As the last couple of paychecks of the year approach, many people get a temporary pay raise, as Ron Lieber of the Wall Street Journal explains:
By now, many of the 8.9 million Americans who earn more than $100,000 annually have already hit six figures; scores more will do so in the next few weeks. Here's what they may miss if they don't watch their paycheck carefully: A nice-sized raise that appears without warning, then vanishes just as quietly on Jan. 1.
Sound odd? It's a function of tax rules. Most workers have their paychecks docked 6.2% to fund Social Security. But they stop paying that tax on income above a certain level each year. This year, the threshold is $94,200. Next year, it is $97,500.
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There's no excuse for frittering the funds away. Be deliberate, and start with the obvious checklist: If you haven't maxed out your 401(k), especially the portion that your employer matches, increase your withholding. (Then consider just leaving it there come January to see if you miss the money.) Pay off your credit-card debt, and if you can't get rid of all of it, at least pay down the higher-interest cards. Fund a Roth IRA if you're eligible, and take advantage of the tax-free earnings you'll be able to withdraw once you're older.
Sounds like an application of the permanent income hypothesis. However, since this comes at the end of the year, a lot of people probably do use it to cover their holiday bills. December always throws off my consumption smoothing plans a bit.
Huh... do we have to still call it that?
Isn't it just a regular implication of models of consumer behavior with explicit maximization, time preference/discounting and rational expectations?
It is. However, I prefer to use this specific term because it reinforces the distinction between permanent and transitory changes in income. This distinction is useful in practice, as in describing real-world "experiments" like this. I use the word experiment here because there is a very specific policy with a very clear theoretical analog. In principle, one could observe the result and compare to the theory.
Your description is fine for a Macro I course (it is nice and abstract), but by calling it the PIH, I'm alluding to a very *specific* implication of models of consumer behavior with explicit maximization, time preferences,... etc.
How Bad Trade Deals are Destroying the Middle Class
This is from “Skeptical Economist”.
So far, our global economic failures show up mainly as discontented workers in areas hard hit by import competition. However, the real problems (and the worker problems are quite real) are considerably worse
The United States as a nation is far from self-sufficient or anything close. Back in Kennedy era, imports and exports were in the range of 4 to 5% of GDP. The US economy was closes to autarkic. These days comparable numbers are imports are 16.22% of GDP and exports are 10.46% of GDP. Per se, there is nothing wrong with trade growing as a percent of GDP. However, the brutal reality is that our nation can no longer pay its bills. Imports of goods are almost double exports of goods. We enjoy a small (and shrinking) surplus on services and are now in deficit for payments (profits received from overseas US investments versus profit earned by foreign investment in the US).
If you could only pay half of your bills, would you think you were doing well? Would that be OK? Might some question of economic failure arise? Wouldn’t virtually every American see it that way? Yet, when it comes to our country, it is somehow OK. Of course, it is not.
If you could only pay half of your bills, your debts would be soaring. Guess what? So are the debts of the United States. Of course, the national debt is growing and more than 50% owned by foreigners. However, the debts of ordinary Americans are rising as well and a growing percentage are owned by foreigners as well.
The trade debate is usually depicted in terms of “cramped, narrow minded, locally oriented protectionists” versus “visionary, open minded, free trading globalists”. This caricature is largely correct. However, that doesn’t mean the protectionists are wrong. With America going broke, they are at least on the right side of the issue..
Thomas Friedman demonstrated again the cluelessness of our elites on trade today. His piece “China: Scapegoat or Sputnik” repeated the usual mantra about education solving our problems. His actual words were “health care, portability of pensions, entitlements, and lifelong learning”. Nice ideas, but will they really help middle aged workers without jobs? No, of course not, but the deeper problem is they won’t fix our trade problems either. We will simply go broke faster. What words were missing? How about “overvalued currency”, “RMB versus the dollar”, “China’s lack of currency flexibility”, etc. All notably missing.