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You asked me to think about long-run downside via fiscal drag and higher required tax rates and revenues in the future, after the economy has returned to full employment, from additional debt-financed COVID depression-fighting stimulus expenditures. You asked me to think in the context of Larry Summers’s and my “Fiscal Policy in a Depressed Economy” of a decade ago.
My conclusion: RIGHT NOW THERE IS NO PROSPECT OF ANY FUTURE FISCAL DRAG FROM ADDITIONAL DEBT-FINANCED FISCAL STIMULUS...
J. Bradford DeLong: The Siren Song of Austerity https://www.project-syndicate.org/commentary/return-of-austerity-in-us-by-j-bradford-delong-2020-11: ‘Among the many lessons of the 2008 financial crisis and its aftermath in the United States is that there is no good reason to start worrying about debt when unemployment remains high and interest rates low. The hasty embrace of austerity derailed the last recovery, and it must not be allowed to do so again: BERKELEY–Ten years and ten months ago, US President Barack Obama announced in his 2010 State of the Union address that it was time for austerity. “Families across the country are tightening their belts and making tough decisions,” he explained. “The federal government should do the same.” Signaling his willingness to freeze government spending for three years, Obama argued that, “Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.” So great was the perceived need for austerity that he even vowed to “enforce this discipline by veto,” just in case congressional Democrats had something else in mind…
DeLongTODAY: Fiscal Policy: MOAR Spend & Borrow Needed https://www.delongtoday.com/today
Claudia R. Sahm & al.: Household Response to the 2008 Tax Rebate http://www-personal.umich.edu/~shapiro/papers/w15421.pdf: 'Only about one-fifth of respondents in the Reuters/University of Michigan survey report that the 2008 tax rebates led them to mostly increase spending, while over half said it would lead them to mostly pay off debt. Of those in the mostly-spend category, the response was swift, with over 80 percent reporting increasing their spending within three months of receiving their rebate. Older households, households with higher wealth and higher income, and those expecting future income growth were generally more likely to spend the rebates. A review of other surveys confirms the general pattern of results and suggests that small changes in survey design do not have a major effect on the distribution of responses. The distribution of survey answers corresponds to an aggregate MPC after one year of about one-third. The paper combines this survey-based estimate of the MPC and the survey-based estimate of the timing of spending to show that the rebates help explain the aggregate movements in saving, spending, and debt in 2008. Because the rebate was large and distributed over a short period, it had a non-trivial effect on total spending in the second and third quarters of 2008. Nonetheless, the results imply that the rebates provided only a modest stimulus to spending per dollar of rebate...
#fiscalpolicy #macro #noted #2020-05-13
Hoisted from the Archives: From Eight Years Ago: The Way the World Looked to Me in the Summer of 2011
Hoisted from the Archives: The Way the World Looked to Me in the Summer of 2011: Back in the summer of 2009, Barack Obama had five economic policy principals on the Treasury Bench:
No Longer Fresh at Project Syndicate: Listening to Arsonists: Barack Obama made a significant mistake in naming the Republican ex-senator Alan Simpson to co-chair the president’s deficit-reduction commission. Simpson was a noted budget arsonist when he was in the Senate, and he has recently expressed views that make no sense whatsoever: Simpson was a noted budget arsonist when he was in the Senate. Indeed, he never met a budget-busting, deficit-increasing initiative from a Republican president that he would not lead the charge to pass. Nor did he ever meet a sober deficit-reducing initiative from a Democratic president that he did not oppose with every fiber of his being...
No Longer Fresh at Project Syndicate: Is Plutocracy Really the Problem?: After the 2008 financial crisis, economic policymakers in the United States did enough to avert another Great Depression, but fell far short of what was needed to ensure a strong recovery. Attributing that failure to the malign influence of the plutocracy is tempting, but it misses the root of the problem.... In fact, big money does not always find a way, nor does its influence necessarily increase as the top 0.01% captures a larger share of total income.... The larger issue...is an absence of alternative voices. If the 2010s had been anything like the 1930s, the National Association of Manufacturers and the Conference Board would have been aggressively calling for more investment in America, and these arguments would have commanded the attention of the press. Labor unions would have had a prominent voice as advocates for a high-pressure economy. Both would have had very powerful voices inside the political process through their support of candidates. Did the top 0.01% put something in the water to make the media freeze out such voices after 2008?... Read MOAR at Project Syndicate
I was hissed at a Pete Buttigieg fundraiser in August when I said that the Obama presidency had been disappointing. But I do believe this is right, and I think this taking your eye off the good-policy ball in order to strut about peacocking was a major thing that went wrong:
Paul Krugman (2010): March of the Peacocks: "Last week, the Center for American Progress, a think tank with close ties to the Obama administration, published an acerbic essay about the difference between true deficit hawks and showy 'deficit peacocks'. You can identify deficit peacocks, readers were told, by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending. One week later, in the State of the Union address, President Obama proposed a temporary freeze in nondefense discretionary spending. Wait, it gets worse. To justify the freeze, Mr. Obama used language that was almost identical to widely ridiculed remarks early last year by John Boehner, the House minority leader. Boehner then: 'American families are tightening their belt, but they don’t see government tightening its belt.' Obama now: 'Families across the country are tightening their belts and making tough decisions. The federal government should do the same.' What’s going on here? The answer, presumably, is that Mr. Obama’s advisers believed he could score some political points by doing the deficit-peacock strut. I think they were wrong, that he did himself more harm than good. Either way, however, the fact that anyone thought such a dumb policy idea was politically smart is bad news because it’s an indication of the extent to which we’re failing to come to grips with our economic and fiscal problems...
Note to Self: 30-Year Treasury bonds continue astonishingly, bizarrely low:
It is no longer the case that they are at their lowest levels ever, but this from Dan Alpert still makes immense sense: Dan Alpert: "We awake this morning to an all-time low yield on 30 year US Treasury bond: 2.107%. This is nearly 40 basis points below the average interest rate on all marketable treasury securities https://t.co/j3trQPFxfN. It is time to borrow and invest in infrastructure #LockItIn:
Note to Self: Talking points for Squawk Box: Business, Politics, Investors and Traders, 7:45 AM EDT 2019-08-24:
Hoisted from 2011: Sumner really knew better than to do this, and really ought to have restrained himself:
Scott Sumner: A Slightly Off-Center Perspective on Monetary Problems: "They are both basically saying: 'if we hold nominal spending constant, fiscal policy can’t fix it.'... [I]t’s really rather sad when people like Krugman and Brad DeLong keep insisting that these guys don’t understand basic macro principles.... I don’t know for sure that Fama was using the same implicit assumption... [but] I think it quite likely that Fama was also cutting corners.... Lots of brilliant people talking past each other.... Welcome to elite macroeconomics, circa 2011.... If I was going to assign blame I’d single out Krugman/DeLong for rudeness and Fama/Cochrane for poor communication skills...
There never was a 90% cliff. And most of the downward slope in teh scatter came not from debt accumulation but from growth that had been slow for other reasons. See Owen Zidar (2013): Debt to GDP & Future Economic Growth:
Hoisted from the Archives: Risks of Debt: The Real Flaw in Reinhart-Rogoff: 2013: A country that spends and spends and spends and spends and does not tax sufficiently will eventually run into debt-generated trouble. Its nominal interest rates will rise as bondholders fear inflation. Its business leaders will hunker down and try to move their wealth out of the corporations they run for fear of high future taxes on business. Real interest rates will rise because of policy uncertainty, and make many investments that are truly socially productive unprofitable. When inflation takes hold, the web of the division of labor will shrink from a global web he'd together by thin monetary ties to a very small web solidified by social bonds of trust and obligation—and a small division of labor means low productivity. All of this is bound to happen. Eventually. If a government spends and spends and spends but does not tax sufficiently.
But can this happen as long as interest rates remain low? As long as stock prices remain buoyant? As long as inflation remains subdued. My faction of economists—including Larry Summers, Laura Tyson, Paul Krugman, and many many others—believe that it will not...
Weekend Reading: Discussion of J. Bradford DeLong and Lawrence H. Summers: "Fiscal Policy in a Depressed Economy
Robert Hall observed that a better title for the paper would be “Eta,” since the paper’s surprising results all stem from the authors’ beliefs about the value of their hysteresis parameter η. The other parameter values the authors used for their simulations seemed mostly reasonable and uncontroversial to Hall. He noted that although Valerie Ramey had estimated a relatively low value for the multiplier on fiscal spending, the standard error on her estimate was large and did not rule out the possibility that the authors’ baseline value of 1.5 was correct. Hall also observed that some alternative ways of analyzing government spending data from World War II generated higher estimates of the multiplier. He found the authors’ value for the growth rate reasonable, and although he shared Ramey’s concern about the authors’ real interest rate assumptions, he thought their baseline value might be reasonable as well.
More than Two Decades of Macroeconomic History Through the Lens of Four Key Components of Aggregate Demand
It is remarkable the extent to which you can tell the story of the U.S. macroeconomy over the past twenty-five years through the reactions of four components of aggregate demand to policies and shocks:
- The dot-com boom unleashed by the Clinton deficit-reduction program and high-tech innovation.
- The dot-com bust.
- The housing boom.
- The successful rebalancing of aggregate demand—housing sits down, while exports and business investment stand up as money flows are successfully redirected.
- The Fed well behind the financial-stability curve: the financial crisis and the collapse.
- Inadequate recovery: The Geithner Treasury and the Obama White House's failure to do anything to promote a recovery of residential construction.
- Inadequate recovery: Republican (and Obama) fiscal austerity.
- Inadequate recovery: Bernanke's highly premature taper tantrum.
- The Trump rebound.
The Intergenerational Burden of the Debt: Nick Rowe Tempts Fate Weblogging: Hoisted from the Archives
Until secular stagnation ends—until the yield on U.S. government debt exceeds the growth rate of the economy—worry about reducing of even stabilizing the debt-to-GDP ratio of a country like the U.S. that has assume running room via financial repression to stabilize demand for its debt is premature. Thus the takeaway is this: It would be much more productive right now to worry about how do we maintain normal levels of net investment in a high government debt post-interest rate normalization environment than to propose sending the economy back into recession in order to reduce government debt accumulation. Recession and high unemployment in the short- and medium-run are problems. Low investment in the medium- and long-run are problems. Government debt is a tool to avoid the first and a source of risk of the second. But it is better to keep your mind focused on the things that are real problems:
Hoisted from the Archives: The Intergenerational Burden of the Debt: Nick Rowe Tempts Fate Weblogging...: Nick Rowe:
Writing Bulls--- for the WSJ Op-Ed Page as a Career Strategy: The Nine Unprofessional Republican Economists
The extra quarter's worth of data from the new BEA NIPA release raises this, once again, to the top of the pile: Note the contrast between the path of investment, on the one hand, implicit in the growth forecast of the effects of the Trump-Ryan-McConnell tax cut that Robert J. Barro, Michael J. Boskin, John Cogan, Douglas Holtz-Eakin, Glenn Hubbard, Lawrence B. Lindsey, Harvey S. Rosen, George P. Shultz and John. B. Taylor, and, on the other hand, reality:
If you are even 10% in the explain-the-world business—if you are even 1% in the explain-the-world business—such a sharp disjunction between what you had predicted and the outcome calls forth curiosity, interest, and explanations of why you think you went wrong and what your future research projects will be to figure it out.
Only if you are 100% in the I-am-engaging-in-vice-signalling-by-writing-bulls----to-please-my-political-masters business are you left doing <crickets> in response to such a very sharp disjunction between your predictions and reality.
Yet as I listen to each and very one of the Nine Unprofessional Republican Economists, all that I hear is: <crickets>...
- Economics as a Professional Vocation: Bulls--- Detection as a Student Learning Goal
- The Nine Unprofessional Republican Economists Have Become Even More Unprofessional
Come to think of it, none of the nine has dared to see that Steve Moore is unqualified to serve on the Federal Reserve, either—and two of the nine, Taylor and Lindsey, are, I am assured, in his corner...
Dotting i's and Crossing t's with Respect to Olivier Blanchard's "Secular Stagnation" Fiscal-Policy-in-an-Era-of-Low-Interest-Rates AEA Presidential Address
Consider the semi-canonical Diamond (1965) overlapping-generations model, with a wedge between the safe government-bond interest and the risky profit rate driven by risk aversion. Blanchard (2018) shows that the effects of increased debt have two effects that:
- raise (lower) reprentative-agent utility,
- evaluated after the resolution of uncertainties when the agent is young:
- a direct-transfer effect that holds when the safe government-bond rate is lower (higher) than the economy's growth rate, and
- a factor-price effect that holds when the risky average profit rate is lower (higher) than the economy's growth rate.
Robert Waldmann has convinced me that this second factor-price effect can be neutralized by a balanced-budget profit tax-funded wage subsidy.
Hence in the semi-canonical Diamond (1965) overlapping-generations model the economy is dynamically-inefficient—can be made better off by reducing its productive capital stock and introducing sustainable pay-as-you-go transfer schemes—whenever the safe government-bond rate is less than the economy's growth rate, no matter what the level of the expected profit rate:
I have been thinking about this by Łukasz Rachel and Lawrence H. Summers this week: On Falling Neutral Real Rates, Fiscal Policy, and the Risk of Secular Stagnation.
It says an awful lot of true things. The average "neutral" 10-year safe real interest rate consistent with full employment in the Global North does look like it has fallen from 4% per year in the 1990s to -0.5% per year today. That does pose a huge problem for central banks that seek to use monetary policy s as the principal depression-fighting tool: a small negative shock that reduces this rate by only a little bit more would drive an economy into territory where the central bank cannot do its job. During this period of decline, increased government debts have put perhaps 2%-points of upward pressure on the neutral rate: the actual decline has been 6.5%-points.
But I find myself uncertain on what conclusions to draw from their paper. They focus on only one of what I think are three key interest-profit-discount rates in play here:
There is the (short or long) real safe interest rate on the securities of governments that issue reserve currencies and thus possess exorbitant privilege. This is down to today's -0.5% from 3% 20 years ago and 4.5% 40 years ago.
There is the long-term real risky discount rate at which the cash flows accruing to owners of capital are discounted in the market—the expected return on financial investments in stocks. This is at to 5% today, up from 4% 20 years ago, down from 12% 40 years ago, and down from 6% 50 years ago.
There is the societal profit rate earned by new investments in physical or intellectual capital. This is ??? to today's ???, from ??? 20 years ago and from ??? 40 years ago.
This third social profit rate is in some sense the fundamental opportunity-benefit-of-investment ground out by the real economy of production and distribution on top of which the financial superstructure is built.
The second is the quotient of profit flows over the market value stock, and takes the societal profit rate returns to society's capital and adds to them the amount of monopoly rents captured by enterprises, subtracts from them labor rents and spillover benefits, both organizational and technological, that are not captured by those who undertake the actions that generate those spillovers, and then values those cash flows at the long-term risky discount rate.
The first of safe interest rate is the second minus the liquidity and safety terms that lower the required rate of return on safe assets.
Łukasz Rachel and Lawrence H. Summers focus on rate (1): the (short or long) real interest rate on the safe securities of governments that issue reserve currencies and thus possess exorbitant privilege. The problem is that the wedge between this (1) safe interest rate and the risky discount rate (2)—the rate at which risky cash flows are discounted—is worse than poorly understood by economists: it is not understood at all.
Debt-Derangement Syndrome: Standard policy economics dictates that the public sector needs to fill the gap in aggregate demand when the private sector is not spending enough. After a decade of denial, the Global North may finally be returning to economic basics.
For the past decade the public sphere of the Global North has been in a fit of high madness with respect to its excessive fear of government debts and deficits. But this affliction may be breaking. In the past two weeks I have noted two straws in the wind.
Note to Self: Thinking About Blanchard's Presidential Address...: Blanchard's calculations of the effect of debt on welfare in his AEA Presidential Address all take the form of evaluating the welfare of a generation of economic agents young in some period t after the resolution of all period-t stochastic elements. That is a fine thing to do. That is not quite the same thing as the effect on expected well-being behind the veil of ignorance, from the nunc stans, taken without any knowledge of the resolution of period-t or indeed of any earlier stochastic elements. But I have not yet been able to wrap my head around what the differences are, or how they matter for conclusions. My notes...
Project Syndicate: Debt Derangement Syndrome: Standard policy economics dictates that the public sector needs to fill the gap in aggregate demand when the private sector is not spending enough. After a decade of denial, the Global North may finally be returning to economic basics: For the past decade, politics in the Global North has been in a state of high madness owing to excessive fear of government debts and deficits. But two recent straws in the wind suggest that this may at long last be changing.... Ken Rogoff.... Brendan Greeley... reported... “a panicked email” from the Committee for a Responsible Federal Budget (CRFB)... Olivier Blanchard.... What Rogoff and Blanchard are saying today is standard policy economics. In fact, I always found it hard to believe–and still do–that anybody can take exception to it. Whenever the private sector stops spending enough to keep unemployment low and jobs easy to find, the public sector needs to fill the gap in aggregate demand... Read MOAR at Project Syndicate
Note to Self: Trying and failing to gain conceptual clarity about and work my way through the algebra involved in a minor point in Blanchard's excellent and stimulating presidential address: Public Debt and Low Interest Rates: https://nbviewer.jupyter.org/github/braddelong/WS2019/blob/master/Thinking_About_Blanchard%27s_Presidential_Address....ipynb?flushcache=true...
Yes, There Are Individual Economists Worth Paying Respect to. But Is Economics Worth Paying Respect to?
Blush. To be one of fifteen good economists name-checked by Larry Summers genuinely makes my day—nay, makes my week.
But this gets into a topic I have been worrying at for a long time now. And so let me try once again to say what needs to be said, for I do have to admit that, contrary to what Larry maintains, Fareed Zakaria does have a point when he says that "events have hammered... nails into the coffin of traditional economics" and that, while the question mark at the end is important, it is time to speak of "the end of economics?". Yes, there are very many good economists worth listening to. But does economics as a whole have any claim to authority, or is it better for outsiders' first reaction to be to dismiss its claims as some combination of ideology on the one hand and obsequious toadying to political masters on the other?
Open right now on my virtual desktop, as has been true about 5% of the time over the past fourteen months, is an article forecasting the economic effects of the 2017 Trump-McConnell-Ryan tax cut by nine academic economists: Robert J. Barro, Michael J. Boskin, John Cogan, Douglas Holtz-Eakin, Glenn Hubbard, Lawrence B. Lindsey, Harvey S. Rosen, George P. Shultz and John. B. Taylor: How Tax Reform Will Lift the Economy: We believe the Republican bills could boost GDP 3% to 4% long term by reducing the cost of capital. It is, bluntly, unprofessional.
Larry Summers: Has economics failed us? Hardly: "My friend Fareed Zakaria... writing... “The End of Economics?,” doubting the relevance and utility of economics and economists. Because Fareed is so thoughtful and echoes arguments that are frequently made, he deserves a considered response. Fareed ignores large bodies of economic thought, fails to recognize that economists have been the sources of most critiques of previous economic thinking, tilts at straw men and offers little alternative to economic approaches to public policy...
Are our models filing systems to remind us in shorthand form of what we think we know—in which case "we" should distrust models that say debt is good—or are they intuition pumps? As I see it, Paul Krugman strongly argues for the first; Olivier Blanchard takes some steps toward the second—which is why there is some dissonance between the tone of and the models in his presidential ddress: Paul Krugman: "A mostly good summary of interesting papers presented at the ASSA https://www.bloomberg.com/news/articles/2019-01-07/a-new-urban-divide-and-other-gems-from-the-big-economics-shindig but tellingly misrepresents what the paper by @ojblanchard1 actually said.... It doesn't say anything like 'debt is bad but not catastrophic'. It notes that in simple models a situation like the one we're in, in which interest rates are below growth rates, is one in which debt is actually good https://www.aeaweb.org/aea/2019conference/program/pdf/14020_paper_etZgfbDr.pdf.... Olivier then asks whether realistic complications reverse that result, and finds it unclear—more debt may well actually be good, and in any case probably doesn't do much harm. It's really a radical repudiation of what the Serious People have been saying. So it's misreporting to imply that it's just about downplaying the catastrophic risk aspect; the chairman of the AEA is basically saying that the whole deficit scold enterprise that dominated so much political discourse was bad economics...
Robert Waldmann (2016): Dynamic Inefficiency: "Is public debt a burden?... It is possible in theory that the answer is no and that higher [initial] public debt causes permanently higher [balanced-growth path] consumption and welfare.... This is called dynamic inefficiency. The standard result from simple models is that an economy is dynamically inefficient if r is less than g where r is the real interest rate and g is the rate of GDP growth...
If Arindrajit Dube and I do start our Economic Home podcast, I think that each 30 minute segment should concentrate on two or three (or four) papers and two or three (or four) graphs and tables. Our first proposed topic is the top marginal tax rate. Are these the right papers? Are these the right graphs and tables?
- Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva (2011): Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities
- Emmanuel Saez and Stefanie Stantcheva (2016): Generalized Social Marginal Welfare Weights for Optimal Tax Theory
- Alan J. Auerbach and Kevin Hassett (2015): Capital Taxation in the Twenty-First Century
What Is “Modern Monetary Theory”?
Ever since the Great Depression it has been settled doctrine in the nations of the North Atlantic that the government has a responsibility to keep the macroeconomy in balance: The circular flow of spending, production, and incomes should be high enough to keep there from being unnecessary unemployment while also being low enough so that prices and inflation are not surprisingly and distressingly high.
To accomplish this, governments use fiscal policy—the purchase of goods and services, the imposition of taxes, and the provision of transfer payments—and monetary policy—the provision by the central bank to the system of those liquid assets called “money” and its consequent nudging up and down of interest rates and asset prices—to attempt to keep the circular flow of spending, etc., in balance with the economy‘s sustainable productive potential at the expected rate of inflation .
Modern Monetary Theory says (1) that that is all there is to worry about, and (2) that fiscal policy should play the principal role in this balancing process.
Equitable Growth Steering Committee member Karen Dynan and company point out a big problem. Should we be trying to pay down our debt now in order to create "fiscal space"? Our should we take secular stagnation seriously, and not fear the possibilty of a sudden downward valuation of government debt that would take fiscal space away?: Karen Dynan, Jay Shambaugh, and Eduardo Porter: What Tools Does the U.S. Have to Combat the Next Recession?: "Today's lower equilibrium interest rates make it more likely that monetary policy would need to make use of unconventional tools to spur the economy. On the fiscal front, we have a much larger level of government debt relative to GDP than we did prior to the financial crisis. However, viewing this level of debt to GDP as a reason to restrain stimulus spending in case of a crisis could make the problem worse. Whether the government uses fiscal policy to stimulate the economy will depend more on political willingness, than on the actual limits on fiscal policy...
David Cho: The Labor Market Effects of Demand Shocks: Firm-Level Evidence from the Recovery Act: "How do firms respond to demand shocks?... Leveraging two firm-level datasets... linked employer-employee administrative records for a subset of U.S. firms from ADP, LLC with a comprehensive database of transactions from the American Recovery and Reinvestment Act (ARRA)... I compare firms that received ARRA funds to a counterfactual sample of employers that were not directly connected to the Recovery Act.... The magnitudes of these changes suggest that the labor supply to an individual firm is relatively inelastic, even in a deep recession, and provide evidence of monopsonistic wage-setting in U.S. labor markets...
Paul Krugman: The Economics of Soaking the Rich: "Diminishing marginal utility is the common-sense notion that an extra dollar is worth a lot less in satisfaction to people with very high incomes than to those with low incomes. Give a family with an annual income of $20,000 an extra $1,000 and it will make a big difference to their lives. Give a guy who makes $1 million an extra thousand and he’ll barely notice it. What this implies for economic policy is that we shouldn’t care what a policy does to the incomes of the very rich. A policy that makes the rich a bit poorer will affect only a handful of people, and will barely affect their life satisfaction, since they will still be able to buy whatever they want...
Laboratories of democracy! It seems pretty clear that Brownback was in on the grift, but expected—hoped?—that his tax cuts would pull enough activity and people from Kansas City, MO to Kansas City, KS that that plus a normal rapid recovery would allow him to claim a "Kansas boom". But his henchmen still control the Kansas Republican Party: Heather Boushey: Failed Tax-Cut Experiment in Kansas Should Guide National Leaders: "Sam Brownback’s failed “red state experiment” has truly come to an end.... In 2012 and 2013, Republican Gov. Sam Brownback signed into law the largest tax cuts in Kansas history. The top state income tax rate fell by nearly one-third and passthrough taxes that affected mainly relatively wealthy individuals were eliminated. With the decline in revenues came significant spending cuts...