February 08, 2008
Around the web
Lawrence White explains why the gold standard may not be such a bad idea. It's a Cato podcast... with a briefing paper to go along with it.
Tim Duy gets frustrated with people comparing our current problems with Japan in the 1990s. Me too. He also gives his take on Plosser's speech and more.
Jeff Frankel is blogging. Go. Read. Now.
Andrew Samwick is disappointed with congress over the stimulus package.
Posted by William Polley at 05:29 PM | Comments (0) | TrackBack
January 18, 2008
Additional thoughts on stimulus
I considered appending this to the last post as an update, but decided it was already long enough. This will be brief.
Tomorrow's NY Times has an article on the disagreement among economists about how best to implement fiscal stimulus. The usual arguments against it have been hashed out already. But here's a defense of timely stimulus from John Taylor.
Stimulus packages of the less recent past are often cited as examples of how not to make policy. Economists say that in the recession of the mid-1970s, spending and tax cut measures were enacted too slowly, having an effect only after the economy had already picked up. In 1992 and 1993, partisan squabbling derailed plans for a stimulus package as the recession came and went.
The measures seven years ago sent a different lesson, according to John B. Taylor, a professor of economics at Stanford and a former Treasury official under Mr. Bush. “People look back at 2001 and are more positive about this kind of approach,” he added.
Taylor's point, which is present in his textbook and which he reiterated in a Bloomberg podcast with Tom Keene, is that timing is everything. However, in the podcast, Taylor reminds us that the 2001 rebate was actually an advance payment on the cut in tax rates (that are set to expire soon). In that way it was different from what is being proposed now.
In my opinion, that is a pretty big difference, and leads me to the view that the rebates being proposed now will be less effective than those in 2001.
Listen to the podcast with Taylor. He has some interesting comments on monetary policy as well. "Bloomberg On the Economy" is a good thing to have on in the background while you're blogging.
Posted by William Polley at 09:58 PM | Comments (3) | TrackBack
Stimulus redux... addicted to rebates
It did not take long for the stimulus/rebate discussion to take on a life of its own. Why it was just earlier this week that the presidential candidates were telling us how they would stimulate the economy. As if any of this would be timely or meaningful by the time they take office. As if green collar job programs are the way to help avoid recession. Well, the current president got the message and looks like he is going to try to steal at least a little bit of their thunder. Mr. Obama will have to either come up with something new or claim victory in that the president is proposing something similar to what he suggested.
Enter Mr. Bush... (NY Times)
WASHINGTON — President Bush called on Friday for about $145 billion worth of tax rebates for American families and incentives for businesses to provide “a shot in the arm to keep a fundamentally strong economy healthy” and avert a slide into recession.
The president said the package “must be big enough to make a difference” in an economy as large as that of the United States, meaning it should be worth about 1 percent of the gross domestic product, putting it at $140 billion to $150 billion, Treasury Secretary Henry M. Paulson Jr. said later.
“This growth package must be temporary and take effect right away,” Mr. Bush said. The president said Mr. Paulson would work with Congressional leaders to get a bipartisan relief package ready as soon as possible.
As soon as possible could be really soon. Over at CNN/Money the sub-headline was "Lawmakers are still working out final details on cutting checks to all Americans to fight recession." We're already on the final details? Considering how long it usually takes to get things done in congress, that is fast. Almost frighteningly fast. Back in the NY Times article, they quote Senator Reid,
The Senate majority leader, Harry Reid of Nevada, was low key and cautious in his initial reaction. “I am encouraged and share the president’s view that we need prompt bipartisan action to strengthen our economy,” he said. “I also agree that our focus must be on finding temporary measures that will do the job effectively. I look forward to working with the president to implement responsible solutions that revive our economy for the benefit of all Americans.”
Reid's "initial reaction" as lawmakers work out the "final details"? Like I said, this took on a life of its own this week. So can we quantify how fast this is rolling ahead? Apparently so. Back to CNN/Money:
On Friday afternoon, House Financial Services Chairman Barney Frank (D-Mass.) told CNN he believed lawmakers could pass a stimulus package, including a rebate, by March 1.
And that means money in your pocket by summertime.
But I ask again, as I asked the other day, is this this the way to go?
I'll stop short of calling it a 100% unmitigated bad thing. Sure, we all know that the link between the rebates and increased spending is tenuous. Shapiro and Slemrod find that only about 22% of households would spend the rebate (link via Angus at Kids Prefer Cheese). So the stimulus part is a little dubious. King Banaian repeats the skepticism he voiced the other day. Bill Thomas and Alex Brill express their displeasure with all the stimulus talk in this Wall Street Journal commentary. The Journal's editorial page also questions the need with a swipe at Nixon's famous line, "We're all Keynesians now." Andrew Samwick just calls it deficit spending. Everyone seems to be piling on, and it's hard to blame them. Still, in defense of the rebates, it's probably faster and, if targeted at low and middle income households, more effective than many other forms of fiscal stimulus.
Yet it's far from clear that fiscal stimulus is what is necessary to fight whatever recession, downturn, slowdown, or whatever you want to call it may be on the horizon. My main concern which I don't think I've seen mentioned elsewhere in the econ-blogosphere (but correct me if I'm wrong) is that politicians might become addicted to these rebate checks. There are all sorts of political games that can be played with them. The president doesn't have to worry about getting re-elected, but clearly the rebates could give him a small victory on the way out. Congress, however, is up for re-election in November, and wouldn't it be nice to be able to go back to their constituents after Labor Day and tell everyone how they are responsible for those checks. Not that the American voters can be bought, of course.
So despite the protests from many quarters, I'd say that the rebate checks (in some form) are just about a sure thing. Shapiro and Slemrod will have a chance at a sequel.
UPDATE: Bruce Bartlett pulls no punches.
Posted by William Polley at 08:26 PM | Comments (4) | TrackBack
January 15, 2008
Q: Is a rebate check the quickest and most effective fiscal stimulus?
Probably not.
But consider the following. Brad DeLong writes:
Bear in mind that I don't yet believe that the case for a fiscal stimulus is strong--although I may change my mind in a month or two, depending on how the data flow looks. The principal organization for successful stabilization policy is the Federal Reserve. Congress and the president have a role to play only in two situations: first, if monetary policy has shot its bolt and cannot do anything more--and we are far from that point--and second, if the Federal Reserve has been caught flat-footed in the wrong policy position, unemployment is rising rapidly, and it is important to get cash quickly into the hands of people who will spend it and so keep the rise in unemployment from being as large. We are not there yet--at least I don't think so--but we may be there in three months.
From this perspective Obama's plan looks pretty good:
Obama stimulus package emphasizes quick cash in hand: a $250 tax credit to 150 million workers to offset the payroll tax paid on the first $8,100 of earnings. He urged a further $250 tax credit per worker if employment declines three months in a row. He also would give a one-time, $250 payment to Social Security recipients who would not benefit from the tax credit, followed by another $250 payment if employment declines three months straight. The immediate relief would cost $45 billion, plus another $45 billion if the economy weakened...
...
John Edwards's and Hillary Rodham Clinton's plans look, to me, likely to be less effective. Consider Hillary Rodham Clinton's:
Talking Points Memo | Clinton offers economic stimulus plan: a $30 billion housing crisis fund to help states and localities deal with the fallout of foreclosures... ease the effects of vacant properties with anti-blight programs and helping local housing authorities buy and rent out vacant properties. Setting a 90-day moratorium on subprime mortgages of at least five years, or until housing lenders have converted mortgages into loans families can afford. The proposal also would increase the portfolio caps at Fannie Mae and Freddie Mac. Providing $25 billion in emergency energy assistance for families facing rising heating bills.... Providing $10 billion to extend unemployment insurance for those struggling to find work while supporting families. Providing $5 billion in energy efficiency by doing such things as giving tax credits to encourage purchases of low emission vehicles and efficient appliances windows and other clean technologies. She also proposes funds to train and put to work people making public buildings more energy efficient...
These are all worthy causes--things that the government should be spending more money on. But this is not a bill that can be passed quickly--the housing provisions, at least, are one of those things where the devil is in the details of the drafting and where quick, clean passage and implementation is almost impossible. Funds to train and put to work people making public buildings more energy efficient--well, those aren't timely. The proposal is not Obama's: we are going to stimulate demand by cutting a lot of identical checks via a refundable tax credit--a thing that the government can do well and quickly....
...
John Edwards and Hillary Rodham Clinton and their staffs--they don't seem to have grasped that governance is best when you ask congress to do things that are within its competence, and ask the administrative branch to do things that are within its competence. They might respond that these stimulus packages are political rather than policy documents--acts of campaigning rather than acts of governance--and they are right, up to a point.
And so my question: Is a rebate check the quickest and most effective fiscal stimulus? It would seem that there is an argument to be made that it is better than many other alternatives. This document from the CBO circulating through the blogosphere gives rebate checks a mixed review. Their report gives the best rating to extensions of unemployment insurance and increasing food stamp benefits. King Banaian is skeptical given that long term unemployment doesn't seem to be our biggest problem. I concur. If indeed we are turning toward recession, then I'd fire the first salvo from the monetary cannon rather than the fiscal one.
There are other problems with the idea of rebates as stimulus. Unless they are coupled with long term tax reductions there is a risk that they will be nothing more than an illustration of the permanent income hypothesis at work. It is unclear that the money would be spent, especially if the rebates are broad-based rather than targeted--and the broad-based ones are the most efficient put into play.
That said, the more complex proposals of Clinton and Edwards would certainly take longer to get through congress. And that's going to be the biggest problem of all.
Menzie Chinn has much more at Econbrowser.
Posted by William Polley at 05:35 PM | Comments (1) | TrackBack
Presidential candidates offer stimulus ideas
There will be a lot more discussion of this in the next few weeks, but here's a start. From the NY Times:
Senator Hillary Rodham Clinton of New York has proposed $70 billion in emergency spending programs, with an additional $40 billion in tax rebates if the economy worsens. Senator Barack Obama of Illinois has a $75 billion plan based largely on immediate tax rebates of $250 to most workers to encourage consumer spending.
...
The Republican presidential candidates have been more skeptical about short-term stimulus measures than President Bush has been. Mr. Bush signaled last week that he would propose a package of measures, probably dominated by tax cuts, in his State of the Union address on Jan. 28.
The debate among candidates about stimulus measures is largely academic, because economic conditions are almost sure to be entirely different by the time a new president takes office a little more than a year from now.
You would be seeing those rebate checks in the summer of 2009 at the earliest, just like we got Bush's rebate checks in the summer of 2001. Depending on how things go this year, the timing might not be as fortuitous. I would be interested in hearing what my readers think about various plans floated by the candidates.
Posted by William Polley at 10:43 AM | Comments (0) | TrackBack
December 05, 2007
Martin Feldstein's two pronged approach
Also in the Wall Street Journal today is a piece by Martin Feldstein. Here are some excerpts.
Further interest-rate cuts can reduce the risk of recession and increase output and employment in 2008 and 2009. The current 4.5% fed-funds rate is essentially neutral -- not low enough to stimulate growth and not high enough to reduce inflation. Although there are risks that the rise in oil prices and the falling dollar will raise the inflation rate, the greater potential damage of an economic downturn calls for a more stimulative policy. The Fed should reduce the fed-funds rate at its December meeting and continue cutting toward 3% in 2008, unless there is a clear sign of an economic improvement.
Because of current credit market conditions, there is a risk that interest rate cuts will not be as effective in stimulating the economy as they were in the past. The current credit crunch reflects not only a lack of liquidity, but also a lack of confidence in the creditworthiness of counterparties and in the accuracy of asset prices. This problem is now being compounded by the banks' loss of capital as they recognize past losses, and by their need to use large amounts of the remaining capital to support existing off-balance-sheet credits that have to be shifted to their balance sheets. All of this implies that lower interest rates may not raise lending and economic activity to the same extent that they did in the past.
The latter paragraph is a good follow up to Greg Ip's piece. In old fashioned Keynesian terms, what we've got here by this reckoning, is the basis for a liquidity trap. Later in the article, Feldstein adds the second part of his strategy.
What's really needed is a fiscal stimulus, enacted now and triggered to take effect if the economy deteriorates substantially in 2008. There are many possible forms of stimulus, including a uniform tax rebate per taxpayer or a percentage reduction in each taxpayer's liability. There are also a variety of possible triggering events. The most suitable of these would be a three-month cumulative decline in payroll employment. The fiscal stimulus would automatically end when employment began to rise or when it reached its pre-downturn level.
Enacting such a conditional stimulus would have two desirable effects. First, it would immediately boost the confidence of households and businesses since they would know that a significant slowdown would be met immediately by a substantial fiscal stimulus. Second, if there is a decline of employment (and therefore of output and incomes), a fiscal stimulus would begin without the usual delays of the legislative process.
You're probably familiar with the term "automatic stabilizers". Well this takes the concept to the next level. A tax cut conditional on economic data--that's an interesting suggestion. Unfortunately, the temporary nature of the cuts would tend to reduce their impact. Anyway, read on.
Even if the Fed decides that it should not cut rates further at the present time, it would not raise rates to offset the stimulus effect of the fiscal change. From the Fed's point of view, the tax cuts can provide a desirable short-run stimulus without the inflationary impact that would result from a lower interest rate and an increase in the stock of money.
Dust off your trusty old IS-LM model and let the fun begin.
Some reliance now on a fiscal stimulus rather than easier money would also take pressure off the exchange-rate adjustment. While further declines of the dollar are necessary to shrink the massive U.S. trade deficit, continued rapid declines might lead to counterproductive retaliatory actions by some of our trading partners.
Add a dash of Mundell-Fleming.
The excessive asset-price increases caused by some past monetary expansions -- especially the induced rise in the prices of real estate -- provide a further reason to use fiscal as well as monetary policy. By cutting the fed-funds rate to just 1% in 2003 and promising that it would be raised only slowly, the Fed contributed to the sharp rise in house prices and the market's current weakness. A mixed strategy that included a prospective fiscal stimulus would have reduced the Fed's perceived need for a sustained negative real fed-funds rate, and would therefore have produced a more balanced expansion of demand.
But didn't we cut taxes in 2001 and 2003? Yes, however those cuts were aimed in large measure at increasing long run growth--the success of which is a fair topic of debate. That's not to say that the short-run stimulative effect was nil. But the question is: would a temporary tax cut with a similar order of magnitude to the 2001 and 2003 cuts have any more stimulative effect? Or would people just save it?
Mark Thoma also mentions the permanent income hypothesis, but doesn't mention the 2001 and 2003 tax cuts. Interestingly, a lot of prominent economists opposed the 2003 tax cut because they thought it should be temporary (contrary to Thoma) in order to provide stimulus without threatening the long term budget outlook and that it should include a spending component (in agreement with Thoma).
I think temporary tax cuts won't work very well (in agreement with Thoma) and I have my doubts about temporary spending increases (more bridges to nowhere?), contrary to Thoma. So where does that leave us?
With a lower funds rate in 2008, that's where.
Posted by William Polley at 12:04 AM | Comments (1) | TrackBack
February 13, 2007
Tax this to pay for that
Here's an article by James Pethokoukis, who writes at U.S. News:
How about a windfall profits tax on Google? It's an idea that came to me after watching a video of Sen. Hillary Clinton, speaking at the Democratic National Committee's winter wing-ding, apparently call for the confiscation of oil company profits. As the front-runner for the 2008 Democratic presidential nomination put it:
The other day the oil companies reported the highest profits in the history of the world. I want to take those profits, and I want to put them into a strategic energy fund that will begin to fund alternative smart energy ... technologies that will begin to actually move us toward the direction of independence.
Why stop there? Why not confiscate a portion of Google's fat annual profits–the company's 2006 earnings were some $3 billion on revenue of $10.6 billion–and use it for some relevant national goal? The search-engine company is, after all, profiting from technological infrastructure it didn't even build, an "information superhighway" (to use a quaint term) that came out of a government defense project. It's time to pay Uncle Sam back. When Sen. Barack Obama officially announced his own presidential bid last weekend, he called for a new Internet initiative. "Let's lay down broadband lines through the heart of inner cities and rural towns all across America," Obama said.
So there you go. A portion of Google's profits, as well as those perhaps from Amazon, Yahoo!, and eBay could be funneled into a government-managed fund to pay for laying down fatter pipe. Heck, it's too bad that some candidate missed an opportunity back in 2004 to advocate the confiscation of home builders' profits to help low-income renters buy their own McMansions. Of course, profits at Lennar, Centex, and Toll Brothers aren't what they used to be, thanks to the housing bust. And if oil prices drop, neither will those at ExxonMobil or Chevron. And if the economy sinks, Google's bottom line won't look so healthy, either.
As they say, read the whole thing. Pethokoukis gets a couple of things right. Windfall profits taxes are not good policy. They severely distort incentives and change the firms' attitude toward risk. The capricious nature with which these taxes could be imposed, removed, or changed just adds to the distortion. If the government needs revenue, there are better ways to get it. You want an alternative energy fund? There are more efficient ways to do fund it.
And as for taxing Google to pay for a broadband initiative, that too would be ill-advised for precisely the same reasons. But as long as we're on the subject, let's talk broadband for a minute. I would be wary of a government managed plan for universal broadband access. My fear would be that they would adopt a 20th century solution to a 21st century problem.
Broadband technology (particularly the new wireless broadband) is still evolving. Once you make it a government program, you introduce a lot of rigidity. Better to keep some flexibility until we see which technology is superior. We can, I believe, afford to do that in this case because wireless is a low fixed cost operation compared to high fixed cost utilities such as the electrical grid, the copper wire laid down by Ma Bell, and even cable TV. There will be competition just as there is for wireless phone service--speaking of an industry that went from high class luxury to practically universal access in about a decade.
Debates will rage about the best way to provide broadband to inner cities and rural areas. Let that debate happen. I won't say that there is no role for government. However, I would urge great caution. We'll have to live with the mistakes for a long time. But in any case, a targeted tax would not be the answer. Didn't we just get rid of one of those telecommunication taxes that was supposed to pay for the Spanish-American War?
UPDATE: PGL at Angry Bear doesn't take kindly to seeing the windfall profits tax bashed. Robert Lawson reports that the governor of Wisconsin wants to repeal the laws of tax incidence
MADISON, Wis. (AP) -- Gov. Jim Doyle proposes taxing big oil companies more than $270 million over the next two years to help pay for the state's transportation needs.
Doyle said the assessment will equate to $1.50 per barrel of oil sold in the state, and the companies would be prohibited from passing the tax on to customers at the pump. Violations carry a criminal penalty of up to six months in prison.
Safe to say that we'll be coming back to this topic.
UPDATE 2: Read the comments at the Angry Bear post (link above) for more of my thoughts as well as those of pgl and others.
Posted by William Polley at 02:18 PM | Comments (3) | TrackBack
February 05, 2007
FY 2008 Budget
The FY 2008 Budget of the United States was released today. If you're in a hurry, here are the summary tables.
My initial read is that there is a good bit of wishful thinking in there. PGL (three posts so far)and Menzie Chinn have various things to say. (Chinn is also quoted in the Wall Street Journal.) I'll just say that what the government actually spends in FY 2008 is likely to be a lot different from what you read today given the current composition of the Congress. Furthermore, the forecasts of the deficit contained in the initial February proposal are seldom very accurate. Perhaps that is a subject worth revisiting later.
Posted by William Polley at 03:32 PM | Comments (1) | TrackBack
December 27, 2006
No-WIN situation
PGL at Angry Bear picks up on my comments from last night, as I hoped someone would. He quotes extensively from the 10 point WIN proposal and notes that Ford also called for capital gains tax cuts and investment tax credits. So allow me to call attention to point number nine:
Number nine: Federal taxes and spending. To support programs, to increase production and share inflation-produced hardships, we need additional tax revenues.
I am aware that any proposal for new taxes just 4 weeks before a national election is, to put it mildly, considered politically unwise. And I am frank to say that I have been earnestly advised to wait and talk about taxes anytime after November 5. But I do say in sincerity that I will not play politics with America's future.
Our present inflation to a considerable degree comes from many years of enacting expensive programs without raising enough revenues to pay for them. The truth is that 19 out of the 25 years I had the honor and the privilege to serve in this Chamber, the Federal Government ended up with Federal deficits. That is not a very good batting average.
By now, almost everybody--almost everybody else, I should say--has stated my position on Federal gasoline taxes. This time I will do it myself. I am not-emphasizing not--asking you for any increase in gas taxes.
I am--I am asking you to approve a 1-year temporary tax surcharge of 5 percent on corporate and upper-level individual incomes. This would generally exclude from the surcharge those families with gross incomes below $15,000 a year. The estimated $5 billion in extra revenue to be raised by this inflation-fighting tax should pay for the new programs I have recommended in this message.
Ford was not a Pigouvian--that much is certain. However, one can see that his understanding of fiscal policy was probably more nuanced than that of many presidents due to his experience in the House. In point number five, he asked for spending to help provide public service employment during the time of recession (you might think he sounds like a quaint New Dealer at this point). But he realizes that this together with the investment tax credits would balloon the deficit if there wasn't some kind of offsetting tax increase. This is the point that I wanted to make earlier, and I thank PGL for the comment that gave me an excuse to refine the point.
This point number nine in the WIN proposal was, however, the only place I could find reference to Ford calling for tax increases, which is why in yesterdays post I was careful to state that he called for tax cuts as well. But, like PGL, I found this to be a rather curious thing. As PGL points out, Ford also calls for monetary restraint and lower interest rates as well. There were some contradictions there. After reading the whole proposal, I get the feeling that he was trying to be revenue neutral (increasing some taxes and decreasing others) while stimulating economic growth and reducing inflation. The cynic in me wonders why he didn't ask for a pony as well, since this was already an impossible list.
But the better part of me wants to cut him some slack. This was two months after taking office in a most undesirable way and one month after making a tough decision that cost him politically. Why not lay it all out on the line? WIN was an impossible dream. Anyone who thought it would whip inflation and bring back prosperity before the 1975 State of the Union Address was not being honest with himself. But Ford did start the ball rolling on some important initiatives that included tax reform and regulatory reform. And the WIN speech was where some of those ideas were rolled out. As usual, Gerald Ford was thinking beyond the next political cycle. Such thinking tends not to get one re-elected, but we could use a bit more of it. The biggest problem with WIN, as I see it, was that it was bound to fail as a short-run solution even though certain aspects of it would have carried long-term benefits. That is a familiar problem in political economy.
As the months wore on, it was the tax cuts that took center stage in Ford's economic policy, but his was not a policy of tax cuts for the wealthy alone. He vetoed a bill that didn't include enough tax relief for the middle class and that didn't include spending cuts.
PGL concludes:
By the time Gerald Ford made this speech, the unemployment rate had increased from 4.9% to 5.9%. By May 1975, the unemployment rate reached 9% and still at 7.7% when voters went to the polls to decide between Gerald Ford and Jimmy Carter. My problem with the WIN program was less its details and more with the fact that this President seemed to ignore the fact that we were on the verge of a rather significant recession.
Check that. By NBER dating, the economy had already been in recession for just short of a year when he made this speech and was only 5 months away from pulling out of it. The labor market is a lagging indicator, so while the unemployment rate was still high, it was trending downward as Carter took office. He was a victim of poor timing in that regard. That is, unless you are going to tell me that the continuation of that trend and a decline of 1% in the unemployment rate in Jimmy Carter's first 12 months in office was due to Carter's economic policies. If so, I would respectfully disagree. Remember also that Ford had to work with a heavily Democratic congress. The wheels turned slowly. The divided government, while perhaps slowing the recovery, also kept either side from pushing the pendulum too far to either side and led to a slow but sustained recovery until the oil crisis reared its head again in Carter's term.
President Ford was dealt a really bad hand. He restored a measure of respect to the office and kept a bad economy from deteriorating any further. He used the power of the veto pen to stand up for fiscal responsibility. He put the nation's interests ahead of his own more than once. He did all this with civility and grace that is becoming ever more rare. He is not the sort of person we tend to elect, but he was there when his country called. He leaves a meaningful legacy to American politics.
UPDATE: Macroblog has more discussion of WIN. David Altig writes:
Seen through contemporary eyes, it is clear that the President Ford's speech hopelessly entangled shocks to relative prices with ongoing inflation of monetary origins.
Indeed. It was, to be blunt, a rather confused attempt to set out inflation's cause and cure. It was a political attack on a monetary problem. It's more about taxes, spending, and conservation. Altig continues:
Are there are any kind words to be found about all of this? More thoughts to follow.
I have tried to find kind words. However, I want to be clear that my kind words are more about what Ford's longer term objectives may have been, and what some of the WIN proposals, and indeed Ford's proposals more generally, were designed to do. I still think that WIN was misleading advertising and a set-up for failure in the short-term. But it was better than Nixon's price controls. Are those the kindest words? I look forward to hearing David's additional thoughts.
UPDATE: Altig does have some nice words to say. James Hamilton, on the other hand, is less charitable. Hamilton says:
And, despite the clever arguments that Dave brings up in the WIN button's favor, I think one great disservice of that campaign was to cultivate the misperception that inflation is somehow the responsibility of ordinary U.S. citizens. In my view, maintaining the purchasing power of a dollar is instead exclusively the responsibility of the people who control how many dollars get printed.
In the long run, yes. In the short run, other things do affect measured inflation, and WIN tried to affect some of these. I still think that it was ill-advised and a set up for failure because it created expectations that could never be fulfilled in the short run (because of politics and policy lags) or the long run (because of Hamilton's argument). Though you must admit that Ford was between a rock and a hard place on this, and although the buttons may have been overkill, some of the policies were worth a shot.
Posted by William Polley at 01:59 PM | Comments (5) | TrackBack
October 03, 2006
Stiglitz on global imbalances
In today's NY Times, Joseph Stiglitz takes on the topic of the hour. Most of it you have probably heard elsewhere. This part is not always mentioned:
Imagine that the Bush administration suddenly got religion (at least, the religion of fiscal responsibility) and cut expenditures. Assume that raising taxes is unlikely for an administration that has been arguing for further tax cuts. The expenditure cuts by themselves would lead to a weakening of the American and global economy. The Federal Reserve might try to offset this by lowering interest rates, and this might protect the American economy — by encouraging debt-ridden American households to try to take even more money out of their home-equity loans to pay for spending. But that would make America’s future even more precarious.
Yes, there is a tension between the fiscal and monetary authorities in cases like this. That is an important point to make, and is not always made. Stiglitz has a simple solution, however.
There is one way out of this seeming impasse: expenditure cuts combined with an increase in taxes on upper-income Americans and a reduction in taxes on lower-income Americans. The expenditure cuts would, of course, by themselves reduce spending, but because poor individuals consume a larger fraction of their income than the rich, the “switch” in taxes would, by itself, increase spending. If appropriately designed, such a combination could simultaneously sustain the American economy and reduce the deficit.
"If appropriately designed...," is a deus ex machina. This paragraph, I think even the most adamant proponents of tax increases would admit, makes a number of assumptions. One important one would be that the increase in taxes at the high end of the distribution does not reduce saving even further (since he laments our lack of savings earlier in the piece). It also assumes that the tax change would cause enough new spending by "poor individuals" to offset whatever change in consumption and savings occurs at the high end. I suppose one could postulate a Keynesian model and mathematically determine how to change taxes at different income levels--thus the phrase "if appropriately designed". I am understandably skeptical of either party's ability to do the math and appropriately design the new policy. I would also apply the Lucas Critique to any proposed model.
So the title of the piece, "How to Fix the Global Economy," is perhaps too ambitious. It's not that simple, even at the textbook level. Unfortunately, it is hard to fix the global economy in 1000 words--harder still when you have to expend half of your word budget rehashing the yuan issue. He makes an excellent point on the fiscal vs. monetary conflict but reduces the solution to one paragraph that raises more questions than it answers and makes some rather heroic assumptions about our ability to model the effects of these policies as well as our ability to design and implement them. The debate continues.
UPDATE: The debate does indeed continue. Mark Thoma, Greg Mankiw, and "knzn" all weigh in. Thoma notes that it is the difference in maginal propensities to consume (for individuals with different levels of income) that matters. True. Mankiw argues that average propensities differ, but that "...the evidence for substantially different marginal propensities is much weaker." Being charitable and granting the benefit of the doubt that there may be some difference in MPCs, I'm still left with the feeling that those MPCs (and the differences between them) are not policy-invariant (my original objection invoking the Lucas Critique). I would be very wary of attempts to fine tune progressivity to this objective. If you want to argue for more progressivity for other purposes, that's one thing. But this argument doesn't convince me. (Greg Mankiw makes a similar statement.)
Postscript: In this post, I referred to posulating a Keynesian model. That is not to say that I think that a Keynesian model would be the one I would opt for in addressing this issue, but because it seemed to best fit the argument that Stiglitz was making (the focus on the MPC in formulating tax policy). Just wanted to clarify that.
Posted by William Polley at 01:46 AM | Comments (9) | TrackBack
February 23, 2006
Debt ceiling follies
Mark Thoma points us to this John Berry column (Bloomberg)
Feb. 23 (Bloomberg) -- The scary, totally unfunny debt ceiling farce is playing once again in Washington.
With the federal government debt about to hit the $8.18 trillion legal limit, the Treasury Department last week suspended sales of special securities bought by state and local governments so that regular auctions of Treasury bills and notes could continue.
More such steps undoubtedly will have to be taken in coming weeks until Congress screws up the courage to increase the debt limit. At some point next month, Treasury will run out of such stop-gap measures and regular securities auctions may have to be postponed.
F. Ward McCarthy of Stone & McCarthy noted that Treasury officials said they were confident Congress would act ``because it would be in `nobody's interest' to fail to do so.''
``Let's hope that this confidence is not misplaced, because it could be very disruptive,'' McCarthy told his clients on Feb. 17. ``While it was in nobody's good interest, prior debt ceiling impasses have resulted in Congress orchestrating intentional delays in passing increases in the debt ceiling, temporary increases in the debt ceiling, interruptions to the Treasury financing calendar, the threat of government shutdowns, and the attachment of questionable parasitic legislation to increases in the debt ceiling.''
The problem, of course, is that voting to increase the debt ceiling is approving profligate behavior, even though they have little choice because of earlier tax and spending decisions.
The rest of the article deals with the debate over making the tax cuts permanent. I'll save that for another day. Don't worry, the issue isn't going away. I want to take up this little game they are playing with the debt ceiling.
The appropriate analogy here is a credit card where you, the spender, also control the credit limit. So, after a big shopping spree, you think that you'll send yourself a message by deliberately not raising the credit limit--even though your next trip to the grocery store will surely put you over the limit. Serves you right, you say. Maybe a week of eating cold cereal instead of your usual breakfast, lunch, and dinner will teach you a lesson. Then, to complete the self-flagellation, you tell all your friends about the extreme sacrifice you have been forced to make and how this will steel your resolve to improve your spending habits. You want their pity. You want to be recognized for your "sacrifice."
Who wouldn't be able to see through that? It's silly, isn't it?
Eating cold cereal for a week is not going to teach you discipline, and it's not sustainable in the long run. The long run solution is to avoid the spending spree in the first place.
Choices have consequences. Playing games with the debt ceiling does not negate those consequences. The present value budget constraint must hold. You can vote either side of the constraint up or down as you please. The other side must rise or fall with it. Full stop.
But alas, who among us believes that this is the last time we'll be seeing this silliness play out?
Anyone?
That's what I thought.
Posted by William Polley at 02:21 AM | Comments (3) | TrackBack
November 30, 2005
Cowen and Sawicky on WSJ Econoblog
Tyler Cowen and Max Sawicky debate in the latest Econoblog. It ends up being largely about the appropriate tax rate on capital. Enjoy!
Posted by William Polley at 05:34 PM | Comments (0) | TrackBack
November 01, 2005
Time for tax reform?
UPDATE: See below.
Division of Labour links to this Wall St. Journal article on President Bush's plan for tax reform. The way they treat the mortgage interest deduction seems like a sensible compromise.
The panel suggests turning the deduction into a tax credit equal to 15% of eligible mortgage interest, which means the tax break for interest on a $100,000 mortgage would be the same for every taxpayer, regardless of income. It suggests lowering the $1 million ceiling to the size of an average mortgage, using Federal Housing Administration regional data.
In today's real-estate market, the ceiling would range from $172,632 in rural areas to $312,895 in the urban corridors of New York City, Boston, Washington, D.C., and parts of California. The FHA says about 81% of its loans are close to the lower end and about 2.5% of loans are in the ceiling range.
The change would mostly affect only taxpayers in higher brackets with above-average mortgages. Under current interest-deduction rules, a taxpayer in the 35% income bracket with a $500,000 mortgage at 6% in the country's pricier urban corridors can reduce his or her taxes by just over $10,000. By contrast, under the new proposal, that same individual could claim a credit of roughly $2,800, according to Goldman Sachs.
The commission also recommends ending tax breaks for second homes and home-equity loans. In its proposal, current homeowners would be able to keep their original mortgage-interest deductions, which would change only if the homeowners refinanced or purchased a new home.
Seems like a good place to start. The effect at the low end is going to be small, and that's where there would likely be any adverse impact on home ownership. So I don't worry that it would change the home ownership numbers that much. There might be some impact on prices at the high end. Using the numbers in the article, the present value of the stream of tax savings on a $500,000 house with a discount rate of 6% amounts to a bit over a bit under $100,000 (Footnote: That's before factoring in any expected appreciation, and the rate of appreciation isn't likely to change much with this policy--we're looking at a level effect here. So think of it as $100,000 in today's housing purchasing power. Update: It's actually a bit less because the interest deduction falls over time, but most of the action is up-front. I haven't incorporated all the details in the proposal, so this is very "back-of-the-envelope" see below for an update that contains the details). I think that's significant enough to make you want to think carefully about how to phase this in over time, but that's not an insurmountable problem. Of course, some people will never be swayed. Read on...
Nevertheless, the housing industry was quick to criticize the proposal. "The tax deductibility of interest paid on mortgages is both a powerful incentive for homeownership and one of the simplest provisions in the tax code," said Al Mansell, president of the National Association of Realtors. "It should not be targeted for change."
I'm shocked... shocked! Note that they [the panel] are recommending an elimination of the tax deduction for state and local taxes. Actually I find it more difficult to argue for a tax on a tax than to argue for the interest deduction. But rent seeking is a powerful thing.
UPDATE: I calculated the actual total present value difference in the tax breaks under the current system and the new proposal. For a $500,000 home in the highest price areas, the actual present value increase in taxes due to the change will be about $66,000. In the lowest price areas, the present value of the change would be about $83,500. Assumptions: 30 year mortgage, 6% interest, 35% tax bracket. By my calculations, having a 5 year phase-in, as they recommend, would reduce the cost in the neighborhood of 10 to 20 thousand dollars in this example.
Read the report, especially the appendix for details.
Posted by William Polley at 11:10 AM | Comments (8) | TrackBack
September 28, 2005
Government finance is more than scorekeeping
So I spent much of the last couple days working on a research question. I'm catching up on blog reading and I find PGL (Angry Bear) and Arnold Kling (EconLog) discussing Thomas Nugent's column at the NRO. Obviously, I sat up straight in my chair and took notice.
Nugent says,
How does the federal government pay for the damages caused by Katrina? Does anyone asking that question actually know how the government pays for anything? Essentially, the federal government pays for things in just one way — it credits a member bank account. Let’s review the process: The federal government writes a check to a construction company to pay for a bridge. The construction company deposits the check at a bank. When that check clears, the Fed credits the bank’s reserve account at the Fed, and then the bank credits the company’s bank account with “good funds.” Bottom line: Operationally, virtually all of the federal government’s spending per se consists of the Fed crediting an account — that’s all. The federal government doesn’t have any “box of money” that gets “filled” from tax collections and the proceeds from new Treasury securities and then gets “used up” by spending or lending. This is an operational reality. In today’s world of non-convertible currencies, spending is necessarily nothing more than “score keeping.” (If one football team scores a touchdown, and 6 points are added to its score, does anyone ask where the scorekeeper gets the points?)
Oh dear.
Likewise, tax payments simply reduce account balances in the private sector. Nothing “goes” anywhere; the government doesn’t “get anything.” To reinforce this point, if you pay your taxes in actual cash, or buy Treasury securities (government bonds) with actual cash, the Fed shreds the cash. Likewise, if you donate cash to the federal government for Katrina, it shreds it. In fact, if you take a $100 bill and burn it, you’ve donated that $100 to Katrina! Operationally, the entire spending process is not constrained by government “revenue.” Whether or not the government has collected taxes or borrowed is not a factor in the payment process. Any constraints on the process can only be “self imposed.”
Oh dear, again. Mr. Nugent, meet Mr. Ponzi. He has some land he'd like to sell you.
Gotta love Arnold Kling's response:
I'm sorry, but I've read the preceding paragraph several times, and it makes less sense each time.
Whether public or private in nature, spending allocation decisions involve real resources, not just scorekeeping. The Treasury and the Fed are not operationally equivalent. Nugent may be trying to get past the notion of a static budget constraint and asserting the most extreme form of Ricardian equivalence in an intertemporal budget constraint. But even the intertemporal constraint is subject to a transversality condition. At face value, Nugent's statement seems to ignore that. The transversality condition is not "self imposed". Ponzi schemes are simply not allowed. Hyperinflation is not an option.
Oh, I know. It's a rhetorical flourish. I can see that, and you can too. But still.
Continuing with Nugent:
Will private borrowers be crowded out? Impossible. The causation is “loans create deposits,” as taught on day one of every traditional money and banking class. The act of borrowing itself creates exactly that same amount of new liabilities (deposits). The process is “self funding” and circular, as a matter of accounting. The concept of a “pool of savings” that somehow gets “used up” by borrowers is a throwback to the time of fixed exchange rates and gold standards, and has no application in today’s floating-exchange-rate world.
Again, I yield the floor to Arnold Kling:
When I was in grad school, I somehow missed the lecture where they said that government deficits are self-funding in a flexible exchange-rate regime.
The savings curve is more elastic, but not perfectly elastic. There is a difference, and I'd hate to learn that the hard way.
Finally, Nugent says,
The true economic cost of Katrina is the real, physical resources committed to repairing the damage that otherwise could have been used elsewhere to expand productivity or improve overall standards of living. But with today’s excess capacity in everything but energy, there is not going to be much of an opportunity-cost to rebuilding, apart from temporary dislocations of building materials and energy production. In other words, shortages of goods and services due to rebuilding should be temporary and modest.
So the private sector faces real trade-offs (but they aren't bad, so don't worry). But the government faces no real trade-offs; its just scorekeeping.
Sorry, governments face real trade-offs too.
UPDATE: MaxSpeak also took notice.
Posted by William Polley at 01:26 PM | Comments (10) | TrackBack
September 19, 2005
What are our fiscal limits?
Partly because I've been preoccupied with monetary policy, I've held off commenting much on the $200 billion bill for rebuilding after Katrina that President Bush outlined in his speech a few days ago. As I sit in front of a blank screen about to write this post, the words of Andrew Samwick ring loudly in my head:
Where to begin?
My first concern is the precision of the estimate of $200 billion. While Katrina was much more devastating (especially when you consider the damage to the levee system in NOLA) than any other hurricane in modern memory, the $200 billion is orders of magnitude higher than for any other rebuilding operation of its kind, at least according to information I've been able to scrounge up. Where will it go? The potential for waste and fraud is staggering. We already know that disaster aid is fraught with abuse. The thought of opening p the purse for an amount equal to about half of the annual defense budget is, well, unnerving.
But suppose we are in a perfect world where these early estimates are precise and fraud is not an issue. What then? The importance of New Orleans as a port is enough to make me sympathetic to plans to strengthen the levees and make it safe to live and conduct business there. People will return; they will rebuild. But it is incumbent on us (read, the government) to make sure it is done in a sensible way. I say this with some trepidation as a non-resident, but some parts of the city probably should not be rebuilt. There should be some care and thought put into this. I fear that with an open purse, care may not be exercised.
There is precedent for a flooded and burned out city rebuilding in a sensible way. Grand Forks, ND suffered a flood in 1997. They have since bought out over 600 properties in the flood plain. According to this document, $12.5 million in FEMA hazard mitigation grants were spent in the buyout. Sure, Grand Forks (pop. 52,000) is smaller than NOLA, and the number of affected properties in NOLA is much larger. But even multiplying the Grand Forks FEMA grants by a factor of 100 would give you a number that is less than 1% of the $200 billion now being requested. Do we need something on the scale of 10,000 Grand Forks disasters?
Rebuilding and strengthening the levee system is worthwhile and because of the value of NOLA as a port, we all benefit. In a perfect world, I'd say this is a good candidate for deficit financing. It's a capital expenditure--something that will hopefully last for generations if done right. Hence it may be appropriate to ask future generations to share in the burden. Perhaps an even better case could be made for this type of spending than on other spending in the budget. That's a topic for another day.
As for the Ricardian equivalence argument, I have some reservations. First, you might recall that I argued that when it comes to Social Security reform, a version of Ricardian equivalence might approximately hold. I'm more confident about a version of Ricardian equivalence applying when it comes to a trade-off between a tax financed and a private savings financed retirement system. The decision problem for the household is much more transparent. Portfolios will adjust. In general, however, when the political system introduces a huge amount of uncertainty as to the duration and amount of the spending on cleanup/war/homeland security, etc. I think it is at the very least marginally harder to argue Ricardian equivalence. Samwick puts it thusly,
There are circumstances under which a higher public deficit would be completely offset through higher saving in the private sector. I've never been convinced that these circumstances apply in practice, even though they closely approximate the behavior of the Samwick household (consumption is set at a level far below permanent income and is unaffected, so far, by changes in tax policy). There are simply too many people not saving enough in the present generation to meaningfully offset the debts we are passing along.
To the extent that for some four years now the lower taxes and higher deficits have not wreaked havoc with interest rates is at least partly attributable to open global capital markets. Of course, Brad Setser, for one, worries about the potential for adjustment somewhere down the road.
That adjustment has the potential to be non-trivial. To really argue Ricardian equivalence with a straight face at this fork in the road, you have to argue that consumer savings could turn on a dime in the event that other nations slow down their bond binge. I can't argue that right now. The adjustment in savings would not come overnight. We would need to be prodded by higher interest rates.
And that brings us full circle to monetary policy, the topic du jour given the FOMC meeting just hours away. The Fed must be looking at this situation and shaking their head as well. Ideally, there is a separation between monetary and fiscal policy, but if we are indeed stretching to our limits as The Eclectic Econoclast believes, there could be a real butting of heads. Something for the next Fed chair to deal with, and it has the potential to be a real trial by fire.
This is no small matter. The whole idea of a soft landing was predicated on the ability of the Fed to manage aggregate demand to smoothly meet up with potential GDP on the upswing. A jarring fiscal shock has the ability to upset that delicate balance, putting us at risk of overshooting or undershooting the goal as the differing fiscal and monetary policy lags worth through the system.
And is anyone else thinking that we might be one $200 billion disaster/war/terrorist attack, etc. away from even bigger problems?
No small matter indeed.
Posted by William Polley at 09:47 PM | Comments (0) | TrackBack