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April 14, 2010

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Latest Posts from Economist's View


Paul Romer: Persuasions and Norms

Posted: 14 Apr 2010 12:33 AM PDT


Persuasions and Norms

Reich: The Republican Strategy on Financial Reform

Posted: 14 Apr 2010 12:24 AM PDT

The audacity of nope:

The Republican Strategy on Financial Reform: Make Democrats Look Like Patsies for the Street, by Robert Reich: Senate Republicans today debuted their new strategy for financial reform: Refuse to cooperate with Democrats on grounds that the Dems are too willing to give Wall Street what it wants.
I'm not making this up.
In a Senate floor speech Minority Leader Mitch McConnell said Republicans couldn't support the legislation that emerged from Chris Dodd's banking committee because it "institutionalizes" future taxpayer bailouts of the Street, giving the Federal Reserve "enhanced emergency lending authority that is far too open to abuse." Senator Bob Corker, a senior Republican on the committee..., huffed that Dodd's final bill provides "the ability to have bailouts."
Sen. Lamar Alexander, a member of the Senate Republican leadership, blasted Dodd for partisanship ... that is, partisanship toward Wall Street. Alexander said Republicans will hold out for a plan "that would end the practice of too big to fail and that would make certain that we don't perpetually use taxpayer dollars to bail out Wall Street."
Republicans have been looking for a way to oppose Senate Dems on financial reform without looking like patsies for the Street. And now they think they've found it — by trying to make Democrats look like patsies for the Street. ...

Let's be clear: The Dodd bill doesn't go nearly far enough... But the Street thinks the Dodd bill goes way too far... Republicans figure they can accommodate the Street by refusing to give the Dems the votes they need unless the Dems agree to weaken the bill — while Republicans simultaneously tell the public they're strengthening the bill and reducing the likelihood of future bailouts.
It's a bizarre balancing act for the Republicans, reflecting the two opposing constituencies they have to appease — big business and Wall Street, on the one hand, and the emerging Tea Partiers, on the other. The Tea Partiers hate the Wall Street bailout as much as the left does. ...
I have a suggestion for Senate Democrats: Don't let them get away with it. Smoke the Republicans out. Respond to their criticism that the Dodd bill leaves open the possibility that some future bank will become too big to fail by amending the bill to limit the size of banks to $100 billion of assets — so no bank can become too big, period. Challenge the Republicans to join you in voting for the amendment. If they decline, force them to explain themselves to their local Tea Partiers.

Taxes over Time

Posted: 14 Apr 2010 12:15 AM PDT

As the deficit hawks begin to make noise, this is worth remembering:

Taxing the Rich, Over Time, by David Leonhardt, Economix: My column this week notes that tax rates on the affluent have fallen more in recent decades than tax rates on other groups. Here are the details...

This chart, which goes through 2004, tells the story in graphical terms. ...

Shifting the Tax Burden Graphic

If we had good numbers on the distribution of state and local taxes, the picture would be even more pronounced. These taxes tend to be less progressive than federal taxes, in part because sales taxes are a larger part of state and local revenue. ...

With all this being said, it is also true — as you often hear — that the wealthy are paying more in taxes than they used to. ... So what's the full story? In brief, tax rates for the wealthy have fallen more than for other income groups. Tax rates for the very wealthy have fallen more than they have for the merely wealthy. Incomes at the top have also increased much more quickly than incomes have for other groups.

Add it all up, and you can see why the wealthy are paying a greater share of federal taxes even though they are paying less tax on each dollar they earn. They're simply making many more dollars than they used to.

links for 2010-04-13

Posted: 13 Apr 2010 11:03 PM PDT

"Deficit Hysteria is Now Mainstream Thinking"

Posted: 13 Apr 2010 06:21 PM PDT

Rebecca Wilder comments on the question of whether a falling US public deficit is bad news:

It doesn't matter why the deficit is falling or why it's lower than expected. This only proves the endogeneity of the deficit: the sole reason that the real economy is experiencing stronger-than-expected growth in tax receipts is because the government ran large deficits. If policymakers start to back off, or worse yet, cut back, the axiom of national income accounting foretells a liquidity squeeze on a private sector whose desired saving is much higher than actual saving. Default, then, would be the only way out. Basically, you drop the deficits now and you shoot yourself in the foot.

Koo is right: we need to be running bigger deficits in order to get the deleveraging process going, and remove the threat of "endogenous" fiscal deficits. It's "jobs hysteria" not "deficit hysteria". The fiscal impetus is germane to the recovery. Until Congress understands that, we might have a Japan 1998 on our hands, or worse yet, a US 1938. People think of the deficit as an exogenous "thing" that the government can control. That's the wrong way to look at it: it's completely endogenous.

Here's more:

Final destination "growing public deficits" with a stopover in "falling public deficits," by Rebecca WilderBrad DeLong and Mark Thoma posit that a falling US public deficit is bad news – they are right!

Deficit hysteria is now mainstream thinking, while the more appropriate hysteria should be "jobs hysteria". How in the world is nominal income growth expected to finance a drop in consumer debt leverage if the government supports a smaller deficit? TARP costs less and tax receipt growth is beating expectations. But that's all it is, beating expectations.

This only proves the endogeneity of the deficit: the sole reason that the real economy is experiencing stronger-than-expected growth in tax receipts is BECAUSE the government ran large deficits.

Put it this way: as long as the US current account deficit is rising or stable, then a shrinking government deficit will, by definition, squeeze liquidity from the private sector. During a "balance sheet recession", the government should be growing its balance sheet not shrinking it.

An excerpt from the Japan's Quarterly Economic Outlook (Summary) (Summer 1997):

Thus, recovery in personal consumption is expected to continue after the reaction to the rise in demand ahead of the consumption tax hike subsides in the near future. However, the pace of recovery is likely to be moderate considering the increases in the tax burden, such as the rise in the consumption tax.
Boy were they wrong – moderate?
GDP fell 2.0% in 1998 (from +1.6% growth in 1997) and consumption growth turned negative over the year, -1.1% (from +0.8% in 1997). Please see slide 9 from one of Richard Koo's presentation in 2008; he highlights the policy-mistake-induced "unnecessary government deficits". The point is: the government deficit is not some exogenous "thing" that the government controls; it's very much endogenous and a function of private demand.

We're on this road now: squeezing liquidity out of the private sector; supporting minimal wage growth; and imminent deleveraging is on the horizon(more likely the default route). And Congress is happy that they are squeezing private sector liquidity? I guess so, as reported by the Wall Street Journal yesterday:
Like a number of Democrats, Mr. Blumenauer said he's "intrigued" with the consumption-tax idea. Tax experts say consumption taxes are regressive, because lower-income people tend to spend more of their income. But a consumption tax could be designed with offsetting breaks for lower-income Americans, to shield them from its impacts.

"Cherry-Picking Income Distribution Statistics"

Posted: 13 Apr 2010 11:43 AM PDT

Justin Wolfers says Greg Mankiw is presenting a misleading picture of the ability of high income households to help with our "fiscal woes":

Cherry-Picking Income Distribution Statistics, by Justin Wolfers: Greg Mankiw is critical of Parade magazine's "Annual Salary Survey." It's a series of pictures of real people, who also 'fess up to what they earned last year. But this being a glossy magazine, they add in a sample of celebrities. In consequence:

about 14 percent of the people in Parade's sample earn more than $1 million a year.  In the real world, the actual percentage is about 0.2 percent.

But Greg is concerned that this sends the wrong message:

There is a common perception in some circles that we can solve all our fiscal problems if only we were willing to tax the rich some more. Yet, in reality, there are not enough rich for this to work. By presenting such a skewed cross-section of incomes, Parade inadvertently feeds an all-too-common misperception.

Well, yes and no. If we are interested in thinking about the potential taxes the rich can pay, Mankiw's 0.2 percent is incredibly misleading. The issue here isn't how many people are rich, but rather how many dollars are earned by the rich. ...

What proportion of income is earned by the rich?  Let's turn to Emmanuel Saez's compilation of income tax statistics. The latest data are for 2007, and for simplicity's sake we'll examine the broadest measure of income. The richest 0.5 percent of families all earned more than $632,000, and received 19.3 percent of all income. Or alternatively, we can focus on the richest 0.1 percent of families—who all earned more than $2 million, and collectively earned an average income of $7.1 million. This sliver of the community—the folks Greg worries about—received 12.3 percent of all income.

The lesson? Families earning more than $1 million probably do represent close to 14 percent of total income, and maybe more. By arguing that only 0.2 percent of families are this rich, Mankiw risks distracting his readers from the fact that increasing the taxes paid by the rich can be a big part of the solution to our fiscal woes.

Whether or not the wealthy can shoulder the tax burden alone, they should still pay their share of taxes. Based upon principles such as equal marginal sacrifice, it seems to me that the share ought to be larger than it is.

Is a Falling Deficit Good News?

Posted: 13 Apr 2010 10:27 AM PDT

At MoneyWatch, some comments on the news that the administration is projecting a fall in the deficit:

Is a Falling Deficit Good News?, by Mark Thoma

Note: I added an update to the original post.

Adair Turner on Financial Regulation

Posted: 13 Apr 2010 08:49 AM PDT

More from the INET Conference:

It's hard to imagine U.S. financial regulators saying these things.

Update: Here is a transcript of his remarks.

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