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July 8, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Do Tax Rates Need to Go Up?

Posted: 08 Jul 2010 01:17 AM PDT

I should emphasize that this is a discussion about what needs to happen after the economy recovers, not what we should do right now:

Taxes Need to Come Up, But That Doesn't Mean Tax Rates Have To, Diane Lim Rogers: ...[A] really old point (or maybe three points) I've made over and over again...:

  1. We need more tax revenue;
  2. the current-law baseline is a good "role model" for the right level of revenue; but…
  3. sticking to current-law baseline revenue levels doesn't require sticking to current tax law, and doesn't even require seeing marginal tax rates go up. way to achieve a more sustainable outlook as far as the revenue side of the budget goes is to just let current tax law happen – and avoid passing any new tax legislation, including any extension of any of the Bush tax cuts.  ...

The CBO long-term budget outlook shows us that sticking to current-law baseline revenue levels is a good and fairly immediate strategy for fiscal sustainability (where debt/GDP is relatively stable, staying below 80 percent over the next 25 years).  ...

But ... current tax law is probably not the best way to raise the current-law level of revenues. Put this challenge to any tax economist:  how can we raise that given level of revenue most efficiently? – and you will get the answer that we need to find the marginal (new) sources of revenue from the broadest, most neutral/efficient tax bases available to us. There are two main possibilities here, and I think we ought to seize both possibilities:

  1. reform the existing federal income tax system to clean up and broaden the income tax base–e.g., close up inefficient tax expenditures that "poke holes" in the income tax base (the many exclusions/exemptions, deductions, and credits); or
  2. add on "cleaner" (broader, purer, or externality-correcting) new tax bases–e.g., an add-on value-added tax (VAT) or environmentally-motivated taxes such as a carbon tax.

With these sorts of base-broadening strategies to achieve current-law revenue levels, marginal tax rates on productive economic activities don't have to come up. ...

One tax that isn't mentioned, one I go hot and cold on, is a financial transactions tax. It would raise quite a bit of revenue, and its effect on efficiency appears to be minor (though that claim is the part that causes me to hesitate). Dean Baker is a proponent of this type of a tax, and he argues the tax will actually be  efficiency-enhancing.

A carbon tax is also tempting as a source of revenue -- such a tax (or its equivalent) is needed to correct externalities and enhance efficiency -- but I think the revenue will need to be used to compensate the people and businesses hurt by the legislation. This is partly because some people, e.g. low income households, will need to be compensated for the higher energy costs they'll face (here's a graphical illustration of how this works).

But it's also because legislators will likely demand payoffs to individuals and businesses affected by the legislation (even those causing the carbon emissions in some cases). Many of these individuals and businesses are key sources of campaign contributions, and payoffs will be required to obtain support for the legislation. Thus, I'm not counting on a carbon tax as a significant source of revenue (supposing it could even be enacted, which is a big suppose).

I've been reluctant to even talk about long-run issues because I think we ought to be focused on our immediate problems -- the job market comes to mind -- and this is a distraction. Worse, it can be counterproductive since an increase rather than a decrease in the deficit is needed in the short-run. So let me add once again that this is for another day. Right now the economy needs more help, and cutting the deficit will make things worse, not better.

Will the New Transport Rule Gut Cap and Trade?

Posted: 08 Jul 2010 01:04 AM PDT

Reblogging John Whitehead'a reblog of RFF:

It's like smaller hot dogs at lower prices, Environmental Economics:

When Sen. Lindsey Graham recently declared cap and trade "dead" he may have been more right than he realized. He was referring to the political prospects for carbon pricing in this Congress, but cap and trade has been the tool of choice for limiting emissions of other pollutants—like sulfur dioxide and nitrous oxides—for almost 20 years. The EPA proposed a rule yesterday that could sharply limit the role of trading in markets for those pollutants.

The proposed "transport rule" would replace the existing Clean Air Interstate Rule (CAIR). Both are aimed at reducing emissions that affect air quality not locally, but in downwind area (hence the "transport" and "interstate" in their names). CAIR was issued under the Bush administration but comprehensively rejected by the D.C. Circuit Court (in North Carolina v. EPA, 531 F.3d 896). CAIR has been in effect since the ruling, but as a zombie regulation. The EPA needs to replace it with a new rule that fits the court's view of the agency's powers under the Clean Air Act. The Transport Rule released yesterday is the agency's attempt to do this. The rule is massive—1,300 pages—and reads like a long-form response to the court's opinion.

So what does this have to do with cap and trade? Among the court's major objections to CAIR was the inability of the EPA to guarantee each state would reduce its emissions sufficiently to prevent interference with air quality downwind. The emissions trading systems set up by CAIR was to reduce emissions overall, and prevent problematic transport of pollution generally but the EPA couldn't promise, as the court read the statute to require, that each and every state would reduce emissions sufficiently. The reason for this is interstate trading. CAIR would have allowed emissions sources in different states to trade with each other. This has obvious benefits, as a bigger market is generally more efficient, but it is impossible to know in advance where the emissions reductions will occur. If it is unexpectedly cheap to reduce NOx emissions in Ohio and unexpectedly expensive in Kentucky, trading will happen and Ohio will make deeper cuts. Knowing in advance where reductions will be cheaper is hard (this lack of information is the reason for having a market in the first place). Generally, this lack of foreknowledge is not a problem, since the overall cost of emissions reductions is lower. Under the court's reading of the Clean Air Act, however, the agency has to know the outcome in advance, at least at the state level.

The transport rule responds by largely eliminating interstate trading. Intrastate trading is still allowed, but the rule would only allow interstate trading at the margin—within relatively narrow "variability limits." The EPA seems to be doubtful that even this small amount of interstate trading will be permitted by the courts. The new rule lists alternative options that do not include interstate trading at all. 

It looks like we'll be lucky if the final version of the new rule includes any interstate trading at all. Without interstate trading, the emissions reductions achieved by the new rule will be more expensive than they otherwise would be – possibly a lot more (I look forward to analysis from economists on exactly how much). Since the transport rule would replace both of the major cap-and-trade programs currently in operation in the U.S.—the Title IV SO2 program and the NOx SIP Call—this would mean an end to interstate emissions trading, at least for the 31 states affected by the new rule. It's only a slight overstatement to say that cap and trade as we now know it would end.


I'm don't fully understand the reasoning behind the D.C. Circuit Court ruling. Can anyone help? Can Congress fix this with new legislation? Actually, is there any hope left for meaningful legislation? Spending on R&D to encourage new technologies seems quite likely, but meaningful measures to reduce carbon emissions do not. I thought there was a chance at one time, but I'm more pessimistic now.

"Fewer Low-Income Students Going to College"

Posted: 08 Jul 2010 12:56 AM PDT

This is not a good trend:

Fewer Low-Income Students Going to College, by Emmeline Zhao, RTE: Fewer low- and moderate-income high school graduates are attending college in America, and fewer are graduating. Enrollment in four-year colleges was 40% in 2004 for low-income students, down from 54% in 1992, and 53% in 2004 for moderate-income students, down from 59% over the same period, according to a report recently submitted to Congress by the Advisory Committee on Student Financial Assistance. ...
College expenses and financial aid have become increasingly larger considerations..., driving more qualified students away from enrolling in four-year colleges. The net price for attending a four-year public college in 2007 for a low-income student was $10,620 — 48% of family income...
Among the students surveyed who had parents "very concerned" about higher-education finances just 66% applied to a four-year college. Some 90% of respondents with parents "not concerned" about finances applied to college. Fewer — 43% — with "very concerned" parents enrolled in a four-year college, compared to 88% that enrolled with "not concerned" parents. ...
Persistence through four-year colleges dropped to 75% in students entering in 2003 for low-income students, down from 78% in students entering in 1995, while persistence for students from moderate-income families remained at 81%. Persistence rates for low- and moderate-income students in two-year colleges, however, fell 10 percentage points to 49% over the same period.
"These trends greatly undermine bachelor's degree completion of high school graduates over the last two decades and, if unchecked, will take an even grater toll this decade," the report states. ...

Education is not the whole answer to better jobs and a more equal distribution of income, but it's a key part of it and this trend is not encouraging. If it was up to me, college education would be essentially free. And not just because of the economic effects. There is value in education that goes far beyond the salary premium that comes with a college degree.

links for 2010-07-07

Posted: 07 Jul 2010 11:01 PM PDT

"The Rising Threat of Deflation"

Posted: 07 Jul 2010 04:32 PM PDT

As I hope you already know, conservatives (update: and some misdirected liberals) aren't standing on very firm ground with their worries about inflation and their calls for austerity. In fact, merely saying the ground they are standing on is shaky is far too generous. But if you need further evidence that they are promoting bad ideas, note that they can't even get the American Enterprise Institute to agree with them:

The Rising Threat of Deflation, by John H. Makin, AEI, July 2010: As we enter the second half of 2010--the ... United States and Europe are heading toward--and Japan already suffers from--deflation, a classic prolonger of crises that boosts the real burden of debt and crushes profit margins.
U.S. year-over-year core inflation has dropped to 0.9 percent--its lowest level in forty-four years. ... Europe's year-over-year core inflation rate has fallen to 0.8 percent... Ireland's deflation rate is 2.7 percent. As commodity prices slip, inflation will become deflation globally in short order. Meanwhile in Japan,... the ... gross domestic product (GDP) deflator had fallen 2.8 percent, reflecting an accelerating pace of deflation in a country where the price level has been falling every year since 2004. ...
The financial crisis of 2008 prompted aggressive monetary and fiscal easing by most governments. ... Many market participants and policymakers have warned that such aggressive easing will lead to inflation. Contrary to those expectations, as noted above, core inflation has steadily moved lower... By later this year, persistent excess capacity will probably create actual deflation in the United States and Europe. Moreover, the recent appreciation of the dollar, especially against the euro, exacerbates the U.S. deflation threat. ...
Perhaps it is time for central banks, the ECB especially, to take note. Financial crises are usually deflationary. Pretending otherwise ... constitutes a necessary, although not sufficient, condition for a global depression. ... A persistent failure to respond to the dangers of further deflation, such as the premature removal of accommodative monetary policy apparently favored at the ECB or a sharp fiscal contraction favored by the European Monetary Union, would sharply elevate the risk of global deflation and depression.
At this point in the postbubble transition to deflation, fiscal rectitude and monetary stringency are a dangerous policy combination, as appealing as they may be to the virtuous instincts of policymakers faced with a surfeit of sovereign debt. ... The G20's shift toward rapid, global fiscal consolidation--a halving of deficits by 2013--threatens a public sector, Keynesian "paradox of thrift" whereby because all governments are simultaneously tightening fiscal policy, growth is cut so much that revenues collapse and budget deficits actually rise. ...
The link between volatile financial conditions and the real economy has been powerfully underscored by the events since mid-2007. Growth has suffered and subsequently recovered given powerful monetary and fiscal stimulus. And yet, the damaged financial sector, unable to supply credit; a jump in the precautionary demand for cash; and a persistent overhang of global production capacity have combined to leave deflation pressure intact. The G20's newfound embrace of fiscal stringency only adds to the extant deflation pressure. ...

About that Recovery

Posted: 07 Jul 2010 11:23 AM PDT

From the SF Fed's latest "Data Dive": Retail, office & industrial vacancies continue to climb:


Pure Competition and the Soup Pot of the Enemy

Posted: 07 Jul 2010 10:17 AM PDT

I have a new post at CBS MoneyWatch: Is it true that the pursuit of individual self-interest always leads to a socially optimum outcome? Not if you're a crab (but it does work for snails):

Pure Competition and the Soup Pot of the Enemy

There's actually a good lesson here about when competition maximizes societal gains, and when it doesn't.

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