to what would have happened in the absence of a policy change.

So what do the counterfactuals say?

Again, Casey Mulligan has constructed these counterfactuals. What he finds is that between 2007 and 2010, the increase in per capita SNAP spending was 100%, adjusted for inflation. He then constructs two counterfactuals. The first counterfactual takes macroeconomic trends as given and computes the increase in per capita SNAP spending under 2007 eligibility rules. The second counterfactual does the same thing assuming that in addition to maintaining 2007 eligibility rules, the government had maintained constant real benefit rules (i.e. would not have increased the after-inflation maximum benefit).

The first counterfactual suggests that from 2007 to 2010 per capita SNAP spending would have only increased by 60%, adjusted for inflation. The second counterfactual suggests that per capita SNAP spending would have increased only 24%, adjusted for inflation. Had no policy changes been enacted in 2008 and 2009, per capita spending on SNAP would have been 62% of what it actually was in 2010. Put differently, 48% of the per capita 2010 spending is attributable to changes in eligibility. Thus, contrary to the claims of Galston, a very large fraction of the increase in SNAP spending is explained by changes in eligibility.

An entirely separate question is whether or not this increased spending is worth it. Answering that question is certainly beyond the scope of this post. However, it is important to be mindful that such analysis must consider both the costs and the benefits of the expansion. The benefits are obvious. Households receive assistance in purchasing food and feeding their families. The costs, however, are more complex. A significant fraction of the increase in spending can be explained by changes in eligibility. Thus, we need to consider the counterfactual. One big issue is to consider how much of the increased benefits are going to those who would not have qualified under the asset tests. Another issue is to consider is the effect of changes in eligibility on the labor supply of those at or near the new eligibility requirements, especially given the work requirement waiver. And there is the obvious monetary cost to the taxpayer. Too often those on each side of the debate focus on only the benefits or only the costs.

Whether the policy changes are worth it depends on a careful analysis of these questions. I will remain agnostic with regards to that type of analysis. However, to argue that those concerned about the expansion spending due to changes in eligibility are misguided and driven by “anti-government ideology”, as Galston argues, is an unfair criticism to those who have carefully looked at the data.

Monetarism, Debt, and Observational Equivalence

I have heard a number of people say over the years that one of the best things about reading Adam Smith and Henry Thornton and other classical economists is that they argued their points fairly. In particular, Smith and Thornton argued in favor of their own views and against opposing views while taking these opposing views at face value. They did not attack straw men. They did not caricature their intellectual adversaries (in fact, Thornton and Smith were intellectual adversaries to some extent in their views on the role of bank notes, bills of exchange, and the operation of the monetary system).

This characteristic is, at times, missing from contemporary discourse. This doesn’t mean that modern disagreements are fraught with malice. However, sometimes ideas are not given the proper understanding sufficient for critique. Franco Modigliani, for example, once joked that what we would now call real business cycle theory blamed recessions on mass outbreaks of laziness. Similarly, when Casey Mulligan published his most recent book on the recession in which he argued that expansions of the social safety net can explain a significant fraction of the increase in unemployment, others shrugged this off by saying that this was akin to saying that soup lines caused the Great Depression.

My point is not to defend Casey Mulligan or the real business cycle theorists. It is perfectly reasonable to view real business cycle theory as unconvincing without referencing mass outbreaks of laziness. Rather my point is that more care needs to be taken to understand opposing theories and views of business cycles, growth, etc. so that one can adequately articulate criticisms and rebuttals to such views.

The fact that there is little understanding of (or perhaps just little credit given to) opposing viewpoints is never more apparent than when predictions of two different theories are observationally equivalent. To give an example, consider two explanations of the cause of the most recent recession. Please note that these are not the only two explanations and that the explanations that I give are sufficiently broad to encapsulate a number of more nuanced views.

The first explanation of the recession is what I will refer to as the Debt Theory. According to this view, the expansion that preceded the recession was fueled by an unsustainable accumulation of debt. There are many varieties of this theory that emphasize different factors that caused the run-up of debt, such as monetary policy, policies that subsidize housing, etc. Regardless of the reason that “too much” debt was accumulated, the debt eventually reached a point (most often argued as the beginning of the collapse in housing prices) that was unsustainable and hence the beginning of a recession. The recession is largely the result of de-leveraging.

The second explanation is what I will refer to as the Money Theory. According to this view, it is a deviation between the supply and demand of money (broadly defined) that ultimately results in reduced spending and, as a result, a lower level of real economic activity. As a result, when the large haircuts became apparent in the market for mortgage-backed securities, this reduced the supply of transaction assets thereby causing a deviation between the supply and demand for money. The Federal Reserve, in its failure to provide a sufficient quantity of transactions assets, thereby allowed this deviation to persist and resulted in decline in nominal, and ultimately, real spending.

As these brief descriptions imply, there doesn’t appear to be much overlap between the two views. However, they actually produce a number of observationally equivalent implications. For example, advocates of the Money Theory point to the negative rates of money growth in broad measures of the money supply as evidence that the Federal Reserve failed to provide adequate liquidity. Nonetheless, this observation is consistent with the Debt Theory. According to this view, de-leveraging reduces the demand for credit and therefore reduces the need of financial intermediaries to create new debt instruments that are used as transaction assets. Thus, we would expect a decline in money growth in both cases.

On the other hand, advocates of the Debt Theory point out that there is a strong relationship between counties that had higher levels of debt prior to the recession and the reductions in consumption during the recession. Nonetheless, this observation is also consistent with the Money Theory. Most advocates of the Money Theory are intellectual descendants of Milton Friedman. In Friedman’s theory of money demand, money is considered similar to a durable good in that individuals hold a stock of money to get the flow of services that come from holding money. Thus, contra the transactions view of money demand, individuals do not draw down money balances during a recession. Instead individuals make adjustments to different parts of their portfolio, most notably consumer debt. In other words, we would observe de-leveraging under both frameworks.

To distinguish between the two views it is not sufficient to point to characteristics that they have in common (although those observations are still important). It is also necessary to find areas in which the theories differ so that one is able to develop an empirical approach to assess each framework’s validity.

The examples given above are obviously simplifications, but this is what makes being an economist difficult. It is not enough to use inductive reasoning to support one’s theory. One must be able to differentiate between other theories that would produce observationally equivalent results. Admittedly, this is a problem that exists to a greater extent in the blogosphere than it does in academic journals. The reason is obvious. If one submits a paper to an academic journal, a good reviewer is able to spot the ambiguities between testing the predictions of a particular theory and contrasting the predictions of theories with observationally equivalent predictions. In the blogosphere, the “reviewers” are commenters and colleagues. However, the differences don’t often get resolved. Perhaps this is because there is no gatekeeper that prevents the blog post from being published. (Ironically, the lack of a gatekeeper is perhaps the best quality of the blogosphere because it allows discourse to take place in public view.) Nonetheless, given the degree to which blog posts and debates in the blogosphere ultimately spill over into the popular financial press and public debate, it is important to be careful and considerate regarding opposing views.

[Note: For an example of someone who tries to disentangle the issues surrounding the Debt View and the Money View, see Robert Hetzel's The Great Recession: Market Failure or Policy Failure?]

Some Thoughts on Liquidity

The quantity theory relates not so much to money as to the whole array of financial assets exogenously supplied by the government. If the government debt is doubled in the absence of a government-determined monetary base the price level doubles just as well as in the case of a doubling of the monetary base in the absence of government debt. — Jurg Niehans, 1982

Seemingly lost in the discussion of monetary policies various QEs is a meaningful resolution of our understanding of the monetary transmission mechanism.  Sure, New Keynesians argue that forward guidance about the time path of the short term nominal interest rate is the mechanism, Bernanke argues that long term interest rates are the mechanism, and skeptics of the effectiveness of QE argue that it is the interest rate on excess reserves that is the mechanism.  I actually think that these are not the correct way to think about monetary policy.  For example, there are an infinite number of paths for the money supply consistent with a zero lower bound on interest rates.  Even in the New Keynesian model, which purportedly recuses money from monetary policy, the rate of inflation is pinned down by the rate of money growth (see Ed Nelson’s paper on this).  It follows that it is the path of the money supply that is more important to the central bank’s intermediate- and long-term goals.  In addition, it must be the case that the time path of the interest rate outlined by the central bank is consistent with expectations about the future time path of interest rates.  The mechanism advocated by Bernanke is also flawed because the empirical evidence suggests that long term interest rates just don’t matter all that much for investment.

The fact that I see the monetary transmission mechanism differently is because you could consider me an Old Monetarist dressed in New Monetarist clothes with Market Monetarist policy leanings (see why labels are hard in macro).  Given my Old Monetarist sympathies it shouldn’t be surprising that I think the aforementioned mechanisms are not very important.  Old Monetarists long favored quantity targets rather than price targets (i.e. the money supply rather than the interest rate).  I remain convinced that the quantity of money is a much better indicators of the stance of monetary policy.  The reason is not based on conjecture, but actual empirical work that I have done.  For example, in my forthcoming paper in Macroeconomic Dynamics, I show that many of the supposed problems with using money as an indicator of the stance of monetary policy are the result of researchers using simple sum aggregates.  I show that if one uses the Divisia monetary aggregates, monetary variables turn out to be a good indicator of policy.  In addition, changes in real money balances are a good predictor of the output gap (interestingly enough, when you use real balances as an indicator variable, the real interest rate — the favored mechanism of New Keynesians — is statistically insignificant).

Where my New Monetarist sympathies arise is from the explicit nature in which New Monetarism discusses and analyzes the role of money, collateral, bonds, and other assets.  This literature asks important macroeconomic questions using rich microfoundations (as an aside, many of the critics of the microfoundations of modern macro are either not reading the correct literature or aren’t reading the literature at all).  Why do people hold money?  Why do people hold money when other assets that are useful in transactions have a higher yield?  Using frameworks that explicitly provide answers to these questions, New Monetarists then ask bigger questions. What is the cost associated with inflation? What is the optimal monetary policy? How do open market operations work?  The importance of the strong microfoundations is that one is able to answer these latter questions by being explicit about the microeconomic assumptions.  Thus, it is possible to make predictions about policy with an explicit understanding of the underlying mechanisms.

An additional insight of the New Monetarist literature is that the way in which we define “money” has changed substantially over time.  A number of assets such as bonds, mortgage-backed securities, and agency securities are effectively money because of the shadow banking system and the corresponding prevalence of repurchase agreements.  As a result, if one cares about quantitative targets, then one must expand the definition of money.  David Beckworth and I have been working on this issue in various projects.  In our paper on transaction assets shortages, we suggest that the definition of transaction assets needs to be expanded to include Treasuries and privately produced assets that serve as collateral in repurchase agreements.  In addition, we show that the haircuts of private assets significantly reduced the supply of transaction assets and that this decline in transaction assets explains a significant portion of the decline in both nominal and real GDP observed over the most recent recession.

The reason that I bring this up is because this framework allows us not only to suggest a mechanism through which transaction assets shortages emerge and to examine the role of these shortages in the context of the most recent recession, but also because the theoretical framework can provide some insight into how monetary policy works.  So briefly I’d like to explain how monetary policy would work in our model and then discuss how my view of this mechanism is beginning to evolve and what the implications are for policy.

A standard New Monetarist model employs the monetary search framework of Lagos and Wright (2005).  In this framework, economic agents interact in two different markets — a decentralized market and a centralized market.  The terms of trade negotiated in the decentralized market can illustrate the effect of monetary policy on the price level. (I am going to focus my analysis on nominal variables for the time being.  If you want to imagine these policy changes having real effects, just imagine that there is market segmentation between the decentralized market and centralized market such that there are real balance effects from changes in policy.)  In particular the equilibrium condition can be written quite generally as:

P = (M+B)/z(q)

where P is the price level, M is the money supply, B is the supply of bonds, and z is money demand as a function of consumption q.  I am abstracting from the existence of private assets, but the implications are similar to those of bonds.  There are a couple of important things to note here.  First, it is the interaction of the supply and demand for money that determines the price level.  Second, it is the total supply of transaction assets that determines the price level.  This is true regardless of how money is defined.  Third, note that as this equation is presented it is only the total supply of transaction assets that determine the price level and not the composition of those assets.  In other words, as presented above, an exchange of money for bonds does not change the price level.  Open market operations are irrelevant.  However, this point deserves further comment.  While I am not going to derive the conditions in a blog post, the equilibrium terms of trade in the decentralized market will only include the total stock of bonds in the event that all bonds are held for transaction purposes.  In other words, if someone is holding bonds, they are only doing so to finance a transaction.  In this case, money and bonds are perfect substitutes for liquidity.  This implication, however, implies that bonds cannot yield interest.  If bonds yield interest and are just as liquid as money, why would anyone hold money? New Monetarists have a variety of reasons why this might not be the case.  For example, it is possible that bonds are imperfectly recognizable (i.e. they could be counterfeit at a low cost). Alternatively, there might simply be legal restrictions that prevent bonds from being used in particular transactions or since bonds are book-entry items, they might not as easily circulate.  And there are many other explanations as well.  Any of these reasons will suffice for our purposes, so let’s assume that that is a fixed fraction v of bonds that can be used in transactions.  The equilibrium condition from the terms of trade can now be re-written:

P = (M + vB)/z(q)

It now remains true that the total stock of transaction assets (holding money demand constant) determines the price level.  It is now also true that open market operations are effective in influencing the price level.  To summarize, in order for money to circulate alongside interest-bearing government debt (or any other asset for that matter) that can be used in transactions, it must be the case that money yields more liquidity services than bonds.  The difference in the liquidity of the two assets, however, make them imperfect substitutes and imply that open market operations are effective.  It is similarly important to note that nothing has been said about the role of the interest rate.  Money and bonds are not necessarily perfect substitutes even when the nominal interest on bonds is close to zero. Thus, open market operations can be effective for the central bank even if the short term interest rate is arbitrarily close to zero.  In addition, this doesn’t require any assumption about expectations.

The ability of the central bank to hit its nominal target is an important point, but it is also important to examine the implications of alternative nominal targets.  Old Monetarists wanted to target the money supply.  While I’m not opposed to the central bank using money as an intermediate target, I think that there are much better policy targets.  Most central banks target the inflation rate.  Recently, some have advocated targeting the price level and, of course, advocacy for nominal income targeting has similarly been growing.  As I indicated above, my policy leanings are more in line with the Market Monetarist approach, which is to target nominal GDP (preferable the level rather than the growth rate).  The reason that I advocate nominal income targeting, however, differs from some of the traditional arguments.

We live in a world of imperfect information and imperfect markets. As a result, some people face borrowing constraints.  Often these borrowing constraints mean that individuals have to have collateral.  In addition, lending is often constrained by expected income over the course of the loan.  The fact that we have imperfect information, imperfect markets, and subjective preferences means that these debt contracts are often in nominal terms and that the relevant measure of income used in screening for loans is nominal income.  A monetary policy that targets nominal income can potentially play an important role in two ways.  First, a significant decline in nominal income can be potentially harmful in the aggregate.  While there are often claims that households have “too much debt” a collapse in nominal income can actually cause a significant increase and defaults and household deleveraging that reduces output in the short run.  Second, because banks have a dual role in intermediation and money creation, default and deleveraging can reduce the stock of transaction assets.  This is especially problematic in the event of a financial crisis in which the demand for such assets is rising.  Targeting nominal income would therefore potentially prevent widespread default and develeraging (holding other factors constant) as well as allow for the corresponding stability in the stock of privately-produced transaction assets.

Postscript:  Overall, this represents my view on money and monetary policy.  However, recently I have begun to think about the role and the effectiveness of monetary policy more deeply, particularly with regards to the recent recession.  In the example given above, it is assumed that the people using money and bonds for transactions are the same people.  In reality, this isn’t strictly the case.  Bonds are predominantly used in transactions by banks and other firms whereas money is used to some extent by firms, but its use is more prevalent among households.  David Beckworth and I have shown in some of our work together that significant recessions associated with declines in nominal income can be largely explained through monetary factors.  However, in our most recent work, it seems that this particular recession is unique.  Previous monetary explanations can largely be thought of as currency shortages in which households seek to turn deposits into currency and banks seek to build reserves.  The most recent recession seems to be better characterized as a collateral shortage, in particular with respect to privately produced assets.  If that is the case, this calls into question the use of traditional open market operations.  While I don’t doubt the usefulness of these traditional measures, the effects of such operations might be reduced in the present environment since OMOs effectively remove collateral from the system.  It would seem to me that the policy implications are potentially different.  Regardless, I think this is an important point and one worth thinking about.

Observational Equivalence, Again

Suppose that prior to the recession, I told you that I had a theory of the business cycle. My theory suggested that shocks to net worth were a significant explanation of the business cycle. Following a shock to net worth, consumption, investment, and hours worked would decline. Suppose that I also told you that increases in the monetary base by the Federal Reserve would keep inflation close to the implicit objective, but have little effect on consumption, investment, and real GDP. Given the events of the last four years, this theory seems to fit pretty well with what we have actually observed. What might surprise you, however, is that the framework I am describing is a real business cycle model with financial market frictions. This view seems largely consistent with James Bullard’s interpretation of events.

Suppose instead that I told you that I had the following theory of the business cycle. My theory suggested that liquidity shocks were a significant explanation of the business cycle. Following a shock to liquidity, and without appropriate Federal Reserve policy, nominal and real GDP would decline and unemployment would rise. In addition, suppose that I told you that if the Federal Reserve increased the monetary base without an explicit target or goal that such an expansion would have little effect on real economic activity. Given the events of the last four years, this theory seems to fit pretty well with what we have actually observed. This view is largely consistent with Scott Sumner’s interpretation of events.

I have used these two examples to illustrate a couple of points. First, neither Bullard nor Sumner (or anybody else associated with similar views) are crazy. They have logically consistent ideas that are consistent with casual observation. Second, confirmation bias is dangerous. It is very tempting to have a theory, look at the world, observe events consistent with your theory, and conclude that your theory is correct. But that is just confirmation bias. What is necessary is to provide evidence to support your theory in light of other theories that have observationally equivalent observations. This is substantially harder to do — even for those who realize it is necessary. Third, and perhaps most importantly, the ability to distinguish between these and other competing theories is incredibly important given the vastly different monetary policy implications.

Economics and Politics

I repeatedly hear claims that solving the current global economic problems merely requires political will. If it wasn’t for the Republican obstructionists or the pigheaded Germans, the problems could (would?) be solved. What I find frustrating about this narrative is its simultaneous simplicity and certainty about the necessary policy prescriptions. Isn’t it possible that so-called Republican obstructionism is the result of a belief on the part of Republicans that the policies they are supposedly obstructing would be ineffective or deleterious? Isn’t it possible that the German leadership is opposed to many suggested policy prescriptions because they believe that many of these proposals simply kick the can down the road and leave them holding the bag? (Isn’t it possible to squeeze countless metaphors into one sentence?!)

The point that I am making is not that the Republicans or the Germans are correct, but rather that it is not certain that they are incorrect. And in the case of Germany, it would seem that they have little to gain and much to lose by helping troubled Eurozone members. Many forget that from the German perspective the ECB’s monetary policy is close to optimal. As such, Germany is likely to be the most insulated from a European economic slowdown — at least according to New Keynesian-style logic. If it makes economic sense for the German leadership to take the position that it does, how can we fault them? Perhaps one could argue that they should care about their fellow Europeans, but that is philosophical and something that is beyond the scope of economics.

In the U.S., what types of policies have been prevented by political obstructionism that would have helped? What evidence is there that these policies would have helped? Is there a competing narrative that can explain the same outcome?

Frequent readers know that I think that monetary policy in the U.S. has been suboptimal. There are “political will” narratives here as well. Those who think that monetary policy has been tight think that the Fed lacks the political will to do what is correct right now. Many of those who think that monetary policy is going to create higher rates of inflation in the near future think that the Fed will lack the political will to bring down inflation when it starts to rise.

A much simpler story is that the Fed is an inflation targeter, with a not-so-implicit-anymore target of 2%. Under this narrative, the past rate of inflation is irrelevant. What matters is preventing the inflation rate from being consistently below target. When I look at the data and when I read speeches by folks like Jim Bullard, this seems entirely more plausible than the political will narrative.

In addition, if the political will narrative is correct, then aren’t these arguments really arguments against the Federal Reserve itself rather than merely policy? In other words, if there is an optimal policy that the Federal Reserve refuses to pursue because of political risks such as diminished credibility, then why have a monetary authority in the first place?

The political will narrative is easy to adopt and probably has some psychological appeal as well. If the POTUS isn’t signing into law policies that you believe would help or if the central bank isn’t following the policy that you believe would be optimal, it is perhaps easiest to think that they simply lack the political will to get things done. Whether policy has been optimal also depends on the objective. If the Fed’s objective is 2% inflation, then they have done a remarkable job. If the Fed’s objective is a trend path for the price level or nominal GDP, then they have done a substantially less than remarkable job. Perhaps it is political will that explains the policy path that has been chosen, but it is possible that there are alternative and entirely valid explanations of such a path.

Insiders Versus Outsiders

The Wall Street Journal reports:

So robust is the recovery in the U.S. auto industry that virtually all the union workers who were laid off by Detroit auto makers during the crisis years can have their jobs back, if they want them.

Even General Motors Co.’s Lordstown, Ohio, complex, long known for its money-losing small cars and its bad labor climate, is running 24 hours a day, with more than 4,000 workers churning out hot-selling Chevy Cruze compacts.

But here in Moraine, the GM assembly plant closed for good. Despite being one of GM’s most productive and cooperative factories, Moraine was closed following the company’s 2007 labor pact with the United Auto Workers union. Under a deal struck by the UAW during GM’s bankruptcy two years later, Moraine’s 2,500 laid-off workers were barred from transferring to other plants, locking them out of the industry’s rebound.

The trouble with Moraine: Its workers weren’t in the UAW.

[...]

Moraine’s workers got nothing in the bankruptcy deal. Their plant, which had closed months earlier, was ultimately sold to a developer. The workers were barred from transfers to UAW plants, as were thousands of others who had worked for Delphi Corp., GM’s former parts arm.

How Moraine’s interests diverged from the UAW’s is rooted in the plant’s history. A former appliance factory, it was converted to a pickup truck plant in 1981 after GM sold its Frigidaire brand. At the time, workers there elected to stick with their existing union, the International Union of Electrical Workers, rather than join the UAW. Over time, they generally accepted contracts negotiated by the UAW.

Through much of the 1990s, vehicles built at Moraine—models like the Chevy TrailBlazer and GMC Envoy—were big sellers and contributors to GM’s profits. In 2007, the plant won recognition as the nation’s most efficient midsize-SUV plant from the Harbour Report, a measure of manufacturing productivity.

“Moraine was always a good plant. The IUE was always a good union,” says Art Schwartz, former general director of labor for GM and now president of Michigan-based Labor & Economic Associates. “It’s a shame what happened to them.”

When GM began spiraling downward in 2007, as soaring fuel prices pummeled truck and SUV sales, IUE leaders decided to break ranks with the UAW and offer concessions to keep GM and Moraine afloat.

The IUE agreed to a two-tier wage system—long opposed by the UAW—in which new hires earn half as much as longtime workers. It also agreed to let the company unload its retiree health obligations into a union-run trust fund.

But as the crisis deepened, and GM and the UAW began negotiating a way out, Moraine’s workers had no seat at the table.

In the fall of 2007, GM promised work to dozens of UAW-represented plants in exchange for concessions on wages and health care, including some of the very changes offered by the IUE. By the time GM doled out enough work to satisfy the UAW, there was nothing left for Moraine.

The reference in the title is to this theory of the labor market.

The Strangest Thing I Read Today

Via Scott Sumner, I find Ezra Klein considering counterfactuals about policy and the recession. However, two sentences stuck out as particularly odd:

The stimulus was a bet that we could get out of this recession through the one path everyone can agree on: growth. The bet was pretty much all-in, and it failed.

The stimulus was about growth? Not the stimulus package that I saw.

The stimulus package was a “gap-closing” policy and the emphasis seemed to be more toward preventing the loss of public sector jobs like teachers, police, and fire service — as evident by the substantial chunk of the package that was devoted to transfers to states. Now we can debate the merits of such policies until we are blue in the fact, but there was very little in the way of growth-producing policies consistent with economic theory (and that remains true if you think that the transfer payments were good policy). What precisely was pro-growth about the stimulus package? Perhaps I missed something.