The Clunky Past of Alan Kreuger, Obama's Economic Adviser Nominee

Princeton's Alan Krueger will tackle unemployment and his academic past.

August 31, 2011, 12:28 PM

Sept. 1, 2011 — -- Princeton economist Alan Krueger, President Obama's nominee for top White House economic adviser, has drawn fire over his work on the "cash for clunkers" program and controversial academic papers on job creation and health care mandates.

Krueger is expected to play a key role in shaping the White House's plans to solve the lingering unemployment problem.

Obama nominated Krueger on Monday to chair the three-person Council of Economic Advisers (CEA), on which the president said he relies "to provide unvarnished analysis and recommendations, not based on politics, not based on narrow interests, but based on the best evidence -- based on what's going to do the most good for the most people in this country."

Roberton Williams, senior fellow with the Tax Policy Center, said the toughest challenge for the CEA chair will be to help solve persistent joblessness.

"Unemployment is a really hard problem to solve. If it was easy, we would have solved it long ago," he said.

Though Krueger has a tough road ahead of him, the role of CEA chair is one of the most prestigious economic policy jobs in the country.

"For somebody who wants to influence policy it's about as good of a job as you can get," William said.

Krueger was chief economist at the U.S. Treasury and assistant secretary for economic policy at the Treasury Department from May 2009 to November 2010, just as the White House implemented the cash allowance rebate system, or "cash for clunkers" program which lasted from July through August 2009.

"In the first two years of this administration, as we were dealing with the effects of a complex and fast-moving financial crisis -- a crisis that threatened a second Great Depression -- Alan's counsel as chief economist at the Treasury Department proved invaluable," the president said.

Critics of the rebate program, which allowed Americans to trade an older gas-guzzling vehicle for $3,500 or $4,500 of credit towards a new car, say its results were short-lived or unclear in boosting car sales and the economy at best.

About 700,000 cars were traded as a result of the program and according to the National Highway Traffic Safety Administration estimates, Cash for Clunkers resulted in a $3.8 billion to $6.8 billion increase in GDP and over 60,000 jobs created or saved.

But, which provides automotive information, estimated that of those 700,000 cars, only 125,000 were incremental sales while the remaining would have been sold independent of the program. Edmunds also estimates the program cost taxpayers $24,000 per vehicle sold.

Edmunds' CEO Jeremy Anwyl told ABC News "cash for clunkers" evolved from an environmental plan to remove inefficient, polluting cars off the road into an economic program.

"It was less effective from an environmental standpoint and not effective from an economic perspective," Anwyl said. "It tried to do too many things."

As chief advisor to Treasury Secretary Timothy Geithner, Krueger had a role in almost every tax policy that originated out of the White House during that time, but that does not necessarily mean he supported them, according to Williams.

"What people do publicly does not necessarily reflect their personal views. It was an administration policy and he supported it," Williams said.

Other policies that Krueger may have helped implement were the Hiring Incentives to Restore Employment, or HIRE, Act from March 2010 and a Social Security payroll tax cut which provided a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid. The payroll tax cut was a part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act approved in December 2010.

A White House spokeswoman said Krueger is not conducting press interviews as he awaits confirmation for his new role from Congress.

A spokeswoman for the Treasury Department provided a statement to ABC News.

"In response to the financial crisis that left millions of Americans out of work and millions more families struggling to make ends meet, the Administration designed a number of programs to boost the economy," the spokeswoman said. "While those programs, including "Cash for Clunkers" and the HIRE Act tax credit, were successful at putting Americans back to work and spurring demand in some of the hardest hit sectors of our economy, there is more work to be done and we won't rest until every American who wants a job has one."

While Krueger has a few degrees of separation from the White House's past economic policies, his past research, on the other hand, has sparked some controversy.

One research paper in 1993, which he co-authored with labor economics professor at the University of California, Berkeley, David Card, suggests that raising the minimum wage does not have a negative impact on employment, an assertion that many labor economists have challenged. Krueger's paper examined the impact of a minimum wage hike in New Jersey on employment in the fast food industry, compared with employment in nearby Pennsylvania.

Stephen Bronars, senior economist with Welch Consulting in Washington D.C., said there may be evidence in the current economic downturn which also casts doubt on the paper's conclusion. The 40 percent increase in the minimum wage between 2007 to 2009 may have contributed to the low employment rates of teenage workers in the current economic downturn, Bronars said.

The Heritage Foundation, a think-tank in Washington, D.C., said the "fatally flawed" study was later disputed by other economists who found the wage increase in New Jersey led to a 4.6 percent decrease in employment there relative to the control group in Pennsylvania.

But Bronars said he believes Krueger is flexible enough to help craft solutions that can be guided through a deeply divided Congress, where the Democrats control the Senate and the House is Republican-led.

"[Krueger] is savvy enough to know that the most relevant policy initiatives are ones where a compromise can be reached, regardless of what his opinions are or what he has learned from his research," Bronars said.

Another paper Krueger co-authored, published in 1991, may spark some debate related to the White House's mandated healthcare laws. The research, co-written with MIT economics professor Jonathan Gruber, found workers paid for roughly 85 percent of employer mandates for benefits such as health insurance or workers compensation. According to Gruber and Krueger the remaining 15 percent of the cost is paid by the employer.

The authors state that "although the nominal burden of mandated employment-based health insurance will be borne by firms, if the experience of health insurance is similar to that of workers' compensation insurance, our estimates suggest that employees will ultimately bear a large fraction of the burden of financing mandated health insurance through lower wages."

Robert Reich, former labor secretary under President Clinton and professor at the University of California, Berkeley, called Krueger "one of the preeminent labor economists in America."

"While economists and policy experts working in high public office occasionally have to pull their punches in public, I have no doubt Alan will tell the president the unvarnished truth," Reich said. "That's what the CEA chair is supposed to do."

Williams of the Tax Policy Center said every CEA chairperson brings with him an "economic toolbox and a view of the world," used in conjunction with the president and his policy focus.

But mostly Williams said the CEA chair's role is to "stop bad ideas."

"That's something someone in the council can do," Williams said. "They speak in an economic voice, promoting plans and keeping bad things from happening."

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